<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998
REGISTRATION NO. 333-50891
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SYKES HEALTHPLAN SERVICES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
FLORIDA 7389 59-3484556
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
11405 BLUEGRASS PARKWAY
LOUISVILLE, KENTUCKY 40299
(502) 267-4900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
DAVID E. GARNER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SYKES HEALTHPLAN SERVICES, INC.
11405 BLUEGRASS PARKWAY
LOUISVILLE, KENTUCKY 40299
(502) 267-4900
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
ROBERT J. GRAMMIG, ESQ. MICHAEL A. CAMPBELL, ESQ.
HOLLAND & KNIGHT LLP MAYER, BROWN & PLATT
400 NORTH ASHLEY DRIVE, SUITE 2300 190 SOUTH LASALLE STREET
TAMPA, FLORIDA 33602 CHICAGO, ILLINOIS 60603
(813) 227-8500 (312) 701-7178
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statements for the same offering. [ ]
---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and one to be used in a concurrent international offering outside
the United States and Canada (the "International Prospectus"). The complete U.S.
Prospectus follows immediately. Following the U.S. Prospectus are certain pages
of the International Prospectus, which include an alternate front cover page, an
alternate underwriting section and an alternate back cover page. All other pages
of the U.S. Prospectus and the International Prospectus are identical.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE OR JURISDICTION.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED JULY 20, 1998
PROSPECTUS
2,500,000 SHARES
[SHPS LOGO]
SYKES HEALTHPLAN SERVICES, INC.
COMMON STOCK
------------------------
Of the 2,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Sykes HealthPlan Services, Inc. (the "Company"), offered
hereby, 2,000,000 shares are being offered initially in the United States and
Canada by the U.S. Underwriters (the "U.S. Offering") and 500,000 shares are
being offered initially in a concurrent international offering outside the
United States and Canada by the International Managers (the "International
Offering," and together with the U.S. Offering, the "Offerings"). The initial
public offering price and the underwriting discount per share are identical for
each of the Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. See "Underwriting" for a discussion of certain factors to be considered
in determining the initial public offering price. It is currently expected that
the initial public offering price will be between $11.00 and $13.00 per share.
The Common Stock has been approved for listing on the Nasdaq National Market
System, subject to official notification of issuance, under the symbol "SHPS."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO PUBLIC DISCOUNT(1) TO COMPANY(2)
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<S> <C> <C> <C>
Per Share.......................................... $ $ $
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Total(3)........................................... $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,250,000.
(3) The Company has granted to the U.S. Underwriters and the International
Managers options, exercisable within 30 days after the date hereof, to
purchase up to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH & CO.
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 4
A diagram entitled "A Bold New Combination of Services," describing the
Company's Care Management services and products and Employee Benefit Services.
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Financial Statements and
related notes thereto, appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information in this Prospectus (i) assumes that the Underwriters'
over-allotment options will not be exercised, (ii) reflects a 0.582 shares for
one share reverse stock split to be effected prior to the completion of the
Offerings and (iii) excludes 1,700,000 shares of Common Stock to be sold by the
Company to HPS simultaneously with the completion of the Offerings in the SHPS
Sale (as defined below) at the initial public offering price, less an amount
equal to the underwriting discount. Unless the context otherwise requires,
references in this Prospectus to the "Company" or "SHPS" are to Sykes HealthPlan
Services, Inc., and its subsidiaries. All references herein to industry
financial and statistical information are based on trade articles and industry
reports that the Company believes to be reliable, although there can be no
assurance to that effect. This Prospectus contains forward-looking statements
that involve risks and uncertainties. Future events and the Company's actual
results could differ materially from the results in these forward-looking
statements as a result of certain of the factors set forth in "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
The Company is a provider of outsourced care management ("Care Management")
services and products and employee benefits administration and support services
("Employee Benefit Services"). The Company's customers include large
corporations, healthcare providers, payors and insurance companies. The
Company's Care Management services are designed to enhance the quality of an
individual's overall healthcare by carefully evaluating clinically-based
solutions to help patients, physicians and healthcare providers and payors
select appropriate and efficient medical treatment while providing the
opportunity to reduce overall medical expenditures. The Company's Employee
Benefit Services enable customers to outsource the administration of their
employee benefit programs. By providing its customers with a single-source for
comprehensive, clinically-sophisticated Care Management services and products
and Employee Benefit Services, the Company believes it has a unique competitive
advantage. In addition, the Company believes the integration of such services
will enhance the Company's customers' ability to determine in a timely fashion
an individual's eligibility to receive services under a customer's benefit
plans. The Company currently provides its services to over 50 of the Fortune 500
companies.
Care Management. The Company's Care Management services and products
assist customers in (i) improving the quality of healthcare services provided to
patients and (ii) monitoring patients' compliance with their prescribed course
of treatment, while (iii) simultaneously reducing inappropriate medical costs.
The Company believes that such costs are generally incurred when there is over-
or under-utilization of healthcare services, resulting in less effective medical
treatment. The Company's Care Management services include demand, utilization,
case, disease and disability management. These services are designed to guide a
patient through the medical process by prospectively assisting in determining an
individual's healthcare needs and monitoring and evaluating the delivery of
clinical care provided.
The Company's clinical staff, comprised of registered nurses and
physicians, interacts with patients, providers, payors and insurance companies
to assist in determining, implementing and monitoring an effective and efficient
customized Care Management program based on each patient's medical profile and
clinical protocols developed by the Company in consultation with a network of
board certified physicians. For instance, if a patient's physician recommends
hospitalization or surgery, a registered nurse reviews the physician's proposed
plan of care and discusses it with the patient's physician based on the
Company's clinical protocols. In the event the registered nurse believes a
second opinion may be warranted, the registered nurse will refer the case to one
of the Company's physician medical directors. If the medical director concurs,
the medical director will provide the patient with the names of physicians in
the patient's area. Physicians identified by the Company to provide second
opinions have been screened to verify that they have met the Company's
requirements in the relevant area of medicine. The Company handles the paperwork
and has the results reported to both the patient and the patient's physician so
that both the patient and the physician can review the consulting physician's
report before deciding whether or how to proceed with treatment. The Company
believes that the by-products of a successful Care Management program can
include not only reduced medical
3
<PAGE> 6
costs for the payor or insurance company and the patient but also improved
patient outcomes and increased patient satisfaction.
In addition, for providers and payors that wish to perform their own
quality assurance or utilization management functions, the Company provides
quality and utilization managed care software solutions through its OPTIMED(R)
("Optimed") software products and related services. These products are based on
clinical protocols and criteria ("Optimed Protocols") developed and reviewed by
the Company's medical panel of approximately 250 board certified physicians.
Employee Benefit Services. The Company's Employee Benefit Services allow
its customers to outsource the administration of their employee benefit plans,
including enrolling new plan participants, developing and maintaining records,
verifying or paying claims and producing management reports. The Company
provides a broad range of Employee Benefit Services, including benefit plan
administration ("BPA"), flexible spending account ("FSA") administration, COBRA
administration, retiree benefits services and other ancillary services.
The Company was formed in December 1997 as a joint venture between
HealthPlan Services Corporation ("HPS"), a provider of marketing, administration
and risk management services for health insurance programs, and Sykes
Enterprises, Incorporated ("Sykes"), a provider of integrated outsourcing
services to the information technology industry. Since its formation, the
Company has acquired Health International, Inc. ("HI"), OMS, Incorporated
("OMS") and Sykes HealthPlan Service Bureau, Inc. ("SHSB," formerly Prudential
Service Bureau, Inc.). The formation of the joint venture and the aforementioned
acquisitions were consummated to take advantage of the substantial perceived
market opportunity to provide a single-source for comprehensive,
clinically-sophisticated Care Management services and products and Employee
Benefit Services. Further, to capitalize upon each partner's competitive
strengths, members of senior management from each of HPS and Sykes joined the
Company.
The Company believes that the combination of these three companies creates
significant opportunities for cross-selling, cost savings and increased sales
and marketing efforts. The Company intends to utilize the strong customer
relationships that have been established by each of these companies to
cross-sell its services to those customers currently using less than all of the
Company's services. For instance, the Company intends to cross-sell its Care
Management services to users of its Optimed software products and related
services. Customers currently using the Company's Optimed software products and
related services include over 40 managed care plans covering approximately 20
million individuals, none of which are currently utilizing the Company's Care
Management services.
According to a Congressional Budget Office report, healthcare spending in
the United States has increased to an estimated $1.1 trillion in 1997, or 13.4%
of gross national product ("GNP"), from $247 billion, or 8.9% of GNP in 1980. As
a result of the increase, payors, providers and users of healthcare services
have sought ways to reduce such expenditures. Medical costs are divided into two
principal components, the costs of clinical delivery of healthcare (i.e., the
costs directly associated with medical treatment) and administrative costs.
According to the Health Care Financing Review, approximately 79% of healthcare
costs have been directly related to the clinical delivery of healthcare. In
addition, efforts to reduce unnecessary clinical costs have been hindered by the
inability to comprehensively and cost efficiently manage the complex task of
guiding a patient through the healthcare process from eligibility determination
to diagnosis, treatment and ultimate claim payment. The Company assists its
customers and their healthcare plan participants to better manage the medical
process.
The Company's strategy is to continue as the single-source provider of
outsourced Care Management services and products and Employee Benefit Services
by capitalizing on its core strengths and the trends in the healthcare and
benefits administration industries towards improving service and thereby
reducing costs. Key elements of the Company's strategy include: (i) delivering
comprehensive and clinically sophisticated services and products; (ii)
cross-selling services to the Company's existing customer base; (iii) expanding
sales and marketing efforts; (iv) broadening service offerings; and (v) pursuing
strategic acquisitions.
4
<PAGE> 7
The Company's principal executive offices are located at 11405 Bluegrass
Parkway, Louisville, Kentucky 40299, and its telephone number is (502) 267-4900.
The Company possesses common law trademark rights in "Sykes HealthPlan Services,
Inc.," "SHPS" and its logo, and has applied to register the marks and logo with
the United States Patent and Trademark Office. The Company has registered the
trademark OPTIMED(R) with the United States Patent and Trademark Office.
RISK FACTORS
Prospective purchasers of the Common Stock in the Offerings should
carefully consider the factors set forth under the caption "Risk Factors" and
other information included in this Prospectus prior to making an investment
decision. In particular, such factors include the Company's absence of a
combined operating history, risks related to integration, unprofitable operating
performance, the Company's ability to manage growth and related risks, the
Company's reliance on its information processing systems and proprietary
technology, Year 2000 compliance, dependence on the trend toward outsourcing,
dependence on key customers, fluctuations in operating results, negotiation of a
new line of credit facility, contract cancellation or reduction, dependence on
senior management, potential risks of Care Management contracts, potential legal
liability for Care Management, potential legal liability as a benefits
administrator, rapid technological and regulatory changes, governmental
regulation, risks relating to laws governing corporate practice of medicine,
risks relating to telemedicine, possible adverse effect of national and state
healthcare reform proposals, competition, control by principal shareholder,
anti-takeover considerations, risks related to goodwill, no prior public market,
potential volatility of the Company's stock price, shares eligible for future
sale, dilution, dividend policy and the interests of NationsBanc Montgomery
Securities LLC in the Offerings.
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered in the Offerings....................... 2,500,000 shares
Common Stock to be outstanding after the Offerings(1)....... 10,020,000 shares
Use of Proceeds............................................. Repay indebtedness (including
accrued interest).
Nasdaq National Market System ("Nasdaq") Symbol............. "SHPS"
</TABLE>
- ---------------
(1) Includes 1,700,000 shares of Common Stock to be sold to HPS simultaneously
with the completion of the Offerings in the SHPS Sale (as defined below) at
the initial public offering price, less an amount equal to the underwriting
discount. Excludes (i) 1,137,928 shares of Common Stock issuable upon
exercise of outstanding options under the Sykes HealthPlan Services, Inc.
1997 Stock Option Plan (the "Stock Option Plan") and (ii) 317,072 shares of
Common Stock available for future grants under the Stock Option Plan upon
completion of the Offerings. See "Management -- Stock Option Plan."
RELATED TRANSACTIONS
Simultaneously with the completion of the Offerings, HPS will (i) purchase
650,000 outstanding shares of Common Stock directly from Sykes (the "Sykes
Sale") and (ii) purchase 1,700,000 newly issued shares of Common Stock directly
from the Company (the "SHPS Sale") (collectively, the Sykes Sale and the SHPS
Sale are referred to as the "HPS Share Purchases"). All shares acquired in the
HPS Share Purchases will be purchased at the initial public offering price, less
an amount equal to the underwriting discount, with respect to the Offerings.
Consummation of the HPS Share Purchases is subject to certain conditions,
including the Company's lenders' agreement to release Sykes and HPS as
guarantors under the Company's existing Revolving Line of Credit Loan Agreement
(the "Line of Credit") or a new line of credit facility. Prior to the Offerings
and the HPS Share Purchases, HPS and Sykes each own 50% of the Company's Common
Stock. Upon completion of the Offerings and the HPS Share Purchases, HPS and
Sykes will own 52.5% and 22.6% of the Company's Common Stock, respectively. See
"Principal Shareholders."
RECENT DEVELOPMENTS
For the three months ended June 30, 1998, the Company's revenues were $18.0
million, income from operations was $1.3 million, and depreciation and
amortization was $1.4 million. For the same period, the Company's net income was
$0.1 million and earnings per share were $0.01 per share based on 6.4 million
5
<PAGE> 8
diluted shares outstanding. For the six months ended June 30, 1998, the
Company's revenues were $20.5 million, loss from operations was ($22.3) million,
and depreciation and amortization was $1.5 million. For the same period, the
Company's net loss was ($23.5) million and loss per share was ($4.04) per share
based on 5.8 million diluted shares outstanding.
On May 6, 1998, HPS and the Company agreed to amend the outsourcing
agreement, dated as of January 1, 1998 between HPS and the Company, to provide
for the payment by HPS to the Company of a fee equal to 81% of monthly care
management and bill audit revenues HPS derives from Centra Benefit Services,
Inc. ("Centra"), a company in which HPS recently acquired a controlling
interest. See "Certain Transactions."
SYKES HEALTHPLAN SERVICES, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<TABLE>
<CAPTION>
ACTUAL PRO FORMA COMPANY(1)(2)(3)(4)
---------------------------------- ----------------------------------
THREE MONTHS THREE MONTHS
PERIOD ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998 DECEMBER 31, 1997 MARCH 31, 1998
----------------- -------------- ----------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $ -- $ 2,431 $ 59,730 $ 17,132
Operating expenses...................... 5,847 25,957 69,010 21,294
--------- --------- --------- ----------
Loss from operations.................... (5,847) (23,526) (9,280) (4,162)
Net loss................................ $ (5,847) $ (23,588) $ (6,522) $ (3,413)
========= ========= ========= ==========
Net loss per share -- basic and
diluted............................... $ (1.00) $ (4.05) $ (0.78) $ (0.41)
========= ========= ========= ==========
Weighted average number of shares....... 5,820,000 5,820,000 8,320,000 8,320,000
========= ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
ACTUAL
----------------------------------
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $1,714 $ 6,770
Total assets................................................ 7,042 81,704
Long-term debt and capital lease obligations, including
current portion........................................... 4,082 51,638
Shareholders' equity........................................ 72 4,565
</TABLE>
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(1) Gives effect to the acquisitions of HI, OMS and SHSB accounted for using the
purchase method for business combinations as if such acquisitions had
occurred on January 1, 1997 adjusted for (i) the elimination of $21.7
million of revenues and associated expenses for the year ended December 31,
1997, and $2.3 million of revenues and associated expenses for the three
months ended March 31, 1998, related to certain services provided to
Prudential Healthcare Pharmacy Services ("PHC") (an affiliate of SHSB prior
to the Company's acquisition of SHSB), which will not be part of the
Company's ongoing operations, (ii) application of the estimated net proceeds
to be received by the Company in the Offerings to repay approximately $26.6
million of existing debt and (iii) other adjustments related to such
acquisitions. See "Sykes HealthPlan Services, Inc. Selected Historical and
Pro Forma Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions." The pro
forma condensed combined financial information contained in these statements
is based on preliminary estimates, available information and certain
assumptions that management deems appropriate and should be read in
conjunction with the other financial statements and notes thereto included
elsewhere in this Prospectus.
(2) Pro forma loss from operations of $9.3 million and $4.2 million for the year
ended December 31, 1997 and for the three months ended March 31, 1998,
respectively, have not been adjusted for certain non-recurring expenses as
well as other costs which management believes could have been eliminated had
the Company, as of January 1, 1997, consummated its acquisitions of HI, OMS
and SHSB and completed
6
<PAGE> 9
the cost-reduction actions that it has subsequently taken. These expenses
and costs totaled approximately $10.9 million and approximately $4.4
million for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively. Non-recurring expenses of approximately $4.0
million and approximately $0.4 million for the year ended December 31, 1997
and for the three months ended March 31, 1998, respectively, consist of (i)
intercompany charges from the predecessor owner of SHSB for, among other
things, industry and compliance studies and cost allocations related to the
predecessor owner's mainframe computer systems and (ii) one-time recruiting
fees, offset by (iii) the Company's estimated annual costs to operate a
client-server system. Cost reductions of approximately $6.9 million and
approximately $4.0 million for the year ended December 31, 1997 and for the
three months ended March 31, 1998, respectively, consist of reductions in
the use of outside consultant services, reduced employee levels and
associated benefits, a restructured incentive bonus program, lower phone
service costs and lower professional fees. Pro forma results also have not
been adjusted to reflect the discontinuance of the Hughes Electronics
contract. See "Risk Factors -- Reliance on Information Processing Systems
and Proprietary Technology," "Sykes HealthPlan Services, Inc. Selected
Historical and Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisitions."
(3) Weighted average number of shares of Common Stock outstanding: (i) includes
2,500,000 shares of Common Stock being sold in the Offerings; and (ii)
excludes options to purchase 1,137,928 shares of Common Stock with a
weighted average exercise price of $5.75.
(4) Excludes the pro forma effect of the SHPS Sale. For the year ended December
31, 1997, inclusion of the SHPS Sale results in (i) a decrease in pro forma
net loss to $(5.6) million, (ii) a decrease in pro forma net loss per
share-basic and diluted to $(0.56) per share and (iii) an increase in the
pro forma weighted average number of shares of Common Stock outstanding to
10,020,000 shares. For the three months ended March 31, 1998 inclusion of
the SHPS Sale results in (i) a decrease in pro forma net loss to $(3.2)
million, (ii) a decrease in pro forma net loss per share-basic and diluted
to $(0.32) per share, and (iii) an increase in the pro forma weighted
average number of shares of Common Stock outstanding to 10,020,000 shares.
ACQUIRED COMPANIES SUMMARY FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
HEALTH INTERNATIONAL, INC. 1993 1994 1995 1996 1997 1997 1998(1)
- -------------------------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 4,756 $ 7,244 $ 7,783 $11,690 $12,059 $ 6,015 $ 6,559
Operating expenses.............. 4,619 6,484 7,553 10,441 10,859 5,383 9,260
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations... 137 760 230 1,249 1,200 632 (2,701)
Net income (loss)............... $ 106 $ 652 $ 227 $ 1,021 $ 755 $ 382 $(2,104)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- --------------
OMS, INCORPORATED 1993 1994 1995 1996 1997 1997
- ----------------- ------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 3,599 $ 3,879 $ 4,248 $ 4,710 $ 5,013 $ 1,132
Operating expenses.............. 3,190 3,263 3,569 3,944 4,406 1,011
------- ------- ------- ------- ------- --------------
Income from operations.......... 409 616 679 766 607 121
Net income...................... $ 224 $ 353 $ 425 $ 453 $ 334 $ 71
======= ======= ======= ======= ======= ==============
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
SYKES HEALTHPLAN ----------------------------------------------- -------------------
SERVICE BUREAU, INC. 1993 1994 1995 1996 1997 1997 1998
- -------------------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $47,602 $60,467 $53,401 $51,637 $64,381 $12,324 $13,811
Operating expenses.............. 45,764 58,941 50,984 56,999 72,555 14,002 17,722
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations... 1,838 1,526 2,417 (5,362) (8,174) (1,678) (3,911)
Net income (loss)............... $ 1,386 $ 762 $ 2,277 $(2,350) $(4,089) $ (740) $(2,306)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes a non-recurring charge during the six months ended March 31, 1998,
of $3.4 million relating to a cash settlement of outstanding stock options
and acquisition-related legal, consulting and financial advisory fees.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------
HEALTH INTERNATIONAL, INC. 1993 1994 1995 1996 1997
- -------------------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................. $ 199 $ 806 $ 671 $ 1,753 $ 2,323
Total assets..................................... 1,691 2,445 3,467 4,412 5,191
Long-term obligations, including capitalized
leases......................................... 361 312 616 578 449
Stockholders' equity............................. 815 1,469 1,702 2,724 3,479
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
OMS, INCORPORATED 1993 1994 1995 1996 1997
- ----------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................. $ (84) $ 527 $ 1,310 $ 1,647 $ 1,970
Total assets..................................... 3,246 3,949 4,344 4,870 6,942
Long-term obligations, including redeemable
preferred stock................................ 1,460 1,301 1,301 1,301 --
Stockholders' equity............................. 299 652 1,078 1,286 4,331
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
SYKES HEALTHPLAN SERVICE BUREAU, INC. 1993 1994 1995 1996 1997
- ------------------------------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................. $ (768) $ (371) $ 999 $ (979) $(3,410)
Total assets..................................... 42,894 40,711 42,599 46,355 41,604
Total long-term obligations, including
capitalized leases............................. 171 955 716 779 11
Stockholders' equity............................. 4,753 5,504 7,781 5,430 1,342
</TABLE>
8
<PAGE> 11
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the risk factors, in
addition to the other information contained in this Prospectus, before
purchasing the Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth below and under "Prospectus Summary," "Sykes HealthPlan Services, Inc.
Selected Historical and Pro Forma Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and "Business," as
well as in the Prospectus generally. The words "believe," "estimate," "expect,"
"intend," "anticipate," "plan," and similar expressions and variations of such
expressions identify certain of such forward-looking statements which speak only
as of the dates on which they were made. Prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Prospectus generally.
ABSENCE OF COMBINED OPERATING HISTORY AND RISKS OF INTEGRATION
The Company has made three acquisitions since its inception in December
1997. These acquisitions involved companies headquartered in Arizona, Kentucky
and Massachusetts, which collectively employed at the time of acquisition
approximately 1,000 individuals. The Company conducted limited operations and
generated limited revenues prior to these acquisitions. Each of the companies
acquired has been operating as a separate independent entity. The success of the
Company will depend, to a large extent, on the synergies expected to be
developed by integrating and cross-selling the services and products of these
previously independent companies, including cost savings and improved operating
results, and the retention of key employees and customers of these companies.
There can be no assurance that such integration and cross-selling will
successfully occur, that synergies will be realized or that such key employees
or customers will be retained by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
UNPROFITABLE OPERATING PERFORMANCE
SHSB, an operating subsidiary of the Company, experienced operating losses
of $5.4 million and $8.0 million in fiscal 1996 and fiscal 1997, respectively.
Since acquiring SHSB, the Company has developed a business strategy intended to
create growth and improve profitability. This strategy involves initiatives to
increase sales of its core services and achieve substantial cost reductions. The
implementation of this new business strategy involves substantial risks, and
there can be no assurance that this strategy will be fully implemented or that
it will achieve its goal of reversing the trend of unprofitable operations at
SHSB. Shortly after its acquisition of SHSB, the Company terminated
approximately 100 staff and consultant positions, as well as the majority of
SHSB's senior management. There can be no assurance that this reduction will not
adversely affect the Company's ability to deliver its services or products,
maintain customer relationships or develop new services or products. See
"Business -- General."
ABILITY TO MANAGE GROWTH AND RELATED RISKS
Due to the Company's recent acquisitions, the Company has experienced a
period of rapid growth. This growth has placed, and will continue to place,
significant strains on the Company's operations and systems. Additionally, the
Company's management team has been assembled only recently. David E. Garner,
James K. Murray, III and John D. Gannett, Jr. joined the Company upon its
formation in December 1997. Owen McKenna and Stephen K. Holland, M.D., joined
the Company upon its acquisition of OMS in December 1997, and Donald K. Kelly,
M.D., Suzanne D. Kelly and Michael C. Peerboom joined the Company upon its
acquisition of HI in March 1998. See "Management." There can be no assurance
that the management team will be able to effectively direct the Company through
this period of significant growth. The Company's growth strategy includes the
expansion of its service offerings in response to changing regulatory
requirements and customer needs. While the Company believes a substantial market
exists for additional service offerings, there can be no assurance that the
Company will have sufficient financial and managerial resources or
9
<PAGE> 12
otherwise be able to make the necessary investments to maintain and expand its
services in response to changing regulatory requirements or customer needs.
Another key element of the Company's growth strategy is the generation of
internal growth by capitalizing on cross-selling opportunities. Internal growth
will depend upon several factors, including the effective initiation,
development and maintenance of customer relationships, the expansion of
marketing operations, the Company's ability to maintain the high quality of the
services and products it offers and to expand such services and products and the
recruitment, motivation and retention of qualified management and other
personnel. The Company's growth strategy also includes making acquisitions.
Growth through acquisition involves substantial risks, including the risk of
improper valuation of the acquired business, diversion of management's attention
to the assimilation of the business acquired and the potential liabilities of
the acquired business. The Company may compete for acquisition and expansion
opportunities with entities that possess significantly greater resources than
the Company. Additionally, there can be no assurance that suitable acquisition
candidates will be available, that financing for acquisitions will be obtained
upon terms acceptable to the Company, that such acquisitions can be consummated,
or that acquired companies can be successfully and profitably integrated into
the Company's business. If the Company were to encounter difficulties in
implementing the expansion or development of its service offerings, in
cross-selling its services and products, in managing growth effectively, or in
integrating acquisitions, such difficulties could have a material adverse effect
on the Company. See "Business -- Services and Products," and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisitions."
RELIANCE ON INFORMATION PROCESSING SYSTEMS AND PROPRIETARY TECHNOLOGY
The Company's business is dependent on its ability to store, retrieve,
process and manage significant databases, and to periodically expand and upgrade
its information processing capabilities. To facilitate the planned expansion of
the Company's existing services to accommodate its customers' needs and future
regulatory requirements, the Company intends to develop additional proprietary
applications software and databases and to use commercially available database
management software and computer hardware that are not currently being used by
the Company. Currently, the information processing systems and services of SHSB
are provided to the Company by The Prudential Insurance Company of America
("Prudential") pursuant to a transitional systems support services agreement.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Pursuant to this agreement, Prudential is to provide
such services through March 31, 1999. The Company is currently in the process of
migrating its information systems from the mainframe platform provided under
this agreement to a proprietary, client server platform. The Company expects
that this migration will be completed prior to March 31, 1999.
The Company currently estimates that the cost to migrate from a mainframe
platform to a client server platform and to make its computer systems Year 2000
compliant will be approximately $5.5 million. However, any additional costs
incurred in connection with such migration, delay in such migration or in
becoming Year 2000 compliant, or the failure of the new systems to adequately
support the Company's operations, could materially adversely affect the
Company's business and financial results. See "-- Year 2000 Compliance" below.
In addition, there can be no assurance that the Company will be able to
incorporate new technology to enhance and develop its existing services.
The Company's computer equipment and software systems are maintained at the
Company's Arizona, Kentucky, Massachusetts, Nevada and Ohio locations.
Interruption or loss of the Company's information processing capabilities
through loss of stored data, breakdown or malfunction of computer equipment and
software systems, telecommunications failure or damage to the Company's systems
or the Arizona, Kentucky, Massachusetts, Nevada or Ohio locations caused by
fire, hurricane, tornado, flood, lightning, electrical power outage or other
disruption could have a material adverse effect on the Company.
The Company's business is dependent on its continued use of proprietary
software, databases and processing techniques. The Company attempts to protect
its trade secrets and other proprietary information through agreements with
customers, employees and consultants. There can be no assurance that these
precautions will be adequate to deter misappropriation of the Company's
proprietary software and healthcare information processing techniques.
10
<PAGE> 13
YEAR 2000 COMPLIANCE
Both the Company's internal operations and its service offerings use a
significant number of computer software programs and operating systems. To the
extent that these software applications contain source code that is unable to
properly interpret the upcoming calendar year 2000, some level of modification
or replacement of such source code or application will be necessary. The Company
has identified the software applications used by HI, OMS and SHSB that are not
Year 2000 compliant and has estimated the cost to achieve Year 2000 compliance
and to migrate from a mainframe platform to a client server platform will be
approximately $5.5 million. The Company's business could also be adversely
effected by the inability of its significant customers to make their computer
systems Year 2000 compliant. The Company is in the process of contacting its
significant customers to determine whether their computer systems are Year 2000
compliant and, if not, whether their failure would have an adverse effect on the
Company's business.
DEPENDENCE ON TREND TOWARD OUTSOURCING
The Company's business and growth depend in large part upon the trend
toward outsourcing support services. There can be no assurance that this trend
will continue, as organizations may elect to perform such services in-house. A
significant change in the direction of this trend could have a material adverse
effect upon the Company. Additionally, to date, although the Company believes
that no other business is currently a single-source provider of outsourcing
services similar to the Company, there can be no assurance that the Company's
cross-selling efforts will cause its customers to purchase additional services
from the Company or adopt a single-source outsourcing approach. See
"Business -- Strategy."
DEPENDENCE ON KEY CUSTOMERS
The Company's top ten customers accounted for approximately 48.6% of the
Company's pro forma revenues in 1997, of which PHC (an affiliate of SHSB prior
to the Company's acquisition of SHSB) and Hughes Electronics represented
approximately 14.7% and 11.0%, respectively. The Company expects to discontinue
providing fulfillment and dental maintenance organization ("DMO") services to
PHC in 1998. The Company estimates that during 1997, the Company provided
fulfillment and DMO services to PHC on a break-even basis. Prior to the
acquisition of SHSB, the predecessor of SHSB was notified that its contract with
Hughes Electronics would not continue after 1998. PHC and HPS are expected to be
the Company's largest customers in 1998. The Company anticipates that in the
future a significant portion of its revenues will continue to be derived from a
limited number of key customers. The Company's loss of more of its business from
PHC than anticipated or the loss of its business from HPS or any of its other
key customers could have a material adverse effect on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Acquisitions," "Business -- Customers" and "Certain
Transactions."
FLUCTUATIONS IN OPERATING RESULTS
The results of operations for the Company's Care Management services
historically have been affected by the addition or loss of significant
customers. When a significant customer is added, the Company hires and trains
additional personnel to service the projected new business prior to receipt of
revenues from the customer. A start-up fee, ranging from $2-$3 per participant,
is initially charged to cover part of the costs incurred by the Company.
Consequently, results of operations for a given quarter may be subject to
significant fluctuations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Revenue Recognition" and
"Business -- Customers".
NEGOTIATION OF NEW LINE OF CREDIT FACILITY
The Company intends to negotiate a new line of credit facility in order to
replace its existing Line of Credit and release Sykes and HPS as guarantors. The
agreement by the Company's lenders to release Sykes and HPS as guarantors is a
condition to consummation of the HPS Share Purchases. The Company expects that
the new line of credit facility will be reduced from the current $75.0 million
to approximately $30.0 million and that the interest rate on borrowed funds will
increase. See "Use of Proceeds." The Company has a
11
<PAGE> 14
commitment from a bank for a 90-day, $15.0 million interim line of credit
facility to replace its current Line of Credit until a new line of credit
facility can be established. There can be no assurance that the Company will be
successful in negotiating a new line of credit facility. The expected reduction
of available credit could adversely affect the Company's ability to implement
its growth strategies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
CONTRACT CANCELLATION OR REDUCTION
The Company's contracts are generally cancellable by each customer at any
time or on short-term notice, and customers may unilaterally reduce their use of
the Company's services under such contracts without penalty. If any material
contract or a significant number of the Company's other contracts are cancelled
or reduced in scope, there could be a material adverse effect on the Company's
business and results of operations.
DEPENDENCE ON SENIOR MANAGEMENT
The future success of the Company is largely dependent upon the efforts,
direction and guidance of its senior management. Although the Company has
entered into employment and noncompetition agreements with its executive
officers, its continued growth and success also depend in part on its ability to
attract and retain skilled employees and managers, and on the ability of its
executive officers and key employees to manage its operations successfully. The
loss of any of the Company's senior management or key personnel, and in
particular, Mr. Garner, President and Chief Executive Officer, Mr. Murray, III,
Executive Vice President, Treasurer and Chief Financial Officer, or senior
executives of HI or OMS, the Company's inability to enforce the employment or
noncompetition agreements with any such executive officers, or the Company's
inability to attract and retain key employees in the future, could have a
material adverse effect on the Company. See "Management."
POTENTIAL RISKS OF CARE MANAGEMENT CONTRACTS
In the future, certain of the Company's Care Management contracts may
contain "shared risk" provisions under which the Company may be required to bear
a portion of any loss in connection with such provisions. To the extent
healthcare participants covered by such contracts require more frequent or
extensive care than anticipated, the Company would incur unexpected costs not
offset by additional revenue, which would reduce operating margins. In the worst
case, the revenue derived from such contracts may be insufficient to cover the
cost of the services provided. Any such reduction or elimination of earnings
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation -- Revenue Recognition".
POTENTIAL LEGAL LIABILITY FOR CARE MANAGEMENT
Participants in the healthcare industry have become subject to an
increasing number of lawsuits alleging malpractice, product liability, bad
faith, ERISA liability and other legal theories, including negligence in
credentialing and utilization management, many of which involve large claims and
significant legal costs. The Company, through its utilization review services,
makes recommendations concerning the appropriateness of providers' proposed
medical treatment of patients and, as a result, it could be subject to liability
arising from any adverse medical consequences. The Company does not grant or
deny claims for payment of benefits, and the Company does not believe that it
engages in the practice of medicine or the delivery of medical services. There
can be no assurance, however, that the Company will not be subject to claims or
litigation related to granting or denying claims for payment of benefits or
allegations that the Company engages in the practice of medicine or the delivery
of medical services. When a patient requires guidance in retaining physician
services in their area, the Company assists them in identifying appropriate
providers. To the extent that those providers are deemed to be agents of the
Company, the Company could be subject to liability regarding adverse medical
consequences or inappropriate provider selection. Additionally, due to the
nature of its business, the Company could become involved in litigation
regarding the information provided telephonically by its clinical service staff,
particularly in light of the emerging laws relating to telemedicine, which is
the practice of performing medical diagnoses and treatment via
telecommunications devices. See "-- Risks Relating to Telemedicine."
12
<PAGE> 15
Additionally, to the extent that the Company's clinical service staff could
be deemed a provider of medical or clinical services, the Company could be
subject to claims of licensure violations, which could result in fines,
suspension or loss of the right to do business in a particular state. In
Arizona, the state court of appeals held that the state board of medicine, as
the entity with authority to regulate the practice of medicine in Arizona, had
jurisdiction to investigate complaints against a physician arising from his
decisions authorizing or denying pre-certification of medical procedures as a
medical director of a health plan. As a result of its investigation, the Arizona
state board of medicine issued a "letter of concern." Unlike the physician in
the Arizona case, the physicians and nurses employed by the Company do not make
final decisions regarding the authorization or denial of medical treatment.
However, to the extent that their duties could be viewed as comparable, the
physicians and nurses employed by the Company could be deemed to be engaged in
the corporate practice of medicine and subject to discipline by the state boards
of medicine and nursing through which they are licensed, which could result in
substantial penalties to the Company, including administrative penalties such as
fines, reprimands, criminal penalties, or an order to cease doing business, any
of which could have a material adverse effect on the Company. See
"Business -- Regulation".
The Company could also incur liability as a fiduciary in respect of certain
of the disability management services it provides. To reduce its exposure, the
Company maintains general liability insurance coverage up to $2.0 million in the
aggregate, product liability insurance coverage up to $1.0 million in the
aggregate, umbrella liability insurance coverage up to $10.0 million in the
aggregate, primary occurrence errors and omissions insurance coverage up to $5.0
million in the aggregate and excess occurrence errors and omissions insurance
coverage up to $5.0 million in the aggregate. There can be no assurance,
however, that such insurance will be sufficient or available at a reasonable
cost to protect the Company from liability. To the extent that such insurance is
insufficient or unavailable to cover the costs associated with these potential
liabilities, the Company's business or results of operations could be materially
adversely affected. See "Business -- Services and Products" and "-- Insurance."
POTENTIAL LEGAL LIABILITY AS A BENEFITS ADMINISTRATOR
As an administrator of benefits, the Company provides services to employers
that are subject to the requirements of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which may prevent the imposition of liability
in state law claims such as malpractice or bad faith. The possibility exists
that the Company could be subject to state law claims for services provided to
plans not covered by ERISA and liability for these claims could be substantial.
Additionally, there can be no assurance that ERISA will not be further eroded by
legal precedent or amended to modify or repeal the current limitations on
liability.
As a provider of COBRA compliance and administration services, the Company
is subject to excise taxes for noncompliance with certain provisions of COBRA.
Under current federal laws, the maximum amount of such taxes that may be imposed
on the Company in any year for unintentional violations of COBRA is $2.0
million. In addition to the excise tax liability that may be imposed on the
Company, substantial excise taxes may be imposed on the Company's customers
under COBRA. Under many of the Company's service agreements, the Company assumes
financial responsibility for the payment of such taxes or penalties assessed
against a customer arising out of the Company's failure to comply with COBRA,
unless such taxes or penalties are attributable to the customer's failure to
comply with the terms of its agreement with the Company. In addition to
liability for excise taxes for noncompliance with COBRA, the Company accepts
financial responsibility for certain civil and other liabilities incurred by its
customers that are attributable to the Company's failure to fulfill its
obligations to its customers under its agreements. These liabilities could, in
certain cases, be substantial. There can be no assurance that the Company will
not incur material liability for noncompliance with COBRA or for its failure to
comply with its agreement with any customer in the future. Although the Company
maintains errors and omissions insurance coverage and such other coverages as
the Company believes are reasonable, the imposition of such liability on the
Company in excess of any available insurance coverage, or its insurer's
interpretation that such liability is not covered under the Company's insurance
policy, could have a material adverse effect on the Company. See
"Business -- Services and Products" and "-- Insurance."
13
<PAGE> 16
RAPID TECHNOLOGICAL AND REGULATORY CHANGES
The market for the Company's services is characterized by rapid
technological advances, new product introductions and enhancements, and changes
in customer and regulatory requirements. These factors will require the Company
to provide adequately trained personnel to address the increasingly
sophisticated, complex and evolving needs of its customers and relevant
regulatory requirements. The Company's ability to capitalize on the acquisition
of OMS will depend upon its ability to continually enhance OMS's software, to
adapt such software to new hardware and operating system requirements and to
develop new software products. Any failure by the Company to anticipate or
respond rapidly to technological advancements, new products and enhancements, or
changes in customer or regulatory requirements could have a material adverse
effect upon the Company. See "Business -- Services and Products."
GOVERNMENTAL REGULATION
The healthcare and employee benefit industries are subject to extensive and
evolving regulation, both at the federal and state levels. The benefit plans
administered by the Company and its Care Management programs are subject to a
variety of laws and regulations, including ERISA, COBRA, the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), federal and state
confidentiality laws, Medicare as secondary payor laws and regulations,
telemedicine laws, the Public Health Service Act, a number of state third party
administrative laws, and state laws involving the provision of healthcare
services. These laws and regulations are administered by numerous agencies,
including the Department of Labor, the Department of Commerce, the Department of
Health and Human Services, the Internal Revenue Service (the "IRS") and state
insurance and health regulation departments.
Where a patient requires a second opinion, one of the Company's physician
medical directors provides the patient with the names of physicians in the
patient's area. The patient selects a physician and the Company makes an
appointment for the patient with the physician, and this physician evaluates the
appropriateness of the care being recommended by the patient's attending
physician. In doing so, the physician may order designated healthcare services
which in turn must be a covered service approved by the Company for payment.
Whether such services are covered benefits is determined by the terms of the
customer's benefit plan, not by the Company. The Company reviews the terms of
its customers' benefit plans, each of which includes a process to determine
which healthcare services are covered. If the ordered designated healthcare
services are covered under the Medicare or Medicaid programs, the provision of
the list of names of physicians or the making of a patient appointment by the
medical director could be deemed a referral subject to the prohibitions against
referrals to entities performing designated healthcare services in which the
referring physician has a financial interest as defined in the Stark I and Stark
II statutes, resulting in fines or criminal penalties, which could have a
material adverse effect on the Company.
The Company's customers, and not the Company, generally pay the physicians
who perform the second opinion and related services, including designated
healthcare services. The Company does not believe that under these circumstances
it has a financial relationship in any entity that provides designated
healthcare services which are reimbursed under the Medicare or Medicaid
programs. Therefore, the Company does not believe that the Stark II statute
impacts referrals made by the Company's medical directors in these instances.
Occasionally, the Company may advance payments to physicians, laboratories
and x-ray facilities, which may include payment for designated healthcare
services, on behalf of the Company's customers. The Company's customers
reimburse the Company in total for these advances. These advances may constitute
a financial interest as that term is defined in Stark I and in the proposed
regulations to the Stark II laws. However, the Company believes that the advance
payments to physicians do not violate the Stark I and Stark II prohibition
against referrals, as the advance payments meet the proposed exception for
physician services under the proposed Stark II regulations. The Company also
believes that these payments, which are authorized by the Company's medical
director, to laboratories and x-ray facilities do not violate Stark I and the
Stark II proposed regulations as these advance payments meet the proposed
exception for payments by physicians for items and services under the proposed
Stark II regulations. However, there are, to date, no final regulations
promulgated under the Stark II statute. To the extent that these actions by the
medical directors
14
<PAGE> 17
could later be found to be subject to and in violation of the Stark II statute,
the medical directors and the Company could be subject to fines or criminal
penalties, which could have a material adverse effect on the Company.
Many of these statutes and regulations impact the development of healthcare
information services and interstate transmission of medical information and
services. Some of the statutes and regulations governing the provision of
healthcare services as well as laws relating to telemedicine and corporate
practice of medicine doctrines could be construed by regulatory authorities to
apply to certain of the Company's activities. See "-- Risks Relating to Laws
Governing Corporate Practice of Medicine." To the extent these statutes and
regulations could be deemed applicable to the Company, the Company and its
employees could be required to obtain additional licenses or registrations or to
modify or curtail the Company's activities, or the Company could be subject to
revocation or suspension of existing licenses or registrations or civil or
criminal penalties or fines, currently as high as $10,000, any of which could
have a material adverse effect on the Company.
Currently 34 states require licensure or registration of entities deemed to
be private utilization review agents. Frequently, these states exempt entities
providing services to ERISA plans. The Company's current clients for these
services are primarily but not exclusively ERISA plans. To the extent that the
Company provides services only to ERISA plans in any given state, the Company
may be exempt from these licensure requirements. Although the Company has
voluntarily achieved licensure in the states in which the Company has determined
licensure is required, penalties for failure to achieve licensure in additional
states could result in the loss of the Company's licenses or substantial
penalties to the Company, which could have a material adverse effect on the
Company. See "Business -- Regulation."
RISKS RELATING TO LAWS GOVERNING CORPORATE PRACTICE OF MEDICINE
The laws of certain states in which the Company operates or may operate in
the future do not permit business corporations to practice medicine or exercise
control over physicians who practice medicine. Currently, Arkansas, California,
Illinois, Iowa, Kansas, Louisiana, Massachusetts, Michigan, New Mexico, Texas,
Virginia, Washington and West Virginia have some form of prohibition against the
corporate practice of medicine. Although the Company does not believe that the
services it provides constitute the corporate practice of medicine, a finding
that the Company is engaged in the corporate practice of medicine in any of the
foregoing states could result in loss of licensing, the need to develop
relationships with physicians licensed in the states having corporate practice
of medicine statutes, and civil and criminal fines, which currently range as
high as $10,000, any of which could require the Company to modify its techniques
of doing business, withdraw from certain states or otherwise curtail its
activities, and could have a material adverse effect on the Company.
RISKS RELATING TO TELEMEDICINE
Telemedicine is the practice of performing medial diagnosis and treatment
via telecommunications devices. These technologies range from providing clinical
advice over the telephone, the transmission of high resolution images (e.g.,
x-rays, sonograms) and the remote performance of clinical evaluations using
interactive teleconferencing. As advanced telecommunications technology has
become more widely available, the legal issues associated with telemedicine have
become the subject of new legislation. In the past three years, legislation has
been introduced to amend licensure laws related to the out of state practice of
medicine and consultation. To date, 23 states have introduced or passed bills
related to telemedicine, primarily regarding the licensure of out-of-state
physicians and the coverage of telemedicine procedures by third party payor
plans. Those states are Alabama, Arkansas, Colorado, Connecticut, Florida,
Georgia, Hawaii, Illinois, Maryland, Mississippi, Montana, Nebraska, New
Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Rhode Island,
Utah, Virginia, Washington and West Virginia.
Although the Company does not believe that these laws currently impact the
Company's operations because it does not believe it engages in medical diagnosis
or treatment via telecommunication devices, to the extent the Company's services
could be deemed to be telemedicine, the Company could be subject to liability
for licensure violations, violations of third party payor requirements or
violations of the laws relating to the confidentiality of patient medical
records, any of which could have a material adverse effect on the Company.
15
<PAGE> 18
POSSIBLE ADVERSE EFFECT OF NATIONAL AND STATE HEALTHCARE REFORM PROPOSALS
The extent and type of government support for and oversight of the delivery
of healthcare services, as well as the extent and type of health insurance
benefits that employers are required to provide employees, have been the subject
of close scrutiny and debate in recent years, both at the national and state
levels, resulting in such legislation as HIPAA. Additional changes in the
government programs and regulations, including requirements governing the manner
by which services are delivered, and the premiums for services, the
reimbursement of fees, benefits packages, parity for particular health
conditions, access to particular types of healthcare providers, or the
development of a modified healthcare purchasing system could have a material
adverse effect on the Company. See "Business -- Regulation."
COMPETITION
The Company's business is highly competitive and fragmented. The Company's
competitors include data processing affiliates of financial institutions,
insurance companies, third party administrators, providers of healthcare
protocols and software solutions and other outsourcing service companies.
Although the Company believes that it is currently the only single-source
provider of comprehensive and clinically sophisticated Care Management services
and products and Employee Benefit Services, several companies, including ABR
Information Services, Inc., Access Health, Inc., HBO & Company and Health
Management Systems, Inc., offer certain services similar to those offered by the
Company. Management believes that there are certain competitors and potential
competitors, including HPS and Sykes, that possess substantially greater
resources and name recognition than the Company. In addition, many of the
services offered by the Company are often provided in-house. There can be no
assurance that the Company will be able to compete effectively in the future.
See "Business -- Competition" and "Certain Transactions."
CONTROL BY PRINCIPAL SHAREHOLDER
Upon the completion of the Offerings and the HPS Share Purchases, HPS, the
Company's remaining principal shareholder, will own approximately 52.5% of the
outstanding Common Stock (approximately 50.6% if the Underwriters'
over-allotment options are exercised in full). As a result, HPS will be able to
control the election of the Company's directors and the outcome of other matters
requiring shareholder approval, including any transaction that might result in a
change of control of the Company. Currently, two members of the Company's Board
of Directors are executive officers or directors of HPS. The voting power of HPS
may have the effect of delaying, deferring or preventing an unsolicited change
of control of the Company, which may adversely affect the market price of the
Common Stock. See "Principal Shareholders."
ANTI-TAKEOVER CONSIDERATIONS
The Company's Amended and Restated Articles of Incorporation (the "Articles
of Incorporation") and Amended and Restated Bylaws (the "Bylaws") and Florida
law contain provisions that may have the effect of inhibiting a non-negotiated
merger or other business combination. In particular, the Company's Articles of
Incorporation provide for a staggered board of directors and permit the removal
of directors only for cause. The Articles of Incorporation also contain a "fair
price" provision which is intended to ensure that the consideration paid by an
acquiror in certain transactions involving the Company that follow a successful
tender offer must be no less than the highest consideration offered pursuant to
the tender offer. Additionally, the Articles of Incorporation authorize the
Company's Board of Directors to issue up to 15,000,000 shares of preferred stock
(the "Preferred Stock") and to fix the rights and preferences thereof, without a
further vote of the shareholders. Certain of these provisions may make it
difficult for other persons, without the approval of the Company's Board of
Directors, to make a tender offer for or acquisition of substantial amounts of
Common Stock or to launch other takeover attempts that a shareholder might
consider to be in such shareholder's best interests, including attempts that
might result in the payment of a premium over the market price for the Common
Stock held by such shareholder. See "Description of Capital Stock."
16
<PAGE> 19
RISKS RELATED TO GOODWILL
At March 31, 1998, the Company's total assets were approximately $81.7
million, of which approximately $37.4 million, or approximately 45.9% of total
assets, was goodwill. Goodwill is the excess of cost over fair value of net
assets acquired. There can be no assurance that the value of such goodwill will
ever be realized by the Company. This goodwill is being amortized on a
straight-line basis over periods of 15 to 20 years, which will produce an annual
charge to operations of approximately $2.2 million, which will adversely impact
the Company's earnings. The Company will evaluate on a regular basis whether
events and circumstances have occurred that indicate that the carrying amount of
goodwill may warrant revision or may not be recoverable. Although at March 31,
1998, 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 adversely affect the Company's financial position.
In connection with the acquisitions of HI, OMS and SHSB, the Company recorded a
charge to earnings of $29.3 million for acquired in-process research and
development, $14.1 million of which is not deductible for income tax purposes.
The identified in-process research and development efforts include significant
product enhancements, systems migration efforts and new customized applications
which have not yet reached the stage of technological feasibility. Therefore the
ultimate revenue generating capability of these items is uncertain. The research
and development acquired will require additional development efforts, estimated
to cost on an average of $5.0 million per year for the next three years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Acquisitions."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or continue following the Offerings, or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price for the Common Stock will be determined by negotiations
between the Company and the Underwriters based on several factors, and may not
be indicative of the market price for the Common Stock after the Offerings. See
"Underwriting."
The Company believes that various factors, such as general economic
conditions and changes or volatility in the financial markets, announcements or
significant developments with respect to healthcare reform or employee benefits
issues, actual or anticipated variations in the Company's quarterly or annual
financial results, the introduction of new services or technologies by the
Company or its competitors, changes in other conditions or trends in the
Company's industry or in the industries of any of the Company's significant
customers, changes in governmental regulation or changes in securities analysts'
estimates of the Company's future performance or that of its competitors or its
industry, could cause the market price of the Common Stock to fluctuate
substantially.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock in the public market after the Offerings
under Rule 144 under the Securities Act of 1933, as amended (the "Securities
Act"), or otherwise, or the perception that such sales could occur, may
adversely affect prevailing market prices of the Common Stock and could impair
the future ability of the Company to raise capital through an offering of its
equity securities or to consummate acquisitions using Common Stock as
consideration. The Company, its executive officers and directors, HPS and Sykes
have agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), except, in the case of the Company, for
shares of Common Stock offered hereby and shares issued and options granted
pursuant to the Stock Option Plan. See "Management -- Stock Option Plan" "Shares
Eligible for Future Sale" and "Underwriting."
17
<PAGE> 20
DILUTION
Investors purchasing Common Stock in the Offerings will incur immediate
dilution in net tangible book value of $13.49 per share (assuming an initial
public offering price of $12.00 per share). See "Dilution."
DIVIDEND POLICY
The Company has never declared, and does not intend, for the foreseeable
future to declare or pay any cash dividends, and intends to retain earnings, if
any, for the future operation and expansion of the Company's business. Any
determination to declare or pay dividends in the future will be at the
discretion of the Company's Board of Directors and will depend on the Company's
results of operations, financial condition, contractual or legal restrictions
and other factors deemed relevant by the Company's Board of Directors. The Line
of Credit currently prohibits the Company from paying any dividends. See
"Dividend Policy."
CONFLICT OF INTERESTS OF NATIONSBANC MONTGOMERY SECURITIES LLC IN THE OFFERINGS
The net proceeds from the Offerings will be applied to repay indebtedness
outstanding under the Line of Credit. NationsBank, N.A., the agent and a lender
under the Line of Credit, is an affiliate of NationsBanc Montgomery Securities
LLC, one of the Underwriters. It is also anticipated that NationsBank, N.A. will
be a lender under the Company's new line of credit facility, and will provide an
interim line of credit facility prior to the establishment of such new line of
credit facility. As a result of these relationships and the intended use of the
net proceeds, NationsBanc Montgomery Securities LLC has a further interest in
the successful completion of the Offerings in addition to the underwriting fees
that it would receive upon such completion, and such further interest may be
different from or contrary to the interests of the Company or potential
investors in the Common Stock. See "Underwriting" for a description of the
independent underwriting procedures that are being executed in connection with
the Offerings.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of shares of
Common Stock in the Offerings (after deducting the Underwriters' discount and
estimated expenses of the Offerings payable by the Company and assuming an
initial public offering price of $12.00 per share) are approximately $26.6
million ($30.8 million if the Underwriters' over-allotment options are exercised
in full).
The Company intends to use the net proceeds from the Offerings, together
with the estimated net proceeds of approximately $19.0 million from the SHPS
Sale, for repayment of indebtedness outstanding under the Line of Credit. The
Line of Credit expires March 27, 2001, and at March 31, 1998, had an outstanding
principal balance of approximately $51.0 million. Amounts outstanding under the
Line of Credit accrue interest at an annual rate equal to either (i) the
lender's prime rate plus a margin ranging from 0% to 0.50% or (ii) the 90-day
London Interbank Offering Rate ("LIBOR") plus a margin ranging from 0.75% to
1.75% at the Company's election. As of March 31, 1998, the interest rate was
approximately 7.19%. The borrowings under the Line of Credit were primarily used
to fund the acquisition of SHSB. See "Risk Factors -- Negotiation of New Line of
Credit Facility" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
NationsBank N.A., the agent and a lender under the Line of Credit, is an
affiliate of NationsBanc Montgomery Securities, LLC, one of the Underwriters.
See "Risk Factors -- Conflict of Interests of NationsBanc Montgomery Securities
LLC in the Offerings" and "Underwriting."
DIVIDEND POLICY
The Company does not intend, for the foreseeable future, to declare or pay
any cash dividends and intends to retain earnings, if any, for the future
operation and expansion of the Company's business. Any determination to declare
or pay dividends in the future will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition and any contractual restrictions, considerations imposed by applicable
law and other factors deemed relevant by the Company's Board of Directors. The
Line of Credit currently prohibits the Company from paying any dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
18
<PAGE> 21
CAPITALIZATION
The table below sets forth the consolidated capitalization of the Company
at March 31, 1998, and as adjusted at that date to give effect to the sale of
the 2,500,000 shares of Common Stock offered by the Company hereby (assuming an
initial public offering price of $12.00 per share). See "Use of Proceeds." This
table should be read in conjunction with the Financial Statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------
ACTUAL AS ADJUSTED(1)
--------- ---------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Current portion of long-term debt........................... $ 216 $ 216
======== ========
Long-term debt and capital lease obligations................ $ 51,422 $ 24,772
Shareholders' equity:
Preferred Stock, $.01 par value; no shares authorized,
issued or outstanding, actual; 15,000,000 shares
authorized, no shares issued or outstanding, as
adjusted............................................... -- --
Class A Voting Common Stock, $.01 par value; 10,000,000
shares authorized, 5,820,000 issued and outstanding,
actual; no shares authorized, issued or outstanding, as
adjusted............................................... 100 --
Class B Non-Voting Common Stock, $.01 par value; 2,000,000
shares authorized, actual; no shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, as adjusted............................... -- --
Common Stock, $.01 par value; no shares authorized, issued
or outstanding, actual; 100,000,000 authorized,
8,320,000 shares issued and outstanding, as
adjusted(2)............................................ -- 83
Capital in excess of par value............................ 33,900 60,567
Accumulated deficit....................................... (29,435) (29,435)
-------- --------
Total shareholders' equity........................ 4,565 31,215
-------- --------
Total capitalization.............................. $ 55,987 $ 55,987
======== ========
</TABLE>
- ---------------
(1) Excludes the SHPS Sale. Inclusion of the SHPS Sale results in (i) a decrease
in long-term debt and capital lease obligations to $5.8 million (ii) an
increase in total shareholders' equity to $50.2 million and (iii) an
increase in shares of Common Stock issued and outstanding to 10,020,000
shares.
(2) Excludes (i) 1,137,528 shares of Common Stock issuable upon the exercise of
outstanding stock options under the Stock Option Plan and (ii) 317,072
shares of Common Stock available for future grants under the Stock Option
Plan upon completion of the Offerings. See "Management -- Stock Option
Plan."
19
<PAGE> 22
DILUTION
As of March 31, 1998, the Company had a net tangible book value of
approximately $(39.1) million or $(6.71) per share of Common Stock. Without
taking into account any other changes in the pro forma net tangible book value
after March 31, 1998, other than to give effect to the receipt by the Company of
the net proceeds from the sale of 2,500,000 shares of Common Stock offered by
the Company hereby (assuming an initial public offering price of $12.00 per
share), the pro forma net tangible book value of the Company as of March 31,
1998 would have been approximately $(12.4) million or $(1.49) per share. This
represents an immediate increase in pro forma net tangible book value of $5.22
per share to existing shareholders and an immediate dilution of $13.49 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
------
Net tangible book value per share at March 31, 1998....... ($ 6.71)
-------
Increase per share attributable to new investors.......... 5.22
-------
Pro forma net tangible book value per share after the
Offerings(1).............................................. (1.49)
------
Pro forma net tangible book value dilution per share to new
investors(1).............................................. $13.49
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing shareholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid (assuming an initial public offering price of $12.00 per
share) and the average price per share paid:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED(2)(3) TOTAL CONSIDERATION(2) PRICE
----------------------- ---------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE(2)
----------- -------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 5,820,000 70.0% $34,000,000 53.1% $ 5.84
New investors................ 2,500,000 30.0 30,000,000 46.9 $12.00
---------- ---- ----------- ----
Total.............. 8,320,000 100% $64,000,000 100%
========== ==== =========== ====
</TABLE>
- ---------------
(1) Excludes the SHPS Sale. Inclusion of the SHPS Sale results in (i) an
increase in pro forma net tangible book value per share after the Offerings
to $0.65 per share and (ii) a decrease in pro forma net tangible book value
dilution per share to new investors to $11.35 per share.
(2) Excludes the SHPS Sale. Inclusion of the SHPS Sale results in (i) an
increase in shares purchased by existing shareholders to 7,520,000 shares,
(ii) an increase in total consideration paid by existing shareholders to
$53.0 million, and (iii) an increase in average price per share paid by
existing shareholders to $7.04 per share.
(3) These computations assume no exercise of any outstanding stock options after
March 31, 1998 or of the Underwriters' over-allotment options. As of June 1,
1998, options to purchase 1,137,928 shares of Common Stock were outstanding.
See "Management -- Stock Option Plan." To the extent these options or the
Underwriters' over-allotment options are exercised, there will be further
dilution to new investors. See "Underwriting" for information concerning the
Underwriters' over-allotment options.
20
<PAGE> 23
SYKES HEALTHPLAN SERVICES, INC.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the
end of, the period ended December 31, 1997, are derived from and should be read
in conjunction with the consolidated audited financial statements of the
Company. The selected consolidated financial data as of, and for the three
months ended March 31, 1998, are derived from the consolidated unaudited interim
financial statements and include, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the data for such periods. The results of operations for the period ended
December 31, 1997, and the three months ended March 31, 1998, are not
necessarily indicative of the results for a full year.
The Company was incorporated on December 18, 1997. On December 31, 1997,
the Company acquired OMS and on March 31, 1998, the Company acquired HI and
SHSB. The following unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1997 and for the three months ended
March 31, 1998, gives effect to (i) the acquisitions of HI, OMS and SHSB
accounted for using the purchase method for business combinations, and the
associated costs which are directly attributable to the acquisitions, (ii) the
Offerings and the application of the estimated net proceeds to be received by
the Company to repay approximately $26.6 million of existing debt and (iii) the
elimination of $21.7 million and $2.3 million of revenues and associated
expenses, respectively, for the year ended December 31, 1997 and for the three
months ended March 31, 1998 related to certain services provided to PHC which
will not be part of the Company's ongoing operations as if each had occurred on
January 1, 1997.
The historical financial statements reflect the results of operations of
the Company and were derived from the respective consolidated financial
statements of the Company, HI, OMS and SHSB where indicated. The periods
included in the fiscal 1997 financial statements for the individual entities are
as follows: the Company for the period from its incorporation on December 18,
1997 through December 31, 1997; OMS for the twelve months ended December 31,
1997; HI for the twelve months ended September 30, 1997; and SHSB for the twelve
months ended December 31, 1997. Prior to its acquisition by the Company, HI
reported on a September 30 fiscal year end. As such, HI's historical results of
operations for the twelve months ended September 30, 1997 is included with the
historical results of operations for the twelve months ended December 31, 1997
for the Company, OMS, and SHSB in the Pro forma Condensed Combined Statement of
Operations for the year ended December 31, 1997. HI has begun operating on a
December 31 fiscal year end.
The following unaudited pro forma condensed combined statements of
operations have been prepared utilizing a preliminary purchase price allocation.
The unaudited pro forma condensed combined statements of operations do not
reflect adjustments for certain non-recurring expenses and cost reductions which
are presented in the notes thereto as supplemental financial information. The
preliminary purchase price allocation is subject to refinement until all
pertinent information regarding the acquired companies is obtained and,
accordingly, the amounts presented herein are subject to change.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The unaudited pro forma condensed combined statements of
operations do not purport to represent what the Company's results of operations
would actually have been if such transactions in fact had occurred on those
dates or to project the Company's results of operations for any future period.
Because the Company was not under common control or management, historical
combined results may not be comparable to, or indicative of, future performance.
The unaudited pro forma condensed combined statements of operations should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus. See "Risk Factors."
21
<PAGE> 24
PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
HISTORICAL ADJUSTMENTS PRO FORMA RELATED
-------------------------------------- FOR THE FOR THE TO THE PRO FORMA
COMPANY HI OMS SHSB ACQUISITIONS ACQUISITIONS OFFERINGS COMPANY(1)(2)
--------- ------- ------ ------- ------------ ------------ ----------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ -- $ 12,059 $5,013 $64,381 $(21,723)(3) $ 59,730 $ -- $ 59,730
Operating expenses......... 5,847(4) 10,859 4,406 72,555 (24,657)(3)(5) 69,010 -- 69,010
--------- -------- ------ ------- -------- ---------- ------- ----------
Income (loss) from
operations............... (5,847) 1,200 607 (8,174) 2,934 (9,280) -- (9,280)
Interest (income)/expense,
net...................... -- (42) (78) (997) 4,595(6) 3,478 (2,193)(7) 1,285
--------- -------- ------ ------- -------- ---------- ------- ----------
Income (loss) before
taxes.................... (5,847) 1,242 685 (7,177) (1,661) (12,758) 2,193 (10,565)
Provision for (benefit
from) income taxes....... -- 487 351 (3,088) (2,677)(8) (4,927) 884(9) (4,043)
--------- -------- ------ ------- -------- ---------- ------- ----------
Net income
(loss)........... $ (5,847) $ 755 $ 334 $(4,089) $ 1,016 $ (7,831) $ 1,309 $ (6,522)
========= ======== ====== ======= ======== ========== ======= ==========
Net income (loss) per
common share:
Basic and Diluted........ $ (1.00) $ (1.35) $ (0.78)
========= ========== ==========
Weighted average number of
shares of Common Stock:
Basic and diluted...... 5,820,000 5,820,000 8,320,000
========= ========== ==========
</TABLE>
- ---------------
(1) Pro forma loss from operations of $9.3 million for the year ended December
31, 1997 has not been adjusted for certain non-recurring expenses as well
as other costs which the Company believes could have been eliminated had
the Company, as of January 1, 1997, consummated its acquisitions of HI, OMS
and SHSB and completed the cost-reduction actions that it has subsequently
taken. The non-recurring expenses and cost reductions totaled approximately
$10.9 million for the period ended December 31, 1997. Non-recurring
expenses of approximately $4.0 million consist of (i) intercompany charges
from the predecessor owner of SHSB for, among other things, industry and
compliance studies and cost allocations related to the predecessor owner's
mainframe computer systems and (ii) one-time recruiting fees, offset by
(iii) the Company's estimated annual costs to operate a client-server
system. See "Risk Factors -- Reliance on Information Processing Systems and
Proprietary Technology. Cost reductions of approximately $6.9 million
consist of reductions in the use of outside consultant services, reduced
employee levels and associated benefits, a restructured incentive bonus
program, lower phone service costs and lower professional fees. Pro forma
results have also not been adjusted for the discontinuance of the Hughes
Electronics contract described in "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions." During
1997, the Hughes Electronics contract represented approximately $6.5
million in revenues and was approximately break-even.
(2) Excludes the pro forma effect of the SHPS Sale. Inclusion of the SHPS Sale
results in (i) a decrease in pro forma net loss to $(5.6) million, (ii) a
decrease in pro forma net loss per share-basic and diluted to $(0.56) per
share, and (iii) an increase in the pro forma weighted average number of
shares of Common Stock outstanding to 10,020,000 shares.
(3) Represents the elimination of $21.7 million of revenues and $21.7 million
of associated expenses related to certain services provided to PHC which
will not be part of the Company's ongoing operations. See "Management
Discussion and Analysis of Financial Condition and Results of Operations --
Acquisitions."
(4) Includes a $5.6 million non-recurring charge for acquired in-process
research and development.
(5) Includes an increase in amortization expense of $0.9 million for existing
technology (over five year useful lives) and $2.1 million for goodwill
(over 15 to 20 year useful lives) related to the acquired companies, and
the reversal of the non-recurring charge of $5.6 million for acquired
in-process research
22
<PAGE> 25
and development for OMS referred to in Note (4). Also includes reversal of
non-recurring acquisition-related costs of $0.4 million incurred by OMS for
investment advisory fees.
(6) Reflects the increase in interest expense of $4.5 million and $0.1 million
for unused fees and arrangement fees attributable to the Line of Credit.
Interest expense is calculated based on the outstanding balance of $51.0
million to finance the HI and SHSB acquisitions, utilizing an 8.75%
interest rate as of March 31, 1998, as specified in the Line of Credit,
over a one-year period.
(7) Reflects the net reduction in interest expense and fees attributable to
obligations retired with proceeds from the Offerings. See "Use of
Proceeds."
(8) Represents a tax benefit attributable to the increase in goodwill
amortization (deductible only for SHSB), existing technology and
capitalized software cost amortization and Line of Credit-related expenses
and fees.
(9) Increase in tax expense attributable to the net decrease in interest
expense and fees referred to in Note (7).
23
<PAGE> 26
PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA ADJUSTMENTS
HISTORICAL ADJUSTMENTS PRO FORMA RELATED TO
------------------------------ FOR THE FOR THE THE PRO FORMA
COMPANY(1) HI SHSB ACQUISITIONS ACQUISITIONS OFFERINGS COMPANY(2)(3)
---------- ------- ------- ------------ ------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $ 2,431 $ 3,173 $13,811 $ (2,283)(4) $ 17,132 $ -- $ 17,132
Operating expenses.............. 25,957(5) 6,372 17,722 (28,757)(4)(6) 21,294 -- 21,294
--------- ------- ------- -------- --------- ----- ----------
Income (loss) from operations... (23,526) (3,199) (3,911) 26,474 (4,162) -- (4,162)
Interest (income)/expense,
net........................... 62 (13) (76) 1,164(7) 1,137 (548)(8) 589
--------- ------- ------- -------- --------- ----- ----------
Income (loss) before taxes...... (23,588) (3,186) (3,835) 25,310 (5,299) 548 (4,751)
Provision for (benefit from)
income taxes.................. -- (575) (1,529) 545(9) (1,559) 221(10) (1,338)
--------- ------- ------- -------- --------- ----- ----------
Net income (loss)....... $ (23,588) $(2,611) $(2,306) $ 24,765 $ (3,740) $ 327 $ (3,413)
========= ======= ======= ======== ========= ===== ==========
Net income (loss) per common
share:
Basic and Diluted............. $ (4.05) $ (0.64) $ (0.41)
========= ========= ==========
Weighted average number of
shares of Common Stock:
Basic and diluted............. 5,820,000 5,820,000 8,320,000
========= ========= ==========
</TABLE>
- ---------------
(1) Reflects the consolidation of OMS, which was acquired on December 31, 1997,
for the three months ended March 31, 1998.
(2) Pro forma loss from operations of $4.2 million for the three months ended
March 31, 1998 has not been adjusted for certain non-recurring expenses as
well as other costs which the Company believes could have been eliminated
had the Company, as of January 1, 1997, consummated its acquisitions of HI,
OMS and SHSB and completed the cost-reduction actions that it has
subsequently taken. The non-recurring expenses and cost reductions totaled
approximately $4.4 million for the three months ended March 31, 1998.
Non-recurring expenses of approximately $0.4 million consist of
intercompany expense allocations related to the mainframe computer system
of the predecessor owner of SHSB, offset by the Company's estimated
quarterly costs to operate a client-server system. See "Risk
Factors -- Reliance on Information Processing Systems and Proprietary
Technology." Cost reductions of approximately $4.0 million consist of
reductions in the use of outside consultant services, reduced employee
costs and associated benefits, a restructured incentive bonus program,
lower phone service costs and lower professional fees. Pro forma results
have also not been adjusted for the discontinuance of the Hughes
Electronics contract described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Acquisitions." The Hughes
Electronics contract represented approximately $1.9 million in revenues for
the three months ended March 31, 1998.
(3) Excludes the pro forma effect of the SHPS Sale. Inclusion of the SHPS Sale
results in (i) a decrease in pro forma net loss to $(3.2) million, (ii) a
decrease in pro forma net loss per share -- basic and diluted to $(0.32)
per share, and (iii) an increase in the pro forma weighted average number
of shares of Common Stock outstanding to 10,020,000 shares.
(4) Represents elimination of $2.3 million in revenues and $2.3 million in
expenses related to certain services provided to PHC which will not be part
of the Company's ongoing operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Acquisitions".
(5) Includes a $23.7 million non-recurring charge for acquired in-process
research and development.
(6) Includes an increase in amortization expense of $0.2 million for existing
technology (over five year useful lives) and $0.4 million for goodwill
(over 15 to 20 year useful lives) related to the acquired companies, and a
reversal of the non-recurring charges of $8.5 million and $15.2 million for
HI and SHSB, respectively, representing acquired in-process research and
development referred to in Note (5). Also includes reversal of
non-recurring compensation expense of $2.6 million attributable to the cash
settlement of HI stock options and reversal of non-recurring
acquisition-related costs of $0.8 million for legal, consulting and
financial advisory fees incurred by HI.
24
<PAGE> 27
(7) Reflects the increase in interest expense of $1.1 million and $0.1 million
for unused fees and arrangement fees attributable to the Line of Credit.
Interest expense is calculated based on the outstanding balance of $51.0
million, to finance the HI and SHSB acquisitions, utilizing an 8.75%
interest rate as of March 31, 1998, as specified in the Line of Credit,
over a three-month period.
(8) Reflects the net reduction in interest expense and fees attributable to
obligations retired with proceeds from the Offerings. See "Use of
Proceeds."
(9) Represents a net tax provision attributable to the reversal of a
non-recurring charge of $2.7 million relating to cash settlement of HI
stock options, offset by the increase in goodwill amortization (deductible
only for SHSB), existing technology and capitalized software cost
amortization and Line of Credit -- related expenses and fees.
(10) Increase in tax expense attributable to the net decrease in interest
expense and fees referred to in Note (8).
25
<PAGE> 28
SELECTED CONSOLIDATED BALANCE SHEET DATA
The selected consolidated balance sheet data of the Company presented below
as of December 31, 1997, is derived from and should be read in conjunction with
the consolidated audited financial statements of the Company. The selected
consolidated balance sheet data of the Company as of March 31, 1998, is derived
from the consolidated unaudited interim financial statements and include, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data as of such date.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
Working capital............................................. $1,714 $ 6,770
Total assets................................................ 7,042 81,704
Total long-term debt and capital lease obligations,
including current portion................................. 4,082 51,638
Shareholders' equity........................................ 72 4,565
</TABLE>
26
<PAGE> 29
ACQUIRED COMPANIES
SELECTED FINANCIAL DATA
The selected financial data for HI as of September 30, 1996 and 1997, and
for the three years ended September 30, 1997 are derived from the audited
financial statements of HI included elsewhere herein. The OMS and SHSB selected
financial data as of December 31, 1996 and 1997, and the three years ended
December 31, 1997 are derived from the respective audited financial statements
of OMS and SHSB included elsewhere herein. The selected financial data for HI as
of September 30, 1993, 1994 and 1995 and for the two years ended September 30,
1994 are derived from unaudited compiled financial information and, in the
opinion of management, include all adjustments (consisting of normal recurring
entries) necessary for a fair presentation of such data. The selected financial
data for OMS and SHSB as of December 31, 1993, 1994 and 1995 and for the two
years ended December 31, 1994 are derived from unaudited compiled financial
information and, in the opinion of management, include all adjustments
(consisting of normal recurring entries) necessary for a fair presentation of
such data. The selected financial data for HI as of and for the six months ended
March 31, 1997 and 1998, is derived from unaudited financial statements as of
such dates and for such periods, and in the opinion of management, include all
adjustments (consisting of normal recurring entries) necessary for a fair
presentation of such data. The selected financial data for OMS and SHSB as of
and for the three months ended March 31, 1997 and 1998, is derived from
unaudited financial statements as of such dates and for such periods, and in the
opinion of management, include all adjustments (consisting of normal recurring
entries) necessary for a fair presentation of such data. The following
information is qualified by reference to, and should be read in conjunction
with, the audited financial statements and related notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
HEALTH INTERNATIONAL, INC. 1993 1994 1995 1996 1997 1997 1998(1)
-------------------------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 4,756 $ 7,244 $ 7,783 $11,690 $12,059 $ 6,015 $ 6,559
Operating expenses........................ 4,619 6,484 7,553 10,441 10,859 5,383 9,260
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 137 760 230 1,249 1,200 632 (2,701)
Net income(loss).......................... $ 106 $ 652 $ 227 $ 1,021 $ 755 $ 382 $(2,104)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- --------------
OMS, INCORPORATED 1993 1994 1995 1996 1997 1997
- ----------------- ------- ------- ------- ------- ------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues.................................. $ 3,599 $ 3,879 $ 4,248 $ 4,710 $ 5,013 $1,132
Operating expenses........................ 3,190 3,263 3,569 3,944 4,406 1,011
------- ------- ------- ------- ------- --------------
Income from operations.................... 409 616 679 766 607 121
Net income................................ $ 224 $ 353 $ 425 $ 453 $ 334 $ 71
======= ======= ======= ======= ======= ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
SYKES HEALTHPLAN SERVICE BUREAU, INC. 1993 1994 1995 1996 1997 1997 1998
- ------------------------------------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................................. $47,602 $60,467 $53,401 $51,637 $64,381 $12,324 $13,811
Operating expenses........................ 45,764 58,941 50,984 56,999 72,555 14,002 17,722
------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 1,838 1,526 2,417 (5,362) (8,174) (1,678) (3,911)
Net income (loss)......................... $ 1,386 $ 762 $ 2,277 $(2,350) $(4,089) $ (740) $(2,306)
======= ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Includes a non-recurring charge during the six months ended March 31, 1998,
of $3.4 million relating to a cash settlement of outstanding stock options
and acquisition-related legal, consulting and financial advisory fees.
27
<PAGE> 30
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------
HEALTH INTERNATIONAL, INC. 1993 1994 1995 1996 1997
-------------------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................. $ 199 $ 806 $ 671 $ 1,753 $ 2,323
Total assets..................................... 1,691 2,445 3,467 4,412 5,191
Total long-term obligations, including
capitalized leases............................. 361 312 616 578 449
Stockholders' equity............................. 815 1,469 1,702 2,724 3,479
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
OMS, INCORPORATED 1993 1994 1995 1996 1997
----------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................. $ (84) $ 527 $ 1,310 $ 1,647 $ 1,970
Total assets..................................... 3,246 3,949 4,344 4,870 6,942
Long-term obligations, including redeemable
preferred stock................................ 1,460 1,301 1,301 1,301 --
Stockholders' equity............................. 299 652 1,078 1,286 4,331
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
SYKES HEALTHPLAN SERVICE BUREAU, INC. 1993 1994 1995 1996 1997
- ------------------------------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Working capital.................................... $ (768) $ (371) $ 999 $ (979) $(3,410)
Total assets....................................... 42,894 40,711 42,599 46,355 41,604
Total long-term obligations, including capitalized
leases........................................... 171 955 716 779 11
Stockholders' equity............................... 4,753 5,504 7,781 5,430 1,342
</TABLE>
28
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements of the Company and of HI, OMS and SHSB (the Company's
three wholly-owned subsidiaries) and related notes thereto appearing elsewhere
in this Prospectus.
OVERVIEW
Since the Company's inception in December 1997, it has acquired three
operating companies: HI (effective March 31, 1998), OMS (effective December 31,
1997) and SHSB (effective March 31, 1998). Each of these acquisitions has been
accounted for using the purchase method (the "Purchase Method") for business
combinations, under which purchase price is allocated to assets and liabilities
based on fair values at the acquisition date. The following discussion and
results of operations pertain to these three operating companies. The Company
intends to report its financial results on a consolidated basis in the future.
ACQUISITIONS
<TABLE>
<CAPTION>
Year
Company Date of Acquisition Business Founded
- ------- ------------------- --------------------------------------------- -------
<S> <C> <C> <C>
HI................... March 31, 1998 Care Management services 1987
OMS.................. December 31, 1997 Care Management products and related services 1990
SHSB................. March 31, 1998 Employee Benefit Services 1989
</TABLE>
On March 31, 1998, the Company acquired all the outstanding stock of HI for
approximately $25.2 million. HI provides Care Management services that are
designed to enhance the quality of an individual's overall healthcare by
carefully evaluating clinically-based solutions to help patients, physicians and
healthcare providers and payors select appropriate and efficient medical
treatment while providing the opportunity to reduce overall medical
expenditures. As part of the transaction, the Company recorded approximately
$1.7 million for existing technology systems and applications, which will be
amortized over five years, and $13.1 million in goodwill which will be amortized
over 15 years. Additionally, on the acquisition date, the Company recorded a
non-recurring charge of $8.5 million related to the write-off of acquired
in-process research and development.
On December 31, 1997, the Company acquired all of the outstanding stock of
OMS for approximately $10.0 million. OMS provides quality and utilization
managed care software solutions through its Optimed software products and
related services. As part of the transaction, the Company recorded approximately
$1.7 million in capitalized software costs and rights, which will be amortized
over five years, and $1.3 million in goodwill, which will be amortized over 15
years. Additionally, on the acquisition date, the Company recorded a
non-recurring charge of $5.6 million related to the write-off of acquired
in-process research and development.
On March 31, 1998, the Company acquired all of the outstanding stock of
SHSB for approximately $50.0 million. SHSB provides Employee Benefit Services
that allow its customers to outsource the administration of their employee
benefits plans, including enrolling new plan participants, developing and
maintaining records, verifying or paying claims and producing management
reports. As part of the transaction, the Company recorded approximately $2.6
million for existing technology systems and applications, which will be
amortized over five years, and $23.0 million in goodwill, which will be
amortized over 20 years. Additionally, on the acquisition date, the Company
recorded a non-recurring charge of $15.2 million related to the write-off of
acquired in-process research and development. Shortly after the SHSB
acquisition, the Company terminated approximately 100 staff and consultant
positions, and the majority of SHSB's senior management. The Company has
recorded a reserve of $1.9 million in connection with this acquisition to cover
expected involuntary termination costs as well as other consolidation-related
charges to be incurred during the first twelve months of operation. Also in
connection with the SHSB acquisition, the Company expects to make an election
under Section 338(h)(10) of the Internal Revenue Code (the "Code") which will
allow the
29
<PAGE> 32
Company to deduct for income tax purposes the value of the goodwill, which the
Company intends to deduct over 15 years.
SHSB initially performed fulfillment services to support PHC, a
wholly-owned subsidiary of SHSB's former owner, Prudential. Fulfillment services
include the production and assembly of employee benefits enrollment kits and
related materials and their distribution to the employees of SHSB's customers.
In the early 1990's, SHSB expanded its service offerings to unaffiliated
companies on a direct basis through its own sales efforts. In addition, SHSB
expanded its capabilities beyond fulfillment services to provide additional
services, including BPA, FSA and ancillary services targeted to new customers.
By fiscal 1997, revenue from unaffiliated parties constituted over 50% of
revenues. In fiscal 1997, SHSB derived approximately $31.5 million in revenue
from PHC. Of this revenue, approximately $17.6 million was related to
fulfillment services and approximately $4.1 million was related to DMO services.
SHSB expects the fulfillment and DMO services to PHC will be discontinued in
1998. The Company intends to cross-sell its fulfillment services to its other
customers in connection with its Employee Benefit Services. See "Risk
Factors -- Dependence on Key Customers."
In connection with the SHSB acquisition, the Company entered into a
transitional systems support service agreement with Prudential regarding the
provision of certain systems-related services to the Company through March 31,
1999. Specifically, Prudential is to provide processing services for various
applications including, but not limited to, BPA, COBRA administration, FSA
administration and retiree benefits services. The Company is currently in the
process of migrating its information systems from the mainframe platform
provided under the agreement to a proprietary, client server platform, which is
expected to be completed before March 31, 1999. The Company currently estimates
that the cost of migration and to make its computer systems Year 2000 compliant
will be $5.5 million. See "Risk Factors -- Reliance on Information Processing
Systems and Proprietory Technology" and "-- Year 2000 Compliance."
During fiscal 1997, SHSB performed approximately $6.5 million of services
(representing approximately 11.0% of the Company's pro forma revenue for fiscal
1997) for Hughes Electronics. For the three months ended March 31, 1998,
revenues for Hughes Electronics were approximately $1.9 million. Prior to the
acquisition of SHSB, the predecessor of SHSB was notified that its contract with
Hughes Electronics would not continue after 1998. See "Risk
Factors -- Dependence on Key Customers."
REVENUE RECOGNITION
HI. Revenues are generated on a per participant per month rate basis. The
Company also makes payments to physicians, laboratories and x-ray facilities in
connection with second opinion services and is reimbursed for such payments at
its cost. Expense reimbursements are recorded in revenues and cost of revenues.
HI's results of operations historically have been affected by the addition or
loss of significant customers. When a significant customer is added, the Company
hires and trains additional personnel to service the projected new business
prior to receipt of revenues from the customer. A startup fee, ranging from
$2-$3 per participant, is initially charged to cover part of the costs incurred
by the Company. Consequently, results of operations for a given quarter may be
subject to significant fluctuations. In the future, certain of the Company's
Care Management contracts may contain "shared risk" provisions under which the
Company may be required to bear a portion of any loss in connection with such
provisions. See "Risk Factors -- Fluctuations in Operating Results" and
"-- Potential Risks of Care Management Contracts" and "Business -- Customers."
OMS. In fiscal 1997, approximately 88% of OMS's revenues was derived from
licensing its Optimed software products, with the remainder derived from support
and consulting services related to installing, maintaining and utilizing such
software. In the future, the Company expects to expand its consulting and
physician review services. OMS licenses its products primarily through
multi-year agreements that typically provide for payment of equal monthly
license fees over the agreements' terms. OMS's licensing revenues are recognized
ratably over the life of the contracts, except that when OMS has no continuing
support service or consulting obligations, such revenue is recognized upon
shipment. Revenue recognized upon shipment is primarily related to the sale of
OMS's Portable Optimed Protocol product, which accounted for approximately
30
<PAGE> 33
11% of OMS's licensing revenues in 1997. Revenues from support and consulting
services are recognized ratably over the contract period or as specific services
are performed.
SHSB. Revenues are primarily derived from: (i) a recurring monthly fee per
eligible employee or participant; (ii) a one-time implementation fee to cover
programming costs associated with customizing SHSB's systems to meet each
customer's specific needs and the data entry costs associated with a startup;
(iii) a COBRA administration fee of 2% of the participant's premium, as allowed
under COBRA regulations; and (iv) fees for fulfillment services, interactive
voice response services, optical character recognition services ("OCR") and
other ancillary services on a per job or per item basis. Interest
(income)/expense, net represents the interest income earned on retiree benefits
services and COBRA payments from the time they are received from participants
until they are remitted to the employer or carrier and the investment of
available cash on hand, offset by interest expense relating to capital lease
obligations and other borrowings. Revenues increased primarily as a result of an
increase in services offered to SHSB's existing customer base, an increase in
the number of participants within such customer base and the addition of a new
customer contract with IBM.
The Company, OMS and SHSB have, for all historical periods presented,
operated on a December 31 fiscal year end. HI, until its acquisition by the
Company, operated on a September 30 fiscal year end and has begun operating on a
December 31 fiscal year end. As used herein, with respect to the Company, OMS
and SHSB, fiscal 1995 means the year ended December 31, 1995; fiscal 1996 means
the year ended December 31, 1996, and fiscal 1997 means the year ended December
31, 1997, and with respect to HI, means the year ended September 30, 1995, 1996
and 1997, respectively. OMS's financial statements for the three months ended
March 31, 1998, are consolidated into the Company's consolidated financial
statements for the three months ended March 31, 1998, presented herein.
RESULTS OF OPERATIONS
The following table sets forth a summary of the results of operations for
the acquired companies for the periods indicated and their percentage of
revenues.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
HI YEAR ENDED SEPTEMBER 30, MARCH 31,
- -- ---------------------------------------------------- ----------------------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $7,783 100.0% $11,690 100.0% $12,059 100.0% $2,990 100.0% $ 3,173 100.0%
Operating expenses.............. 7,553 97.0 10,441 89.3 10,859 90.0 2,748 91.9 6,372 200.8
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Income (loss) from operations... 230 3.0 1,249 10.7 1,200 10.0 242 8.1 (3,199) (100.8)
Interest (income)/expense,
net........................... (27) (0.3) 16 0.1 (42) (0.3) (5) (0.2) (13) (0.4)
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Income (loss) before taxes...... 257 3.3 1,233 10.6 1,242 10.3 247 8.3 (3,186) (100.4)
Provision for (benefit from)
income taxes.................. 30 0.4 212 1.8 487 4.0 99 3.3 (575) (18.1)
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Net income (loss)....... $ 227 2.9% $ 1,021 8.8% $ 755 6.3% $ 148 5.0% $(2,611) (82.3)%
====== ===== ======= ===== ======= ===== ====== ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
OMS YEAR ENDED DECEMBER 31, MARCH 31,
- --- ---------------------------------------------------- ----------------------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $4,248 100.0% $ 4,710 100.0% $ 5,013 100.0% $1,132 100.0% $ 1,137 100.0%
Operating expenses.............. 3,569 84.0 3,944 83.8 4,406 87.9 1,011 89.3 870 76.5
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Income from operations.......... 679 16.0 766 16.2 607 12.1 121 10.7 267 23.5
Interest (income)/expense,
net........................... (40) (0.9) (63) (1.3) (78) (1.6) (25) (2.2) -- 0.0
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Income before taxes............. 719 16.9 829 17.5 685 13.7 146 12.9 267 23.5
Provision for income taxes...... 294 6.9 376 8.0 351 7.0 75 6.6 -- 0.0
------ ----- ------- ----- ------- ----- ------ ----- ------- ------
Net income.............. $ 425 10.0% $ 453 9.5% $ 334 6.7% $ 71 6.3% $ 267 23.5%
====== ===== ======= ===== ======= ===== ====== ===== ======= ======
</TABLE>
31
<PAGE> 34
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SHSB YEAR ENDED DECEMBER 31, MARCH 31,
- ---- ---------------------------------------------------- ----------------------------------
1995 % 1996 % 1997 % 1997 % 1998 %
------ ----- ------- ----- ------- ----- ------- ----- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $53,401 100.0% $51,637 100.0% $64,381 100.0% $12,324 100.0% $13,811 100.0%
Operating expenses.............. 50,984 95.5 56,999 110.4 72,555 112.7 14,002 113.6 17,722 128.3
------ ----- ------- ----- ------- ----- ------- ----- ------- ------
Income (loss) from operations... 2,417 4.5 (5,362) (10.4) (8,174) (12.7) (1,678) (13.6) (3,911) (28.3)
Interest (income)/expense,
net........................... (1,408) 2.7 (1,524) (3.0) (997) (1.5) (447) (3.6) (76) .5
------ ----- ------- ----- ------- ----- ------- ----- ------- ------
Income (loss) before taxes...... 3,825 7.2 (3,838) (7.4) (7,177) (11.2) (1,231) (10.0) (3,835) (27.8)
Provision for (benefit from)
income taxes.................. 1,548 2.9 (1,488) (2.9) (3,088) (4.8) (491) (4.0) (1,529) (11.1)
------ ----- ------- ----- ------- ----- ------- ----- ------- ------
Net income (loss)....... $2,277 4.3% $(2,350) (4.6)% $(4,089) (6.4)% $ (740) (6.0)% $(2,306) (16.7)%
====== ===== ======= ===== ======= ===== ======= ===== ======= ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues
HI. Revenues increased $0.2 million or 6.6% to $3.2 million in the three
months ended March 31, 1998 from $3.0 million in the three months ended March
31, 1997. Revenues increased primarily as a result of the addition of PepsiCo as
a new customer in October 1997. This increase was partially offset by the loss
of an aerospace customer and a lower service charge per person charged to a
customer resulting from a change in the scope of services provided.
In addition, as of January 1, 1998, the Company entered into an outsourcing
agreement with HPS pursuant to which HPS has outsourced to the Company certain
care management services for current HPS customers. This agreement is expected
to generate approximately $5.0 million in annual revenue for the Company in
fiscal 1998. See "Certain Transactions."
OMS. Revenues of $1.1 million remained unchanged from the three months
ended March 31, 1998 compared to the three months ended March 31, 1997. During
the first three months of 1998, revenues decreased as a result of the loss of
two license fee contracts. This decrease in revenue was offset by a new
consulting contract with Blue Cross/Blue Shield of Michigan and the revenues
generated from OMS's new Optimed physician review services.
SHSB. Revenues increased $1.5 million or 12.1% to $13.8 million in the
three months ended March 31, 1998 from $12.3 million in the three months ended
March 31, 1997. Revenues increased primarily as a result of an increase in
services offered to SHSB's existing customer base as well as an increase in the
number of participants within such customer base.
Operating Expenses
HI. Operating expenses increased $3.6 million to $6.4 million in the three
months ended March 31, 1998 from $2.7 million in the three months ended March
31, 1997. Of such increase, $2.6 million related to a cash settlement of
outstanding stock options held by certain personnel. On the date of acquisition,
the Company provided a capital contribution of $2.6 million to replenish capital
used by HI in terminating various stock options. The remaining increase was due
primarily to non-recurring pre-tax acquisition-related costs of $0.8 million for
legal, consulting, and financial advisory fees and $0.4 million of recurring
expenses such as increased salary, depreciation, phone usage and travel expenses
resulting from the addition of PepsiCo as a new customer.
OMS. Operating expenses decreased $0.2 million to $0.9 million in the
three months ended March 31, 1998 from $1.1 million in the three months ended
March 31, 1997. As a percentage of revenues, operating expenses decreased to
76.5% in the three months ended March 31, 1998 from 89.3% in the three months
ended March 31, 1997. Operating expenses decreased primarily due to personnel
reductions and increased software capitalization costs due to new software
releases reaching technological feasibility during fiscal 1997.
SHSB. Operating expenses increased to $17.7 million in the three months
ended March 31, 1998 from $14.0 million in the three months ended March 31,
1997. The increase in operating expenses was primarily
32
<PAGE> 35
due to annual increases in salaries and benefit levels for 1998, additional
employees, one-time consulting expenses incurred for systems analysis and risk
assessment, including Year 2000 consulting expenses and a change in the
capitalization policy for certain software and hardware items. This increase was
partially offset by reduced printing and distribution costs, which were
performed internally during the three months ended March 31, 1998.
Income (Loss) from Operations
HI. The loss from operations increased $3.4 million to $3.2 million in the
three months ended March 31, 1998 compared to income from operations of $0.2
million in the three months ended March 31, 1997. This increase was primarily
due to non-recurring pre-tax expenses of $3.4 million for the cash settlement of
outstanding stock options held by certain personnel, and acquisition-related
legal, consulting, and financial advisory fees incurred by HI in the three
months ended March 31, 1998, as discussed above.
OMS. Income from operations increased $0.2 million to $0.3 million in the
three months ended March 31, 1998 from $0.1 million in the three months ended
March 31, 1997. This increase was primarily due to a modest increase in revenues
from the new Optimed physician review services and a slight decrease in the cost
of revenues and operating expenses, as discussed above.
SHSB. The loss from operations increased to $3.9 million in the three
months ended March 31, 1998. This loss was primarily due to increases in salary
and benefits, one-time consulting expenses and increases in other operating
costs, as discussed above.
Interest (Income)/Expense, Net
SHSB. Interest (income)/expense, net decreased to $0.1 million in the
three months ended March 31, 1998 from $0.4 million in the three months ended
March 31, 1997 due to costs of external borrowings for working capital purposes.
Provision for (Benefit from) Income Taxes
HI. The effective tax rates were (18.0)% and 40.0% in the three months
ended March 31, 1998 and 1997, respectively. The effective tax rates varied from
the statutory tax rate primarily due to utilization of net operating losses.
OMS. The effective tax rate was 51.2% for the three months ended March 31,
1997. The effective tax rate for the three months ended March 31, 1997 varied
from the statutory tax rate due to state and local taxes and nondeductible
goodwill. Since OMS's results are included in the Company's consolidated tax
return for the three months ended March 31, 1998, the income taxes related to
its results are provided for at the consolidated level.
SHSB. The effective tax rates were 39.9% in the three months ended March
31, 1998 and 1997, respectively. The effective tax rates for these periods
approximate the statutory tax rate.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues
HI. Revenues increased $0.4 million or 3.2% to $12.1 million in fiscal
1997 from $11.7 million in fiscal 1996. Approximately $0.3 million of this
increase was due to the increase in expense reimbursement from HI's customers.
The balance of the increase in revenues was primarily the result of an increase
in the number of participants covered by HI's Care Management services.
OMS. Revenues increased $0.2 million or 6.4% to $5.0 million in fiscal
1997 from $4.7 million in fiscal 1996. Revenues increased primarily as a result
of new customers in fiscal 1997, and due to higher license fees from existing
customers. This increase was partially offset by a $0.4 million decrease due to
the expiration of certain license agreements with existing customers.
33
<PAGE> 36
SHSB. Revenues increased $12.8 million or 24.7% to $64.4 million in fiscal
1997 from $51.6 million in fiscal 1996. The increase of $12.8 million was
primarily the result of an increase of $4.9 million in revenue from new
customers, including the City of Los Angeles, Textron, IBM and Xerox, a $4.8
million increase in revenues from PHC and a $1.8 million increase in revenues to
other existing customers. The $4.8 million increase in revenues from PHC was
comprised of an $8.6 million increase in sales of fulfillment services to PHC
offset by a $2.4 million decrease and a $1.4 million decrease, respectively, in
revenues generated in the earlier period by services provided to PHC's legal
service and life insurance businesses, which service arrangements were not
purchased by the Company in connection with its acquisition of SHSB. In
addition, the Company expects to discontinue fulfillment services to PHC during
1998.
Operating Expenses
HI. Operating expenses increased to $10.9 million in fiscal 1997 from
$10.4 million in fiscal 1996. These costs increased due to higher salary costs
from the addition of supervisory personnel and from a general payroll raise to
existing employees.
OMS. Operating expenses increased to $4.4 million in fiscal 1997 from $3.9
million in fiscal 1996. As a percentage of revenues, operating expenses
increased to 87.9% in fiscal 1997 from 83.8% in fiscal 1996. This increase was
primarily due to compensation expenses related to providing additional
consulting and new physician review services to customers. This increase was
also the result of non-recurring pre-tax acquisition-related costs of $0.4
million for advisory fees in fiscal 1997, which were partially offset by a $0.2
million decrease in research and development expenses due to new software
releases reaching technological feasibility during fiscal 1997.
SHSB. Operating expenses increased to $72.6 million in fiscal 1997 from
$57.0 million in fiscal 1996. As a percentage of revenues, operating expenses
increased 2.3% in fiscal 1997. The increase was as a result of increased
supplies and postage costs of $8.4 million, primarily due to the increase in
fulfillment services provided to PHC. Additionally, the increase was due to
higher salary and benefit costs of approximately $4.0 million resulting from the
addition of over 200 staff positions to service new customers and a pay
adjustment of $1.5 million. Additionally, the increase included $2.9 million of
one-time consulting expenses incurred for systems analysis and risk assessment,
including Year 2000 consulting expenses, and efforts to re-engineer and improve
certain operational procedures. Finally, depreciation expense increased by $2.1
million from a change in the estimated remaining useful lives of fixed assets,
which was lowered from five years to three years.
Income (Loss) from Operations
HI. Income from operations was relatively unchanged between fiscal 1997
and fiscal 1996. The decrease in operating income in fiscal 1997 as a percentage
of revenues was due to higher salary costs from the addition of supervisory
personnel and from a pay adjustment of $1.5 million, as discussed above.
OMS. Income from operations decreased by 20.7% to $0.6 million for fiscal
1997, while operating margins decreased to 12.1% in fiscal 1997. The decrease
was primarily due to compensation expenses incurred in connection with providing
additional consulting and new physician review services to customers, and due to
non-recurring pre-tax acquisition-related advisory fees in fiscal 1997, as
discussed above.
SHSB. Loss from operations increased by 52.4% to $8.2 million for fiscal
1997 from a loss from operations of $5.4 million for fiscal 1996. The operating
margin decreased to 12.7% in fiscal 1997 from 10.4% in fiscal 1996. The increase
in the operating loss was due primarily to the increases in expenses related to
the addition of over 200 staff positions and consultants to service new
customers, one-time consulting expenses incurred for systems analysis and risk
assessment, including Year 2000 consulting, and efforts to re-engineer and
improve certain operational procedures, and depreciation expense, as discussed
above.
Interest (Income)/Expense, Net
OMS. Non-operating income was comprised of interest income derived from
short-term investments of cash generated from operations. Interest income was
relatively unchanged between fiscal 1997 and fiscal 1996.
34
<PAGE> 37
SHSB. The $0.5 million decrease in other income is due to an increase in
interest expense on borrowings made for working capital purposes in fiscal 1997.
Provision for (Benefit from) Income Taxes
HI. The effective tax rates of 39.2% for fiscal 1997 and 17.2% for fiscal
1996 were different from the statutory rate of 35% primarily due to utilization
of net operating loss carryforwards, which expired in fiscal 1996.
OMS. The effective tax rates of 51.2% for fiscal 1997 and 45.4% for fiscal
1996 were different from the statutory rate of 35% due to state and local taxes,
deductible tax credits, and certain expenses, including a portion of meals,
entertainment, and premiums on key man life insurance policies, which are not
deductible for income tax purposes. The increase in the fiscal 1997 effective
tax rate was due to non-deductible acquisition-related advisory fees.
SHSB. SHSB was a member of a group of affiliated companies, which joined
in filing a consolidated federal income tax return, yet filed a separate return
for state and local tax purposes. Federal taxes were determined pursuant to a
tax allocation arrangement with Prudential and state and local taxes were
determined on a stand-alone basis. The effective tax rates of 43.0% and 38.8%
for fiscal 1997 and 1996, respectively, were different from the statutory rate
of 35% due to state income taxes.
FISCAL 1996 COMPARED TO FISCAL 1995
Revenues
HI. Revenues increased $3.9 million or 50.2% to $11.7 million in fiscal
1996 from $7.8 million in fiscal 1995. Revenues increased primarily due to the
addition of Kmart as a new customer in September 1995, per participant per month
rate increases, and an increase in the number of participants covered under HI's
Care Management services.
OMS. Revenues increased $0.5 million or 11.9% to $4.7 million in fiscal
1996 from $4.2 million in fiscal 1995, primarily as a result of new customers in
fiscal 1996.
SHSB. Revenues decreased $1.8 million or 3.4% to $51.6 million in fiscal
1996 from $53.4 million in fiscal 1995. Revenues decreased primarily as a result
of the loss of an $8.8 million contract with IBM. This decrease was offset by
new customer revenues of $5.9 million, due primarily to the addition of a large
telecommunications company for FSA services and an increase in existing business
of $1.3 million resulting from increases in the number of participants in
several existing customers' plans. The remaining $0.2 million decrease in
revenues related primarily to a decrease in PHC revenues as a result of a change
in the scope of services provided.
Operating Expenses
HI. Operating expenses increased $2.9 million or 38.2% to $10.4 million in
fiscal 1996 from $7.6 million in fiscal 1995. As a percentage of revenues,
operating expenses decreased to 89.3% for fiscal 1996 from 97.0% for fiscal
1995. The increase was due to increased nurse and physician staffing, marketing
personnel, rental space, telephone usage, recruiting and travel expenses and
administrative personnel to accommodate Kmart as a new customer commencing
September 1995.
OMS. Operating expenses increased to $3.9 million in fiscal 1996 from $3.6
million in fiscal 1995. As a percentage of revenues, operating expenses remained
relatively unchanged between fiscal 1996 and fiscal 1995. The increase was
primarily the result of higher marketing and research and development expenses
incurred in fiscal 1996 due to new software releases that were in their initial
stages of development and had not yet reached technological feasibility during
1996.
SHSB. Operating expenses increased 11.8% to $57.0 million in fiscal 1996
from $51.0 million in fiscal 1995. The increase was primarily due to an increase
in salaries, higher communications, supplies and postage expenses resulting
primarily from a change in the mix of revenues from BPA services to more labor
intensive
35
<PAGE> 38
FSA services. Additionally, the increase was the result of a $2.0 million
reserve set up in fiscal 1996 for a potential COBRA liability. Other items
contributing to the overall increase in operating expenses included $1.1 million
for severance costs associated with employee terminations made in September 1996
of approximately 150 people relating to an overall down-sizing by PHC; $0.7
million for personnel costs resulting from overtime and temporary employment;
$0.9 million for an increase in the bad debt and escheatment reserves; and $0.3
million to improve customer service.
Income (Loss) from Operations
HI. Income from operations increased $1.0 million to $1.2 million or 10.7%
of revenues from $0.2 million or 3.0% of revenues, primarily due to the addition
of Kmart as a customer.
OMS. Income from operations increased by 12.7% to $0.8 million for fiscal
1996, while the operating margin increased to 16.2% in fiscal 1996 from 16.0% in
fiscal 1995. The increase in income from operations was due to a slight increase
in gross profit, which was partially offset by higher marketing and research and
development expenses in fiscal 1996, as discussed above.
SHSB. A $5.4 million loss from operations was incurred for fiscal 1996
compared to $2.4 million in income from operations for fiscal 1995. The decrease
in operating income was due primarily to the decrease in revenues, the one-time
charges related to severance, transition costs and the accrual for a potential
COBRA liability, and the increase of costs of services, as discussed above.
Interest (Income)/Expense, Net
SHSB. Other income amounts remained relatively unchanged between fiscal
1996 and fiscal 1995.
Provision for (Benefit from) Income Taxes
HI. The effective tax rates of 17.2% for fiscal 1996 and 11.7% for fiscal
1995 were different from the statutory rate of 35% primarily due to the
utilization of net operating loss carryforwards.
OMS. The effective tax rates of 45.4% for fiscal 1996 and 40.9% for fiscal
1995 were different from the statutory rate of 35% due to state and local taxes,
deductible tax credits, and certain expenses, including a portion of meals,
entertainment, and premiums on key man life insurance policies, which were not
deductible for income tax purposes. The increase in the fiscal 1996 effective
tax rate was due to non-deductible compensation expenses for income tax
purposes.
SHSB. SHSB was a member of a group of affiliated companies, which joined
in filing a consolidated federal income tax return, yet filed a separate return
for state and local tax purposes. Federal taxes were determined pursuant to a
tax allocation arrangement with Prudential and state and local taxes were
determined on a stand-alone basis. The effective tax rates of 38.8% and 40.5%
for fiscal 1996 and fiscal 1995, respectively, were different from the statutory
rate of 35% due to state income taxes.
HI -- SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31,
1997
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31,
-----------------------------------
1997 1998
--------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues................................................. $6,015 100.0% $ 6,559 100.0 %
Operating expenses....................................... 5,383 89.5 9,260 141.2
------ ----- ------- -----
Income (loss) from operations............................ 632 10.5 (2,701) (41.2)
Interest (income)/expense, net........................... (9) (0.1) (22) (0.3)
------ ----- ------- -----
Income before taxes...................................... 641 10.6 (2,679) (40.9)
Provision for (benefit from) income taxes................ 259 4.3 (575) (8.8)
------ ----- ------- -----
Net income (loss).............................. $ 382 6.3% $(2,104) (32.1)%
====== ===== ======= =====
</TABLE>
36
<PAGE> 39
Revenues
Revenues increased $0.5 million or 9.0% to $6.6 million in the six months
ended March 31, 1998 from $6.0 million in the six months ended March 31, 1997.
Revenues increased primarily as a result of the addition of PepsiCo as a new
customer in October 1997.
Operating Expenses
Operating expenses increased $3.9 million to $9.3 million or 141.2% of
revenues in the six months ended March 31, 1998 from $5.4 million or 89.5% in
the six months ended March 31, 1997. Of such increase, $2.6 million related to a
cash settlement of outstanding stock options held by certain personnel. On the
date of acquisition, the Company provided a capital contribution of $2.6 million
to replenish capital used by HI in terminating various stock options. The
remaining increase was due primarily to non-recurring pre-tax
acquisition-related costs of $0.8 million for legal, consulting, and financial
advisory fees and $0.4 million of recurring expenses such as increased salary,
depreciation, phone usage and travel expenses resulting from the addition of
PepsiCo as a new customer.
Income (Loss) from Operations
The loss from operations increased $3.3 million to $2.7 million in the six
months ended March 31, 1998, compared to income from operations of $0.6 million
in the six months ended March 31, 1997. This increase was primarily due to
non-recurring pre-tax expenses of $3.4 million for the cash settlement of
outstanding stock options held by certain personnel, and acquisition-related
legal, consulting, and financial advisory fees, partially offset by the increase
in operating income due to the addition of PepsiCo as a new customer, as
discussed above.
Provision for (Benefit from) Income Taxes
The effective tax rates were (21.5)% and 40.4% in the six months ended
March 1998 and 1997, respectively. The effective tax rate for the six months
ended March 31, 1998 varied from the statutory tax rate primarily due to
utilization of net operating losses resulting from the acquisition of HI by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's primary sources of liquidity were cash
flows from operations and available borrowings under its Line of Credit. The
Company believes that its primary short term capital expenditures will be
approximately $5.5 million for the Company's migration from a mainframe to a
client server platform and to make its computer systems Year 2000 compliant. See
"Risk Factors -- Reliance on Information Processing Systems and Proprietary
Technology" and "-- Year 2000 Compliance." In addition, the Company expects to
incur in the ordinary course of business expenses of its operations. The Company
expects to meet these needs through cash flows from operations, borrowings and
the proceeds of the Offerings. In the longer term, other than ordinary expenses,
the Company expects that its primary expenditures will be for possible
acquisitions and for improvements to its technology to meet future regulatory
requirements and customer demand.
In March 1998, the Company entered into a $75.0 million Line of Credit.
This Line of Credit consists of a revolving credit facility of up to $75.0
million which includes a letter of credit facility of up to $10.0 million and
matures in March 2001. The Line of Credit is collateralized by all of the stock
of the Company's subsidiaries. Interest on borrowings under the Line of Credit
accrues at an annual rate equal to either (i) the lender's prime rate plus a
margin ranging from 0.00% to 0.50%, or (ii) LIBOR plus a margin ranging from
0.75% to 1.75%, at the Company's election. As of March 31, 1998, the interest
rate was 7.19%.
The Line of Credit contains customary restrictive covenants, including
restrictions on reductions in shareholders equity; limitation on acquisitions,
transfers of assets, mergers or consolidations; and incurrence of additional
indebtedness. In addition, the Company is required to maintain a consolidated
leverage ratio, as defined in the Line of Credit, greater than 4.25 to 1.0 on or
prior to September 28, 1998 and 3.5 to 1.0
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<PAGE> 40
thereafter and a fixed charge ratio, as defined therein, less than 2.0 to 1.0.
At March 31, 1998, the Company was in compliance with all covenants under the
Line of Credit and believes it will be in compliance with such covenants on the
date of closing of the Offerings. The Company intends to achieve the removal of
HPS and Sykes as guarantors under the Line of Credit through the replacement of
the Line of Credit with a new line of credit facility. The Company expects that
the new line of credit facility will be reduced from the current $75.0 million
to approximately $30.0 million and will otherwise contain similar terms as the
existing Line of Credit although it is likely that the interest rate on borrowed
funds will increase. The Company has a commitment from a bank for a 90-day,
$15.0 million interim line of credit facility to replace its current Line of
Credit until a new line of credit facility can be established. See "Risk
Factors -- Negotiation of New Line of Credit Facility."
As of March 31, 1998, the Company had approximately $51.0 million of
indebtedness outstanding under the Line of Credit. The Company intends to use
the entire estimated net proceeds of approximately $45.6 million from the
Offerings and the SHPS Sale for repayment of indebtedness outstanding under the
Line of Credit. See "Use of Proceeds."
The Company believes that the net proceeds from the Offerings and the SHPS
Sale, combined with available funds under its new line of credit facility and
cash flows from operations, will be adequate for the Company's capital needs,
excluding acquisitions, for the foreseeable future, as its operations are
presently being conducted. Other than the $5.5 million estimated to be incurred
for the computer systems migration and Year 2000 compliance discussed above, as
well as approximately $13.7 million in future minimum lease payments under
noncancellable operating leases having an initial or remaining term in excess of
one year, the Company currently has no material commitments regarding capital
expenditures. However, the net proceeds of the Offerings and the SHPS Sale,
together with cash generated from the Company's operations and availability
under the new line of credit facility, may not be sufficient to finance
acquisitions and the Company may be required to seek additional financing. If
the Company does require additional financing, it expects that it would seek
debt financing either from its current lenders or other financing sources or
that it would attempt to raise the necessary funds through an equity offering.
There can be no assurance that such additional financing will be available in
amounts and upon terms acceptable to the Company, if at all. See "Risk
Factors -- Ability to Manage Growth and Related Risks," "-- Reliance on
Information Processing Systems and Proprietary Technology" and "-- Year 2000
Compliance."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" was issued, establishing standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company will adopt this pronouncement in 1998 in accordance with
the implementation requirements.
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," was issued, establishing standards for public
enterprises to disclose certain information about operating segments and related
disclosures about products and services, geographic areas and significant
customers. The Company will adopt this pronouncement in 1998 in accordance with
the implementation requirements. Management believes the adoption of SFAS No.
130 and SFAS No. 131 will not have a material impact on the Company's financial
statements.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The Company adopted SFAS No. 128 for the year ended
December 31, 1997. SFAS No. 128 simplifies the standards required under current
accounting rules for computing earnings per share and replaces the presentation
of primary earnings per share and fully diluted earnings per share with a
presentation of basic earnings per share ("Earnings per share") and diluted
earnings per share ("Earnings per share -- diluted"). Earnings per share
excludes dilution and is determined by dividing income available to common
shareholders by the weighted average number of shares of Common Stock
outstanding during the period. Earnings per share -- diluted reflects the
potential dilution that could occur if securities and other contracts to issue
Common Stock were exercised or converted into Common Stock. Earnings per
share -- diluted is computed similarly to fully diluted earnings per share under
previous accounting.
38
<PAGE> 41
BUSINESS
GENERAL
The Company is a provider of outsourced Care Management services and
products and Employee Benefit Services. The Company's customers include large
corporations, healthcare providers, payors and insurance companies. The
Company's Care Management services are designed to enhance the quality of an
individual's overall healthcare by carefully evaluating clinically-based
solutions to help patients, physicians and healthcare providers and payors
select appropriate and efficient medical treatment while providing the
opportunity to reduce overall medical expenditures. The Company's Employee
Benefit Services enable customers to outsource the administration of their
employee benefit programs. By providing its customers with a single-source for
comprehensive, clinically-sophisticated Care Management services and products
and Employee Benefit Services, the Company believes it has a unique competitive
advantage. In addition, the Company believes the integration of such services
will enhance the Company's customers' ability to determine in a timely fashion
an individual's eligibility to receive services under a customer's benefit
plans. The Company currently provides its services to over 50 of the Fortune 500
companies.
Care Management. The Company's Care Management services and products
assist customers in (i) improving the quality of healthcare services provided to
patients and (ii) monitoring patients' compliance with their prescribed course
of treatment, while (iii) simultaneously reducing inappropriate medical costs.
The Company believes that such costs are generally incurred when there is over-
or under-utilization of healthcare services, resulting in less effective medical
treatment. The Company's Care Management services include demand, utilization,
case, disease and disability management. These services are designed to guide a
patient through the medical process by prospectively assisting in determining an
individual's healthcare needs and monitoring and evaluating the delivery of
clinical care provided.
The Company's clinical staff, comprised of registered nurses and
physicians, interacts with patients, providers, payors and insurance companies
to assist in determining, implementing and monitoring an effective and efficient
customized care management program based on each patient's medical profile and
clinical protocols developed by the Company in consultation with a network of
board certified physicians. For instance, if a patient's physician recommends
hospitalization or surgery, a registered nurse reviews the physician's proposed
plan of care and discusses it with the patient's physician based on the
Company's clinical protocols. In the event the registered nurse believes a
second opinion may be warranted, the registered nurse will refer the case to one
of the Company's physician medical directors. If the medical director concurs,
the medical director will provide the patient with the names of physicians in
the patient's area. Physicians identified by the Company to provide second
opinions have been screened to verify that they have met the Company's
requirements in the relevant area of medicine. The Company handles the paperwork
and has the results reported to both the patient and the patient's physician so
that both the patient and the physician can review the consulting physician's
report before deciding whether or how to proceed with treatment. The Company
believes that the byproducts of a successful Care Management program can include
not only reduced medical costs for the payor or insurance company and the
patient but also improved patient outcomes and increased patient satisfaction.
In addition, for providers and payors that wish to perform their own
quality assurance or utilization management functions, the Company provides
quality and utilization managed care software solutions through its Optimed
software products and related services. These products are based on Optimed
Protocols developed and reviewed by the Company's medical panel of approximately
250 board certified physicians.
Employee Benefit Services. The Company's Employee Benefit Services allow
its customers to outsource the administration of their employee benefit plans,
including enrolling new plan participants, developing and maintaining records,
verifying or paying claims and producing management reports. The Company
provides a broad range of Employee Benefit Services, including BPA, FSA
administration, COBRA administration, retiree benefits services and other
ancillary services.
The Company was formed in December 1997 as a joint venture between HPS, a
provider of marketing, administration and risk management services for health
insurance programs, and Sykes, a provider of integrated outsourcing services to
the information technology industry. Since its formation, the Company has
39
<PAGE> 42
acquired HI, OMS and SHSB. The formation of the joint venture and the
aforementioned acquisitions were consummated to take advantage of the
substantial perceived market opportunity to provide a single-source for
comprehensive, clinically-sophisticated Care Management services and products
and Employee Benefit Services. Further, to capitalize upon each partner's
competitive strengths, members of senior management from each of HPS and Sykes
joined the Company.
The Company believes that the combination of these three companies creates
significant opportunities for cross-selling, cost savings and increased sales
and marketing efforts. The Company intends to utilize the strong customer
relationships that have been established by each of these companies to
cross-sell its services to those customers currently using less than all of the
Company's services. For instance, the Company intends to cross-sell its Care
Management services to users of its Optimed software products and related
services. Customers currently using the Company's Optimed software products and
related services include over 40 managed care plans covering approximately 20
million individuals, none of which are currently utilizing the Company's Care
Management services.
INDUSTRY OVERVIEW
According to a Congressional Budget Office report, healthcare spending in
the United States has increased to an estimated $1.1 trillion in 1997, or 13.7%
of GNP, from $247 billion, or 8.9% of GNP in 1980. As a result of the increase,
payors, providers and users of healthcare services have sought to reduce such
expenditures. Medical costs are divided into two principal components, the costs
of clinical delivery of healthcare (i.e., the costs directly associated with
medical treatment) and administrative costs. According to the Health Care
Financing Review, approximately 79% of healthcare costs have been directly
related to the clinical delivery of healthcare. In addition, efforts to reduce
unnecessary clinical costs have been hindered by the inability to
comprehensively and cost efficiently manage the complex task of guiding a
patient through the healthcare process from eligibility determination to
diagnosis, treatment and ultimate claim payment. The Company assists its
customers and their healthcare plan participants to better manage the medical
process. Opportunities to improve the delivery of healthcare include:
Improve Prospective Care and Early Treatment. The Company believes that
timely and convenient access by healthcare plan participants to useful
healthcare related information and subsequent appropriate preventative care and
early intervention can improve an individual's overall healthcare and wellness
while reducing inappropriate healthcare costs. The Company's Care Management
services are designed to enhance an individual's healthcare by prospectively
evaluating an individual's medical profile and potential healthcare needs,
providing information and educational assistance and improving patient
compliance with prescribed courses of treatment.
Improve Chronic Care Management. The Company believes that
chronic-condition healthcare costs represent a disproportionate share of
healthcare expenditures, and in managing such conditions, there often is a
significant difference between the clinically appropriate and documented disease
management guidelines and actual day-to-day treatment practices. Such
differences can result in lower quality care and unnecessary medical costs. The
Company's HI CARES program can promote higher quality individual medical
treatment while also reducing unnecessary costs associated with high-cost
chronic patient conditions.
Efficient Utilization of Healthcare Resources by Individuals. Healthcare
plan participants have not historically had convenient access to qualified
clinical personnel to answer healthcare questions and provide guidance on
healthcare treatment alternatives, often resulting in inappropriate consumption
of medical resources, inappropriate utilization or clinical inefficiency.
Individuals without such assistance can delay needed treatment, treat themselves
inappropriately or seek unnecessary care, all of which can lead to poor health
outcomes and higher costs. For example, the National Center for Health
Statistics found that in 1995, up to 55% of all emergency room visits were
unnecessary. The Company provides a toll-free helpline that allows participants
and their families to contact the Company's registered nurses with any questions
or concerns they may have regarding their treatment alternatives. The Company's
toll-free helpline is staffed 24 hours a day, 365 days a year, by qualified
clinical personnel that can assist individuals with questions or concerns they
may have regarding their health or medical treatment.
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Outsourcing of care management and employee benefits administration has
shown significant growth over the last several years due to: (i) significant
increases in the cost of healthcare and loss claim ratios; (ii) the desire to
improve the quality of healthcare; (iii) the need for extensive staff training
to effectively monitor, adapt and manage benefit programs to incorporate complex
and frequently changing governmental regulations; (iv) substantial potential
legal exposure for non-compliance with federally mandated healthcare
requirements; (v) the need for technologically sophisticated data processing
systems that require periodic maintenance, updates and reinvestment; and (vi)
increased employee awareness of healthcare benefits and employer concern for
potential litigation due to inadequate benefits administration.
STRATEGY
The Company's strategy is to continue as the single-source provider of
outsourced Care Management services and products and Employee Benefit Services
to corporations and healthcare providers and payors. This strategy includes the
following key elements:
- Deliver Comprehensive and Clinically Sophisticated Services and
Products. The Company intends to aggressively market itself to new and
existing customers as a single-source provider of comprehensive and
clinically sophisticated Care Management services and products and
Employee Benefit Services. The Company believes it is currently the only
single-source provider of such comprehensive services. In addition, the
Company believes that by integrating such services the Company's
customers will have the ability to determine a potential patient's
healthcare benefits eligibility status on a real time basis, thereby
reducing overall healthcare costs. The Company believes that its strong
customer relationships, knowledge of its customers' needs and ability to
address those needs, along with its broad range of service offerings will
enable the Company to continue as the single-source provider of Care
Management services and products and Employee Benefit Services.
- Cross-Sell Services to Existing Customer Base. The Company currently has
a significant customer base, including over 50 of the Fortune 500
companies. However, only a limited number of these customers utilize more
than one of the Company's services. The Company intends to utilize the
strong customer relationships established by each of its Care Management
and Employee Benefit Services operations to cross-sell the Company's
comprehensive suite of services to those customers currently using less
than all of its services. For instance, the Company intends to
aggressively cross-sell its Care Management services to users of its
Optimed software products. Customers currently using Optimed's software
products and services include over 40 managed care plans covering
approximately 20 million individuals, none of which currently utilize the
Company's Care Management services.
- Expand Sales and Marketing Efforts. Prior to the acquisition of HI, OMS
and SHSB, those companies collectively employed only five sales and
marketing personnel and did not aggressively market their services and
products. The Company is in the process of developing a comprehensive
marketing program and hiring additional sales and marketing personnel to
complete the development of its integrated sales and marketing team. The
Company believes that through its expanded sales and marketing team, it
will be able to effectively market itself to both new and existing
customers as a provider of comprehensive Care Management services and
products and Employee Benefit Services.
- Broaden Service Offerings. The Company continually evaluates regulatory
developments and emerging trends and innovations in the healthcare,
employee benefits and information technology industries and their
potential impact on the Company's existing and future customers. The
Company intends to continue to expand its service offerings to meet its
customers' existing needs as well as future needs created by regulatory
and other changes. The Company believes it has substantial capacity in
its existing facilities and systems to accommodate such expansion.
- Pursue Strategic Acquisitions. Since its inception in December 1997, the
Company has acquired three companies. The Company intends to continue to
evaluate acquisition opportunities to expand its service and product
offerings, geographic presence, customer base, industry expertise and
technical abilities.
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SERVICES AND PRODUCTS
<TABLE>
<CAPTION>
SERVICES AND PRODUCTS DESCRIPTION
- --------------------- -----------
<S> <C>
CARE MANAGEMENT
Demand Management.................................... 24-hour patient information services
Utilization Management............................... Pre-certification and concurrent
utilization review services
Case Management...................................... Management of complex catastrophic or
prolonged cases
Disease Management................................... Identification and management of at-risk
patients
Disability Management................................ Workers' compensation and disability case
management services
Protocol Products & Services......................... Quality and utilization management
software solutions
EMPLOYEE BENEFIT SERVICES
Benefits Plan Administration......................... Administration of employer's customized
benefits
Flexible Spending Account Administration............. Administration of FSA processing and
communications
COBRA Administration................................. Management of COBRA notification and
administration
Retiree Benefits Services............................ Administration of billing and collection
of premiums to retirees
Fulfillment Services................................. Production, assembly and distribution of
employee benefits materials
</TABLE>
CARE MANAGEMENT. The Company's Care Management services and products
assist customers in (i) improving the quality of healthcare services provided to
patients and (ii) monitoring patients' compliance with their prescribed course
of treatment, while (iii) simultaneously reducing inappropriate medical costs.
The Company believes that such costs are generally incurred when there is over-
or under-utilization of healthcare services, resulting in less effective medical
treatment. The Company's Care Management services include demand, utilization,
case, disease and disability management. These services are designed to guide a
patient through the medical process by prospectively assisting in determining an
individual's healthcare needs and monitoring and evaluating the delivery of
clinical care provided.
The Company's clinical staff, comprised of registered nurses and
physicians, interacts with patients, providers, payors and insurance companies
to assist in determining, implementing and monitoring an effective and efficient
customized Care Management program based on each patient's medical profile and
clinical protocols developed by the Company in consultation with a network of
board certified physicians. For instance, if a patient's physician recommends
hospitalization or surgery, a registered nurse reviews the physician's proposed
plan of care and discusses it with the patient's physician based on the
Company's clinical protocols. In the event the registered nurse believes a
second opinion may be warranted, the registered nurse will refer the case to one
of the Company's physician medical directors. If the medical director concurs,
the medical director will provide the patient with the names of physicians in
the patient's area. Physicians identified by the Company to provide second
opinions have been screened to verify that they have met the Company's
requirements in the relevant area of medicine. The Company handles the paperwork
and has the results reported to both the patient and the patient's physician so
that both the patient and the physician can review the consulting physician's
report before deciding whether or how to proceed with treatment. The Company
believes that the byproducts of a successful Care Management program can include
not only reduced medical costs for the payor or insurance company and the
patient but also improved patient outcomes and increased patient satisfaction.
Demand Management. The Company provides a toll-free telephone number that
allows participants and their families to contact the Company's registered
nurses, and in certain circumstances physicians, with questions or concerns they
may have regarding their health or medical treatment. The toll-free telephone
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<PAGE> 45
number is operational and available to subscribers 24 hours a day, seven days a
week. The Company's registered nurses and physicians assist in: (i) locating
appropriate providers of healthcare services throughout the United States; (ii)
identifying the types of alternative treatments that may be available for the
patient's condition; (iii) providing a plain language description of the
patient's medical condition, along with valuable information about conditions;
and, if appropriate, (iv) answering other questions the patient may raise. To
accomplish these objectives, the Company provides:
- Assessment of patient needs;
- Review of options and choices for care;
- Education concerning home care techniques;
- 24-hour follow-up calls;
- Access to poison control information;
- Printed educational material;
- Referrals to physicians and consultants; and
- Access to toll-free numbers of healthcare organizations across the United
States.
Through its toll-free telephone number, the Company is able to offer a
valuable employee benefit that enables patients and their families to deal more
effectively with important health issues. In addition, the toll-free number
provides cost savings that result from patients accessing the medical system at
the appropriate entry point for their medical conditions.
Utilization Management. The Company offers pre-certification and
concurrent utilization review services. The Company's pre-certification service
is designed for use prior to a patient's non-emergency admission to the hospital
and prior to a patient undergoing certain surgical procedures and diagnostic
tests on an outpatient basis. This program is designed to review all appropriate
care options available to the patient and the patient's treating physician to
ensure appropriate treatment and prevent the over- and under-utilization of
healthcare services. Upon notification of a request for pre-certification,
usually through its toll-free telephone line, a registered nurse reviews the
proposed treatment and compares it to clinical protocols which have been
developed by the Company in consultation with a network of board certified
physicians. As part of its pre-certification reviews, the Company may arrange
for second and, in certain circumstances, third surgical opinions for
non-emergency procedures through its database of more than 25,000 board
certified physicians. This surgical opinion review program offers cost savings
to the Company's customers and informed choices to their insureds. Obtaining a
second or third opinion for many types of surgery often results in the patient
choosing an appropriate alternative treatment plan, thereby resulting in reduced
medical plan costs, and, possibly, substantial savings on disability income
payments and lost days on the job. If a nurse is unable to certify the proposed
treatment plan as appropriate, the case is referred to a medical director
trained in the applicable medical specialty for direct consultation with the
patient's attending physician. If the approved treatment plan involves a
hospital admission, a nurse certifies an optimal discharge target based on
guidelines established by the Company. During the course of the hospitalization,
a nurse telephonically monitors (concurrent review) the patient's progress until
discharge. For certain diagnoses the Company initiates discharge planning. After
discharge from the hospital, the patient may require additional services such as
home healthcare. A nurse identifies any necessary additional services and
coordinates the provision of such care. The Company also offers specialty
programs for behavioral health and substance abuse review, as well as high-risk
maternity screening via its Special Delivery Program for expectant mothers. The
focus of its Special Delivery Program is the identification and prevention of
pre-term labor and pre-term birth.
Case Management. The Company offers medical case management services for
conditions and injuries deemed catastrophic or complex in nature, or where
prolonged recovery is expected. For these cases, the Company maintains a
physician database to provide knowledgeable consultants for the benefit of the
patients. The Company has established a medical advisory committee consisting of
nationally-recognized physicians in various medical specialties. These committee
members are not employees of the Company and are not compensated by the Company,
except for an honorarium of $250 that the committee members receive for
attending an annual meeting of the medical advisory committee. The medical
advisory committee has
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identified physicians and facilities throughout the United States that are
recognized experts in various types of complex and unusual procedures. The
advantages to the patients are the review of their cases by some of the most
qualified physicians in the United States and the assurance that any necessary
medical procedure will be performed by qualified medical personnel in an
appropriate facility.
Disease Management. Through its HI CARES program, the Company provides
disease management, which seeks to promote wellness and avoid unnecessary or
prolonged hospitalizations, reduce lengths of stay, and otherwise reduce costs
associated with high-frequency and high-cost chronic medical conditions. The
Company attempts to identify patients through claims history that are at risk
for particular diseases or suffering from a high-cost chronic medical condition.
Specific programs are in place for the following diseases and conditions:
- Endocrinological diseases;
- Respiratory diseases;
- Cardiac diseases;
- Cancer;
- Musculoskeletal conditions;
- Neurological conditions;
- Immune System disorders; and
- Transplants.
The Company's HI CARES program is a voluntary, confidential program,
administered by qualified clinical personnel who are registered nurses, and
consists of the following four stages:
- Patient Identification. The Company receives monthly paid claims data,
including prescription drug data, via computer from the claims payor.
This data is entered into the Company's Care Management database on an
ongoing basis. A review of this combined database is utilized to identify
patients who have, among other criteria: (i) high risk diagnoses; (ii)
multiple hospital admissions; (iii) high dollar claims; (iv) conditions
requiring health education; or (v) family claims considerations or other
indicators of potential high healthcare usage.
- Patient Contact. In the second stage, the patient or family member is
contacted by a registered nurse who specializes in a specific disease
classification. The nurse inquires as to the status of the patient's
health and explains the confidential nature of the program and the
Company's goals for the patient and the patient's family. Undocumented
conditions such as weight problems, smoking or family problems may also
be identified and discussed. If the patient agrees to participate in the
HI CARES program, the registered nurse will forward a patient release
form along with a letter that further explains the program. If the
patient does not wish to participate, a notation is made in the system.
The claims data, however, is continually reviewed and if the patient's
condition does not improve, further contact is initiated when
appropriate.
- Intervention. Once the patient agrees to participate in the HI CARES
program, a registered nurse and, in certain circumstances a medical
doctor, will conduct further medical interviews with the patient over the
phone, and possibly a medical record review. Based upon the patient's
condition, the registered nurse will contact the patient's physician to
explain the Company's role and develop, in conjunction with the patient's
physician, a suggested plan of treatment. Patients participating in the
HI CARES program are continuously monitored through follow-up phone calls
and other communications with the patient and providers at intervals
determined by the patient's needs. The plan of treatment is frequently
monitored and altered to meet the patient's changing healthcare needs.
Specific interventions often include: (i) reviewing the patient's current
treatment plan; (ii) referring the patient to medical specialists with
appointments made by a registered nurse; (iii) referring the patient to
community services and support groups; (iv) arranging for and monitoring
home healthcare services and therapies; (v) arranging for discounts for
specialized services; (vi) providing directories of healthcare providers
in the patient's community; (vii) facilitating communications between the
patient and their healthcare
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<PAGE> 47
providers; (viii) assisting the patient during medical situations and
giving support during medical intervention; and (ix) educating the
patient to assist in managing the medical process.
- Outcomes. Participants in the HI CARES program become part of the
Company's national database, designed to measure the effectiveness of
various treatments of specific diseases. The Company participates in and
monitors outcomes research on a continuous basis. Patient surveys are
also utilized to determine patient satisfaction and various
quality-of-life indicators.
Disability Management. The Company provides a range of services designed
to monitor the medical necessity and appropriateness of healthcare services
provided to workers' compensation and disability claimants. The Company also
provides services that may expedite claimants' return to work. A registered
nurse manages both workers' compensation and disability claimants by interacting
with both the claimant and the claimant's attending physician to establish the
shortest duration of disability consistent with the medical information and the
customer's benefit plan. This interface is customized to fit each customer's
needs. As part of its case initiation, a registered nurse assigned to the case
works with the claimant and the customer to assess the appropriate job
classification for the claimant. On-line disability duration guidelines are
utilized as a component of each specific case evaluation. The Company is able to
customize the guidelines on a customer specific basis through the review of
historical disability data from the customer. Disability days requested and
authorized are collected by diagnosis codes with indications whether the
claimant was hospitalized or had surgery. Reports comparing the outcome of each
disability case to the above norms are produced for tracking and monitoring
purposes.
Protocol Products and Services. The Company provides quality and
utilization management solutions that allow managed care payors and providers to
concurrently and prospectively control healthcare utilization and costs, while
simultaneously seeking to optimize the quality of their patients' healthcare.
The software solutions provided by the Company have been in continuous operation
for more than 12 years and are currently being used in the management of the
insured population of more than 40 managed care plans covering approximately 20
million people throughout the United States and Puerto Rico. The Company
provides software solutions to its customers through its Optimed products and
services, which are based on the Optimed Protocols.
Optimed Protocols. The Optimed Protocols are developed and maintained
by the Company's clinical staff, as well as its national panel of over 250
board certified physicians, and represent more than 52,000 diagnosis and
procedure-specific criteria that establish medical practice parameters to
provide an objective, substantiated clinical basis for the evaluation of
high cost/high volume treatments and procedures. Optimed Protocols enable
managed care personnel to (i) assess the appropriateness of care, and (ii)
manage the location and duration of the medical services provided. The
Company uses a process employing healthcare data analysis, scientific
literature review and clinical consensus to substantiate the validity of
the Optimed Protocols.
The clinical development and ongoing maintenance of each Optimed
Protocol relating to appropriateness or location of care and duration of
stay include: (i) analyzing the Company's national database of healthcare
data; (ii) reviewing current scientific and medical literature; (iii)
compiling a comprehensive list of indications for surgical intervention or
inpatient admission; (iv) consulting with over 250 board certified
practicing physicians and clinicians, representing a broad range of medical
and surgical specialties, subspecialties and practice models; (v)
constructing automated step-by-step procedures; and (vi) involving
practicing clinicians in all stages of the development of Optimed
appropriateness review criteria.
OMS Software. Optimed has been engineered into three fully-featured
software packages that use Microsoft Windows 95/NT(R), Unix and IBM
Mainframe technologies. Both the Unix and IBM systems include the ability
to manage member eligibility, provider networks and specialty referrals.
Both systems automatically generate notification letters for physicians,
facilities and patients; provide sophisticated management reporting; and
can be interfaced to claims processing, eligibility and provider systems.
The Windows-based portable Optimed product is a graphic user interface and
client server-based software system designed to interface with third party
and legacy utilization management software systems.
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OMS Services. The Company provides a broad range of standard support
and optional services to assist its customers in maximizing the benefits of
the Optimed Protocols, including: (i) initial implementation planning and
project management; (ii) training and educational programs; (iii) technical
consulting and support; (iv) medical management consulting, including
auditing and analyzing the customer's medical management data and
operation; and (v) physician peer review services.
EMPLOYEE BENEFIT SERVICES. The Company's Employee Benefit Services allow
its customers to outsource the administration of their employee benefit plans,
including enrolling new plan participants, developing and maintaining records,
verifying or paying claims and producing management reports. The Company
provides a broad range of Employee Benefit Services, including BPA, FSA
administration, COBRA administration, retiree benefits services and other
ancillary services. The Company currently provides these services to over 600
companies, collectively serving over 4 million employees, either as a
comprehensive package or on an individual basis.
Benefits Plan Administration. The Company assumes primary responsibility
for administering the complete benefits package offered by an employer, which
permits employees to structure a benefit package to meet their personal needs.
Under a flexible benefits plan, the employer generally provides employees with a
minimum of core benefits coverages, such as basic health and life insurance.
Employees can then select additional benefits from a list of available options
or choose higher levels of coverage. Depending upon the benefit plan design
offered by an employer, an employee can either purchase additional benefits
through higher payroll deductions or use credits funded by the employer, which
are allotted to them based upon salary, years of service or some other criteria.
The Company provides the following BPA services:
- Creating an employee election database and eligibility tables;
- Compiling and maintaining employee and dependent demographics and benefit
elections;
- Calculating, reporting and disbursing premiums to payors;
- Reporting eligibility to payors;
- Updating customer payroll systems on a scheduled basis;
- Providing toll-free benefits inquiry services;
- Producing COBRA initial notification of rights letters, qualifying events
notices and certificates of coverage under HIPAA; and
- Providing standard monthly management reports for the customer's benefits
department.
Additionally, the Company offers its customers carrier administration
services, which offers a single point of contact for all insurance
carrier-related activities, and provides the ongoing change processing
associated with plan changes, new enrollments, terminations and dependent
changes.
Flexible Spending Account Administration. The Company's FSA administration
system is structured to provide the employer with flexible and efficient
processing and timely communications. An FSA provides a means for employees to
pay for out-of-pocket healthcare and dependent expenses on a pre-tax basis.
Employees who choose to establish an FSA deposit pre-tax dollars into either a
healthcare or dependent care account, or both. Healthcare reimbursement accounts
are designed to help employees pay for certain eligible healthcare expenses that
may not be 100% covered or are ineligible for payment by their healthcare plans.
Dependent care reimbursement accounts are designed to help employees pay for
child care services or care for a disabled spouse or dependent.
To establish an FSA plan, an implementation manager meets with the customer
to collect information about its FSA administration needs and its employee
demographic information. Through its FSA administration system, the Company
processes FSA enrollments, maintains and updates all FSA records, processes
claims and produces reports. Changes in eligibility and deposit and withdrawal
information are recorded on a monthly basis through an integrated reporting
system. The Company currently provides FSA administration
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services for more than 339,000 individuals. The Company can design an FSA
program to meet customer specifications, as well as provide all record keeping
and administrative functions in accordance with IRS regulations.
The Company's FSA administration system contains the following core
components:
- AccountLINK. The Company's interactive customer assistance system allows
participants to use a touch-tone phone to access their accounts daily for
balance, date the last claim check was mailed and date of payment of the
last claim.
- Electronic Funds Transfer. Electronic funds transfer offers employees
the convenience of direct deposit into their individual bank accounts
from their FSA. Employees can call AccountLINK to verify the status of
their payment. Deposits will be recorded on their monthly banking
statements.
- Employee Communications. The Company provides FSA-related brochures,
other communications in electronic format and a video for educating
employees on the advantages related to an FSA.
- Enrollment Support. The Company can provide enrollment support through
enrollment meetings, instructional videos and brochures, presentations,
and preparation of plan documents.
COBRA Administration. The Company manages all COBRA notification and
administration procedures on behalf of its employers. Enacted in 1986, COBRA
requires virtually all employers with 20 or more employees that maintain group
health insurance plans to offer continued healthcare coverage for employees and
their dependents following "qualifying events," such as changes in employment
status. In August 1996, Congress passed HIPAA in an effort to provide
"guaranteed" group health plan coverage to individuals with pre-existing
conditions. This effort includes placing limits on group health plan
pre-existing limitation periods. HIPAA also imposed new ERISA rules on group
health plans, including prohibitions on provisions that discriminate against
plan participants based on health status-related factors. The HIPAA legislation
has had a significant impact on the COBRA administration business because it
requires employers to provide a certificate of insurance for each employee who
ceases to be employed. The HIPAA legislation has also resulted in further
complexity in determining the period of eligibility for COBRA participation, and
redefined qualified beneficiaries.
The Company's COBRA administrative services include:
- Distributing notification letters to employees when initially hired and
when a "qualifying event" occurs;
- Enrolling an employee into a health insurance plan sponsored by the
employer, consistent with COBRA regulations;
- Receiving and disbursing employee premium payments; and
- Maintaining a record of all related documentation and transactions.
Throughout the COBRA continuation period, the Company monitors:
- A qualified beneficiary's continued eligibility;
- Second qualifying events (e.g., death, divorce and dependents'
eligibility status) for any extension of benefits for which a participant
might be eligible;
- The payment record of each qualified employee (if a payment is not
received before the 30-day grace period expires, a participant's account
will automatically terminate and a termination notice will be issued);
- If the employer has established a conversion provision (60 days before
termination, the Company will generate an automated conversion reminder
letter informing COBRA beneficiaries of the option to convert to an
individual policy after COBRA coverage expires); and
- Any end of coverage event (the Company is required to send the employee a
notice indicating that coverage will cease to be in effect on a
particular date).
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Retiree Benefits Services. Retiree benefits services consist of the
billing and collection of premiums from retirees and employees on a
leave-of-absence. Participant demographic and accounting records are established
in a database, premium bills are sent and premiums are collected and disbursed
either back to the employer or directly to the appropriate carrier. Eligibility
and accounting reports are produced monthly for the carriers, and management
reports are produced monthly for the employer. Additionally, a toll-free
employee benefit support line, including an automated inquiry facility and an
on-line call documentation system, provides responsive handling of participant
inquiries.
Fulfillment Services. The Company operates a 78,750 square foot
fulfillment center in Louisville, Kentucky. The Company's fulfillment services
include the production and assembly of employee benefits enrollment kits and
related materials and their distribution to customers and their employees.
Other Services. In addition to Care Management and Employee Benefit
Services, the Company offers the following ancillary services to its customers:
Optical Character Recognition. OCR is a system by which a device
scans and recognizes hand-printed or typed data and then encodes the data
into alphanumeric characters for processing. The OCR system "photographs"
data within a document, then captures and transfers the data into a
software-based program, where it is processed with a minimal amount of
human intervention. OCR technology is an attractive alternative to manual
data entry systems. This can expedite the set-up process by reducing the
manual intervention required to get new customers on the Company's system.
In the case of a large organization, an OCR scanning application is ideal
for benefit enrollment needs. The Company's facility is capable of
processing 12,600 documents per hour.
Interactive Voice Response System. The Company operates an
interactive voice response system service that gathers and provides
information through the use of a touch tone telephone. This system allows
callers to enter a request, answer questions, or place an order directly by
telephone, which saves the expense of manual data entry and reduces or
eliminates the need to staff for these calls. This system can save the
customer significant man hours and labor costs.
CUSTOMERS
The Company has customers in the United States and Puerto Rico, including
in excess of 50 Fortune 500 corporations. The Company believes its base of
nationally recognized customers presents important opportunities for further
marketing of its services.
Approximately 59.7%, 53.7%, 48.6% and 46.7% of the Company's pro forma
revenues in fiscal 1995, 1996, 1997 and the three months ended March 31, 1998,
respectively, were attributable to the Company's top ten customers. Of the
Company's pro forma revenues in 1997, PHC and Hughes Electronics represented
approximately 14.7% and 11.0%, respectively. The Company expects to discontinue
providing fulfillment and DMO services to PHC in 1998. The Company estimates
that during 1997, the Company provided fulfillment and DMO services to PHC on a
break-even basis. Prior to the acquisition of SHSB, the predecessor of SHSB was
notified that its contract with Hughes Electronics would not continue after
1998. PHC and HPS are expected to be the Company's largest customers in 1998.
The Company anticipates that in the future a significant portion of its revenues
will continue to be derived from a limited number of key customers. The
Company's loss of more of its business from PHC than anticipated or the loss of
its business from HPS or any of its other key customers could have a material
adverse effect on the Company's results of operations. See "Risk
Factors -- Dependence on Key Customers," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Acquisitions" and "Certain
Transactions."
The results of operations for the Company's Care Management services
historically have been affected by the addition or loss of significant
customers. When a significant customer is added, the Company hires and trains
additional personnel to service the projected new business prior to receipt of
revenues from the customer. A start-up fee, ranging from $2-$3 per participant,
is initially charged to cover part of the costs incurred by the Company.
Consequently, results of operations for a given quarter may be subject to
significant
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fluctuations. See "Risk Factors -- Fluctuations in Operating Results" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Revenue Recognition."
The following is a representative list of the Company's customers based on
the variety of industries served and customer revenues:
Care Management
<TABLE>
<S> <C>
Care Management Services Protocol Products and Services
American Airlines Alliance Blue Cross/Blue Shield
Bank of America Anthem Blue Cross/Blue Shield of
Best Life Assurance Connecticut
Fox Television Blue Cross/Blue Shield of Michigan
Kmart Blue Cross/Blue Shield of Oklahoma
Kerr-McGee Blue Cross/Blue Shield of South Carolina
McKesson Blue Cross/Blue Shield of Texas
Nestle USA Great-West Life
PepsiCo Independence Blue Cross
Warner Bros.
Xerox
</TABLE>
Employee Benefit Services
<TABLE>
<S> <C>
ADP Lucent Technologies
AT&T NationsBank
Banc One Corporation Northwest Airlines
City of Los Angeles Procter & Gamble
Coopers & Lybrand Saint-Gobain
IBM
Kroger
</TABLE>
COMPETITION
The business of providing outsourced Care Management and Employee Benefit
Services is highly competitive and fragmented. The Company's principal
competitors include data processing affiliates of financial institutions,
insurance companies, third party administrators, providers of healthcare
protocols and software solutions and other outsourcing service companies.
Although the Company believes that it is currently the only single-source
provider of comprehensive and clinically sophisticated Care Management services
and products and Employee Benefit Services, several companies, including ABR
Information Services, Inc., Access Health, Inc., HBO & Company and Health
Management Systems, Inc., offer certain services similar to those offered by the
Company. Management believes that there are certain competitors, as well as
potential competitors, including HPS and Sykes, that possess substantially
greater resources and name recognition than the Company. See "Certain
Transactions." In addition to the Company's competitors, many of the Company's
services, including COBRA compliance and other employee benefits administration,
are often provided in-house. The Company believes that the most significant
competitive factors in the sale of its outsourcing services and products include
quality, reliability of services and data provided, flexibility in tailoring
services to customer needs, assumption of certain responsibilities for
compliance with complex laws and regulations, experience, reputation,
comprehensive services, integrated services and price. See "Risk
Factors -- Competition."
SALES AND MARKETING
Prior to the Company's acquisition of HI, OMS and SHSB, those companies
collectively employed only five sales and marketing personnel and did not
aggressively market their services and products. The Company is in the process
of developing a comprehensive marketing program and hiring additional sales and
marketing
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personnel to complete the development of its integrated sales and marketing
team. Although each of the Company's broad range of services may target
different industry segments, the Company has the ability to provide a
comprehensive suite of outsourcing services to any individual customer. The
Company plans to market its Care Management services and products and Employee
Benefit Services through a variety of methods, including cross-selling
additional services to existing customers, customer referrals, personal sales
calls, advertising in industry publications, direct mailings to targeted
customers and participating in industry trade shows.
The Company also intends to strengthen its relationships with its existing
customers. Sales representatives and account executives will be assigned to a
limited number of accounts in order to develop a complete understanding of each
customer's particular needs, to form strong customer relationships and to
encourage cross-selling of other services offered by the Company. Account
executives will also receive incentives for cross-selling the Company's
services.
INSURANCE
The Company maintains insurance policies, including general liability
insurance coverage up to $2.0 million in the aggregate, product liability
insurance coverage up to $1.0 million in the aggregate, umbrella liability
insurance coverage up to $10.0 million in the aggregate, primary occurrence
errors and omissions insurance coverage up to $5.0 million in the aggregate and
excess occurrence errors and omissions insurance coverage up to $5.0 million in
the aggregate. The Company believes its insurance coverage to be adequate in
amount and coverage for the current size and scope of its operations. There can
be no assurance, however, that the coverage maintained by the Company will be
sufficient to cover all future claims or will continue to be available in
adequate amounts or at a reasonable cost. Although the Company has not
experienced difficulty in obtaining insurance coverage in the past, there can be
no assurance that it will be able to obtain continued insurance coverage on
acceptable terms or at all. In addition, although the Company's contracts with
its customers sometimes require the customer to indemnify the Company for the
customer's negligent conduct, the contracts do not provide for adequate
indemnification against many of the potential litigation risks facing the
Company and often require the Company to indemnify its customer for the
Company's negligence. The Company, therefore, could be held responsible for
losses incurred in connection with the performance of its services under the
terms of these contracts or otherwise and could incur substantial costs in
connection with legal proceedings associated with its services. See "Risk
Factors -- Potential Legal Liability for Care Management" and "-- Potential
Legal Liability as a Benefits Administrator."
EMPLOYEES
As of April 17, 1998, the Company had approximately 975 full-time
employees, including approximately 700 employees providing Employee Benefit
Services and approximately 275 employees providing Care Management services and
products. The technical and service nature of the Company's business makes its
employees an important corporate asset, and the identification and retention of
qualified personnel is an important corporate goal. It is particularly important
for the Company to retain qualified healthcare, technical and employee support
personnel to continually enhance the Company's services and related products.
While the market for qualified personnel is very competitive, the Company
believes its relationship with its employees is good.
INTELLECTUAL PROPERTY
The Company relies upon a combination of contract provisions and trade
secret laws to protect the proprietary technology it uses at its facilities and
relies on a combination of copyright, trademark and trade secret laws to protect
the Company's proprietary software. The Company attempts to further protect its
trade secrets and other proprietary information through agreements with
customers, employees and consultants. The Company does not hold any patents and
does not have any patent applications pending. There can be no assurance that
the steps taken by the Company to protect its proprietary technology will be
adequate to deter misappropriation of its proprietary rights or third party
development of similar proprietary software. The Company possesses common law
trademarks in "Sykes HealthPlan Services, Inc.," "SHPS" and its logo, and
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has applied to register the marks and logo with the United States Patent and
Trademark Office. The Company has registered the trademark OPTIMED(R) with the
United States Patent and Trademark Office. The Company owns all copyrights to HI
CARES.
LEGAL PROCEEDINGS
The Company is not a party to any litigation, nor is it aware of any
threatened litigation, that is expected to have a material adverse effect on the
Company or its business.
REGULATION
The healthcare industry is subject to federal and state governmental
regulation. Certain of these statutes and regulations governing the provision of
healthcare services could be construed by regulatory authorities to apply to
certain of the Company's products and services. This is particularly true with
regard to the provision of healthcare-related services by nurses and physicians
located in and licensed in one state that provide services to patients located
in another jurisdiction. There is currently no clear and consistent judicial or
statutory guidance regarding whether or not the activities performed by the
Company constitute the practice of nursing or medicine. However, one state court
has upheld the discipline imposed on a physician by the state's medical
licensure board for the denial of health benefits under a managed care plan. If
a court determines that the Company's healthcare-related activities constitute
the practice of nursing or medicine, the employees of the Company will be
governed by the state's boards of nursing and medicine or the Company may be
found to be in violation of a state's corporate practice of medicine statute.
Several states require that physicians licensed in one state who provide
services across state lines also maintain licensure in the state in which the
patient is located. In addition, some states have begun to enact telemedicine
laws which, in the future, could be deemed to curtail, modify or prohibit
physicians and nurses from providing "medical advice" via the telephone.
Enforcement of such statutory and regulatory requirements could require the
Company to obtain additional licenses or registrations, modify current
operations, pay fines or incur other penalties such as the loss of the right to
do business in a particular state.
Many states in which the Company provides Care Management services require
the Company or its employees to receive regulatory approval or licensure to
conduct such business. 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
and may rely on certain accreditations from nationally recognized entities in
granting, renewing or revoking such licenses and approvals. These laws and
regulations are intended to protect insured parties rather than shareholders,
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 certain of the
Company's service offerings. The Company could also incur liability as a
fiduciary in respect of certain of the disability management services it
provides.
The American Accreditation HealthCare Commission, also known as the
Utilization Review Accreditation Commission ("URAC"), is an organization which
accredits a wide range of managed care activities and organizations including
utilization review services. Currently, thirty-two of the fifty states require
licensure for utilization review. As of April 1998, 18 states and the District
of Columbia have incorporated URAC accreditation into their utilization review
regulatory schemes as part or in lieu of their process to obtain a license.
URAC's governing structure currently consists of 16 member organizations,
each of which may appoint one individual to a seat on the URAC Board of
Directors. Four directors also serve as corporate officers. The URAC Board of
Directors forms various committees, including the committee to review
accreditation applications and committees to develop new accreditation modules
and review standards. As part of the accreditation and review process, URAC has
conflict of interest procedures to prevent its reviewers from participating in
the review of applications of entities in which they have a pecuniary or
personal interest.
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URAC also has a "blinded" accreditation committee process where all identifying
information is removed by its reviewers before submission to the committee.
Suzanne D. Kelly, Vice-Chairperson and Co-Chief Executive Officer of HI, is a
board member and currently serves as URAC's Chairperson. See "Management --
Directors and Executive Officers."
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 and
applies to employer-based welfare plans. Excluded from ERISA are government
plans, church plans, plans established solely for the purpose of workers'
compensation, unemployment benefits or disability plans maintained outside the
United States for the nearly exclusive benefit of non-resident aliens and
unfunded excess benefit plans. ERISA generally provides that a person is a
fiduciary of a plan to the extent that such person has discretionary authority
in administration of the plan or with respect to the plan's assets. Each
employer is a fiduciary of the plan it sponsors, but there can also be other
fiduciaries of a plan and 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 Department of Labor 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 previously. Similarly, there can be no
assurance that future statutory changes to ERISA will not significantly affect
the Company and its industry.
Enacted in 1986, COBRA is subject to interpretation by the federal courts
and is administered jointly by several federal agencies, including the IRS, the
Department of Labor and the Department of Health and Human Services. In
addition, COBRA is affected by other federal legislation and entitlement
programs, such as Medicaid, Medicare and the Family and Medical Leave Act of
1993. COBRA applies to virtually all employers with 20 or more employees that
maintain group health insurance plans, including fully insured, self-insured or
partially-insured plans and union or non-union plans. Church groups and the
District of Columbia government are exempt from compliance with COBRA.
The penalties for noncompliance with COBRA are substantial. As a provider
of COBRA compliance and administration services, the Company's exposure under
the Code for excise taxes imposed for unintentional violations of certain
provisions of COBRA is limited to an aggregate of $2.0 million per year. Under
the Code, employers that are subject to COBRA are liable for excise taxes at the
rate of $100 per "qualified beneficiary" ($200 if the qualified beneficiary has
covered dependents) for each day during which the group healthcare plan is in
noncompliance, subject to an annual maximum for unintentional violations. When
such noncompliance is not corrected before an IRS audit, this excise tax
obligation increases, depending on whether or not the violations are "de
minimis." ERISA also imposes personal liability on the plan administrator for
the benefit of plan participants for COBRA violations in the form of a penalty
of up to $100 for each day the violation continues. In addition to liability for
COBRA violations under the Code and ERISA, improper denial of coverage under
COBRA or failure to comply with COBRA's notification requirements may result in
an employer's liability for healthcare coverage to a former employee or
dependent that is retroactive to the date of the qualifying event which
triggered the notification requirement. Depending on the terms of the employer's
group healthcare plan, such an employer may be required to provide this type of
retroactive coverage without reimbursement from its insurance carrier.
The Company follows changes in federal laws and regulations related to and
judicial interpretations of COBRA, and promptly implements required changes to
its data processing operations. The Company's internal compliance department
periodically reviews the Company's operations to monitor compliance with the
Company's internal systems of controls and applicable federal laws and
regulations.
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HIPAA requires employers with two or more employees and a group health plan
to issue "Certificates of Creditable Coverage" to all persons who were covered
by their group health plan but lost coverage for any reason since October 1,
1996. The requirement also applies to anyone losing coverage after June 1, 1997.
The certificate will serve as proof of coverage which the individual can use to
obtain waivers of pre-existing condition limitations when seeking coverage under
another employer's plan.
HIPAA requires employers to capture information reflecting type of coverage
and coverage periods for individuals (employees and dependents) on their plan.
Data must be captured as far back as July 1, 1996. The employers then must issue
certificates to these individuals documenting the coverage periods for future
insurers. Employees, covered dependents, employers and carriers may request
certificates at any time up to 24 months after the loss-of-coverage event. The
HIPAA compliance process begins when the Company sends each employee and his or
her dependents a HIPAA certificate following any qualifying event.
As a provider of HIPAA compliance and administration services, the Company
is subject to excise taxes for noncompliance with certain provisions of HIPAA.
Under the Company's service agreements with its customers, the Company assumes
financial responsibility for the payment of such taxes assessed against its
customers arising out of the Company's failure to comply with HIPAA, unless such
taxes are attributable to the customer's failure to comply with HIPAA or with
the terms of its agreement with the Company. Under the Code, employers that are
subject to HIPAA are liable for excise taxes at the rate of $100 per "qualified
beneficiary" for each day during which the group healthcare is in noncompliance.
These liabilities could, in certain cases, be substantial. Although there can be
no assurance that the Company will not incur any material liability for
noncompliance with HIPAA or for its failure to comply with its agreement with
any customer, to date the Company has not incurred any such material liability.
The imposition of such liability on the Company could have a material adverse
effect on the Company.
Several of the products and services offered by the Company require the
Company to view, maintain and transport the confidential medical records of
health plan beneficiaries. The maintenance and transmission of medical records
is governed by a wide variety of state and federal laws, including HIPAA. There
are also several federal bills pending which would further restrict access to
and provide protection for confidential medical records. The state laws
governing medical records vary significantly from state to state. The failure of
the Company to comply with these requirements or material changes in such
requirements could result in significant liability as well as possible civil and
criminal penalties.
The Company also offers services to health plan participants, the payment
of which may be approved by Medicare as a federal Medicare secondary payor,
which may require the Company in some instances to take appropriate
administrative action.
From time to time, Congress has also considered federal regulation of the
health insurance industry. No such legislation has been adopted. Any legislation
relating to a comprehensive healthcare program could adversely affect the
Company. See "Risk Factors -- Possible Adverse Effect of National and State
Healthcare Reform Proposals."
If the Company were to pursue opportunities outside the United States, it
may become subject to the regulatory requirements of such foreign jurisdictions
and there can be no assurance that the Company would be able to adapt its
operations to, or comply with, such regulatory requirements.
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FACILITIES
The Company's principal executive offices are located in Louisville,
Kentucky. The following table sets forth information concerning the Company's
facilities:
<TABLE>
<CAPTION>
PROPERTIES(1) SQUARE FEET GENERAL USAGE LEASE EXPIRATION
- ------------- ----------- ------------- ----------------
<S> <C> <C> <C>
Louisville, Kentucky............... 160,689 Corporate headquarters July 31, 2005
Louisville, Kentucky............... 78,750 Operating facility June 30, 2001
Scottsdale, Arizona(2)............. 39,140 Operating facility June 30, 2002
Lexington, Massachusetts........... 12,182 Operating facility October 31, 2002
</TABLE>
- ---------------
(1) The Company has also subleased space in two customers' facilities located in
Columbus, Ohio and Las Vegas, Nevada on a month-to-month basis.
(2) The Company's facilities in Scottsdale, Arizona consist of five separate
facilities within the same office complex.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to each
person who is a director or executive officer of the Company:
<TABLE>
<CAPTION>
YEAR
FIRST DIRECTOR'S
BECAME A TERM
NAME POSITION(S) AGE DIRECTOR EXPIRES
- ---- ----------- --- -------- ----------
<S> <C> <C> <C> <C>
David E. Garner............... President, Chief Executive 40 1998 2001
Officer and Director
James K. Murray, III.......... Executive Vice President, 35 -- --
Treasurer, Chief Financial
Officer
John D. Gannett, Jr. ......... Senior Vice President, 43 -- --
Customer and Employee Services
Owen McKenna.................. President and Chief Executive 49 -- --
Officer of OMS
Stephen K. Holland, M.D. ..... Senior Medical Director of OMS 47 -- --
Donald K. Kelly, M.D.......... Chairman and Co-Chief 65 -- --
Executive Officer of HI
Suzanne D. Kelly.............. Vice-Chairperson and Co-Chief 47 -- --
Executive Officer of HI
Michael C. Peerboom........... President and Chief Operating 47 -- --
Officer of HI
Christine L. Beckler.......... Controller and Secretary 28 -- --
William L. Bennett............ Director 49 1998 2000
Linda McClintock-Greco,
M.D. ....................... Director 43 1998 2000
James K. Murray, Jr........... Chairman of the Board of 63 1997 2001
Directors
</TABLE>
David E. Garner has served as President and Chief Executive Officer of the
Company since its inception in December 1997 and as a director of the Company
since March 1998. From May 1994 until December 1997, Mr. Garner served as Senior
Vice President of Sykes with responsibility for information technology support
services for both national and international operations. Mr. Garner joined Sykes
in 1984 and, prior to becoming Senior Vice President of Sykes, held various
technical and managerial positions within Sykes.
James K. Murray, III, has served as Executive Vice President, Treasurer and
Chief Financial Officer of the Company since December 1997. Prior to joining the
Company, Mr. Murray served as Executive Vice President and Chief Financial
Officer of HPS from December 1995 to December 1997. Mr. Murray was President and
Chief Executive Officer and a director of a federally insured commercial bank in
Hillsborough County, Florida, from August 1993 to December 1995, as well as
Executive Vice President and Chief Financial Officer from 1990 until 1993. From
1985 to 1990, Mr. Murray was employed by Arthur Andersen & Co. in Atlanta,
Georgia. Mr. Murray was a director of Medirisk, Inc., a company engaged in the
healthcare information business until June 1998. Mr. Murray, III is the son of
James K. Murray, Jr.
John D. Gannett, Jr., has served as Senior Vice President, Customer and
Employee Services of the Company since its inception in December 1997. From July
1995 until December 1997, Mr. Gannett served as Senior Vice President of Sykes
with responsibility for information technology development services and
solutions. Prior to July 1995, he provided consulting services to Sykes under an
agreement entered into in
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1991. From 1979 to 1991, Mr. Gannett held various management positions within
the technical and documentation services areas of Sykes.
Owen McKenna has served as President and Chief Executive Officer of OMS
since 1990. Prior to joining OMS, from 1988 to 1990, Mr. McKenna served as the
General Manager of the Health Data Institute ("HDI"), a data analytic and
managed care consulting company, where he was responsible for all managed care
consulting, data analytic and software business units. From 1984 to 1989, Mr.
McKenna served as a Division Vice President of Baxter International, a
biotechnology company, where he was responsible for the development and
management of its Hospital Systems and Management Services Division.
Stephen K. Holland, M.D., has served as Senior Medical Director of OMS
since 1990. Prior to joining OMS, from 1985 to 1988, Dr. Holland served as a
Vice President and Medical Director of HDI where he was responsible for the
development of managed care products (such as Optioned and HDI care management
services) and one of the first clinically-based prepayment claims editing
systems, the Advanced MedLogic System. From 1988 to 1990, Dr. Holland was an
independent consultant in the managed care industry for both U.S.-based
companies (such as Private HealthCare Systems and Adjust International) and
international companies (such as British United Provident Association and
Private Patient Plan).
Donald K. Kelly, M.D., has served as the Chairman and Co-Chief Executive
Officer of HI since he founded HI in 1985. Prior to founding HI, Dr. Kelly
founded and served as Chairman and Chief Executive Officer of Healthgroup
International, an HMO located in Southern California, which was purchased by
Hospital Corporation of America in July 1985. He also developed Ambulatory
Medical Systems, an emergency room services company, and Manhattan Health Plan,
an HMO located in New York. Dr. Kelly began his career in healthcare cost
containment when he founded HMO International, an HMO located in Southern
California, in 1964, which he developed into the largest for-profit HMO in
Southern California before its sale to INA Corporation (now CIGNA Healthplans)
in 1978. Dr. Kelly is the husband of Suzanne D. Kelly.
Suzanne D. Kelly has served as the Co-Chief Executive Officer of HI since
October 1997 and as the Vice-Chairperson and Secretary of HI since 1985. Prior
to joining HI, Ms. Kelly served as the Vice President of Personnel and Legal
Compliance and Corporate Secretary of Healthgroup International from 1979 to
1985. Ms. Kelly served as the Administrative Assistant to the Chairman of the
Board of HMO International and as the Director of Personnel and Corporate
Secretary of Manhattan Healthplan, Inc., a New York-based HMO, from 1975 to
1977. She is currently the Chairperson of the Board of Directors and of the
Executive Committee of the American Accreditation HealthCare Commission/URAC.
Ms. Kelly is the wife of Donald K. Kelly, M.D.
Michael C. Peerboom has served as the President and Chief Operating Officer
of HI since its inception in 1985. Prior to joining HI, Mr. Peerboom held a
variety of positions with several companies in the healthcare industry,
including National Medical Enterprises, American Medical International, CIGNA
Healthplans and Healthgroup International, specializing in the area of
healthcare management information systems.
Christine L. Beckler has served as Controller and Secretary of the Company
since March 1998. From September 1996 through March 1998, Ms. Beckler served as
Controller of the Small Group Division at HPS. Prior to this period, Ms. Beckler
was employed by Price Waterhouse, L.L.P. in Tampa, Florida from October 1995 to
September 1996 and by Arthur Andersen L.L.P. in Chicago, Illinois from September
1991 to October 1995. Ms. Beckler is a Certified Public Accountant.
William L. Bennett has served as a director of the Company since March
1998. Mr. Bennett has served as Vice Chairman of the Board of HPS since January
1998 and served as Chairman of the Board of HPS between March 1995 and December
1997. He has served as a director of HPS since August 1994. Previously, Mr.
Bennett was Co-Chairman and Chief Executive Officer of Noel Group, Inc. from
November 1987 to March 1995. He is a director of Allegheny Energy, Inc., an
electric utility holding company, and Sylvan, Inc., a company that produces
mushroom spawn and fresh mushrooms.
Linda McClintock-Greco, M.D., has served as a director of the Company since
March 1998. Dr. McClintock-Greco has served as Chief Executive Officer since
July 1996, and previously as Chief Medical
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Officer from October 1994 to July 1996, of Tampa General HealthPlan, Inc. She
has spent the past 10 years in the healthcare industry as both a private
practitioner in Texas and a managed care executive serving as the Assistant
Regional Medical Director with Humana HealthCare Plan. Dr. McClintock-Greco
serves on the Board of Directors of the Florida Association of Managed Care
Organizations and currently serves as Treasurer. Dr. McClintock-Greco is a
director of Sykes.
James K. Murray, Jr. has served as Chairman of the Board of Directors of
the Company since its inception in December 1997. Mr. Murray has served as
Chairman and Chief Executive Officer of HPS since December 1997 and as a
director of HPS since October 1994. From October 1994 until December 1997, he
served as President and Chief Executive Officer of HPS. He co-founded the
predecessor of HPS in 1970. Mr. Murray held the position of Corporate Senior
Vice President of the Dun & Bradstreet Corporation ("D&B") from March 1990 until
his retirement from D&B in December 1993. Mr. Murray also served as Chairman of
the Board of the Reuben H. Donnelley Corp., a publisher of telephone yellow
pages, from August 1991 until December 1993. He is also a director of Noel
Group, Inc. Mr. Murray, Jr. is the father of James K. Murray, III.
John H. Sykes, the Chairman of the Board, President and Chief Executive
Officer of Sykes, resigned as a director of the Company as of June 17, 1998.
COMPOSITION OF THE BOARD OF DIRECTORS
Pursuant to the terms of the Company's Articles of Incorporation and
Bylaws, which will be effective upon completion of the Offerings, the Board of
Directors has the power to set the number of directors (but not more than 12
members) by resolution adopted by the directors of the Company. The directors
are divided into three classes, as nearly equal in number as possible. Each
director in a particular class is elected to serve a three-year term or until
his or her successor is duly elected and qualified. Because the classes are
staggered their terms expire in successive years. The staggered structure of the
Company's Board of Directors may have an anti-takeover effect by impairing a
third party's ability to acquire immediate control of the Board of Directors.
Currently, the number of directors is set at seven. The Company intends to
maintain at all times at least two independent directors on its Board of
Directors. See "Risk Factors -- Anti-Takeover Considerations."
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. The Company has established an Audit Committee composed
of Mr. Bennett and Dr. McClintock-Greco. The Audit Committee makes
recommendations concerning the engagement of independent public accountants,
reviews with the independent public accountants the plans and results of the
audit engagement, approves professional services provided by the accountants,
reviews the independence of the accountants, considers the range of audit and
non-audit fees, and reviews the adequacy of the Company's internal accounting
controls. The Audit Committee is also responsible for the review of transactions
between the Company and any affiliate or entity in which a Company affiliate has
a material interest.
Compensation Committee. The Company has established a Compensation
Committee, consisting of Messrs. Bennett and Murray Jr. and Dr.
McClintock-Greco. The Compensation Committee establishes the compensation of the
Company's executive officers and sets financial targets to be used in
determining executive bonuses. The Compensation Committee also administers the
Stock Option Plan and determines the amount, exercise price and vesting
schedules of stock options awarded thereunder.
Other Committees. The Board of Directors may establish other committees as
deemed necessary or appropriate from time to time.
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<PAGE> 60
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive any fee in
addition to their regular salary for serving on the Board of Directors.
Non-employee directors will be eligible to participate in the Stock Option Plan.
Upon his or her election to the Board of Directors, each non-employee director
will receive a nonqualified stock option to purchase 8,730 shares of Common
Stock. The exercise price of the options are, and will be, based on the fair
market value of the Common Stock as of the date of grant of each option. This
option will become vested and exercisable in three equal annual installments
beginning on the first anniversary of the date of grant. Each non-employee
director will also receive $500 per board or committee meeting attended. All
directors receive reimbursement for reasonable out-of-pocket expenses incurred
in connection with meetings of the Board of Directors.
EXECUTIVE OFFICER COMPENSATION
The Company was formed in December 1997 and, therefore, no executive
officer of the Company received compensation in excess of $100,000 during the
fiscal period from the date of incorporation to the date of this Prospectus.
Pursuant to the terms of their respective employment agreements with the
Company, David E. Garner, President and Chief Executive Officer, Donald K.
Kelly, M.D., Chairman and Co-Chief Executive Officer of HI, Suzanne D. Kelly,
Vice-Chairperson and Co-Chief Executive Officer of HI, Michael C. Peerboom,
President and Chief Operating Officer of HI, James K. Murray, III, Executive
Vice President, Chief Financial Officer and Treasurer, and Stephen K. Holland,
M.D., Senior Medical Director of OMS, are to receive annual base salaries of
$225,000, $200,000, $200,000, $200,000, $165,000 and $165,000, respectively.
Messrs. Garner and Murray, III, and Dr. Holland also have the opportunity to
receive cash performance bonuses pursuant to their respective employment
agreements with the Company. Further, each of the executive officers is eligible
to participate in the Stock Option Plan and has been granted stock options
thereunder. See "-- Employment Agreements" and "-- Stock Option Plan."
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with David E. Garner dated
as of December 31, 1997, for Mr. Garner's full-time employment. The agreement,
which expires on December 31, 2000, provides for an annual base salary of
$225,000, payable weekly, which may be changed during the term by the Company,
and for a performance bonus of up to $175,000 if the Company meets certain
strategic objectives set forth from time to time by the Board of Directors. For
the current year, such objectives relate to the Company's revenues, operating
margin of profit after interest payments, depreciation and amortization, and
ratio of return on invested capital. Mr. Garner is also entitled to participate
in such other incentive compensation plans as may be available to the other
executive officers of the Company. The agreement prohibits Mr. Garner from
competing with the Company during the term of the agreement and for a period of
three years after termination of his employment. In the event that Mr. Garner's
employment is terminated by the Company other than for death, disability or
cause, Mr. Garner shall be entitled to receive severance payments of $225,000
for each year of his noncompetition period, provided that if in such
circumstances the Company elects to release Mr. Garner from his covenant not to
compete, the Company's obligation to make such severance payments shall be
limited to $150,000 per year.
The Company entered into employment agreements with Donald K. Kelly, M.D.,
Suzanne D. Kelly and Michael C. Peerboom dated as of March 31, 1998, for their
full-time employment. The agreements, which expire on March 31, 2003, provide
for an annual base salary of $200,000, payable weekly, which may be increased
but not decreased during the term by the Company. Dr. Kelly, Ms. Kelly and Mr.
Peerboom are also entitled to participate in such other incentive compensation
plans as may be available to the other executive officers of the Company. The
agreements prohibit Dr. Kelly, Ms. Kelly and Mr. Peerboom from competing with
the Company during the terms of their employment and for a period thereafter
equal to the greater of the remaining unexpired terms of the agreements or
twenty-four months. In the event that Dr. Kelly's, Ms. Kelly's or Mr. Peerboom's
employment terminates other than for death, disability or cause, such officer
shall be entitled to receive severance payments of $21,875 for each month of the
noncompetition period, provided that if following the end of the remaining
unexpired term of the agreement the Company elects to release such
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<PAGE> 61
officer from the covenant not to compete, the Company shall have no obligation
to continue to make such severance payments.
The Company and Mr. Murray, III entered into an employment agreement dated
as of December 31, 1997, for Mr. Murray's full-time employment. Mr. Murray's
agreement, which expires on December 31, 2000, provides for an annual base
salary of $165,000, payable weekly, which may be increased but not decreased
during the term by the Company, and for a performance bonus of up to his base
salary upon obtaining certain performance targets to be set annually by the
Compensation Committee of the Board of Directors. Mr. Murray is also entitled to
participate in such other incentive compensation plans as may be available to
the other executive officers of the Company. The agreement prohibits Mr. Murray
from competing with the Company during the term of his agreement and for a
period of two years after termination of his employment. In the event that Mr.
Murray's employment is terminated other than for death, disability or cause, Mr.
Murray shall be entitled to receive severance payments equal to his base salary
for each year of his noncompetition period, provided that if in such
circumstances the Company elects to release Mr. Murray from his covenant not to
compete, the Company shall have no obligation to make such severance payments
(but HPS, Mr. Murray's prior employer, shall continue to have an obligation to
make such severance payments).
OMS entered into an employment agreement with Stephen K. Holland, M.D.,
dated as of December 31, 1997, for his full-time employment, the performance of
which was guaranteed by the Company. The agreement, which expires on December
31, 2000, provides for an annual base salary of $165,000, payable weekly, which
may be increased but not decreased during the term by OMS, and for a performance
bonus of up to $75,000 upon the attainment by OMS of certain performance targets
with respect to its total operating revenues and its earnings before interest
payments, taxes, depreciation and amortization. Dr. Holland is also entitled to
participate in such other incentive compensation plans as may be available to
the other executive officers of the Company and OMS. The agreement prohibits Dr.
Holland from competing with OMS during the term of his employment and for a
period of 24 months thereafter. In the event that Dr. Holland's employment
terminates other than for death, disability or cause, he shall be entitled to
receive severance payments equal to his base salary for each year of his
noncompetition period, provided that if after six months following the
termination of his employment OMS elects to release Dr. Holland from his
covenant not to compete, OMS shall have no obligation to continue to make such
severance payments.
STOCK OPTION PLAN
The Stock Option Plan provides for the grant of both nonqualified stock
options and stock options intended to be treated as incentive stock options
within the meaning of Section 422 of the Code. The Stock Option Plan is intended
to promote the best interests of the Company, its subsidiaries and its
shareholders by providing incentives and rewards for key employees of the
Company who have contributed and will continue to contribute to the success of
the Company. In addition, the Stock Option Plan provides for nonqualified stock
option grants to non-employee directors of the Company. The Stock Option Plan
was adopted in December 1997 by the Board of Directors of the Company and was
approved in December 1997 by the shareholders of the Company.
Under current provisions of the Code and related regulations, the federal
income tax treatment of incentive stock options and nonqualified stock options
is different. With respect to incentive stock options, an optionee who meets
certain holding period requirements will not recognize income at the time the
option is granted or at the time the option is exercised, and a federal income
tax deduction generally will not be available to the Company at any time as a
result of such grant or exercise. With respect to nonqualified stock options,
the difference between the fair market value on the date of exercise and the
option exercise price generally will be treated as ordinary income to the
optionee upon exercise, and the Company will be entitled to a deduction in the
amount of income so recognized by the optionee.
So long as an option is granted at fair market value on the date of grant,
neither the grant nor the exercise of an incentive stock option or nonqualified
stock option under the Stock Option Plan currently requires any charge against
earnings under generally accepted accounting principles. If a nonqualified
option has an exercise price of less than fair market value, the Company would
be required to accrue a charge of
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compensation at the time of grant. In certain circumstances, shares issuable
pursuant to outstanding options under the Stock Option Plan might be considered
outstanding for purposes of calculating diluted earnings per share.
During the period from December 1997 to April 1, 1998, the Board granted to
employees incentive stock options to purchase 366,778 shares of Common Stock, of
which an aggregate of 209,520 shares were options granted to executive officers,
and also granted nonqualified stock options to purchase 771,150 shares of Common
Stock, of which an aggregate of 625,650 shares were options granted to executive
officers. Between December 18, 1997 and March 25, 1998, the Board granted to
non-employee directors nonqualified stock options to purchase 75,660 shares of
Common Stock. The exercise price of the options granted between December 1997
and April 1, 1998 ranges between $4.12 and $10.21 per share based on the fair
market value of Common Stock as of the date of the grant of each option as
determined by the Company's Board of Directors or the Compensation Committee in
consultation with a third party appraiser.
The incentive stock options granted to employees vest and become
exercisable in three equal annual installments commencing on the first
anniversary of the date of grant. The nonqualified stock options granted to
employees vest and become exercisable nine years after the date of grant. The
nonqualified stock options granted to nonemployee directors vest and become
exercisable in three equal annual installments commencing on the first
anniversary of the date of grant. The Company may establish performance
objectives which, if met, shall cause to accelerate the vesting and exercise
ability of the nonqualified options. The total number of shares of Common Stock
reserved for issuance under the Stock Option Plan will be 1,455,000, effective
upon completion of the Offerings, of which options to purchase 1,137,928 shares
have been granted.
The Compensation Committee is authorized to administer the Stock Option
Plan, including the selection of employees of the Company to whom options may be
granted and the terms of each option grant. The duration of an option granted
under the Stock Option Plan is determined by the Compensation Committee;
provided, however, that the duration of an incentive stock option may not exceed
10 years from the date of grant.
Incentive stock options granted under the Stock Option Plan are
non-transferable other than by will or by the laws of descent and distribution.
Nonqualified stock options granted under the Stock Option Plan are non-
transferable except to the extent and in the manner allowed by the Compensation
Committee. The Stock Option Plan may be amended at any time by the Board or the
Compensation Committee, although the Board and the Compensation Committee shall
obtain shareholder approval for an amendment if such approval is necessary or
advisable with respect to applicable tax laws or securities exchange or market
requirements. The Stock Option Plan terminates in 2007.
Pursuant to the terms of certain stock option agreements, the Company has
granted options to purchase Common Stock under the Stock Option Plan to certain
of its executive officers. Mr. Garner was granted incentive stock options to
purchase 69,840 shares of Common Stock and nonqualified stock options to
purchase 221,160 shares of Common Stock. Mr. Murray, III was granted incentive
stock options to purchase 69,840 shares of Common Stock and nonqualified stock
options to purchase 104,760 shares of Common Stock. The grant date of these
options was December 18, 1997. The exercise price of these options is $4.12 per
share based on the fair market value of Common Stock as of the date of grant as
determined by the Company's Board of Directors in consultation with a third
party appraiser. The incentive stock options vest and become exercisable in
three equal annual installments commencing on the first anniversary of the date
of grant. The nonqualified stock options vest and become exercisable nine years
after the date of grant or will automatically vest and become immediately
exercisable upon the completion of the Offerings.
On December 31, 1997, Dr. Holland was granted incentive stock options to
purchase 11,640 shares of Common Stock and nonqualified stock options to
purchase 11,640 shares of Common Stock. The exercise price of these options is
$4.12 per share based on the fair market value of Common Stock as of the date of
grant as determined by the Company's Board of Directors in consultation with a
third party appraiser. The incentive stock options vest and become exercisable
in three equal annual installments commencing on the first anniversary of the
date of grant. The nonqualified stock options vest and become exercisable nine
years after the date of grant, subject to acceleration for achievement by OMS of
certain performance targets with
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<PAGE> 63
respect to its total operating revenues and its earnings before interest
payments, taxes, depreciation and amortization, or will automatically vest and
become immediately exercisable upon completion of the Offerings.
In December 1997, Messrs. Murray, Jr. and Sykes were each granted
nonqualified stock options to purchase 29,100 shares of Common Stock. The
exercise price of these options is $4.12 per share based on the fair market
value of Common Stock as of the date of grant as determined by the Company's
Board of Directors in consultation with a third party appraiser. These
nonqualified stock options vest and become exercisable nine years after the date
of grant or will automatically vest and become immediately exercisable upon the
completion of the Offerings or upon the sale or disposition of all or
substantially all of the assets of the Company.
On January 22, 1998, Dr. Kelly, Ms. Kelly and Mr. Peerboom were each
granted nonqualified stock options to purchase 29,100 shares of Common Stock.
These options have an exercise price of $5.84 per share based on the fair market
value of Common Stock as of the date of grant as determined by the Company's
Board of Directors in consultation with a third party appraiser. These
nonqualified stock options vest and become exercisable nine years after the date
of grant or will automatically vest and become immediately exercisable upon the
completion of the Offerings. On April 1, 1998, Dr. Kelly, Ms. Kelly and Mr.
Peerboom were granted nonqualified stock options to purchase 48,500, 48,500 and
48,500 shares of Common Stock, respectively. These options have an exercise
price of $10.21 per share based on the fair market value of Common Stock as of
the date of grant as determined by the Compensation Committee in consultation
with a third party appraiser. These nonqualified stock options vest and become
exercisable upon the achievement by HI of certain performance targets with
respect to its revenues and earnings before interest payments, taxes,
depreciation and amortization derived from a specific customer. If such targets
are not met within five years of the date of grant, these options expire.
In March 1998, Mr. Bennett and Dr. McClintock-Greco were each granted
nonqualified stock options to purchase 8,730 shares of Common Stock. The
exercise price of Mr. Bennett's options is $9.45 per share and of Dr.
McClintock-Greco's options is $10.21 per share based on the fair market value of
Common Stock as of the date of grant as determined by the Company's Board of
Directors in consultation with a third party appraiser. These nonqualified stock
options vest and become exercisable in three equal annual installments
commencing on the first anniversary of the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee was formed in March 1998 and consists of Messrs.
Bennett and Murray Jr. and Dr. McClintock-Greco. Prior to the creation of the
Compensation Committee, the Board of Directors determined the compensation of
executive officers and administered the Stock Option Plan. John H. Sykes is
Chairman of the Board, President and Chief Executive Officer of Sykes. Mr.
Garner, the President and Chief Executive Officer of the Company, served as a
director of Sykes until March 1998. Mr. Sykes was a member of the Board of
Directors of the Company and participated in its deliberations regarding
executive compensation while Mr. Garner was a director of Sykes.
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<PAGE> 64
CERTAIN TRANSACTIONS
As of January 1, 1998, the Company entered into an outsourcing agreement
with HPS pursuant to which HPS has outsourced to the Company certain care
management services for current HPS customers. The Company has agreed to pay HPS
5% of any revenues derived from customers obtained by HPS after January 1, 1998.
HPS is to pay the Company a fee equal to 82.5% of the first $500,000 of monthly
revenues HPS derives from its pre-January 1, 1998 customers for certain care
management services plus 80% of such revenues in excess of $500,000. The
agreement has a term of one year and automatically renews unless otherwise
terminated by HPS or the Company.
On May 6, 1998, HPS and the Company agreed to amend the outsourcing
agreement to provide for the payment by HPS to the Company of a fee equal to 81%
of monthly care management and bill audit revenues HPS derives from Centra, a
company in which HPS recently acquired a controlling interest. All other terms
of the outsourcing agreement remain unchanged. The Company believes that the
terms of the outsourcing agreement and the amendment to the outsourcing
agreement are no less favorable to the Company than would have been obtained
from an unrelated third party.
On December 18, 1997, HPS and Sykes, the sole shareholders of the Company,
executed a Shareholder Agreement outlining the relationship between such
shareholders and the Company. The Shareholder Agreement prohibits, during the
term of such agreement and for a period of five years following termination of
such agreement, the Company from competing, either directly or indirectly, with
the core businesses of HPS and Sykes (as defined in the Shareholder Agreement).
Both HPS and Sykes likewise agreed not to compete in such other shareholder's
core business or in the core business of the Company which is defined in such
agreement as the operation of call centers to provide utilization, catastrophic
case, disease and demand management services to benefits payors and healthcare
providers, third party administrators, provider organizations and provider
management companies. The Shareholder Agreement will terminate upon completion
of the Offerings. However, the covenant not to compete between the Company, HPS
and Sykes will remain in effect for five years following the completion of the
Offerings. See "Risk Factors -- Competition."
On December 30, 1997, the Company issued promissory notes to HPS and Sykes
in exchange for loans from each of up to approximately $9.0 million. Interest on
the notes was at LIBOR plus one percent (6.72% at December 31, 1997). At
December 31, 1997, there was approximately $14.0 million available for
borrowings under the notes. The outstanding balance of these notes was converted
by HPS and Sykes into equity of the Company, by amending the Shareholder
Agreement to reflect such conversion.
On December 31, 1997, the Company acquired all of the outstanding stock of
OMS for approximately $10.0 million. The purchase price was determined through
arm's-length negotiations between the Company and the shareholders of OMS,
including Dr. Holland and Mr. McKenna, who are now executive officers of the
Company. The factors considered by the parties in determining the purchase price
included, among others, the historical operating results, the net worth and the
future prospects of OMS. Dr. Holland and Mr. McKenna each received $1,421,675
from the Company for the sale of their shares of stock of OMS to the Company.
On March 31, 1998, the Company acquired all of the outstanding stock of HI
for approximately $25.2 million. The purchase price was determined through
arm's-length negotiations between the Company, and the shareholders of HI,
including Dr. Kelly, Ms. Kelly and Mr. Peerboom, who are now executive officers
of the Company. The factors considered by the parties in determining the
purchase price included, among others, the historical operating results, net
worth and the future prospects of HI. Dr. Kelly and Ms. Kelly, husband and wife,
received $10.2 million in the aggregate from the Company for the sale of their
shares of stock of HI to the Company, and Mr. Peerboom received $762,000 from
the Company for the sale of his shares of stock of HI to the Company. In
addition, Dr. Kelly, Ms. Kelly and Mr. Peerboom will each receive additional
annual payments of $175,000 over the five-year terms of their respective
employment agreements as part of the purchase price for their shares of stock of
HI.
Simultaneously with the completion of the Offerings, HPS will purchase
1,700,000 newly issued shares of Common Stock directly from the Company pursuant
to the SHPS Sale at the initial public offering price, less an amount equal to
the underwriting discount, with respect to the Offerings.
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<PAGE> 65
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, and as adjusted to
reflect consummation of the Offerings and the HPS Share Purchases for: (i) each
of the Company's directors and executive officers; (ii) all executive officers
and directors of the Company as a group; and (iii) each person known by the
Company to beneficially own more than 5% of the outstanding Common Stock. Except
as set forth below, the shareholders named below have sole voting and investment
power with respect to all shares of Common Stock shown as being beneficially
owned by them:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERINGS AND THE HPS OFFERINGS AND THE HPS
SHARE PURCHASES(1) SHARE PURCHASES
---------------------- ----------------------
NAME NUMBER PERCENT NUMBER PERCENT
- ---- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
HealthPlan Services Corporation.............. 2,910,000 50% 5,260,000(2) 52.5%
Sykes Enterprises, Incorporated.............. 2,910,000 50% 2,260,000(3) 22.6%
David E. Garner(4)........................... -- * 221,160 2.2%
James K. Murray, III(5)...................... -- * 104,760 1.0%
John D. Gannett, Jr.(6)...................... -- * 43,650 *
Owen McKenna(7).............................. -- * 8,730 *
Stephen K. Holland, M.D.(8).................. -- * 11,640 *
Donald K. Kelly, M.D.(9)..................... -- * 29,100 *
Suzanne D. Kelly(10)......................... -- * 29,100 *
Michael C. Peerboom(11)...................... -- * 29,100 *
Christine L. Beckler(12)..................... -- * 2,910 *
James K. Murray, Jr.(13)..................... 2,910,000 50% 5,289,100(2) 52.6%
John H. Sykes(14)............................ 2,910,000 50% 2,289,100(3) 22.8%
William L. Bennett(15)....................... -- * -- *
Linda McClintock-Greco, M.D.(16)............. -- * -- *
All Directors and Executive Officers as a
Group (13 persons)(13)(14)(17)............ 5,820,000 100% 8,058,350 76.3%
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership of shares, as determined in accordance with applicable
Securities and Exchange Commission rules, includes shares as to which a
person shares voting power and/or investment power.
(2) Includes 650,000 outstanding shares of Common Stock to be acquired from
Sykes pursuant to the Sykes Sale and 1,700,000 newly issued shares of
Common Stock to be acquired from the Company pursuant to the SHPS Sale. The
business address for Mr. Murray, Jr. and HPS is 3501 Frontage Road, Tampa,
Florida 33607.
(3) Reflects the sale of 650,000 outstanding shares of Common Stock to HPS
pursuant to the Sykes Sale. The business address for Mr. Sykes and Sykes is
100 North Tampa St., Suite 3900, Tampa, Florida 33602.
(4) Mr. Garner has been granted incentive stock options to purchase 69,840
shares of Common Stock and nonqualified stock options to purchase 221,160
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options will vest in three equal annual installments beginning on the
first anniversary of the date of grant. See "Management -- Stock Option
Plan."
(5) Mr. Murray, III has been granted incentive stock options to purchase 69,840
shares of Common Stock and nonqualified stock options to purchase 104,760
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options will vest in three equal annual installments beginning on the
first anniversary of the date of grant. See "Management -- Stock Option
Plan."
(6) Mr. Gannett has been granted incentive stock options to purchase 43,650
shares of Common Stock and nonqualified stock options to purchase 43,650
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options
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<PAGE> 66
will vest in three equal annual installments beginning on the first
anniversary of the date of grant. See "Management -- Stock Option Plan."
(7) Mr. McKenna has been granted incentive stock options to purchase 8,730
shares of Common Stock and nonqualified stock options to purchase 8,730
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options will vest in three equal annual installments beginning on the
first anniversary of the date of grant. See "Management -- Stock Option
Plan."
(8) Dr. Holland has been granted incentive stock options to purchase 11,640
shares of Common Stock and nonqualified stock options to purchase 11,640
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options will vest in three equal annual installments beginning on the
first anniversary of the date of grant. See "Management -- Stock Option
Plan."
(9) Dr. Kelly has been granted nonqualified stock options to purchase 29,100
shares of Common Stock which will become immediately exercisable upon
completion of the Offerings and nonqualified stock options to purchase
48,500 shares of Common Stock which will vest upon the achievement of
certain performance targets. If such targets are not met within five years
of the date of grant, these non-qualified options will expire. See
"Management -- Stock Option Plan."
(10) Ms. Kelly has been granted nonqualified stock options to purchase 29,100
shares of Common Stock which will become immediately exercisable upon
completion of the Offerings and nonqualified stock options to purchase
48,500 shares of Common Stock which will vest upon the achievement of
certain performance targets. If such targets are not met within five years
of the date of grant, these non-qualified options will expire. See
"Management -- Stock Option Plan."
(11) Mr. Peerboom has been granted nonqualified stock options to purchase 29,100
shares of Common Stock which will become immediately exercisable upon
completion of the Offerings and nonqualified stock options to purchase
48,500 shares of Common Stock which will vest upon the achievement of
certain performance targets. If such targets are not met within five years
of the date of grant, these non-qualified options will expire. See
"Management -- Stock Option Plan."
(12) Ms. Beckler has been granted incentive stock options to purchase 5,820
shares of Common Stock and nonqualified stock options to purchase 2,910
shares of Common Stock. The nonqualified stock options will become
immediately exercisable upon completion of the Offerings and the incentive
stock options will vest in three equal annual installments beginning on the
first anniversary of the date of grant.
(13) Mr. Murray, Jr. has been granted nonqualified stock options to purchase
29,100 shares of Common Stock. These nonqualified stock options will become
immediately exercisable upon completion of the Offerings. See
"Management -- Stock Option Plan." These totals also include all shares of
Common Stock beneficially owned by HPS of which Mr. Murray, Jr. may be
deemed the indirect beneficial owner under Rule 13d-3 by reason of his
position as a shareholder, Chairman and Chief Executive Officer of HPS.
(14) Mr. Sykes has been granted nonqualified stock options to purchase 29,100
shares of Common Stock. These nonqualified stock options will become
immediately exercisable upon completion of the Offerings. See
"Management -- Stock Option Plan." These totals also include all shares of
Common Stock beneficially owned by Sykes of which Mr. Sykes may be deemed
the indirect beneficial owner under Rule 13d-3 by reason of his position as
a shareholder, President and Chief Executive Officer of Sykes. Mr. Sykes
intends to resign as a director of the Company prior to the completion of
the Offerings.
(15) Mr. Bennett has been granted nonqualified stock options to purchase 8,730
shares of Common Stock. These nonqualified stock options will become
exercisable in three equal annual installments beginning on the first
anniversary of the date of grant. See "Management -- Stock Option Plan."
(16) Dr. McClintock-Greco has been granted nonqualified stock options to
purchase 8,730 shares of Common Stock. These nonqualified stock options
will become exercisable in three equal annual installments beginning on the
first anniversary of the date of grant. See "Management -- Stock Option
Plan."
(17) Includes 538,350 shares of Common Stock purchasable under options issued to
various directors and executive officers of the Company that will become
exercisable upon completion of the Offerings.
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<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of the Offerings and the SHPS Sale, the authorized
capital stock of the Company will consist of 100,000,000 shares of Common Stock,
of which 10,020,000 shares will be issued and outstanding, and 15,000,000 shares
of Preferred Stock issuable in one or more series by the Board of Directors, of
which no shares will be issued and outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held.
Shareholders do not have the right to cumulate their votes in elections of
directors. Accordingly, holders of a majority of the issued and outstanding
Common Stock will have the right to elect all the Company's directors and
otherwise control the affairs of the Company, subject to any voting rights of
the then outstanding Preferred Stock. After the completion of the Offerings and
the HPS Share Purchases, HPS will effectively control the Company. See "Risk
Factors -- Control by Principal Shareholder."
Holders of Common Stock are entitled to dividends on a pro rata basis upon
declaration of dividends by the Board of Directors. Dividends are payable only
out of unreserved and unrestricted surplus that is legally available for the
payment of dividends. Any determination to declare or pay dividends in the
future will be at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, contractual
or legal restrictions, and other factors deemed relevant by the Board of
Directors. The Company's Line of Credit currently prohibits the Company from
paying any dividends. See "Dividend Policy."
Upon a liquidation of the Company, holders of Common Stock will be entitled
to a pro rata distribution of the assets of the Company, after payment of all
amounts owed to the Company's creditors, and subject to any preferential amount
payable to holders of preferred stock of the Company, if any.
PREFERRED STOCK
The Company's Articles of Incorporation permit the Company's Board of
Directors to issue shares of Preferred Stock in one or more series, and to fix
the relative rights, preferences, and limitations of each series. Among such
rights, preferences, and limitations are dividend rights and rates, provisions
for redemption, rights upon liquidation, conversion privileges, and voting
powers. Any issuance of Preferred Stock with a dividend preference over Common
Stock could adversely affect the dividend rights of holders of Common Stock. The
Board of Directors of the Company currently has no plans to issue any shares of
Preferred Stock.
The issuance of Preferred Stock, for example in connection with a
shareholder rights plan, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding existing stock of the Company. See "Risk
Factors -- Control by Principal Shareholder," and "-- Anti-Takeover
Considerations."
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION
The Company's Articles of Incorporation, which will be effective upon
completion of the Offerings, provide for a classified Board of Directors. The
directors are divided into three classes, as nearly equal in number as possible.
The directors are elected for three-year terms, which are staggered so that the
terms of one-third of the directors expire each year. The Articles of
Incorporation permit removal of directors only for cause by the shareholders of
the Company at a meeting by the affirmative vote of at least two-thirds of the
outstanding shares of Common Stock. The Articles of Incorporation establish an
advance notice procedure for the nomination of candidates for election as
directors, as well as for other shareholder proposals to be considered at
shareholders' meetings.
The Articles of Incorporation also contain a "fair price" provision which
is intended to ensure that the consideration paid by an acquiror in certain
transactions involving the Company that follow a successful tender
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<PAGE> 68
offer must be no less than the highest consideration offered pursuant to the
tender offer. Among other things, such transactions must be approved by: (i) the
holders of at least 80% of the outstanding Common Stock, and (ii) the holders of
a majority of the outstanding Common Stock other than the interested
shareholder.
The above-described provisions may have certain anti-takeover effects. Such
provisions, in addition to the provisions described below and the possible
issuance of Preferred Stock discussed above, may make it more difficult for
other persons, without the approval of the Company's Board of Directors, to make
a tender offer or acquisitions of substantial amounts of the Common Stock or to
launch other takeover attempts that a shareholder might consider to be in such
shareholder's best interests, including attempts that might result in the
payment of a premium over the market price for Common Stock held by such
shareholder. See "Risk Factors -- Anti-Takeover Considerations."
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several antitakeover provisions under Florida law
that apply to a public corporation organized under Florida law, unless the
corporation has elected to opt out of those provisions in its articles of
incorporation or bylaws. The Company has not elected to opt out of those
provisions. The FBCA prohibits the voting of shares in a publicly-held Florida
corporation that are acquired in a "control share acquisition" unless the
holders of a majority of the corporation's voting shares (exclusive of shares
held by officers of the corporation, inside directors, or the acquiring party)
approve the granting of voting rights as to the shares acquired in the control
share acquisition. A "control share acquisition" is defined as an acquisition
that immediately thereafter entitles the acquiring party to vote in the election
of directors within each of the following ranges of voting power: (i) one-fifth
or more but less than one-third of such voting power; (ii) one-third or more but
less than a majority of such voting power; and (iii) more than a majority of
such voting power.
The FBCA also contains an "affiliated transaction" provision that prohibits
a publicly-held Florida corporation from engaging in a broad range of business
combinations or other extraordinary corporate transactions with an "interested
shareholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested shareholder;
(ii) the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years; or (iii) the transaction is
approved by the holders of two-thirds of the corporation's voting shares other
than those owned by the interested shareholder. An interested shareholder is
defined as a person who together with affiliates and associates beneficially
owns more than 10% of the corporation's outstanding voting shares.
TRANSFER AGENT AND REGISTRAR
The Company has selected First Union National Bank, Charlotte, North
Carolina, as the transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings and the SHPS Sale, the Company will have a
total of 10,020,000 shares of Common Stock outstanding (10,395,000 shares if the
Underwriters' over-allotment options are exercised in full). Of these shares,
2,500,000 shares (2,875,000 shares if the Underwriters' over-allotment options
are exercised in full) of Common Stock offered hereby will be freely tradeable
without restriction or registration under the Securities Act by persons other
than "affiliates" of the Company, as defined in the Securities Act, who would
otherwise be required to sell such shares pursuant to Rule 144 under the
Securities Act. The remaining 7,520,000 shares of Common Stock outstanding will
be "restricted securities" as that term is defined by Rule 144 (the "Restricted
Shares"). The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act.
In general, pursuant to Rule 144 under the Securities Act as currently in
effect, a person (or persons whose shares are aggregated) who has beneficially
owned restricted securities for at least one year (including the holding period
of any prior owner except an affiliate), including persons who may be deemed
"affiliates" of
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<PAGE> 69
the Company, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of one percent of the number of shares
of Common Stock then outstanding (approximately 100,200 shares upon completion
of the Offerings) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 under the Securities Act are also subject to
certain manner of sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at the time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an affiliate), would be entitled to sell such shares under
Rule 144(k) under the Securities Act without regard to the requirements
described above. Rule 144 under the Securities Act also provides that affiliates
who are selling shares that are not restricted securities must nonetheless
comply with the same restrictions applicable to restricted securities with the
exception of the holding period requirement.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to the exercise of outstanding options or the
grant of Common Stock pursuant to written compensation plans or contracts prior
to the Offerings may be resold by persons other than affiliates beginning 90
days after the date of this Prospectus, subject only to the manner of sale
provisions of Rule 144 under the Securities Act, and by affiliates, beginning 90
days after the date of this Prospectus, subject to all provisions of Rule 144
under the Securities Act except its one-year minimum holding period requirement.
The shareholders of the Company (who in the aggregate will hold 7,520,000
Restricted Shares upon completion of the Offerings) have agreed pursuant to
lock-up agreements not to sell or offer to sell or otherwise dispose of any
shares of Common Stock currently held by them, any right to acquire any shares
of Common Stock or any securities exercisable for or convertible into any shares
of Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent of Merrill Lynch. In addition, the Company and
its executive officers and directors have agreed that for a period of 180 days
after the date of this Prospectus it will not, without the prior written consent
of Merrill Lynch, offer, sell or otherwise dispose of any shares of Common Stock
except, in the case of the Company, for shares of Common Stock offered hereby
and shares issued and options granted pursuant to the Stock Option Plan.
As of June 1, 1998, there were 1,137,928 outstanding options to purchase
shares of Common Stock under the Stock Option Plan. An additional 317,072 shares
of Common Stock are reserved for issuance under the Stock Option Plan. The
Company currently intends to file a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock issuable pursuant to the
Stock Option Plan. The Company expects to file this registration statement
within 90 days following the date of this Prospectus, and such registration
statement will become effective upon filing. Shares covered by this registration
statement will thereupon be eligible for sale in the public markets, subject to
Rule 144 under the Securities Act limitations applicable to affiliates.
Prior to the Offerings, there has been no public market for the Common
Stock, and no predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities or to consummate acquisitions using Common Stock as
consideration.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal tax
consequences of the acquisition, ownership, and disposition of Common Stock by a
holder that, for United States Federal income tax purposes, is not a "United
States person" (a "Non-United States Holder"). This discussion is based upon the
United States Federal tax law now in effect, which is subject to change,
possibly retroactively. For purposes of this discussion, a "United States
person" means a citizen or resident of the United States; a corporation,
partnership, or other entity created or organized in the United States or under
the laws of the United States or of any political subdivision thereof; an estate
whose income is includible in gross income for United States Federal income tax
purposes regardless of its source; or a "United States Trust." A United States
Trust is any trust if, and only if, (i) a court within the United States is able
to exercise primary supervision over the administration of the trust and (ii)
one or more United States trustees have the authority to control all substantial
decisions of the trust. This discussion does not consider any specific facts or
circumstances that may apply to a particular Non-United States Holder.
Prospective investors are urged to consult their tax advisors regarding the
United States Federal tax consequences of acquiring, holding, and disposing of
Common Stock, as well as any tax consequences that may arise under the laws of
any foreign, state, local, or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
withholding of United States Federal income tax at the rate of 30% unless the
dividend is effectively connected with the conduct of a trade or business within
the United States by the Non-United States Holder (or if certain tax treaties
apply, is attributable to a United States permanent establishment maintained by
such Non-United States Holder), in which case the dividend will be subject to
the United States Federal income tax on net income on the same basis that
applies to United States persons generally. In the case of a Non-United States
Holder which is a corporation, such effectively connected income also may be
subject to the branch profits tax (which is generally imposed on a foreign
corporation on the repatriation from the United States of effectively connected
earnings and profits). Non-United States Holders should consult any applicable
income tax treaties that may provide for a lower rate of withholding or other
rules different from those described above. A Non-United States Holder may be
required to satisfy certain certification requirements in order to claim treaty
benefits or otherwise claim a reduction of or exemption from withholding under
the foregoing rules.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
Federal income tax on gain recognized on a sale or other disposition of Common
Stock unless (i) the gain is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder or, if tax
treaties apply, is attributable to a United States permanent establishment
maintained by the Non-United States Holder, (ii) in the case of a Non-United
States Holder who is a nonresident alien individual and holds the Common Stock
as a capital asset, such holder is present in the United States for 183 or more
days in the taxable year of disposition or either such individual has a "tax
home" in the United States or the gain is attributable to an office or other
fixed place of business maintained by such individual in the United States,
(iii) the Company is or has been a "United States real property holding
corporation" for United States Federal income tax purposes (which the Company
does not believe that it is or likely to become) and the Non-United States
Holder holds or has held, directly or indirectly, at any time during the
five-year period ending on the date of disposition, more that 5% of the Common
Stock or (iv) the Non-United States Holder is subject to tax pursuant to the
Code provisions applicable to certain United States expatriates. Gain that is
effectively connected with the conduct of a trade or business within the United
States by the Non-United States Holder will be subject to the United States
Federal Income tax on net income on the same basis that applies to United States
persons generally (and, with respect to corporate holders, under certain
circumstances, the branch profits tax) but will not be subject to withholding.
Non-United States Holders should consult any applicable treaties that may
provide for different rules.
68
<PAGE> 71
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident of the United States at the date of death will be included
in such individual's estate for United States Federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid to, and the tax withheld with respect to,
such holder, regardless of whether any tax was actually withheld. This
information may also be made available to the tax authorities of a country in
which the Non-United States Holder resides.
Under the temporary United States Treasury regulations, United States
information reporting requirements and backup withholding tax at a rate of 31%
will generally apply to dividends paid on the Common Stock to a Non-United
States Holder and to payments by a United States office of a broker of the
proceeds of a sale of Common Stock to a Non-United States Holder unless the
holder certifies its Non-United States Holder status under penalties of perjury
or otherwise establishes an exemption. Information reporting requirements (but
not backup withholding) will also apply to payments of the proceeds of sales of
Common Stock by foreign offices of United States brokers, or foreign brokers
with certain types of relationships to the United States, unless the broker has
documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise establishes
an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States Federal income tax liability, provided that the
required information is furnished to the IRS.
These information reporting and backup withholding rules are under review
by the United States Treasury, and their application to the Common Stock could
be changed by future regulations. On October 14, 1997, final Treasury
Regulations were published in the Federal Register concerning the withholding of
tax and reporting for certain amounts paid to nonresident individuals and
foreign corporations. The Treasury Regulations will be effective for payments
made after December 31, 1999. After such date, Non-United States Holders
claiming treaty benefits or claiming that income is effectively connected will
be required to submit an appropriate version of IRS Form W-8 to the United
States withholding agent. New rules will apply to Non-United States Holders who
invest through intermediaries. Prospective investors should consult their tax
advisors concerning these Treasury Regulations and the potential effect on their
ownership of Common Stock.
69
<PAGE> 72
UNDERWRITING
Merrill Lynch, ING Baring Furman Selz LLC, NationsBanc Montgomery
Securities LLC and Raymond James Associates, Inc. are acting as the U.S.
Underwriters. Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement") among the Company and the U.S.
Underwriters, and concurrently with the sale of 500,000 shares of Common Stock
to the International Managers (as defined below), the Company has agreed to sell
to the U.S. Underwriters, and each of the U.S. Underwriters severally has agreed
to purchase from the Company, the number of shares of Common Stock set forth
opposite its name below at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
ING Baring Furman Selz LLC..................................
NationsBanc Montgomery Securities LLC.......................
Raymond James & Associates, Inc.............................
---------
Total.......................................... 2,000,000
=========
</TABLE>
The Company has also entered into the international purchase agreement (the
"International Purchase Agreement") with certain underwriters outside the United
States and Canada (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters") for whom Merrill Lynch International, ING
Baring Furman Selz LLC, NationsBanc Montgomery Securities LLC and Raymond James
& Associates, Inc. are acting as lead managers. Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 2,000,000 shares of Common Stock to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Company has agreed to sell to the
International Managers, and the International Managers severally have agreed to
purchase from the Company, an aggregate of 500,000 shares of Common Stock. The
initial public offering price per share and the total underwriting discount per
share of Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, the commitments of
non-defaulting U.S. Underwriters or International Managers, as the case may be,
may be increased. The closings with respect to the sale of shares of Common
Stock to be purchased by the U.S. Underwriters and the International Managers
are conditioned upon one another.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-United States or non-Canadian persons or to persons
they believe intend to resell to persons who are non-United States or
non-Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are United States or Canadian persons or to persons they
believe intend to resell to persons who are United States or Canadian persons,
except in each case for transactions pursuant to the Intersyndicate Agreement.
70
<PAGE> 73
The U.S. Underwriters have advised the Company that the U.S. Underwriters
propose initially to offer the shares of Common Stock offered hereby to the
public at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
300,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may exercise this option only to cover over-allotments, if
any, made on the sale of the Common Stock offered hereby. To the extent that the
U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
Common Stock proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. The Company also has granted an option to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 75,000 additional shares of Common
Stock to cover over-allotments, if any, on terms similar to those granted to the
U.S. Underwriters.
The Company's shareholders have agreed not to sell or offer to sell or
otherwise dispose of any shares of Common Stock currently held by them (except
pursuant to the HPS Share Purchases), any right to acquire any shares of Common
Stock or any securities exercisable for or convertible into any shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Merrill Lynch.
In addition, the Company and its executive officers and directors have
agreed that for a period of 180 days after the date of this Prospectus they will
not, without the prior written consent of Merrill Lynch, offer, sell or
otherwise dispose of any shares of Common Stock except, in the case of the
Company, for shares of Common Stock offered hereby and shares issued and options
granted pursuant to its Stock Option Plan.
Prior to the Offerings, there has been no public market for the Common
Stock of the Company. The initial offering price for the Common Stock will be
determined by negotiations between the Company and the U.S. Underwriters and the
International Managers. The factors to be considered in determining the initial
public offering price, in addition to prevailing market conditions, will be
price earnings ratios of publicly traded companies that the U.S. Underwriters
believe to be comparable to the Company, certain financial information of the
Company, the history of and the prospects for the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for and timing of future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of securities of
other companies engaged in businesses similar to the Company. There can be no
assurance, however, that an active or orderly trading market will develop for
the Common Stock or that the Common Stock will trade in the public markets
subsequent to the Offerings at or above the initial offering price.
The Common Stock has been approved for listing on Nasdaq, subject to
official notification of issuance, under the symbol "SHPS." The Underwriters do
not intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S. Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The U.S. Underwriters may also elect to reduce any short position by exercising
all or part of the over-allotment options described above.
71
<PAGE> 74
The U.S. Underwriters may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the U.S. Underwriters purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of Common Stock, they may reclaim the amount
of the selling concession from the Underwriters and selling group members who
sold these shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it may
discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Because the Company intends to use the entire estimated net proceeds of
approximately $26.6 million from the Offerings for repayment of indebtedness
outstanding under the Line of Credit with respect of which an affiliate of
NationsBanc Montgomery Securities LLC is a lender, the underwriting arrangements
for the Offerings must comply with the requirements of Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc. (the "NASD"). The Offerings are
being conducted in accordance with Rule 2720(c)(3), which provides that, among
other things, when an NASD member participates in a public offering where more
than 10% of the net offering proceeds, not including underwriting compensation,
are intended to be paid to members participating in the distribution of the
Offerings or associated or affiliated persons of such members, the price at
which the issue is to be distributed to the public must be no higher than that
recommended by a "qualified independent underwriter." Accordingly, Merrill Lynch
is acting as a qualified independent underwriter for purposes of determining the
price of the Common Stock offered hereby and has conducted due diligence
investigations and has reviewed and participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus forms a part.
The price at which the Common Stock is being sold to the public will be no
higher than the price recommended by Merrill Lynch. See "Risk Factors --
Conflict of Interests of NationsBanc Montgomery Securities LLC in the
Offerings."
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 250,000 shares of the Common Stock that
will be offered by this Prospectus for directors, officers and employees of the
Company and certain other persons. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares that are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
The Company has agreed to indemnify the U.S. Underwriters and the
International Managers against certain liabilities, including liabilities under
the Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the provisions of the U.S. and International Purchase
Agreements, the Company has been informed that in the opinion of the Securities
and Exchange Commission (the "Commission"), such indemnification is against
public policy as expressed in the Securities Act and is therefore enforceable.
72
<PAGE> 75
LEGAL MATTERS
Certain legal matters in connection with the sale of the shares of Common
Stock offered hereby will be passed upon for the Company by Holland & Knight
LLP, Tampa, Florida, and certain legal matters will be passed upon for the
Underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The Financial Statements and schedules of the Company and OMS for fiscal
1997, and the Financial Statements and schedules of HI for fiscal 1995, 1996 and
1997, included in this Prospectus and elsewhere in this Registration Statement
have been audited by Arthur Andersen LLP, independent certified public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The Financial Statements of SHSB (formerly Prudential Service Bureau, Inc.)
for fiscal 1995 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors as stated in their report appearing herein, and
are included in reliance upon the reports of such firm given upon their
authority as experts in auditing and accounting. The Financial Statements of
SHSB as of December 31, 1997 and 1996 and for the years then ended included in
this Prospectus have been so included in reliance on the report (which contains
explanatory paragraphs relating to SHSB's relationship with affiliated companies
as described in notes 1 and 2 to the Financial Statements and relating to the
sale of shares held in the Company pursuant to a stock purchase agreement as
described in note 9 to the Financial Statements) of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The Financial Statements of OMS at December 31, 1995 and 1996, and for each
of the two years in the period ended December 31, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-1
(the "Registration Statement") filed by the Company with the Commission under
the Securities Act with respect to the Common Stock in the Offerings. This
Prospectus omits certain of the information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and
related exhibits and schedules for further information with respect to the
Company and the Common Stock in the Offerings. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and in
each such instance reference is made to the copy of such document filed as an
exhibit to the Registration Statement. Each such statement is qualified in its
entirety by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington D.C.
and copies of all or any part thereof may be obtained from the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional office located at Seven World Trade Center, 13th Floor, New
York, New York 10048, and the Chicago regional office located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
upon payment of certain fees prescribed by the Commission. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's World Wide Web site is
http://www.sec.gov.
Following the Offerings, the Company will be subject to the information
reporting requirements of the Exchange Act. The Company intends to furnish its
shareholders with annual reports, containing audited financial statements and a
report thereon expressed by independent certified public accountants, and
quarterly reports containing unaudited information for the first three quarters
of each fiscal year.
73
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
SYKES HEALTHPLAN SERVICES, INC.
Report of Independent Certified Public Accountants..... F-2
Consolidated Balance Sheets at March 31, 1998
(Unaudited), and December 31, 1997.................... F-3
Consolidated Statements of Operations for the
three-month period ended March 31, 1998 (Unaudited)
and the period from December 18, 1997 through December
31, 1997.............................................. F-4
Consolidated Statements of Shareholders' Equity for the
three-month period ended March 31, 1998 (Unaudited),
and the period from December 18, 1997 through December
31, 1997.............................................. F-5
Consolidated Statements of Cash Flows for the
three-month period ended March 31, 1998 (Unaudited),
and for the period from December 18, 1997 through
December 31, 1997..................................... F-6
Notes to Consolidated Financial Statements............. F-7
HEALTH INTERNATIONAL, INC.
Report of Independent Public Accountants............... F-16
Balance Sheets at September 30, 1997 and 1996.......... F-17
Statements of Operations for the years ended September
30, 1997, 1996 and 1995 and the six month period ended
March 31, 1998 and 1997 (Unaudited)................... F-18
Statements of Shareholders' Equity for the years ended
September 30, 1997, 1996 and 1995 and the six month
period ended March 31, 1998 (Unaudited)............... F-19
Statements of Cash Flows for the years ended September
30, 1997, 1996 and 1995 and the six month period ended
March 31, 1998 and 1997 (Unaudited)................... F-20
Notes to Financial Statements.......................... F-21
OMS, INC.
Report of Independent Certified Public Accountants..... F-28
Statement of Operations for the year ended December 31,
1997.................................................. F-29
Statement of Stockholders' Equity for the year ended
December 31, 1997..................................... F-30
Statement of Cash Flows for the year ended December 31,
1997.................................................. F-31
Notes to Financial Statements.......................... F-32
Report of Independent Auditors......................... F-37
Balance Sheets at December 31, 1996 and 1995........... F-38
Statements of Income for the years ended December 31,
1996 and 1995......................................... F-39
Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1995............................ F-40
Statements of Cash Flows for the years ended December
31, 1996 and 1995..................................... F-41
Notes to Financial Statements.......................... F-42
SYKES HEALTHPLAN SERVICE BUREAU, INC. (FORMERLY PRUDENTIAL
SERVICE BUREAU, INCORPORATED)
Statements of Operations and Retained Earnings for the
Three Months Ended March 31, 1998 and 1997
(Unaudited)........................................... F-48
Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (Unaudited)................... F-49
Notes to Unaudited Financial Statements................ F-50
Report of Independent Accountants...................... F-51
Balance Sheet at December 31, 1997 and 1996............ F-52
Statement of Operations and Retained Earnings for the
years ended December 31, 1997 and 1996................ F-53
Statement of Cash Flows for the years ended December
31, 1997 and 1996..................................... F-54
Notes to Financial Statements.......................... F-55
Independent Auditor's Report........................... F-60
Balance Sheet for the year ended December 31, 1995..... F-61
Statement of Operations and Retained Earnings for the
year ended December 31, 1995.......................... F-62
Statement of Cash Flows for the year ended December 31,
1995.................................................. F-63
Notes to Financial Statements.......................... F-64
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Sykes HealthPlan Services, Inc.:
We have audited the accompanying consolidated balance sheet of Sykes
HealthPlan Services, Inc. (a Florida corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the period from December 18, 1997,
through December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sykes
HealthPlan Services, Inc. and subsidiaries as of December 31, 1997, and the
results of its operations and its cash flows for the period from December 18,
1997, through December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida,
February 27, 1998
(Except for Note 12
as to which the date is
June 5, 1998)
F-2
<PAGE> 78
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED), AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,918,091 $ 845,977
Short-term investments.................................... -- 1,585,796
Trade accounts receivable................................. 8,845,791 1,145,696
Prepaid expenses and other current assets................. 927,861 67,988
Income tax receivable..................................... 925,393 --
Cash surrender value of insurance......................... 256,122 266,853
------------ ----------
Total current assets............................... 30,873,258 3,912,310
------------ ----------
Property and equipment:
Computer and office equipment............................. 4,979,104 178,925
Furniture and fixtures.................................... 410,162 --
Software.................................................. 41,485 --
Leasehold improvements.................................... 298,030 --
------------ ----------
5,728,781 178,925
------------ ----------
Deferred income taxes..................................... 1,413,850 --
Deposits.................................................. 56,935 --
Intangible assets......................................... 43,631,650 2,951,219
------------ ----------
Total assets....................................... $ 81,704,474 $7,042,454
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 13,787,225 $ 784,876
Accrued expenses.......................................... 9,027,316 224,927
Capital lease obligation.................................. 216,234 --
Deferred compensation..................................... -- 266,853
Due to related parties.................................... 505,614 228,852
Income taxes payable...................................... 196,445 187,470
Deferred revenue.......................................... 586,263 505,466
------------ ----------
Total current liabilities.......................... 24,319,097 2,198,444
Deferred rent............................................... 53,616 53,616
Capital lease obligation, less current portion.............. 422,320 --
Related-party notes payable................................. -- 4,081,600
Line of credit.............................................. 51,000,000 --
Deferred income taxes....................................... 1,344,864 637,204
------------ ----------
Total liabilities.................................. 77,139,897 6,970,864
------------ ----------
Commitments
Shareholders' equity:
Class A voting common stock, $.01 par value; 10,000,000
shares authorized, 5,820,000 shares issued and
outstanding............................................. 100,000 100,000
Capital in excess of par value............................ 33,900,000 5,818,400
Accumulated deficit....................................... (29,435,423) (5,846,810)
------------ ----------
Net shareholders' equity........................... 4,564,577 71,590
------------ ----------
Total liabilities and shareholders' equity......... $ 81,704,474 $7,042,454
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 79
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
AND THE PERIOD FROM DECEMBER 18, 1997, THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 18,
THREE-MONTH PERIOD ENDED THROUGH
MARCH 31, 1998 DECEMBER 31, 1997
------------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 2,430,610 $ --
Cost of revenues, exclusive of items shown separately
below................................................ 980,206 --
------------ -----------
Gross profit................................. 1,450,404 --
------------ -----------
Expenses:
General and administrative costs..................... 1,003,047 255,575
Research and development............................. 145,354 --
Depreciation......................................... 20,325 1,235
Amortization......................................... 103,467 --
Acquired in-process research and development......... 23,705,000 5,590,000
------------ -----------
Total expenses............................... 24,977,193 5,846,810
------------ -----------
Loss from operations................................... (23,526,789) (5,846,810)
Other expense, net..................................... 61,824 --
------------ -----------
Loss before provision for income taxes................. (23,588,613) (5,846,810)
Provision for income taxes............................. -- --
------------ -----------
Net loss............................................... $(23,588,613) $(5,846,810)
============ ===========
Loss per share -- basic and diluted.................... $ (4.05) $ (1.00)
Weighted average outstanding shares -- basic and
diluted.............................................. 5,820,000 5,820,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 80
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED),
AND THE PERIOD FROM DECEMBER 18, 1997, THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
CLASS A VOTING
COMMON STOCK
--------------------- CAPITAL IN
NUMBER OF EXCESS OF ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE DEFICIT EQUITY
---------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 18, 1997....... -- $ -- $ -- $ -- $ --
Issuance of Class A voting common
stock on December 18, 1997..... 5,820,000 100,000 5,818,400 -- 5,918,400
Net loss............... -- -- -- (5,846,810) (5,846,810)
---------- -------- ----------- ------------ ------------
Balance, December 31, 1997....... 5,820,000 100,000 5,818,400 (5,846,810) 71,590
Unaudited:
Conversion of related-party
notes payable............... -- -- 5,117,896 -- 5,117,896
Capital contributions.......... -- -- 22,963,704 22,963,704
Net loss............... -- -- -- (23,588,613) (23,588,613)
---------- -------- ----------- ------------ ------------
Balance, March 31, 1998
(Unaudited).................... 5,820,000 $100,000 $33,900,000 $(29,435,423) $ 4,564,577
========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 81
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED),
AND FOR THE PERIOD FROM DECEMBER 18, 1997, THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERIOD FROM
THREE-MONTH PERIOD DECEMBER 18,
ENDED 1997, THROUGH
MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(23,588,613) $ (5,846,810)
Adjustments to reconcile net loss to net cash
Provided by operating activities
Acquired in-process research and development.............. 23,705,000 5,590,000
Interest on related-party notes payable converted to
capital................................................ 36,296 --
Depreciation and amortization............................. 123,792 --
Change in operating assets and liabilities -- net of
business acquisitions..................................
Short-term investments................................. 1,585,796 --
Trade accounts receivables............................. (25,105) --
Prepaid expenses and other current assets.............. (97,057) (21,969)
Cash surrender value of insurance...................... 10,731 --
Accounts payable and accrued expenses.................. (609,824) 49,927
Deferred compensation.................................. (266,853) --
Due to related parties................................. 276,762 228,852
Deferred revenue....................................... (177,051) --
------------ ------------
Net cash provided by operating activities......... 973,874 --
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of assets and assumption of liabilities of OMS,
Inc., net of cash......................................... -- (9,154,023)
Purchase of assets and assumption of liabilities of Health
International, Inc., net of cash.......................... (22,576,007) --
Purchase of assets and assumption of liabilities of
Prudential Service Bureau, Inc., net of cash.............. (33,974,017) --
Increase in intangibles..................................... (309,189) --
Purchases of property and equipment......................... (6,251) --
------------ ------------
Net cash used in investing activities............. (56,865,464) (9,154,023)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... -- 5,918,400
Issuance of related-party notes payable..................... 1,000,000 4,081,600
Capital contributions....................................... 22,963,704 --
Proceeds from subordinated debt............................. 51,000,000 --
------------ ------------
Net cash provided by financing activities......... 74,963,704 10,000,000
------------ ------------
Change in cash and cash equivalents......................... 19,072,114 845,977
Cash and cash equivalents, beginning of period.............. 845,977 --
------------ ------------
Cash and cash equivalents, end-of period.................... $ 19,918,091 $ 845,977
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of related-party notes payable to capital
contribution........................................... $ 5,081,600 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 82
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. FORM OF ORGANIZATION AND SUMMARY OF OPERATIONS
Sykes HealthPlan Services, Inc. and subsidiaries (SHPS or the Company) was
incorporated in the State of Florida on December 18, 1997. The Company is a
provider of outsourced care management services and products and employee
benefits administration services. The Company was incorporated through the
issuance of 10,000,000 shares of Class A voting common stock (the "Class A
Common Stock") having a par value $.01 per share. (See Note 12.) Additionally,
the Company is authorized to issue 2,000,000 shares of Class B non-voting Common
Stock having a par value of $.01 per share. In the event that Class A Common
Stock is sold to the public pursuant to the effective registration statement
under the Securities Act of 1933, the total number of Class B non-voting Common
Stock that may be issued shall increase to 2,500,000 and will convert to Class A
Common Stock.
In connection with the organization, Sykes Enterprises, Inc. (Sykes), a
Florida corporation, and HealthPlan Services Corporation (HPS), a Delaware
corporation, entered into a Shareholder Agreement (the Shareholder Agreement).
Under the terms of the Shareholder Agreement, Sykes and HPS each provided
$2,959,200 in cash, resulting in a 50% ownership interest each, in exchange for
all of the shares of the Common Stock. Additionally, under the terms of the
Shareholder Agreement, Sykes and HPS each committed to make available to the
Company a term loan in the amount up to $9,040,800. (See Note 5)
2. BUSINESS COMBINATION
Effective December 31, 1997, pursuant to a Stock Purchase Agreement (the
Purchase Agreement), SHPS Acquisition Corp., a wholly owned subsidiary of the
Company, purchased all of OMS, Inc.'s (OMS) outstanding Common Stock (the OMS
Acquisition) for $10,000,000 (the Purchase Price) in cash, less $500,000 held in
escrow pending adjustments to the Purchase Price, as defined in the Purchase
Agreement. OMS develops and markets healthcare clinical criteria and software
systems for the managed healthcare insurance industry and provides installation,
customization and training for its products.
The Acquisition was accounted for using the purchase method of accounting,
under which the purchase price is allocated to the assets and liabilities, based
on fair values at the date of the acquisition. Direct acquisition costs of
$150,000 have been recorded by the Company at the date of acquisition.
The allocations resulted in goodwill recognized of $1,341,219, representing
the excess of purchase price over the fair value of net assets acquired, as
follows:
<TABLE>
<S> <C>
Goodwill.................................................... $ 1,341,219
Fair value of assets acquired............................... 4,833,289
Acquired research and development........................... 5,590,000
Liabilities assumed......................................... (2,610,485)
-----------
Cash paid, net of cash acquired............................. $ 9,154,023
===========
</TABLE>
On the acquisition date, a $5,590,000 charge for acquired in-process
research and development was recorded and is reflected in the accompanying
consolidated statement of operations for the period ended December 31, 1997.
As consideration for termination of the OMS Deferred Compensation Plan, the
Company agreed to pay OMS officers proceeds from the cash surrender value of
insurance of approximately $267,000, which was paid subsequent to year-end.
F-7
<PAGE> 83
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth unaudited pro forma statement of operations
data of the Company, which reflects adjustments to the consolidated financial
statements to present the effect of the Acquisition as if it was effective
January 1, 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Revenues.................................................... $ 5,013,423
===========
Net loss.................................................... $(5,266,019)
===========
Loss per share -- Basic and diluted......................... $ (0.90)
===========
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to
adjustments for acquisition-related expenses, additional amortization of
intangibles, and adjustments to the federal and state income tax provisions
based on pro forma operating results. Loss per share assumes all shares had been
outstanding for the period presented. The unaudited pro forma data presented
above is not necessarily indicative of actual results that might have occurred
had the Acquisition occurred on January 1, 1997.
3. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sykes
HealthPlans Services, Inc. and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Interim Information
The interim financial statements are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all normal recurring adjustments necessary to fairly
present the financial position, results of operations and cash flows with
respect to consolidated interim financial statements, have been included. The
consolidated results of operations for the interim period are not necessarily
indicative of the results for the entire fiscal year.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Earnings Per Share
Earnings per share data presented has been computed pursuant to Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share (EPS),"
that requires a dual presentation of basic earnings per share (basic EPS) and
diluted earnings per share (diluted EPS). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that could occur if common stock equivalents
were converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the Company.
F-8
<PAGE> 84
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, 762,420 stock options were outstanding but were not included
in the computation of diluted EPS because conversion of such stock options to
common stock would have an antidilutive effect on EPS.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value Of Financial Instruments",
requires disclosure of the estimated fair values of certain financial
instruments. As the related party notes payable have not been registered or
traded in an established trading market, and the notes were entered into during
the current period, the Company has estimated the fair value of the debt to be
the carrying value. The carrying amount of the Company's financial instruments
included in current assets and current liabilities approximates their fair value
due to their short-term nature.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other investments with
original maturities of three months or less at the date of purchase.
Short-Term Investments
The Company's short-term investments consist of U.S. treasury bills with
original maturities of less than one year.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation,
provisions for which have been determined using the straight-line method over
the estimated useful lives ranging from three to five years.
Expenditures for maintenance and repairs are charged in expenses as
incurred. Additions and major replacements or betterments that increase capacity
or extend useful lives are capitalized. Upon sales or retirement of equipment,
the cost and related accumulated depreciation are eliminated from the respective
accounts and the resulting gain or loss is included in other expense, net, in
the accompanying consolidated statement of operations.
Intangible Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 establishes the recognition and
measurement standards related to the impairment of long lived assets. The
Company periodically assesses the realizability of its long-term assets pursuant
to the provisions of SFAS No. 121. Based on the Company's analysis of the
undiscounted future cash flows for its long-term assets, no impairments would be
recognized under SFAS No. 121.
Income Taxes
The Company accounts for income taxes under the liability method as
required by SFAS No. 109, "Accounting for Income Taxes." The liability method
requires income taxes to be recognized based on income taxes currently payable
and the change in deferred taxes. Deferred taxes are recognized based on the
temporary differences between the financial statement and tax bases of assets
and liabilities at enacted tax rates as of the dates the differences are
expected to reverse.
F-9
<PAGE> 85
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition and Deferred Revenue
Revenues are derived from licensing the Company's software (Optimed) and
for support and consulting services related to installing, maintaining and
utilizing the software. The Company generally recognizes revenue from the
licensing, installation and maintenance of the software ratably over the life of
the contracts (one to six years) beginning at the date of acceptance in
accordance with the provisions of Statement of Position 97-2, "Software Revenue
Recognition." Revenue from software licensing, when the Company has no
significant obligations is recognized upon shipment. Revenues from support and
consulting services are recognized ratably over the contract period or as
services are performed.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130),
was issued, establishing standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt this
pronouncement in 1998 in accordance with the implementation requirements.
In June 1997, SFAS No. 131, "Disclosures About Segments Of An Enterprise
and Related Information" (SFAS 131), was issued, establishing standards for
public enterprises to disclose certain information about operating segments. It
also requires that public enterprises report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company will adopt this pronouncement in 1998 in accordance
with the implementation requirements.
Management does not believe that adoption of SFAS 130 and SFAS 131 will
have a material impact on the Company's consolidated financial statements.
4. INTANGIBLE ASSETS
Intangible assets are stated at cost and are being amortized on a
straight-line basis over their useful lives. The balance at December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
USEFUL LIVES
AMOUNT IN YEARS
---------- ------------
<S> <C> <C>
Excess of cost over net assets of acquired companies........ $1,341,219 15
Existing technologies....................................... 1,610,000 5
----------
$2,951,219
</TABLE>
5. RELATED PARTY NOTES PAYABLE
As discussed in Note 1, on December 30, 1997, the Company entered into
separate unsecured promissory notes (the Notes) under term loan (See Note 1)
with Sykes and HPS, providing for loans from each of up to $9,040,800, with
interest at one percent in excess of the London Interbank Offering Rate (LIBOR)
(6.72 percent at December 31, 1997), accruing daily and payable on a calendar
quarter basis each year. The principal balance advanced, together with accrued
but unpaid interest, was due on December 11, 2000. The approximate available
level of borrowings under the Notes at December 31, 1997 was $14,000,000.
On February 28, 1998, Sykes and HPS amended the Shareholder Agreement to
convert the term loan and the Notes, plus accrued interest, to contributed
capital ($2,559,316 each for Sykes and HPS.) In addition, the amendment required
that Sykes and HPS contribute additional capital to SHPS that would increase
their capital contributions to $34,000,000 in total ($17,000,000 each).
Accordingly, Sykes and HPS each contributed an additional $11,481,852 in cash.
F-10
<PAGE> 86
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The tax effects of significant items comprising the Company's total
deferred tax assets and total deferred tax liabilities as of December 31, 1997
are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
Deferred tax assets:
Net operating loss (NOL) carryforward..................... $ 44,000
Origination costs......................................... 59,000
Research and development credits.......................... 195,796
Valuation allowance....................................... (298,796)
---------
Total deferred tax asset.......................... $ --
---------
Deferred tax liabilities:
Capitalized software...................................... $(599,852)
Other..................................................... (37,352)
---------
Total deferred tax liability...................... $(637,204)
=========
</TABLE>
At December 31, 1997, the Company had approximately $110,000 of a NOL
carryforward for federal and state tax purposes. The carryforward expires in
2017. Also, the company has approximately $196,000 in research and development
credits for federal and state tax purposes. The credits expire in varying
amounts in 2012. The ability of the Company to utilize the carryforward and
credits is dependent on the ability of the Company to generate future income to
utilize the carryforward and credits. As a result, the potential tax benefit of
the NOL carryforward and research and development credits have been fully
reserved with a valuation allowance at December 31, 1997.
7. RELATED PARTY TRANSACTIONS
All officers have entered into agreements with the Company which provide
for base salaries, annual bonuses, and certain severance benefits in the event
that their employment is terminated by the Company.
In 1997, Sykes and HPS allocated operating costs representing executive
salaries, rent, and legal, incurred on the Company's behalf. Management believes
that the amounts were allocated at the prevailing market rates for the services
provided. At December 31, 1997, the Company owed Sykes and HPS $228,852 related
to these allocated expenses and such amount was recorded as due to related
parties in the accompanying consolidated balance sheet.
Effective January 1, 1998, SHPS entered into an outsourcing agreement with
HPS. Under the agreement, HPS will outsource its care management business to
SHPS.
8. COMMITMENTS
Employment Agreements
The Company entered into employment agreements with four officers (the SHPS
Employment Agreements). The SHPS Employment Agreements are for periods ranging
from two to three years, beginning from December 1, 1997 to January 1, 1998, and
include annual base salaries ranging from $150,000 to $225,000 for each officer.
In connection with the OMS Acquisition, the Company entered into employment
agreements with three officers of OMS (the OMS Employment Agreements). The OMS
Employment Agreements are for a period of three years, beginning January 1,
1998, and include annual base salaries ranging from $140,000 to $165,000 for
each officer.
F-11
<PAGE> 87
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments
The Company rents its office space and certain office equipment under
various operating leases. Future minimum lease payments under all non-cancelable
operating leases having an initial or remaining term in excess of one year are
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998........................................................ $ 262,119
1999........................................................ 260,020
2000........................................................ 259,883
2001........................................................ 280,186
2002........................................................ 233,488
Thereafter.................................................. --
----------
$1,295,696
==========
</TABLE>
9. STOCK OPTION PLAN
Stock Option Plan
On December 18, 1997, the Company adopted a stock option plan (the Plan)
which reserved the 2,000,000 of Class B non-voting common stock (see Note 1) for
future issuance under the Plan to eligible employees and non-employee directors
of the Company. The per share exercise price of each stock option issued was not
less than the fair market value of the stock on the date of grant or, in the
case of an employee or non-employee director owning more than ten percent of
outstanding stock of the Company and to the extent Incentive Stock Options
(ISOs) are issued, the price is not less than one hundred and ten percent of
such fair market value. Also, the aggregate fair market value of the stock with
respect to which ISOs are exercisable for the first time by an officer in any
calendar year may not exceed $100,000.
Aggregate Stock Option Activity
As of December 31, 1997, 762,420 options were outstanding at a weighted
average exercise price of $4.12 per share, and 1,237,580 remained available for
future grants. Of the options outstanding, none were immediately exercisable.
Stock option activity for the period ended December 31, 1997 was as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, beginning of period............................ -- $ --
Granted................................................... 762,420 4.12
Exercised................................................. -- --
Canceled or expired....................................... -- --
--------- -----
Outstanding, end of period.................................. 762,420 $4.12
Options vested at year-end.................................. -- $ --
</TABLE>
The weighted-average remaining contractual lives for the options
outstanding at December 31, 1997 was 2.7 years.
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25), under which no compensation expense has been recognized. In October 1995,
the Financial Accounting Standards Board issued SFAS
F-12
<PAGE> 88
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, "Accounting for Stock-Based Compensation," (SFAS 123), which allows
companies to continue following the accounting guidance of APB 25, but requires
pro forma disclosure of net income and earnings per share for the effects on
compensation expense had the accounting guidance of SFAS 123 been adopted.
The Company has elected SFAS 123 for disclosure purposes. For SFAS 123
purposes, the fair value of each option granted has been estimated as of the
grant date using the minimum value method, which is equivalent to using the
Black-Scholes valuation method for a non-public company, with the following
weighted average assumptions: risk-free interest rate of 5.5 percent, expected
life of 2.7 years and no expected dividends. The weighted average fair value of
options granted during the period ended December 31, 1997, was $0.57. ISOs vest
ratably over a three-year period beginning at the date of grant. Non-qualified
stock options vest upon attainment of specified performance-based objectives
over a nine-year period, or immediate vesting if the Company were to complete an
initial public offering. The term of all options granted is ten years. The
effect of recording compensation expense consistent with SFAS 123 would not have
had a material effect for the period ended December 31, 1997.
10. UNAUDITED INTERIM INFORMATION
The following represents the condensed statement of operations for OMS for
the three-month period ended March 31, 1997:
<TABLE>
<CAPTION>
AMOUNT
-----------
(UNAUDITED)
<S> <C>
Revenues.................................................... $1,131,700
----------
Income before provision for income taxes.................... $ 145,627
==========
Net income.................................................. $ 71,066
==========
</TABLE>
The following represents the condensed balance sheet of OMS as of March 31,
1997:
<TABLE>
<CAPTION>
AMOUNT
-----------
(UNAUDITED)
<S> <C>
Current assets.............................................. $2,539,854
Property and equipment, net................................. 191,821
Other assets................................................ 1,392,931
----------
Total assets...................................... $4,124,606
==========
Current liabilities......................................... $ 803,285
Long-term liabilities....................................... 663,547
Stockholders' equity........................................ 2,657,774
----------
Total liabilities and stockholders' equity........ $4,124,606
==========
</TABLE>
11. SUBSEQUENT EVENTS (UNAUDITED)
Business Combinations
On March 31, 1998, the Company entered into an agreement to acquire all of
the issued and outstanding preferred and common stock of Health International
(HI) for approximately $22,615,000. The purchase price is contingent on the
stockholders acceptance of the tender offer. Alternatively, the stockholders
have the option of receiving fair value per share, as determined by an
independent valuation. In addition, the Company contributed $2,606,000 in cash
to HI for the retirement of 511,000 HI stock options. HI is a disease management
company that provides a comprehensive managed medical care program for employers
and plan administrators to assist employees and their dependants in improving
the quality of their healthcare and reducing unnecessary medical costs. HI
provides care management services that can enhance the quality of an
F-13
<PAGE> 89
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
individual's overall healthcare by carefully evaluating clinically-based
solutions to help individual physicians, providers and payors select appropriate
and efficient medical treatment options, while providing the opportunity to
reduce overall medical expenditures. Goodwill of approximately $13,000,000 was
recorded related to the purchase and will be amortized on a straight-line basis
over 15 years.
On March 31, 1998, the Company entered into an agreement with Prudential
Insurance Company of America (Prudential) to acquire all of the outstanding
shares of Prudential Service Bureau, Inc. (referred to as "SHSB",
prospectively), a wholly-owned subsidiary of Prudential, for approximately
$50,000,000 in cash, subject to purchase price adjustments as defined in the
agreement. SHSB provides employee benefit services that enable its customers to
outsource the administration of their employee benefit plans, including
enrolling new plan participants, developing and maintaining records, verifying
or paying claims and producing management reports. Goodwill of approximately
$23,000,000 was recorded relating to the purchase and will be amortized on a
straight-line basis over 20 years.
The acquisitions of HI and SHSB will be accounted for using the purchase
method under which the results of operations of such acquisitions will be
included in the Company's consolidated statement of operations from the date of
acquisition. The Company recorded a charge to earnings of $23,705,000 for
acquired in-process research and development which is reflected as a charge in
the unaudited consolidated statement of operations of the Company for the
three-month period ended March 31, 1998.
The following unaudited pro forma results of operations of the Company give
effect to the acquisitions as though the transactions had occurred on January 1,
1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
(UNAUDITED)
<S> <C>
Revenues................................................. $ 21,136,780
============
Net income............................................... $ (3,721,693)
============
Net income per share..................................... $ (0.64)
</TABLE>
In connection with the acquisition of HI, the Company entered into
employment agreements with three HI officers (the HI Employment Agreements). The
HI Employment Agreements are for a period of five years, beginning March 31,
1998, and include annual base salaries of $200,000 for each officer.
Line of Credit
In March, 1998, the Company entered into a $75 million line of credit (Line
of Credit) with a bank. This Line of Credit consists of a revolving credit
facility of up to $75,000,000, which includes a letter of credit facility of up
to $10,000,000 and matures in March 2001. The Line of Credit is collateralized
by all of the stock of the Company's subsidiaries and is guaranteed by Sykes and
HPS. Interest on borrowings under the Line of Credit accrues at an annual rate
equal to either (i) the lender's prime rate plus a margin ranging from 0% to
0.50% or (ii) the 90-day London Interbank Offering interest rate plus a margin
ranging from 0.75% to 1.75% at the Company's election. The Line of Credit, which
matures in 2001, contains certain covenants, the most restrictive of which
include, a minimum consolidated stockholders' equity, and leverage and fixed
charge ratio requirements (as defined in the Line of Credit), among others. The
Company had $51 million outstanding under the Line of Credit as of March 31,
1998.
As of July 1998, the Company has a commitment from a bank for a 90-day,
$15.0 million interim line of credit facility to replace its current Line of
Credit until a new line of credit facility can be established.
F-14
<PAGE> 90
SYKES HEALTHPLAN SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Initial Public Offering
The Company's Board of Directors authorized management to prepare and file
a Registration Statement on Form S-1 with the U.S. Securities and Exchange
Commission in connection with the contemplated initial public offering of its
Common Stock (the "Offering").
Upon the completion of the Offering, the Company intends to use the
proceeds for repayment of indebtedness outstanding under the Company's Line of
Credit and all outstanding stock options to purchase Class B non-voting Common
Stock shall be converted to options to purchase the same number of the Class A
Common Stock. In addition, the Company intends to renegotiate its Line of Credit
(or negotiate a new credit facility) in order to release Sykes and HPS as
guarantors. The agreement by the Company's lenders to release Sykes and HPS as
guarantors under the Line of Credit or a new line of credit facility is a
condition to consummation of the transactions described in the following
paragraph. Management believes that its Line of Credit will be reduced and its
interest rate on borrowed funds will increase.
Concurrent with the completion of the Offerings, HPS will purchase 650,000
outstanding shares of Common Stock from Sykes and purchase 1,700,000 newly
issued shares of Common Stock from the Company at the initial public offering
price, less an amount equal to the underwriting discount.
Stock Option Activity
From January 1, 1998 to March 31, 1998 (the "Interim Period"), the Company
granted 130,950 options to employees and non-employee directors at exercise
prices ranging from $5.84 to $10.21. Utilizing the assumptions detailed in Note
9, the weighted-average fair value of options granted during the Interim Period
was $0.87. The effect of recording compensation expense consistent with SFAS 123
would not have had a material effect for the three-month period ended March 31,
1998.
On April 1, 1998, the Company granted an additional 244,440 options to
employees at an exercise price of $10.21.
As the Company had a net loss at December 31, 1997, the options issued
subsequent to year-end would not have had an effect on the computation of
earnings per share had they been issued prior to year-end, as their effect would
have been antidilutive.
12. REVERSE STOCK SPLIT
A 0.582 shares for one share reverse stock split of the Class A Voting
Common Stock and the Class B Non-Voting Common Stock was effected prior to the
completion of the Offerings. All per share amounts, stock options granted and
the exercise prices in the financial statements reflect this reverse stock
split.
F-15
<PAGE> 91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Health International, Inc.:
We have audited the accompanying balance sheets of HEALTH INTERNATIONAL,
INC. (a Delaware corporation) as of September 30, 1997 and 1996, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Health International, Inc.
as of September 30, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
October 17, 1997
(Except for Note 14
as to which the date is
April 10, 1998)
F-16
<PAGE> 92
HEALTH INTERNATIONAL, INC.
BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $3,220,000 $2,474,000
Accounts receivable....................................... 226,000 247,000
Prepaid expenses.......................................... 140,000 132,000
---------- ----------
Total current assets.............................. 3,586,000 2,853,000
---------- ----------
Equipment
Furniture and fixtures.................................... 2,502,000 1,654,000
Capitalized equipment leases.............................. 1,087,000 1,676,000
---------- ----------
3,589,000 3,330,000
Less-Accumulated depreciation............................. (2,089,000) (1,827,000)
---------- ----------
1,500,000 1,503,000
---------- ----------
Other Assets:
Refundable deposits....................................... 41,000 56,000
Deferred tax asset........................................ 64,000 --
---------- ----------
105,000 56,000
---------- ----------
Total assets...................................... $5,191,000 $4,412,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 68,000 $ 45,000
Taxes payable............................................. 53,000 125,000
Accrued liabilities....................................... 609,000 523,000
Current portion of capital lease obligations.............. 213,000 297,000
Unearned revenue.......................................... 320,000 110,000
---------- ----------
Total current liabilities......................... 1,263,000 1,100,000
---------- ----------
Long-term obligations:
Long term of capital lease obligations.................... 449,000 578,000
Deferred tax liability.................................... -- 10,000
---------- ----------
Total liabilities................................. 1,712,000 1,688,000
---------- ----------
Commitments and contingencies...............................
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares
authorized, 31 and 33 shares outstanding on September
30, 1997 and 1996, respectively........................ 284,000 302,000
Common stock, $0.10 par value, 5,000,000 shares
authorized, 2,760,867 and 2,756,867 shares issued and
outstanding on September 30, 1997 and 1996,
respectively........................................... 276,000 276,000
Paid-in-capital........................................... 2,312,000 2,294,000
Retain earnings (deficit)................................. 607,000 (148,000)
---------- ----------
Total stockholders' equity........................ 3,479,000 2,724,000
---------- ----------
Total liabilities and stockholders' equity........ $5,191,000 $4,412,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-17
<PAGE> 93
HEALTH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31, FOR THE YEARS ENDED SEPTEMBER 30,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Fee income...................... $ 6,353,000 $5,833,000 $11,661,000 $11,461,000 $7,569,000
Reimbursed medical expenses..... 206,000 182,000 398,000 229,000 214,000
----------- ---------- ----------- ----------- ----------
6,559,000 6,015,000 12,059,000 11,690,000 7,783,000
Cost of revenue:
Direct payroll expenses......... 2,762,000 2,180,000 4,499,000 4,227,000 2,752,000
Direct medical expenses......... 206,000 182,000 398,000 229,000 214,000
----------- ---------- ----------- ----------- ----------
2,968,000 2,362,000 4,897,000 4,456,000 2,966,000
----------- ---------- ----------- ----------- ----------
Gross profit.................... 3,591,000 3,653,000 7,162,000 7,234,000 4,817,000
Costs and expenses:
General and administrative...... 5,988,000 2,739,000 5,386,000 5,470,000 4,281,000
Depreciation.................... 304,000 282,000 576,000 515,000 306,000
----------- ---------- ----------- ----------- ----------
Operating income (loss)........... (2,701,000) 632,000 1,200,000 1,249,000 230,000
Interest income................... (59,000) (55,000) (128,000) (77,000) (71,000)
Interest expense.................. 37,000 46,000 86,000 93,000 44,000
----------- ---------- ----------- ----------- ----------
Income (loss) before provision for
income taxes.................... (2,679,000) 641,000 1,242,000 1,233,000 257,000
Provision for (benefit from)
income taxes.................... (575,000) 259,000 487,000 212,000 30,000
----------- ---------- ----------- ----------- ----------
Net income (loss)....... $(2,104,000) $ 382,000 $ 755,000 $ 1,021,000 $ 227,000
=========== ========== =========== =========== ==========
Basic (loss) earnings per common
share........................... $ (0.76) $ 0.14 $ 0.27 $ 0.37 $ 0.08
=========== ========== =========== =========== ==========
Diluted (loss) earnings per common
share........................... $ (0.76) $ 0.13 $ 0.26 $ 0.34 $ 0.08
=========== ========== =========== =========== ==========
Shares used for computing basic
earnings per common share....... 2,765,445 2,759,600 2,760,867 2,756,467 2,753,267
=========== ========== =========== =========== ==========
Shares used for computing diluted
earnings per common share....... 2,765,445 2,918,157 2,893,768 2,959,607 2,898,346
=========== ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE> 94
HEALTH INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996, 1995
AND THE SIX MONTH PERIOD ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
----------------- -------------------- PAID-IN EARNINGS TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
------ -------- --------- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at September 30,
1994.......................... 38 $348,000 2,744,267 $275,000 $2,242,000 $(1,396,000) $1,469,000
Exercise of common stock
warrants.................... (5) (46,000) 10,000 1,000 45,000 -- --
Exercise or options........... -- -- 2,000 -- 6,000 -- 6,000
Net income............. -- -- -- -- -- 227,000 227,000
-- -------- --------- -------- ---------- ----------- ----------
Balances at September 30,
1995.......................... 33 302,000 2,756,267 276,000 2,293,000 (1,169,000) 1,702,000
Exercise of options........... -- -- 600 -- 1,000 -- 1,000
Net income............. -- -- -- -- -- 1,021,000 1,021,000
-- -------- --------- -------- ---------- ----------- ----------
Balances at September 30,
1996.......................... 33 302,000 2,756,867 276,000 2,294,000 (148,000) 2,724,000
Conversion of preferred
stock....................... (2) (18,000) 4,000 -- 18,000 -- --
Net Income............. -- -- -- -- -- 755,000 755,000
-- -------- --------- -------- ---------- ----------- ----------
Balances at September 30,
1997.......................... 31 284,000 2,760,867 276,000 2,312,000 607,000 3,479,000
Conversion of preferred stock... (6) (55,000) 12,000 1,000 54,000 -- --
Exercise of common stock
warrants...................... -- -- 4,000 -- 8,000 -- 8,000
Sykes capital contribution...... -- -- -- -- 2,606,000 -- 2,606,000
Net loss............... -- -- -- -- -- (2,104,000) (2,104,000)
-- -------- --------- -------- ---------- ----------- ----------
Balances at March 31, 1998
(Unaudited)................... 25 $229,000 2,776,867 $277,000 $4,980,000 $(1,497,000) $3,989,000
== ======== ========= ======== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 95
HEALTH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
MARCH 31 FOR THE YEARS ENDED SEPTEMBER 30,
------------------------ ------------------------------------
1998 1997 1997 1996 1995
----------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income.......................... $(2,104,000) $ 382,000 $ 755,000 $1,021,000 $ 227,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation...................... 304,000 282,000 576,000 515,000 306,000
Decrease (increase) in:
Accounts receivable............ (146,000) (54,000) 21,000 (96,000) 366,000
Prepaid expenses............... (45,000) (61,000) (8,000) (49,000) (8,000)
Other assets................... (14,000) 14,000 (3,000) (13,000)
Deferred tax asset............. -- (64,000) --
Income taxes receivable........ (925,000)
Increase (decrease) in:
Accounts payable, taxes
payable, accrued liabilities
and unearned revenue......... 247,000 (89,000) 375,000
Accounts payable............... 9,000 70,000
Taxes payable.................. (44,000) (129,000)
Accrued liabilities............ 139,000 131,000
Unearned revenue............... (62,000) 254,000
Deferred tax liability......... (10,000) 10,000 --
----------- ---------- ---------- ---------- ----------
Net cash provided by (used
in) operating
activities.............. (2,888,000) 875,000 1,531,000 1,309,000 1,253,000
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Marketable securities acquired...... (205,000)
Capital expenditures for
equipment......................... (187,000) (297,000) (467,000) (133,000) (392,000)
----------- ---------- ---------- ---------- ----------
Net cash used in investing
activities.............. (392,000) (297,000) (467,000) (133,000) (392,000)
----------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments under capital lease
obligations....................... (113,000) (177,000) (318,000) (288,000) (160,000)
Proceeds from exercise of options... 8,000 -- 1,000 6,000
Sykes capital contribution.......... 2,606,000
----------- ---------- ---------- ---------- ----------
Net cash provided by (used
in) financing
activities.............. 2,501,000 (177,000) (318,000) (287,000) (154,000)
----------- ---------- ---------- ---------- ----------
Net increase in cash................ (779,000) 401,000 746,000 889,000 707,000
Cash at beginning of year........... 3,220,000 2,474,000 2,474,000 1,585,000 878,000
----------- ---------- ---------- ---------- ----------
Cash at end of year................. $ 2,441,000 $2,875,000 $3,220,000 $2,474,000 $1,585,000
=========== ========== ========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Capital lease obligation incurred as
a result of new lease
agreements........................ $ 89,000 $ 105,000 $ 108,000 $ 290,000 $ 569,000
=========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid................... $ 394,000 $ 389,000 $ 637,000 $ 117,000 $ 27,000
=========== ========== ========== ========== ==========
Interest paid....................... $ 37,000 $ 46,000 $ 86,000 $ 93,000 $ 44,000
=========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 96
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. ORGANIZATION AND BUSINESS OF THE COMPANY
Health International, Inc. (HI or the Company), a Delaware Corporation, is
a national health advisory service company which provides utilization review
services, including a second surgical opinion program, a hospital case
management program and a disease management program, to employers throughout the
United States. Utilization review is comprised of several areas, including
second surgical opinion plans, hospital review and prolonged rehabilitation
review. The basis of sound utilization review is to secure appropriate medical
treatment for the patient. The Company's trained medical staff assist the
attending physician in reviewing the alternatives for the patient, especially
when the patient needs acute care or prolonged medical attention. HI primarily
focuses its efforts upon a review of those procedures which are the most
expensive, namely, hospitalization, surgical procedures and long-term inpatient
therapy.
The Company's second surgical opinion and hospital case management programs
include the following services: second surgical opinions, pre-admission
certification, concurrent review, discharge planning, national tertiary level
physician network, audits, catastrophic case management, case management of
alcohol and substance abuse, inpatient psychiatric and extended care case
management, workers' compensation case management and short-term disability case
management.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
Cash and Cash Equivalents
Cash and cash equivalents include cash and highly liquid debt instruments
with an original maturity of three months or less.
Fee Income
Fee income represents revenue derived from the Company's health advisory
services. Such revenues are generated on a rate per employee per month. Cash
received in advance of the service period is classified as unearned revenue. The
Company does not participate in any contingency arrangements with respect to
savings generated through its health advisory services.
Equipment
Equipment is recorded at cost. Routine maintenance, repairs and minor
replacements are charged to expense when incurred, while improvements and
renewals are capitalized. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets, generally five years.
Reimbursed Medical Expenses and Direct Medical Expenses
The Company makes payments to physicians, laboratories and x-ray facilities
in connection with second opinion services and is reimbursed for such payments
at its cost. Expense reimbursements are recorded as revenues.
F-21
<PAGE> 97
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of such assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse.
Fair Value of Financial Instruments
As of September 30, 1997, the carrying amounts of the Company's financial
instruments, which include cash and cash equivalents, accounts payable, accrued
liabilities and capital lease obligations are recorded at amounts, which
approximate fair value.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 revises and simplifies the computation for earnings per share
and requires certain additional disclosures. The adoption of SFAS 128 had the
following effect on previously reported earnings per share data for 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
Primary EPS as reported..................................... $ 0.35 $0.08
Effect of SFAS 128.......................................... 0.02 --
------ -----
Basic EPS as restated....................................... $ 0.37 $0.08
====== =====
Fully diluted EPS as reported............................... $ 0.35 $0.08
Effect of SFAS 128.......................................... (0.01) --
------ -----
Diluted EPS as restated..................................... $ 0.34 $0.08
====== =====
</TABLE>
3. ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of September 30:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accrued health plan......................................... $521,000 $373,000
Other accrued liabilities................................... 88,000 150,000
-------- --------
$609,000 $523,000
======== ========
</TABLE>
4. WARRANTS
In the past the Company sold warrants to purchase shares of its common
stock. Each warrant entitles the holder to purchase 1000 shares of common stock.
As of September 30, 1997, there were warrants outstanding to purchase 4000
shares of common stock, at $2.00 per share. The warrants originally had an
exercise period of five years which may be extended from time to time by HI. As
of September 30, 1997, the exercise period for these warrants was extended to
September 30, 1998. See Note 14.
F-22
<PAGE> 98
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PREFERRED STOCK
Preferred stock consists of Series A convertible preferred stock. Each
share is convertible into 2,000 shares of common stock.
The Series A convertible preferred stock has a liquidation preference equal
to 100 percent of the original $10,000 purchase price. After satisfaction or the
full preferential liquidation amounts, the holders of the Series A convertible
preferred stock are entitled to share ratably on a share-for-share basis with
holders of shares of common stock in the remaining assets of the Company. The
Series A convertible preferred stock has no voting rights except as required by
the California Corporations Code.
During 1997, Series A holders converted 2 units of their Series A
convertible preferred stock into 4,000 shares of common stock. There were no
conversions during 1996. See Note 14.
6. COMMITMENTS AND CONTINGENCIES
The Company may in the normal course of business become a defendant or
plaintiff in various lawsuits. Although a successful claim for which the Company
is not fully insured could have a material effect on the Company's financial
condition, management is not of the opinion that it maintains adequate insurance
to mitigate against the normal risk of operations.
7. STOCK OPTIONS
The Company has a non-qualified stock option plan ("Plan"). Options may be
granted as nonqualified stock options. The Company accounts for the plan under
APB Opinion No. 25, under which no cost has been recognized.
The Company may grant options to purchase up to 300,000 shares of common
stock under the Plan. The options are issued with exercise prices ranging
between 85% and 110% of the Company's stock price at the date of grant. Options
granted under the Plan vest over a period of up to five years, are exercisable
in whole or in installments, and expire five years from date of grant. Upon
termination of employment, stock options must be exercised within 90 days.
In accordance with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), the fair value of
options grants is estimated using the Black Scholes option pricing model for pro
forma footnote purposes. The following assumptions were used in 1997 dividend
yield -- 0%; risk free interest rate -- 5.2% to 6.8%; expected option life -- 5
years; weighted average expected volatility -- 56.2%.
As permitted by SFAS 123, the company has chosen to continue accounting for
stock options at their intrinsic value. Accordingly, no compensation expense has
been recognized for its stock option compensation plans. Had the fair value
method of accounting been applied to the Company's stock option plans, the tax-
effected impact would be as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Net income:
As reported............................................... $755,000 $1,021,000
Pro forma................................................. 694,000 1,004,000
Basic EPS:
As reported............................................... $ 0.27 $ 0.37
Pro forma................................................. $ 0.25 $ 0.36
</TABLE>
F-23
<PAGE> 99
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The table below summarizes the transactions in the Company's stock options
during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Options outstanding at beginning of year............... 406,900 302,500 210,500
Options granted........................................ 171,000 115,000 103,500
Options exercised...................................... -- (600) (2,000)
Options canceled....................................... (138,400) (10,000) (9,500)
-------- -------- --------
Options outstanding at end of year..................... 439,500 406,900 302,500
======== ======== ========
Exercise price of options granted...................... $2.00 to $2.50 to $1.75 to
$ 3.75 $ 4.75 $ 4.50
</TABLE>
8. LEASE OBLIGATIONS
The Company leases 39,140 square feet of office space in Scottsdale,
Arizona. Rent expense is approximately $31,214 per month. The leases have
current expiration terms at various dates through June 30, 2000 and have renewal
options for unspecified periods subsequent to their current terms.
In addition, the Company leases certain equipment at interest rates ranging
from 8.50 percent to 13.03 percent. Amortization of equipment held under capital
leases is included in depreciation expense.
Future minimum lease payments under the capital and operating leases with
initial or remaining terms of one year or more as follows:
<TABLE>
<CAPTION>
CAPITAL MINIMUM
YEAR ENDING SEPTEMBER 30, LEASE RENTALS
- ------------------------- -------- --------
<S> <C> <C>
1998.............................................. $270,000 $341,000
1999.............................................. 260,000 346,000
2000.............................................. 234,000 149,000
2001.............................................. -- 70,000
2002.............................................. -- 52,000
-------- --------
764,000 $958,000
========
Less -- amount representing interest........................ 102,000
--------
Value of minimum lease payments............................. 662,000
Less -- current installments................................ 213,000
--------
Long-term capital lease obligations......................... $449,000
========
</TABLE>
F-24
<PAGE> 100
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Federal:
Current............................................... $458,000 $137,000 $12,000
Deferred.............................................. (54,000) 24,000 --
-------- -------- -------
404,000 161,000 12,000
-------- -------- -------
State:
Current............................................... 100,000 65,000 18,000
Deferred.............................................. (17,000) (14,000) --
-------- -------- -------
83,000 51,000 18,000
-------- -------- -------
$487,000 $212,000 $30,000
======== ======== =======
</TABLE>
The components of the net deferred tax asset (liability) as of September
30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Other liabilities and reserves............................ $ 166,000 $ 140,000
Net operating loss carryforwards.......................... -- 14,000
--------- ---------
Total deferred tax assets......................... 166,000 154,000
--------- ---------
Deferred tax liabilities:
Equipment -- accumulated depreciation..................... (71,000) (90,000)
Other liabilities......................................... (31,000) (74,000)
--------- ---------
Total deferred tax liability...................... (102,000) (164,000)
--------- ---------
Net deferred tax asset (liability)................ $ 64,000 $ (10,000)
========= =========
</TABLE>
A reconciliation of the provision for income taxes to the amount computed
at the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- -----
<S> <C> <C> <C>
Federal income tax at statutory rate........................ 34.0% 34.0% 34.0%
State taxes, net of Federal benefit......................... 2.0 3.0 7.0
Non-operating loss utilization.............................. -- -- (17.0)
Other....................................................... 3.0 -- --
Reversal of Federal and State reserves no longer needed..... -- (20.0) (11.0)
---- ----- -----
39.0% 17.0% 13.0%
==== ===== =====
</TABLE>
10. EMPLOYEE MEDICAL BENEFITS
On January 1, 1991, the Company elected to self-insure employee medical
benefits with stop-loss insurance coverage. The accrual for payment of future
claims is $520,899 and $373,025 as of September 30, 1997 and 1996, respectively,
and is reflected in accrued liabilities in the accompanying financial
statements. The Company had stop-loss coverage of $15,000 per employee in 1997
and 1996, and approximately $240,000 in 1997 and 1996 in the aggregate.
F-25
<PAGE> 101
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER SHARE
A reconciliation of the net income and shares used in the computations of
the basic and diluted earnings per share ("EPS") for each of the three years in
the period ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1997
-------------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Net Income....................................... $755,000 2,760,867 $0.27
Effect of Dilutive Securities:
Convertible Preferred Stock...................... -- 62,000
Stock Options and Warrants......................... -- 70,901
-------- --------- -----
Diluted EPS........................................ $755,000 2,893,768 $0.26
======== ========= =====
</TABLE>
During 1997, 50,000 stock options, convertible into 50,000 shares of common
stock were outstanding but were not included in the computation of diluted EPS
because conversion would have an antidilutive effect on EPS.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1996
---------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Net Income...................................... $1,021,000 2,756,467 $0.37
=====
Effect of Dilutive Securities:
Convertible Preferred Stock..................... -- 66,000
Stock Options and Warrants........................ -- 137,140
---------- ---------
Diluted EPS....................................... $1,021,000 2,959,607 $0.34
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 1995
-------------------------------------
PER SHARE
INCOME SHARES AMOUNT
--------- ---------- ----------
<S> <C> <C> <C>
Basic EPS
Net income....................................... $227,000 2,753,267 $0.08
=====
Effect of Dilutive Securities:
Convertible Preferred Stock...................... -- 66,000
Stock Options and Warrants......................... -- 79,079
-------- --------- -----
Diluted EPS........................................ $227,000 2,898,346 $0.08
======== ========= =====
</TABLE>
During 1995, 86,375 stock options, convertible into 86,375 shares of common
stock were outstanding but were not included in the computation of diluted EPS
because conversion would have an antidilutive effect on EPS.
F-26
<PAGE> 102
HEALTH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. MAJOR CUSTOMERS
American Airlines Corporation and Kmart Corporation are the company's two
major customers. They accounted for the following revenues:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
American Airlines Corporation...................... $2,228,000 $2,129,000 $2,029,000
19% 19% 27%
Kmart Corporation.................................. 2,299,000 2,837,000 --
20% 25% --
</TABLE>
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended September
30, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................ $3,025,000 $2,990,000 $2,987,000 $3,057,000
Income before provision for income
taxes................................. 395,000 246,000 291,000 310,000
Net income.............................. 234,000 148,000 175,000 198,000
Basic EPS............................... $ 0.08 $ 0.05 $ 0.06 $ 0.08
Diluted EPS............................. $ 0.08 $ 0.05 $ 0.06 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue................................. $2,957,000 $2,942,000 $2,785,000 $3,006,000
Income before provision for income
taxes................................. 401,000 307,000 153,000 372,000
Net income.............................. 353,000 270,000 135,000 263,000
Basic EPS............................... $ 0.13 $ 0.10 $ 0.05 $ 0.09
Diluted EPS............................. $ 0.12 $ 0.09 $ 0.05 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
1995
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues................................ $1,817,000 $1,872,000 $1,864,000 $2,228,000
Income before provision for income
taxes................................. 128,000 57,000 51,000 21,000
Net income.............................. 133,000 50,000 44,000 --
Basic EPS............................... $ 0.04 $ 0.02 $ 0.02 --
Diluted EPS............................. $ 0.04 $ 0.02 $ 0.02 --
</TABLE>
14. SUBSEQUENT EVENT
Effective March 31, 1998 HI entered into an Acquisition Agreement whereby
Sykes Healthplan Services, Inc. (SHPS) has tendered an offer to purchase all of
the issued and outstanding preferred and common stock of HI. Prior to closing,
the outstanding shares of preferred stock will be converted into common stock.
SHPS will pay $8.00 per share in cash consideration for each common stock share
acquired. Additionally, all outstanding stock options will be canceled in
exchange for cash consideration and any remaining treasury stock owned by HI
will be canceled and will cease to exist. As a result of the agreement, HI will
be merged with a subsidiary entity of SHPS and the merged entities will operate
as one new entity under the current HI corporate name. HI is obligated to comply
with certain conditions under such agreement which limits capitalized lease
obligations, provides for a minimum working capital balance and places
restrictions on negative changes in certain account balances.
F-27
<PAGE> 103
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
OMS, Inc.:
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of OMS, Inc., a Massachusetts corporation, for the year
ended December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of OMS, Inc.'s operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Tampa, Florida,
February 27, 1998
F-28
<PAGE> 104
OMS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
License fees.............................................. $4,393,811
Consulting, support and other services.................... 619,612
----------
Total revenues............................................ 5,013,423
Cost of revenues, exclusive of items shown separately
below..................................................... 1,407,231
----------
Gross profit.............................................. 3,606,192
Operating expenses:
Selling, general and administrative....................... 1,991,454
Research and development.................................. 534,525
Capitalized software cost amortization.................... 389,718
Depreciation.............................................. 83,042
----------
Total operating expenses.................................. 2,998,739
----------
Income from operations...................................... 607,453
Interest income............................................. (78,331)
----------
Income before provision for income taxes.................... 685,784
Provision for income taxes.................................. 351,113
----------
Net income........................................ $ 334,671
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-29
<PAGE> 105
OMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............... 439,998 $4,400 $ 70,630 $1,211,178 $1,286,208
Net income............................. -- -- -- 334,671 334,671
Common stock options exercised......... 30,000 300 224,700 -- 225,000
Conversion of Series A preferred stock
to common stock..................... 510,000 5,100 1,295,400 -- 1,300,500
------- ------ ---------- ---------- ----------
BALANCE, December 31, 1997............... 979,998 $9,800 $1,590,730 $1,545,849 $3,146,379
======= ====== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-30
<PAGE> 106
OMS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 334,671
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation.............................................. 83,042
Capitalized software cost amortization.................... 389,718
Deferred income taxes..................................... 12,884
Deferred rent............................................. 53,616
Changes in operating assets and liabilities-
Accounts receivable....................................... 55,746
Prepaid expenses and other current assets................. 55,312
Cash surrender value of insurance......................... (133,719)
Accounts payable and accrued expenses..................... (229,558)
Income taxes payable...................................... (28,937)
Deferred revenue.......................................... 124,982
Deferred compensation..................................... 195,446
-----------
Net cash provided by operating activities................. 913,203
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (1,585,796)
Payments for capitalized software......................... (563,082)
Purchases of equipment.................................... (123,840)
-----------
Net cash used in investing activities..................... (2,272,718)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock options exercised............................ 225,000
-----------
Net cash provided by financing activities................. 225,000
-----------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (1,134,515)
CASH AND CASH EQUIVALENTS, beginning of year................ 1,980,492
-----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 845,977
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for taxes....................................... $ 367,166
-----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of 510,000 shares of Series A preferred stock
to common stock........................................ $ 1,300,500
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-31
<PAGE> 107
OMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BASIS OF PRESENTATION:
Effective December 31, 1997, pursuant to a Stock Purchase Agreement (the
Agreement), SHPS Acquisition Corp., a wholly-owned subsidiary of Sykes
HealthPlan Services, Inc. (SHPS), purchased all of the outstanding common stock
of OMS, Inc. (the Company) for $10,000,000 (the Purchase Price) in cash,
$500,000 of which was held in escrow, pending adjustments to the Purchase Price,
as defined in the Agreement.
SHPS Acquisition Corp. accounted for the acquisition using the purchase
method of accounting, under which the purchase price was allocated to the assets
and liabilities, based on fair values at the date of the acquisition. The
allocations were based on appraisals, evaluations, estimations and other
studies. The excess of the purchase price over the fair value of net assets
acquired resulted in goodwill of $1,341,219 as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Goodwill.................................................... $ 1,341,219
Fair value of assets acquired............................... 5,679,266
Acquired in-process research and development................ 5,590,000
Liabilities assumed......................................... (2,610,485)
-----------
Cash paid......................................... $10,000,000
===========
</TABLE>
The accompanying financial statements present the results of the Company's
operations and its cash flows for the year ended December 31, 1997, on a
pre-acquisition basis.
2. FORM OF ORGANIZATION AND SUMMARY OF OPERATIONS:
The Company was organized under Massachusetts Law on January 18, 1990, for
the purpose of acquiring certain assets of Health Data Institute, Inc., a
division of Baxter Healthcare Corp. (Baxter). The original stockholders of the
Company were Blue Cross Blue Shield of Connecticut, Inc. (Blue Cross) and two
former executives of Baxter and a former independent consultant (the
Principals). The Company was incorporated through the issuance of 510,000 shares
of Series A convertible redeemable preferred stock (the Preferred Stock), par
value $2.55 per share, and 439,998 shares of common stock (the Common Stock),
par value $.01 per share. Holders of the Preferred Stock had the number of votes
per share equal to the number of shares of Common Stock into which each share of
Preferred Stock held by such holder was convertible at the time of such vote.
In connection with the organization, Blue Cross provided $1,300,500 in cash
in exchange for all of the issued shares of the Preferred Stock. Each of the
three Principals acquired 146,666 shares of Common Stock for cash of $10,010 and
notes payable to the Company of $15,000, which were repaid by the Principals
during 1991 and 1992.
The Company develops and markets healthcare clinical criteria and software
systems for the managed healthcare insurance industry and provides installation,
customization and training for its products.
3. SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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.
F-32
<PAGE> 108
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
The Company develops and markets healthcare clinical software systems to
companies in the healthcare insurance industry. The Company may perform periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. Credit losses have not been material historically.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other investments with
original maturities of three months or less at the date of purchase.
Equipment
Equipment was recorded at historical cost. Depreciation expense has been
determined using the straight-line method over the estimated useful lives of
three to five years.
Income Taxes
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." The liability method requires income taxes to be
recognized based on income taxes currently payable and the change in deferred
taxes. Deferred taxes are recognized based on the temporary differences between
the financial statement and tax bases of assets and liabilities at enacted tax
rates as of the dates the differences are expected to reverse.
Capitalized Software Costs
All costs incurred to establish the technological feasibility of a computer
software product to be marketed are charged to research and development as
incurred. Technological feasibility of a computer software product is
established when the Company has completed all planning, designing, coding and
testing activities that are necessary to establish that the product can be
produced to meet its design specifications including functions, features and
technical performance requirements.
The Company capitalizes software costs incurred in developing a product
from the time when detail program specifications are completed and coding has
begun until the production of master copies for general release. Capitalized
software costs are amortized over the product's estimated economic life,
generally five to seven years, commencing at the point that the product is
available to the market. Research and development activity for the year ended
December 31, 1997, was as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Total research and development.............................. $1,097,607
Amount capitalized.......................................... (563,082)
----------
Research and development expense.................. $ 534,525
==========
</TABLE>
Amortization expense of $389,718 is included in capitalized software cost
amortization in the accompanying statement of operations.
Revenue Recognition and Deferred Revenue
Revenues are derived from licensing the Company's software (Optimed(R)) and
for support and consulting services related to installing and maintaining the
software. The Company generally recognizes revenue from the licensing,
installation and maintenance of the software and ratably over the life of the
contracts (one to six years) in accordance with the provisions of the Statement
of Position 97-2, "Software Revenue Recognition." Revenues from support and
consulting services are recognized ratably over the contract period or as
services
F-33
<PAGE> 109
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
are performed. Revenue from software licensing, when the Company has no
continuing support service or consulting obligations, is recognized upon
shipment.
Recent Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130),
was issued, establishing standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt this
pronouncement in 1998 in accordance with the implementation requirements.
In June 1997, SFAS No. 131, "Disclosures About Segments Of An Enterprise
and Related Information" (SFAS 131), was issued, establishing standards for
public enterprises to disclose certain information about operating segments. It
also requires that public enterprises report certain information about their
products and services, the geographic areas in which they operate, and their
major customers. The Company will adopt this pronouncement in 1999 in accordance
with the implementation requirements.
Management does not believe that adoption of SFAS 130 and SFAS 131 will
have a material impact on the Company's financial statements.
4. LINE OF CREDIT:
The Company had a line of credit agreement with Blue Cross under which it
could borrow up to $1,000,000. During 1997, there were no borrowings on the line
of credit. Borrowings under the agreement bore interest at Blue Cross' cost of
funds plus 5 percent.
5. INCOME TAXES:
The provision for income taxes for the year ended December 31, 1997,
consisted of the following:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Current:
Federal................................................... $288,462
State..................................................... 49,767
--------
338,229
--------
Deferred:
Federal................................................... 9,019
State..................................................... 3,865
--------
12,884
--------
$351,113
========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal tax rate of 34 percent to income before provision for income taxes
as follows:
<TABLE>
<CAPTION>
PERCENTAGE
----------
<S> <C>
Statutory federal income tax rate........................... 34.0%
Acquisition fees............................................ 20.6
State taxes, net of federal benefit......................... 6.3
Common stock options exercised.............................. (3.9)
Research and development credits used....................... (3.2)
Other....................................................... (2.6)
----
Effective tax rate.......................................... 51.2%
====
</TABLE>
F-34
<PAGE> 110
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
6. SIGNIFICANT CUSTOMERS:
For the year ended December 31, 1997, the Company earned revenue comprising
approximately 20 percent of total revenues from two unaffiliated customers.
Revenue earned from Blue Cross (see Note 2) was approximately $483,000 for
the year ended December 31, 1997.
7. 401(K) PLAN:
All employees of the Company who were over the age of 21 were eligible to
participate in the Company's defined contribution plan (the 401(k) Plan).
Participants in the 401(k) Plan could not contribute more than the greater of a
specified statutory amount or 15 percent of his or her pre-tax total
compensation. Eligible employees were 100 percent vested in their own
contributions. The 401(k) Plan permits, but did not require, additional
contributions to the 401(k) Plan by the Company. The Company recorded an
additional contribution in 1997 of approximately $53,000, which is included in
the accompanying statement of operations.
8. DEFERRED COMPENSATION PLANS:
Under deferred compensation arrangements (the Deferred Compensation Plans),
the Company had agreed to pay certain key employees a certain sum annually for
15 years upon their retirement or, in the event of their death, to their
designated beneficiary. A benefit equal to the current cash surrender value of
insurance was payable if the employee was terminated (other than by his
voluntary action or discharge for cause) before they attained age 60. The
Company had purchased individual life insurance contracts with respect to each
employee covered by this program, with the Company as the owner and beneficiary
of the contracts. Prior to the acquisition, the Company and the key employees
agreed to terminate the Deferred Compensation Plans. As consideration for
termination of the Deferred Compensation Plans, the Company agreed to pay the
key employees proceeds from the cash surrender value of insurance of
approximately $267,000, which was paid subsequent to year-end.
During 1997, insurance expense, net of the increase in the cash surrender
value of insurance, was approximately $26,000. The expense associated with the
Deferred Compensation Plans was approximately $195,000 for 1997.
9. STOCK OPTIONS:
During 1996 and 1997, the Company granted non-qualified stock options (the
Option Shares) to two employees (the Option Holders) for the purchase of up to
20,000 and 10,000 shares, respectively, of the Company's Common Stock, with an
exercise price of $7.50 per share (the Exercise Price).
Immediately prior to the acquisition, the Option Holders exercised all of
the Option Shares at the Exercise Price and Blue Cross converted the 510,000 of
Preferred Stock on a one-to-one basis into Common Stock.
F-35
<PAGE> 111
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company applied Accounting Principles Board Opinion No. 25 in
accounting for its stock options and, accordingly, no compensation cost has been
recognized for stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock option under SFAS No. 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Net income:
As reported............................................... $334,671
Pro forma................................................. 259,671
</TABLE>
10. COMMITMENTS:
Lease Commitments
The Company rented its office space and certain office equipment under
various operating leases. Future minimum lease payments under all non-cancelable
operating leases having an initial or remaining term in excess of one year were
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
1998........................................................ $ 262,119
1999........................................................ 260,020
2000........................................................ 259,883
2001........................................................ 280,186
2002........................................................ 233,488
----------
$1,295,696
==========
</TABLE>
Total rent expense was approximately $262,000 during the year ended
December 31, 1997.
F-36
<PAGE> 112
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
OMS, Inc.
We have audited the accompanying balance sheets of OMS, Inc. as of December
31, 1996 and 1995, and the related statements of income, stockholders' equity
and cash flows for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of OMS, Inc. at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 21, 1997
F-37
<PAGE> 113
OMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,980,492 $ 1,499,591
Accounts receivable, less allowances of $0 in 1996 and
$18,000 in 1995)....................................... 1,201,442 1,148,175
Deferred income taxes..................................... -- 7,830
Prepaid expenses and other current assets................. 101,331 108,898
----------- -----------
Total current assets.............................. 3,283,265 2,764,494
----------- -----------
Equipment:
Computer and office equipment............................. 548,072 537,847
Less accumulated depreciation............................. 409,945 424,331
----------- -----------
138,127 113,516
----------- -----------
Cash surrender value of insurance........................... 133,134 --
Intangible assets:
Capitalized software costs................................ 2,390,891 2,183,217
Rights to the Optimed software............................ 388,868 388,868
Other..................................................... 54,029 54,029
----------- -----------
2,833,788 2,626,114
Less accumulated amortization............................. 1,518,367 1,159,801
----------- -----------
1,315,421 1,466,313
----------- -----------
$ 4,869,947 $ 4,344,323
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 1,039,434 $ 809,081
Income taxes payable...................................... 216,407 170,611
Deferred revenue.......................................... 380,484 475,000
----------- -----------
Total current liabilities......................... 1,636,325 1,454,692
----------- -----------
Deferred income taxes....................................... 575,507 510,337
Deferred compensation....................................... 71,407 --
Commitments and contingencies...............................
Redeemable preferred stock..................................
Convertible Redeemable Preferred stock, Series A; $2.55 par
value; 510,000 shares authorized, issued and outstanding,
redemption value $2.55.................................... 1,300,500 1,300,500
Stockholders' equity:
Common stock, $.01 par value; 1,100,000 shares authorized;
439,998 shares issued and outstanding.................. 4,400 4,400
Capital in excess of par value............................ 70,630 70,630
Retained earnings......................................... 1,211,178 1,003,764
----------- -----------
1,286,208 1,078,794
----------- -----------
$ 4,869,947 $ 4,344,323
=========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE> 114
OMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
License fees.............................................. $4,102,340 $3,847,147
Consulting services....................................... 286,200 181,740
Support and other services................................ 321,414 219,355
---------- ----------
Total revenues............................................ 4,709,954 4,248,242
Cost of sales............................................. 1,167,382 1,055,877
---------- ----------
Gross profit........................................... 3,542,572 3,192,365
---------- ----------
Operating expenses:
General and administrative................................ 1,108,488 1,074,998
Research and development.................................. 821,886 695,034
Selling................................................... 437,707 338,000
Amortization.............................................. 358,566 328,990
Depreciation.............................................. 50,603 75,820
---------- ----------
2,777,250 2,512,842
---------- ----------
Income from operations.................................... 765,322 679,523
Interest income, net...................................... 62,892 40,317
---------- ----------
Income before income taxes................................ 828,214 719,840
Provision for income taxes................................ 376,000 294,000
---------- ----------
Net income........................................ $ 452,214 $ 425,840
========== ==========
</TABLE>
See accompanying notes.
F-39
<PAGE> 115
OMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ---------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994....................... 439,998 $ 4,400 $70,630 $ 577,924 $ 652,954
Net income for the year ended December 31,
1995........................................... 425,840 425,840
------- ---------- ------- ---------- ----------
Balance at December 31, 1995....................... 439,998 4,400 70,630 1,003,764 1,078,794
Net income for the year ended December 31,
1996........................................... 452,214 452,214
Dividends declared................................. (244,800) (244,800)
------- ---------- ------- ---------- ----------
Balance at December 31, 1996....................... 439,998 $ 4,400 $70,630 $1,211,178 $1,286,208
======= ========== ======= ========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE> 116
OMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 452,214 $ 425,840
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 50,603 75,820
Amortization.............................................. 358,566 328,990
Deferred income taxes..................................... 73,000 152,000
Deferred compensation..................................... 71,407 --
Change in operating assets and liabilities:
Accounts receivable....................................... (53,267) 95,300
Prepaid expenses and other current assets................. 7,567 (22,204)
Accounts payable and accrued expenses..................... 230,353 (19,329)
Income taxes payable...................................... 45,796 129,100
Deferred revenue.......................................... (94,516) (133,199)
---------- ----------
Net cash provided by operating activities................... 1,141,723 1,032,318
---------- ----------
INVESTING ACTIVITIES
Payments for capitalized software........................... (207,673) (164,116)
Purchases of equipment...................................... (75,215) (35,462)
Cash surrender value...................................... (133,134) --
---------- ----------
Net cash used for investing activities...................... (416,022) (199,578)
---------- ----------
FINANCING ACTIVITIES
Reduction in software development obligation................ -- (159,194)
Dividends paid.............................................. (244,800) --
---------- ----------
Net cash used for financing activities...................... (244,800) (159,194)
---------- ----------
Increase in cash and cash equivalents....................... 480,901 673,546
Cash and cash equivalents at beginning of year.............. 1,499,591 826,045
---------- ----------
Cash and cash equivalents at end of year.................... $1,980,492 $1,499,591
========== ==========
Supplemental disclosure:
Interest paid............................................. $ -- $ 3,261
========== ==========
Taxes paid................................................ $ 257,204 $ 12,900
========== ==========
</TABLE>
See accompanying notes.
F-41
<PAGE> 117
OMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Business Activity
OMS, Inc. (the Company) develops and markets healthcare clinical criteria
and software systems for the managed healthcare insurance industry and provides
installation, customization and training for its products.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company develops and markets healthcare clinical software systems to
companies in the healthcare insurance industry. The Company may perform periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. At December 31, 1996 and 1995, all of its accounts
receivable were from customers in the healthcare insurance industry. Credit
losses have not been material historically.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other investments with
maturities of three months or less at the date of purchase.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments approximates carrying
value as of December 31, 1996 and 1995.
Equipment
Equipment is stated at cost less accumulated depreciation, provisions for
which have been determined by use of the straight-line method over the estimated
useful lives of three to five years.
Income Taxes
The Company accounts for income taxes under the liability method as
required by Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." The liability method requires income taxes to be recognized based
on income taxes currently payable and the change in deferred taxes. Deferred
taxes are recognized based on the temporary differences between the financial
statement and tax bases of assets and liabilities at enacted tax rates as of the
dates the differences are expected to reverse.
Intangible Assets
Intangible assets, other than capitalized software costs, represent
principally the cost of acquisition in 1990 of certain rights, titles and assets
of Health Data Institute, Inc., a division of Baxter Healthcare Corp., and are
amortized on a straight-line basis over periods ranging from two to seven years.
F-42
<PAGE> 118
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized Software Costs
Pursuant to Statement of Financial Accounting Standards No. 86, Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
issued by the Financial Accounting Standards Board, the Company is required to
capitalize certain software development and production costs related to products
to be sold or licensed to customers once technological feasibility has been
achieved. Software development costs incurred prior to achieving technological
feasibility are charged to operating expense as incurred.
Capitalized software development costs are reported at the lower of
unamortized cost or net realizable value. Commencing upon initial product
availability, these costs are amortized using the straight-line method over the
estimated life, generally five to seven years.
Accounting for the Impairment of Long-Lived Assets
The Company has adopted SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets to be Disposed of, effective in 1996. The Statement requires
impairment losses to be recognized for long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the assets carrying amount. The adoption of FAS 121 had no
impact on the Company's financial statements.
Revenue Recognition and Related Costs
Revenues are derived from licensing the Company's software (Optimed(R)) and
for support and consulting services related to installing and maintaining the
software. The Company generally recognizes revenue from the licensing of the
software ratably over the life of the contracts (one to six years). Revenues
from support and consulting services are recognized ratably over the contract
period or as services are performed. Revenue from software licensing when the
Company no longer has any significant obligations is recognized upon shipment.
Research and Development Costs
Research and development costs (principally salaries and related costs) are
charged to expense as incurred.
2. FORM OF ORGANIZATION
The Company was organized under Massachusetts Law on January 18, 1990 for
the purpose of acquiring certain assets of Health Data Institute, Inc., a
division of Baxter Healthcare Corp. (Baxter). The stockholders of the Company
are Blue Cross Blue Shield of Connecticut, Inc. (Blue Cross) and two former
executives of Baxter and a former independent consultant (principals). The
Company was incorporated through the issuance of 510,000 shares of Series A
convertible redeemable preferred stock (Preferred Stock), par value $2.55 per
share and 439,998 shares of common stock, par value $.01 per share.
In connection with the organization, Blue Cross provided $1,300,500 in cash
in exchange for all of the issued shares of the Preferred Stock. Each of the
three principals acquired 146,666 shares of common stock for cash of $10,010 and
9% nonrecourse notes payable to the Company of $15,000 which were repaid by the
principals during 1991 and 1992.
During 1996 the Company granted a non-qualified stock option to one
employee for the purchase of up to an aggregate amount of 20,000 shares of $.01
par value common stock at a price of $7.50 per share. The option vests 50% on
January 1, 1997 and 50% on January 1, 1998 and expires 10 years from the date of
grant.
F-43
<PAGE> 119
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LINE OF CREDIT
The Company has a line of credit agreement with Blue Cross under which it
may borrow up to $1,000,000. At December 31, 1996 and 1995, there were no
borrowings outstanding. Borrowings under the agreement bear interest at Blue
Cross' cost of funds plus 1/2% (7.8% at December 31, 1996).
4. CAPITALIZED SOFTWARE COSTS AND SOFTWARE DEVELOPMENT OBLIGATION
Net capitalized software costs consisted of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Costs capitalized........................................... $2,390,891 $2,183,217
Accumulated amortization.................................... 1,097,348 794,335
---------- ----------
$1,293,543 $1,388,882
========== ==========
</TABLE>
In September 1991, the Company entered into an agreement with a significant
customer whereby the customer agreed to develop a version of Optimed software
that operates in a mainframe environment. Title to this new version of Optimed
software remains with the Company. The Company funded development costs totaling
$895,468 incurred by the customer by a reduction of $18,655 in the customer's
monthly license fee through September 1995, plus interest payable monthly at an
annual rate of 6.5% on the unamortized balance. In connection with this
agreement, development costs totaling $895,468 were capitalized and are included
in the amounts presented above. This software product became available for
general release in July 1992. Amortization of capitalized software costs is
included in operating expenses in the accompanying statements of income and
totaled $303,013 and $266,935 for the years ended December 31, 1996 and 1995,
respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------- --------
<S> <C> <C>
Salaries and benefits....................................... $ 271,600 $280,000
Consulting service contractors.............................. 316,459 337,689
Insurance payable........................................... 159,703 --
Other....................................................... 291,672 191,392
---------- --------
$1,039,434 $809,081
========== ========
</TABLE>
6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
The preferred stock is convertible into the Company's common stock at a
conversion price of $2.55 per share. The preferred stock is redeemable
subsequent to July 1, 1995 at a price of $2.55 per share plus an amount equal to
all unpaid dividends payable provided that such redeeming holder shall have
given written notice to the Company at least 45 days prior to the requested date
of redemption. Each share of preferred stock shall automatically be converted
into shares of common stock at the effective conversion price if the Company
offers and sells common stock to the public at an aggregate offering price
resulting in gross proceeds to the Company as seller of at least $5,000,000,
provided that the offering price per share is not less than $5.50 per share.
Dividends of $244,800 were declared and paid on preferred stock during
1996. The dividends declared and paid during 1996 included dividends in arrears
from January 1, 1993 through December 31, 1995 and current dividends payable
through September 30, 1996. Undeclared and unpaid dividends at December 31, 1996
totaled $16,320.
F-44
<PAGE> 120
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Holders of the preferred stock shall have the number of votes per share
equal to the number of shares of common stock into which each share of preferred
stock held by such holder is convertible at the time of such vote. In the event
of any liquidation, dissolution or winding up of affairs of the Company, each
holder of preferred stock shall be entitled to receive $2.55 per share plus any
unpaid dividends prior to any type of distribution to the holders of common
stock.
7. INCOME TAXES
The provision for income taxes for the year ended December 31 consisted of:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Current:
Federal................................................... $250,000 $142,000
State..................................................... 53,000 --
-------- --------
Total current............................................. 303,000 142,000
Deferred:
Federal................................................... 58,000 91,000
State..................................................... 15,000 61,000
-------- --------
Total deferred............................................ 73,000 152,000
-------- --------
Provision for income taxes.................................. $376,000 $294,000
======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
The provision for income taxes for the year ended December 31 differs from
the amount computed by applying the federal tax rate of 34 percent to income
before provision for income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
(PERCENTAGE)
<S> <C> <C>
Statutory federal income tax rate........................... 34.0% 34.0%
State taxes, net of federal benefit....................... 5.7 5.5
Officers life insurance................................... 16.9 .6
NOL and Research and development credits used............. (14.2) (7.9)
Other..................................................... (3.0) (8.6)
----- -----
Effective tax rate........................................ 45.4 40.8
===== =====
</TABLE>
Net deferred tax liabilities are attributable to the following temporary
differences at December 31.
<TABLE>
<CAPTION>
1996 1995
-------- ---------
<S> <C> <C>
Capitalized Software development............................ $562,691 $ 604,164
Research and development tax credit carryforward............ (108,835)
Other, net.................................................. 12,816 15,008
-------- ---------
$575,507 $ 510,337
======== =========
</TABLE>
At December 31, 1996 for tax purposes the Company has approximately
$183,400 and $90,100, respectively, of federal and state research and
development tax credit carryforwards. These credits are available, subject to
limitations, to offset future tax liabilities of the Company and expire through
2011.
F-45
<PAGE> 121
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, the Company earned revenue
constituting approximately 12% and 11% of total revenues from each of two
unaffiliated customers. The Company earned revenue of approximately 10% and 13%
of total revenues from these same two customers for the year ended December 31,
1995.
Revenue earned from Blue Cross (see Note 2) approximated $525,000 and
$406,000 for the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996 and 1995, accounts receivable included amounts due from Blue
Cross of $71,127 and $148,804, respectively.
9. 401(K) PLAN
On January 1, 1996, the Company converted its Simplified Employee Pension
Plan to a defined contribution plan (the 401(k) Plan). All current and future
employees who are over the age of 21, are eligible to participate in the 401(k)
Plan. Participants in the 401(k) Plan may not contribute more than the greater
of a specified statutory amount or 15% of his or her pre-tax total compensation.
Eligible employees are 100% vested in their own contributions. The 401(k) Plan
permits, but does not require, additional contributions to the 401(k) Plan by
the Company. The Company recorded an additional contribution in 1996 of $43,000.
This amount is included in accounts payable and accrued expenses as of December
31, 1996.
10. DEFERRED COMPENSATION PLAN
During 1996, the Company entered into a deferred compensation arrangement
with certain key employees. Under this program, the Company has agreed to pay
each covered employee a certain sum annually for 15 years upon their retirement
or, in the event of their death, to their designated beneficiary. A benefit
equal to the current cash surrender value is payable if the employee is
terminated (other than by his voluntary action or discharge for cause) before
they attain age 60. The Company has purchased individual life insurance
contracts with respect to each employee covered by this program. The Company is
the owner and beneficiary of the insurance contracts. The insurance expense, net
of the increase in the cash surrender value, was $26,569 for 1996. The expense
associated with the deferred compensation plan was $71,407 for 1996.
11. COMMITMENTS
In connection with its relocation to new office facilities, the Company
entered into a new lease agreement as of December 1, 1996 with a five year term.
Under the lease agreement, the landlord has agreed to reimburse the Company for
certain relocation costs totalling $45,270. The Company, at the end of October
31, 2002, has the option to extend the term of the lease for an additional three
year period.
Annual lease payments under the amended lease are approximately $256,000
and the Company is also responsible for the payment of certain operating costs.
Total rent expense was $186,000 and $183,000, during the years ended December
31, 1996 and 1995, respectively.
F-46
<PAGE> 122
OMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company also rents certain office equipment under various operating
leases. Future minimum lease payments under all noncancelable operating leases
(office space and equipment) having an initial or remaining term in excess of
one year are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997...................................................... $ 222,833
1998...................................................... 262,119
1999...................................................... 260,020
2000...................................................... 259,883
2001...................................................... 280,186
Thereafter................................................ 233,488
----------
$1,518,529
==========
</TABLE>
F-47
<PAGE> 123
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Services provided -- related parties...................... $ 5,435,557 $ 5,448,087
Others.................................................... 8,375,613 6,876,691
----------- -----------
Total revenues.................................... 13,811,170 12,324,778
COST OF SERVICES PROVIDED................................... 17,722,120 14,001,674
----------- -----------
Loss from operations.............................. (3,910,950) (1,676,896)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 325,398 459,546
Related party interest expense............................ (249,008) (13,347)
----------- -----------
Total other income (expense)...................... 76,390 446,199
----------- -----------
LOSS BEFORE PROVISION FOR INCOME TAXES...................... (3,834,560) (1,230,697)
INCOME TAX BENEFIT, (NET)................................... (1,529,031) (490,740)
----------- -----------
NET LOSS.................................................... (2,305,529) (739,957)
RETAINED EARNINGS, BEGINNING OF YEAR........................ (658,355) 3,430,462
----------- -----------
RETAINED EARNINGS, END OF YEAR.............................. $(2,963,884) $ 2,690,505
=========== ===========
</TABLE>
See notes to unaudited financial statements.
F-48
<PAGE> 124
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,305,529) $ (739,957)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 689,848 839,465
Deferred income taxes.................................. 431,138 (103,044)
Change in assets and liabilities:
Accounts receivable, net............................. 1,091,532 (7,893,982)
Prepaids............................................. 326,398 177,800
Accounts payable and accrued expenses................ (375,312) 6,915,898
Income taxes payable................................. 293 248
Receivable from Prudential........................... 1,696,258 (475,039)
Payable to Prudential................................ (1,240,671) (6,035,578)
Restricted cash and other............................ (503,960) (3,192,771)
----------- ------------
Net cash used in operating activities............. (190,005) (10,506,960)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of equipment and leasehold improvements......... (791,719) (685,088)
----------- ------------
Net cash used in investing activities............. (791,719) (685,088)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable....................... (906) --
Principal payments on capital leases...................... -- (1,068,424)
----------- ------------
Net cash used in financing activities............. (906) (1,068,424)
----------- ------------
CHANGE IN CASH AND CASH EQUIVALENTS......................... (982,630) (10,890,296)
CASH AND CASH EQUIVALENTS, beginning of period.............. 3,763,152 14,368,115
----------- ------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 2,780,522 $ 3,477,819
=========== ============
</TABLE>
See notes to unaudited financial statements.
F-49
<PAGE> 125
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1. BASIS OF PRESENTATION
The accompanying financial statements of Sykes HealthPlan Service Bureau,
Inc. (the Company) (formerly Prudential Service Bureau, Inc.), as of and for the
three months then ended March 31, 1998 and 1997, are unaudited. In the opinion
of management, all adjustments necessary for the fair presentation of such
financial information have been included. These adjustments are of a normal
recurring nature. There have been no changes in accounting policies since the
years ending December 31, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. These financial statements, footnotes and discussions should
be read in conjunction with the December 31, 1997 and 1996 financial statements
and related footnotes contained elsewhere in the Registration Statement.
2. SUBSEQUENT EVENT
Effective March 31, 1998, pursuant to a Stock Purchase Agreement (the
Agreement) Sykes HealthPlan Services, Inc. (SHPS) purchased all of the
outstanding stock of the Company for $50,000,000 (the Purchase Price) in cash.
SHPS accounted for the acquisition using the purchase method of accounting,
under which the purchase price was allocated to the assets and liabilities,
based on fair values at the date of the acquisition. The allocations were based
on appraisals, evaluations, estimations and other studies. The excess of the
purchase price over the fair value of the assets acquired resulted in goodwill
of $23,039,706 as follows:
<TABLE>
<CAPTION>
AMOUNT
------------
<S> <C>
Goodwill................................................... $ 23,039,706
Fair value of assets acquired.............................. 15,982,180
Acquired in-process research and development............... 15,240,000
Fair value of liabilities assumed.......................... (20,287,869)
------------
Cash paid........................................ $ 33,974,017
============
</TABLE>
The accompanying financial statements present the results of the Company's
operations and its cash flows for the period ended March 31, 1998 on a
pre-acquisition basis.
F-50
<PAGE> 126
REPORT OF INDEPENDENT ACCOUNTANTS
April 16, 1998
To the Prudential Insurance Company of
America as the Sole Shareholder of
Prudential Service Bureau, Incorporated
In our opinion, the accompanying balance sheet and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Prudential Service Bureau,
Incorporated (the "Company") at December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended, 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 out
audits provide a reasonable basis for the opinion expressed above.
The Company is a member of a group of affiliated companies and, as disclosed in
Notes 1 and 2 to the financial statements, has extensive transactions and
relationships with members of the group. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
As explained in Note 9 to the financial statements, The Prudential Insurance
Company of America, the sole beneficial owner of the shares of the Company, sold
all shares held in the Company pursuant to a Stock Purchase Agreement dated
March 8, 1998.
/s/ Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
F-51
<PAGE> 127
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,763,152 $14,368,115
Restricted cash........................................... 14,414,906 9,729,962
Accounts receivable --
Prudential affiliates.................................. 8,417,088 3,738,229
Others (net of allowance of $103,088; 1996;
$104,674)............................................. 7,642,895 7,269,049
Other accounts receivable................................. -- 600,505
Receivable from Prudential................................ -- 756,442
State income tax receivable............................... 400,303 61,279
Prepaids and other current assets......................... 992,780 761,832
Deferred income tax....................................... 1,209,714 1,307,904
----------- -----------
Total current assets.............................. 36,840,838 38,593,317
Deferred income tax......................................... 571,414 --
Equipment and leasehold improvements (net).................. 4,191,371 7,761,961
----------- -----------
Total assets...................................... $41,603,623 $46,355,278
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 5,904,579 $ 4,834,676
Payable to Prudential and affiliates...................... 18,284,023 21,622,737
Product payable........................................... 14,325,005 9,729,962
Current portion of capital lease obligation............... -- 289,889
Other current liabilities................................. 1,737,547 3,094,739
----------- -----------
Total current liabilities......................... 40,251,154 39,572,003
Deferred income tax liability............................... -- 574,278
Notes payable............................................... 10,824 --
Long term capital lease obligation.......................... -- 778,535
----------- -----------
Total liabilities................................. 40,261,978 40,924,816
=========== ===========
Stockholder's equity:
Capital stock -- common, $10 par value, 100 shares
authorized, issued and outstanding..................... 1,000 1,000
Additional paid-in capital................................ 1,999,000 1,999,000
Retained earnings/(accumulated deficit)................... (658,355) 3,430,462
----------- -----------
Total stockholder's equity........................ 1,341,645 5,430,462
----------- -----------
Total liabilities and stockholder's equity........ $41,603,623 $46,355,278
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 128
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Services provided -- Prudential and affiliates............ $ 31,488,950 $ 23,572,537
Others............................... 32,892,249 28,064,056
------------ ------------
64,381,199 51,636,593
Costs of services provided.................................. (72,554,592) (56,998,855)
------------ ------------
(8,173,393) (5,362,262)
Gain on sale of fixed assets.............................. 200,872 --
------------ ------------
Loss from operations........................................ (7,972,521) (5,362,262)
Other income (expense):
Interest income........................................... 1,435,115 1,586,567
Interest expense -- Other................................. (71,588) (62,872)
-- Prudential and affiliates.......................... (567,870) --
------------ ------------
Loss before income taxes.................................... (7,176,864) (3,838,567)
Income tax benefit.......................................... 3,088,047 1,487,982
------------ ------------
Net loss.................................................... (4,088,817) (2,350,585)
Retained earnings, beginning of year........................ 3,430,462 5,781,047
------------ ------------
Retained earnings/(accumulated deficit), end of year........ $ (658,355) $ 3,430,462
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 129
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY-OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (4,088,817) $(2,350,585)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization expense................... 4,942,213 3,057,694
Deferred income tax benefit............................. (1,047,481) (1,752,589)
Gain on sale of fixed assets............................ (200,872) --
Change in current assets and liabilities:
Accounts receivable, net (including Prudential)....... (5,052,705) (4,237,283)
Prepaids and other current assets..................... (230,948) 284,382
Accounts payable and accrued expenses................. 1,069,903 2,718,077
Income taxes payable.................................. -- 849,248
Receivable from Prudential............................ 756,442 (436,097)
Payable to Prudential and affiliate................... (3,338,714) (2,724,510)
Other................................................. (1,475,502) 2,797,689
------------ -----------
Net cash used in operating activities.............. (8,666,481) (1,793,974)
------------ -----------
Cash flows from investing activities:
Proceeds from sale of fixed assets........................ 838,675 --
Additions to equipment and leasehold improvements......... (2,787,981) (2,200,383)
------------ -----------
Net cash used in investing activities.............. (1,949,306) (2,200,383)
------------ -----------
Cash flows from financing activities:
Principal payments on capital leases...................... -- (318,775)
Note Payable.............................................. 10,824 --
------------ -----------
Net cash from (used in) financing activities....... 10,824 (318,775)
------------ -----------
Net decrease in cash and cash equivalents................... (10,604,963) (4,313,132)
Cash and cash equivalents, beginning of year................ 14,368,115 18,681,247
------------ -----------
Cash and cash equivalents, end of year...................... $ 3,763,152 $14,368,115
============ ===========
Supplemental disclosures:
Interest paid............................................. $ 639,458 $ 62,872
============ ===========
Income tax refund received (paid)......................... $ (1,110,514) $ 636,356
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 130
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Ownership. Prudential Service Bureau, Incorporated (the
"Company") is a wholly owned subsidiary of The Prudential Insurance Company of
America ("Prudential"). The Company was incorporated in October 1989 under the
laws of Kentucky. The Company is a third-party administrator, engaged in
providing benefit outsourcing services, which includes benefit plan management
and administration services and cost containment services. As more fully
described in Note 2, the Company is a member of a group of affiliated companies
and has various agreements and extensive transactions with affiliates relating
to fees, reimbursement of expenses and services of officers and employees. The
accompanying financial statements, including the results of operation, have been
prepared from the separate records maintained by the Company and may not
necessarily be indicative of the conditions that would have existed if the
Company had been operating as an unaffiliated entity.
Cash and Cash Equivalents. All highly liquid investments with a maturity
of three months or less when purchased are considered to be cash equivalents. In
connection with investment transactions, the Company enters into repurchase
agreements, a bank as custodian for Company takes possession of the underlying
security as collateral, with a market value at equal to the amount of the
repurchase transaction, including principal and accrued interest. In the event
of default on the obligation to repurchase, the Company has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or collateral or proceeds may be subject to legal
proceedings.
The cash balance at December 31, 1997 and 1996 included securities
purchased under repurchase agreements of $2,212,000 and $38,415,000
respectively.
Trust Assets and Liabilities. The financial statements include restricted
cash, which is held in trust for clients, and the related product payable at
December 31, 1997 and 1996.
Fixed Assets and Depreciation. Fixed assets are stated at cost less
accumulated depreciation. Computer hardware and software and telecommunication
equipment is depreciated over a period of three years. Leased equipment and
leasehold improvements are stated at historical cost. Depreciation and
amortization are computed using the straight-line method based upon the shorter
of the estimated useful life of the asset or the lease term. Effective January
1, 1997, the Company changed its estimate of useful life of computer hardware
and software and telecommunication equipment acquired prior to December 31, 1995
from five years to three years. Consequently, the depreciation charged in the
current year on such assets, exceeded the amount that would have applied under
the previous estimate by approximately $2.0 million.
Accounts Receivable. Included in accounts receivable at December 31, 1997
and 1996 are earned but unbilled receivables totaling $11,998,968 and
$5,770,763, respectively.
Service Revenue. Service revenue is recorded as revenue in the month for
which the service is provided.
Income Taxes. The Company is a member of a group of affiliated companies
which join in filing a consolidated federal income tax return. The Company files
separate state and local tax returns.
Pursuant to the tax allocation arrangements, total federal tax expense is
determined on a separate company basis. Members with losses record tax benefits
to the extent such losses are recognized in the consolidated federal tax
provisions. The Internal Revenue Code limits the amount of non-life insurance
losses that may offset life insurance company taxable income.
F-55
<PAGE> 131
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Deferred income taxes are generally recognized, based on enacted rates,
when assets and liabilities have different values for financial statement and
tax reporting purposes. A valuation allowance is recorded to reduce any deferred
tax asset to that amount expected to be realized. See Note 5 for additional
information.
Management Estimates. The financial statements have been prepared in
accordance with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as at the date of the
balance sheet and income and expense for the period. Actual results could differ
from those estimates.
2. RELATED PARTY TRANSACTIONS
At December 31, 1997, the Company had $0 (1996: $756,442) receivable from
Prudential and $18,284,023 (1996: $21,622,737) payable to Prudential and its
affiliates.
Included in accounts receivable at December 31, 1997 are $8,417,088 (1996:
$3,738,229) of receivables for services provided to affiliated companies.
The Company provides certain claims administration data processing and
other services to certain Prudential affiliates. Included in revenue at December
31, 1997 is affiliated service revenue of approximately $30,480,652 (1996:
$19,996,906). Additionally, the Company had a service agreement with an
affiliated company whereby the Company furnished the services of officers,
employees and data processing. The Company was reimbursed for these costs of
services provided by Prudential. During 1997, prior to the sale of that business
by the affiliate, approximately $1,008,000 (1996: $3,575,631) was billed under
this agreement and is included in revenues.
The Company has also entered into a service agreement with Prudential
whereby Prudential and its affiliate furnish services of officers and employees
and data processing to the Company. In 1997, the Company recognized expenses of
$10,178,157 (1996: $8,988,333) for services provided under this agreement.
The Company has obtained a portion of its working capital financing from
certain Prudential affiliates. The amount of such financing is included in the
amount payable to Prudential. During the year ended December 31, 1997 and 1996,
the interest paid on such financings, rate on which approximated 30 day LIBOR,
was $567,870 and 0, respectively. Such amounts are included in interest expense
on the Statement of Operations.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Computer equipment and software............................. $13,470,888 $12,477,832
Furniture and fixtures...................................... 1,164,961 3,054,789
Telecommunications equipment................................ 1,516,579 1,288,654
Leasehold improvements...................................... 1,001,236 794,055
Automobiles................................................. 14,827 14,827
----------- -----------
17,168,491 17,630,157
Less accumulated depreciation and amortization.............. 12,977,120 9,868,196
----------- -----------
Total............................................. $ 4,191,371 $ 7,761,961
=========== ===========
</TABLE>
The depreciation and amortization expense for the years ended December 31,
1997 and 1996 was $4,942,213 and $3,057,694, respectively.
F-56
<PAGE> 132
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
4. OPERATING LEASES
The Company leases its facility and warehouse under a renewable,
non-cancellable operating lease agreement which requires payment of property
taxes, insurance and normal maintenance costs.
As of December 31, 1997 future annual minimum operating lease payments for
leases with remaining lease terms in excess of one year are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,755,370
1999........................................................ 1,511,110
2000........................................................ 1,462,258
2001........................................................ 1,462,260
2002........................................................ 1,462,260
Thereafter.................................................. 3,777,495
-----------
Total............................................. $11,430,753
===========
</TABLE>
Rent expenses for the year ended December 31, 1997 were $1,615,788 (1996:
$1,650,603).
5. INCOME TAXES
The components of income taxes for the years ended December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current taxes (benefit)
Federal................................................... $(1,701,542) $ 189,294
State..................................................... (339,024) 75,333
----------- -----------
Total............................................. (2,040,566) 264,627
----------- -----------
Deferred taxes (benefits)
Federal................................................... (850,463) (1,422,965)
State..................................................... (197,018) (329,644)
----------- -----------
Total............................................. (1,047,481) (1,752,609)
----------- -----------
Total taxes....................................... $(3,088,047) $(1,487,982)
=========== ===========
</TABLE>
The effective income tax rate of 43.03% as of December 31, 1997 (1996:
38.76%) is different from the expected statutory federal income tax rate of 35%
primarily due to state income tax.
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Deferred tax asset:
Expenses currently not deductible......................... $ 846,473 $1,307,904
Employee benefits......................................... 363,241 --
Depreciation.............................................. 571,414
---------- ----------
1,781,128 1,307,904
Deferred tax liability:
Depreciation.............................................. -- (574,278)
---------- ----------
Net deferred tax asset...................................... $1,781,128 $ 733,626
========== ==========
</TABLE>
F-57
<PAGE> 133
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
The receivable from Prudential at December 31, 1997 includes a current
income tax receivable of $1,312,369, and the payable to Prudential at December
31, 1996 includes a current income tax payable of $1,499,665.
Management believes that based on its historical pattern of taxable income,
the consolidated group will produce sufficient income in the future to realize
its deferred tax asset after valuation allowance. Adjustments to the valuation
allowance will be made if there is a change in management's assessment of the
amount of deferred tax asset that is realizable.
The Internal Revenue Service (the Service) has completed an examination of
the consolidated federal income tax return through 1989. The Service has
examined the years 1990 through 1992. Discussions are being held with the
Service with respect to proposed adjustments, however, management believes there
are adequate defenses against, or sufficient reserves to provide for, such
adjustments. The Service has begun their examination of the years 1993 through
1995.
6. RETIREMENT PLAN
The Company sponsors a defined contribution plan (the "Plan") that covers
all employees meeting certain eligibility requirements. The Company recognized
expense of $251,251 (1996: $221,973) for the year ended December 31, 1997
pertaining to the Plan.
7. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company believes the concentration
of credit risk in its trade receivables is substantially mitigated by the
Company's ongoing credit evaluation process, relatively short collection terms
and the nature of the Company's client base, primarily mid- and large-size
corporations with significant financial histories. The Company does not
generally require collateral from customers. The Company evaluates the need for
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
Historically, the Company has not incurred any significant credit related
losses.
Revenue from two unrelated customers was approximately 10% and 5% of total
revenue for the year ended December 31, 1997 (1996: 10% and 9% respectively).
The Company had two customers that represented approximately 2% and 4% of the
total accounts receivable at December 31, 1997 (1996: 13% and 15% respectively).
Revenues from the Company's Fulfillment activity represented approximately 29%
of the total revenues of the Company for the year ended December 31, 1997.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments" which requires that the Company disclose estimated fair
values for certain financial instruments. Considerable judgment is required to
interpret the effects on fair value. The carrying amounts of cash and cash
equivalents, accounts receivables, prepaids and other current assets, and
accounts payable and accrued liabilities approximate fair value because of the
short maturity of those instruments. The fair value of capital lease obligations
at December 31, 1996 was estimated by discounting projected cash flows using an
estimate of the Company's borrowing rate at December 31, 1996. The fair value of
the capital lease obligation at December 31, 1996 approximates its carrying
amount of $1,068,424.
F-58
<PAGE> 134
PRUDENTIAL SERVICE BUREAU, INCORPORATED
(A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
9. SUBSEQUENT EVENTS
Pursuant to a Stock Purchase Agreement (the Agreement) dated March 9, 1998
between the Prudential and Sykes Healthplan Services, Inc. (the Buyer), all
shares of beneficial interest were sold by Prudential to the Buyer on March 31,
1998.
10. RECLASSIFICATIONS
Reclassifications have been made to 1996 amounts for comparative purposes.
F-59
<PAGE> 135
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Sykes HealthPlan Service Bureau, Inc.
Louisville, Kentucky
We have audited the accompanying balance sheet of Sykes HealthPlan Service
Bureau, Inc. (formerly Prudential Service Bureau, Incorporated) (the "Company")
as of December 31, 1995, and the related statements of operations and retained
earnings and of cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Sykes HealthPlan Service Bureau, Inc. as of
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Parsippany, New Jersey
May 24, 1996
(March 31, 1998 as to Note 10)
F-60
<PAGE> 136
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $18,681,247
Restricted cash........................................... 7,263,237
Accounts receivable (net of allowance of $12,038)......... 6,769,995
Receivable from Prudential................................ 320,345
Prepaids and other current assets......................... 1,046,214
-----------
Total current assets.............................. 34,081,038
Equipment and leasehold improvements........................ 8,517,509
-----------
Total assets...................................... $42,598,547
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 2,116,599
Payable to Prudential..................................... 22,847,580
Product payable........................................... 7,263,237
Current portion of capital lease obligation............... 265,518
Corporate income tax payable.............................. 589,140
-----------
Total current liabilities......................... 33,082,074
Long-term capital lease obligation.......................... 716,463
-----------
Deferred income tax......................................... 1,018,963
Total liabilities................................. 34,817,500
-----------
Stockholder's equity:
Capital stock -- common, $10 par value, 100 shares
authorized, issued and outstanding..................... 1,000
Additional paid-in capital................................ 1,999,000
Retained earnings......................................... 5,781,047
-----------
Total stockholder's equity........................ 7,781,047
-----------
Total liabilities and stockholder's equity........ $42,598,547
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE> 137
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Revenues:
Services provided......................................... $53,400,675
Costs of services provided................................ 50,983,750
-----------
Income from operations.................................... 2,416,925
-----------
Other income (expense):
Interest income........................................... 1,451,572
Interest expense.......................................... (43,362)
-----------
Total other income................................ 1,408,210
-----------
Income before income taxes.................................. 3,825,135
Provision for income taxes.................................. 1,548,029
-----------
Net income.................................................. 2,277,106
Retained earnings, beginning of year........................ 3,503,941
-----------
Retained earnings, end of year.............................. $ 5,781,047
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 138
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 2,277,106
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense..................... 2,823,914
Write-off of computer software............................ 189,734
Deferred income taxes..................................... (88,796)
Change in operating assets and liabilities:
Accounts receivable (net)................................. 2,304,190
Prepaids and other current assets......................... (264,671)
Accounts payable and accrued expenses..................... 543,452
Income taxes payable...................................... (366,038)
Receivable from Prudential................................ 2,205,274
Payable to Prudential..................................... (240,490)
-----------
Net cash provided by operating activities.............. 9,383,675
Cash flows from investing activities:
Additions to equipment and leasehold improvements......... (3,595,220)
Proceeds from sale of equipment........................... 1,421
-----------
Net cash used in investing activities.................. (3,593,799)
-----------
Cash flows from financing activities:
Principal payments on capital leases...................... (238,053)
-----------
Net cash used in financing activities.................. (238,053)
-----------
Net increase in cash and cash equivalents................... 5,551,823
Cash and cash equivalents, beginning of year................ 13,129,424
-----------
Cash and cash equivalents, end of year...................... $18,681,247
===========
Supplemental disclosures:
Interest paid............................................. $ 40,192
===========
Income taxes paid......................................... $ 2,028,863
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE> 139
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
FOR YEAR ENDED DECEMBER 31, 1995
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Ownership
Prudential Service Bureau, Incorporated (the "Company") is a wholly-owned
subsidiary of The Prudential Insurance Company of America ("Prudential"). The
Company was incorporated in October 1989 under the laws of Kentucky. The Company
is a third-party administrator, engaged in providing benefit outsourcing
services, which includes benefit plan management and administration services and
cost containment services. As more fully described in Note 2, the Company is a
member of a group of affiliated companies and has various agreements and
extensive transactions with affiliates relating to fees, reimbursement of
expenses and services of officers and employees.
The accompanying financial statements, including the results of operating,
have been prepared from the separate records maintained by the Company and may
not necessarily be indicative of the conditions that would have existed if the
Company had been operating as an unaffiliated entity.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Restricted Cash
The financial statements include restricted cash which is held in escrow
for clients at December 31, 1995. Included in current liabilities at December
31, 1995 is the related product payable.
Equipment and Leasehold Improvements; Fixed Assets and Depreciation
Equipment and leasehold improvements are stated at historical cost.
Depreciation and amortization are computed using the straight-line method based
upon the shorter of the estimated useful life of the asset or the lease term.
Accounts Receivable
Included in accounts receivable at December 31, 1995 is earned but unbilled
receivables totaling $3,065,623.
Service Revenue
Service revenue is recorded as revenue in the month for which the service
is provided.
Management Estimates
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as the date of the balance sheet and
income and expense for the period. Actual results could differ from those
estimates.
2. RELATED PARTY TRANSACTIONS
At December 31, 1995, the Company had $320,345 receivable from and
$22,847,580 payable to Prudential.
F-64
<PAGE> 140
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Included in accounts receivable at December 31, 1995 is $865,560 of
receivables from services provided to affiliated companies.
The Company provides certain claims administration data processing and
other services to certain Prudential affiliates. Included in revenue at December
31, 1995 is affiliated service revenue of $11,401,052.
The Company has also entered into a service agreement with Prudential
whereby Prudential furnishes services of officers and employees and data
processing to the Company. In 1995, the Company expended $12,846,248 for
services provided under this agreement.
Additionally, the Company has a service agreement with an affiliated
company whereby the Company furnishes the services of officers, employees and
data processing. The Company is reimbursed for these costs of services provided
by Prudential. During 1995, $1,425,854 was reimbursed under this agreement and
was deducted from the costs of services provided.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of the following at December
31, 1995:
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Computer equipment and software............................. $11,934,372
Furniture and fixtures...................................... 2,368,151
Telecommunications equipment................................ 995,708
Leasehold improvements...................................... 701,715
Automobiles................................................. 14,827
-----------
16,014,773
Less accumulated depreciation and amortization.............. (7,497,264)
-----------
Total............................................. $ 8,517,509
===========
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
Capital lease obligations at December 31, 1995 are payable through October
2000, and are collateralized by equipment. Future minimum lease payments for
capitalized lease obligations at December 31, 1995 are as follows:
<TABLE>
<S> <C>
December 31,
1996...................................................... $ 326,295
1997...................................................... 326,295
1998...................................................... 286,163
1999...................................................... 177,728
2000...................................................... 92,727
----------
Total minimum obligations................................... 1,209,208
Less interest............................................... (227,227)
----------
Present value of net minimum obligations.................... 981,981
Less current portion........................................ (265,518)
----------
$ 716,463
==========
</TABLE>
F-65
<PAGE> 141
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. OPERATING LEASES
The Company leases its facility and warehouse under a renewable,
non-cancelable operating lease agreement which requires payment of property
taxes, insurance and normal maintenance costs. Future annual minimum operating
lease payments, for leases with remaining lease terms in excess of one year are
as follows:
<TABLE>
<S> <C>
1996........................................................ $ 1,755,370
1997........................................................ 1,755,370
1998........................................................ 1,755,370
1999........................................................ 1,511,110
2000........................................................ 1,462,258
Thereafter.................................................. 6,702,015
-----------
Total............................................. $14,941,493
===========
</TABLE>
Rent expense was $1,589,343 for the year ended December 31, 1995.
6. INCOME TAXES
The Company is a member of a group of affiliated companies which join in
filing a consolidated federal tax return. Pursuant to a tax allocation
agreement, current tax liabilities are determined for individual companies based
upon their separate return basis taxable income. Members with taxable income
incur an amount in lieu of the separate return basis federal tax. Members with a
loss for tax purposes recognize a current benefit in proportion to the amount of
their anticipated eligible losses utilized in computing consolidated taxable
income.
For state income tax purposes, the Company files its own separate state tax
return.
The Federal and State income tax provisions for the year ended December 31,
1995 consisted of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $1,313,015
State..................................................... 323,810
----------
Total............................................. 1,636,825
----------
Deferred:
Federal................................................... (76,111)
State..................................................... (12,685)
----------
Total............................................. (88,796)
----------
Total............................................. $1,548,029
==========
</TABLE>
The deferred income tax liability at December 31, 1995 of $1,018,963
resulted from temporary differences between book and tax depreciation.
7. PENSION PLAN
The Company sponsors a defined contribution plan (the "Plan") that covers
all employees meeting certain eligibility requirements. The Company expended
$168,806 for the year ended December 31, 1995 pertaining to the Plan.
F-66
<PAGE> 142
SYKES HEALTHPLAN SERVICE BUREAU, INC.
(FORMERLY PRUDENTIAL SERVICE BUREAU, INCORPORATED)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company believes the concentration
of credit risk in its trade receivables is substantially mitigated by the
Company's ongoing credit evaluation process, relatively short collection terms
and the nature of the Company's client base, primarily mid- and large-size
corporations with significant financial histories. The Company does not
generally require collateral from customers. The Company evaluates the need for
an allowance for doubtful accounts based upon factors surrounding the credit
risk of specific customers, historical trends and other information.
Historically, the Company has not incurred any significant credit related
losses.
Revenue from two unrelated customers was approximately 17% and 7% of total
revenue for the year ended December 31, 1995 of which the larger customer's
contract was a one-time three year contract which was fulfilled in 1995 and not
renewed. The Company had three customers that represented approximately 16%,
13%, and 9% of the total accounts receivable at December 31, 1995.
9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS No. 107, "Disclosures
About Fair Value of Financial Instruments" which requires that the Company
disclose estimated fair values for certain financial instruments. Considerable
judgment is required to interpret the effects on fair value. The carrying
amounts of cash and cash equivalents, accounts receivables, prepaids and other
current assets, and accounts payable and accrued liabilities approximate fair
value because of the short maturity of those instruments. The fair value of
capital lease obligations has been estimated by discounting projected cash flows
using an estimate of the Company's borrowing rate at December 31, 1996. The fair
value of capital lease obligations has been estimated by discounting projected
cash flows using an estimate of the Company's borrowing rate at December 31,
1995.
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- ----------
<S> <C> <C>
Capital Lease Obligation.................................... $981,981 $1,006,803
</TABLE>
10. SUBSEQUENT EVENT -- SALE OF THE COMPANY
On March 31, 1998, Sykes Health Plan Services, Inc. acquired all of the
outstanding stock of the Company from Prudential.
F-67
<PAGE> 143
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Sykes HealthPlan Services, Inc.
Selected Historical and Pro Forma
Financial Data...................... 21
Acquired Companies Selected Financial
Data................................ 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 39
Management............................ 55
Certain Transactions.................. 62
Principal Shareholders................ 63
Description of Capital Stock.......... 65
Shares Eligible for Future Sale....... 66
Certain United States Federal Tax
Consequences to Non-United States
Holders............................. 68
Underwriting.......................... 70
Legal Matters......................... 73
Experts............................... 73
Additional Information................ 73
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,500,000 SHARES
(SHPS LOGO)
SYKES HEALTHPLAN
SERVICES, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY
SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 144
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE OR JURISDICTION.
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED JULY 20, 1998
PROSPECTUS
2,500,000 SHARES
[SHPS LOGO]
SYKES HEALTHPLAN SERVICES, INC.
COMMON STOCK
------------------------
Of the 2,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), of Sykes HealthPlan Services, Inc. (the "Company"), offered
hereby, 500,000 shares are being offered initially outside the United States and
Canada by the International Managers (the "International Offering") and
2,000,000 shares are being offered initially in a concurrent offering in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering," and
together with the International Offering, the "Offerings"). The initial public
offering price and the underwriting discount per share are identical for each of
the Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. See "Underwriting" for a discussion of certain factors to be considered
in determining the initial public offering price. It is currently expected that
the initial public offering price will be between $11.00 and $13.00 per share.
The Common Stock has been approved for listing on the Nasdaq National Market
System, subject to official notification of issuance, under the symbol "SHPS."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO PUBLIC DISCOUNT(1) TO COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total(3)........................................... $ $ $
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses of the Offerings payable by the Company estimated
at $1,250,000.
(3) The Company has granted to the International Managers and the U.S.
Underwriters options, exercisable within 30 days after the date hereof, to
purchase up to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE> 145
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING
Merrill Lynch International, ING Baring Furman Selz LLC, NationsBanc
Montgomery Securities LLC and Raymond James Associates, Inc. are acting as
International Managers. Subject to the terms and conditions set forth in the
International purchase agreement (the "International Purchase Agreement") among
the Company and the International Managers, and concurrently with the sale of
2,000,000 shares of Common Stock to the U.S. Underwriters (as defined below),
the Company and the Selling Shareholders have agreed to sell to the
International Managers, and each of the International Managers severally has
agreed to purchase from the Company, the number of shares of Common Stock set
forth opposite its name below at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International.................................
ING Baring Furman Selz LLC..................................
NationsBanc Montgomery Securities LLC.......................
Raymond James & Associates, Inc.............................
-------
Total.......................................... 500,000
=======
</TABLE>
The Company has also entered into the U.S. purchase agreement (the "U.S.
Purchase Agreement") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, ING Baring Furman Selz LLC, NationsBanc
Montgomery Securities LLC and Raymond James & Associates, Inc. are acting as
representatives. Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 500,000 shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase from the Company, an aggregate of
2,000,000 shares of Common Stock. The initial public offering price per share
and the total underwriting discount per share of Common Stock are identical
under the International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. Under certain circumstances, the commitments of
non-defaulting U.S. Underwriters or International Managers, as the case may be,
may be increased. The closings with respect to the sale of shares of Common
Stock to be purchased by the International Managers and the U.S. Underwriters
are conditioned upon one another.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are non-United States or non-Canadian persons or to persons
they believe intend to resell to persons who are non-United States or
non-Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are United States or Canadian persons or to persons they
believe intend to resell to persons who are United States or Canadian persons,
except in each case for transactions pursuant to the Intersyndicate Agreement.
70
<PAGE> 146
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
The International Managers have advised the Company that the International
Managers propose initially to offer the shares of Common Stock offered hereby to
the public at the initial public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $ per share of Common Stock. The International Managers may
allow, and such dealers may reallow, a discount not in excess of $ per
share of Common Stock on sales to certain other dealers. After the initial
public offering, the public offering price, concession and discount may be
changed.
The Company has granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of 75,000 additional shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option only
to cover over-allotments, if any, made on the sale of the Common Stock offered
hereby. To the extent that the International Managers exercise this option, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. The
Company also has granted an option to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
300,000 additional shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to the International Managers.
The Company's shareholders have agreed not to sell or offer to sell or
otherwise dispose of any shares of Common Stock currently held by them (except
pursuant to the HPS Share Purchases), any right to acquire any shares of Common
Stock or any securities exercisable for or convertible into any shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Merrill Lynch.
In addition, the Company and its executive officers and directors have
agreed that for a period of 180 days after the date of this Prospectus to not,
without the prior written consent of Merrill Lynch, offer, sell or otherwise
dispose of any shares of Common Stock except in the case of the Company, for
shares of Common Stock offered hereby and shares issued and options granted
pursuant to its Stock Option Plan.
Prior to the Offerings, there has been no public market for the Common
Stock of the Company. The initial offering price for the Common Stock will be
determined by negotiations between the Company and the U.S. Underwriters and the
International Managers. The factors to be considered in determining the initial
public offering price, in addition to prevailing market conditions, will be
price earnings ratios of publicly traded companies that the U.S. Underwriters
believe to be comparable to the Company, certain financial information of the
Company, the history of and the prospects for the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for and timing of future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of securities of
other companies engaged in businesses similar to the Company. There can be no
assurance, however, that an active or orderly trading market will develop for
the Common Stock or that the Common Stock will trade in the public markets
subsequent to the Offerings at or above the initial offering price.
The Common Stock has been approved for listing on Nasdaq, subject to
official notification of issuance, under the symbol "SHPS." The Underwriters do
not intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Until the distribution of the Common Stock is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
71
<PAGE> 147
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The U.S. Underwriters may also elect to reduce any short position
by exercising all or part of the over-allotment options described above.
The U.S. Underwriters may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the U.S. Underwriters purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of Common Stock, they may reclaim the amount
of the selling concession from the Underwriters and selling group members who
sold these shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it may
discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
Because the Company intends to use the entire estimated net proceeds of
approximately $26.6 million from the Offerings for repayment of indebtedness
outstanding under the Line of Credit with respect of which an affiliate of
NationsBanc Montgomery Securities LLC is a lender, the underwriting arrangements
for the Offerings must comply with the requirements of Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc. (the "NASD"). The Offerings are
being conducted in accordance with Rule 2720(c)(3), which provides that, among
other things, when an NASD member participates in a public offering where more
than 10% of the net offering proceeds, not including underwriting compensation,
are intended to be paid to members participating in the distribution of the
Offerings or associated or affiliated persons of such members, the price at
which the issue is to be distributed to the public must be no higher than that
recommended by a "qualified independent underwriter." Accordingly, Merrill Lynch
is acting as a qualified independent underwriter for purposes of determining the
price of the Common Stock offered hereby and has conducted due diligence
investigations and has reviewed and participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus forms a part.
The price at which the Common Stock is being sold to the public will be no
higher than the price recommended by Merrill Lynch. See "Risk Factors --
Conflict of Interests of NationsBanc Montgomery Securities LLC in the
Offerings."
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 250,000 shares of the Common Stock that
will be offered by this Prospectus for directors, officers and employees of the
Company and certain other persons. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares that are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
The Company has agreed to indemnify the International Managers and the U.S.
Underwriters against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the provisions of the International and U.S. Purchase
Agreements, the Company has been informed that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
72
<PAGE> 148
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY SECURITIES TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
IN THE PROSPECTUS, REFERENCES TO "DOLLARS" AND "$" ARE TO UNITED STATES
DOLLARS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 9
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Sykes HealthPlan Services, Inc.
Selected Historical and Pro Forma
Financial Data...................... 21
Acquired Companies Selected Financial
Data................................ 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
Business.............................. 39
Management............................ 55
Certain Transactions.................. 62
Principal Shareholders................ 63
Description of Capital Stock.......... 65
Shares Eligible for Future Sale....... 66
Certain United States Federal Tax
Consequences to Non-United States
Holders............................. 68
Underwriting.......................... 70
Legal Matters......................... 73
Experts............................... 73
Additional Information................ 73
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,500,000 SHARES
(SHPS LOGO)
SYKES HEALTHPLAN
SERVICES, INC.
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH INTERNATIONAL
ING BARING FURMAN SELZ LLC
NATIONSBANC MONTGOMERY
SECURITIES LLC
RAYMOND JAMES & ASSOCIATES, INC.
, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 149
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. All such
fees and expenses shall be borne by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 33,959
NASD filing fee............................................. 12,012
Nasdaq listing fee.......................................... 38,750
Printing and engraving expenses............................. 150,000*
Accounting fees and expenses................................ 350,000*
Legal fees and expenses..................................... 250,000*
Blue Sky fees and expenses.................................. 30,000*
Transfer Agent's fees and expenses.......................... 15,000*
Miscellaneous............................................... 370,279*
----------
Total............................................. $1,250,000*
==========
</TABLE>
- ---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Florida corporation. The FBCA provides that, in general, a
business corporation may indemnify any person who is or was a party to any
proceeding (other than an action by, or in the right of, the corporation) by
reason of the fact that he is or was a director or officer of the corporation,
against liability incurred in connection with such proceeding, including any
appeal thereof, provided certain standards are met, including that such officer
or director acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the corporation, and provided further
that, with respect to any criminal action or proceeding, the officer or director
had no reasonable cause to believe his conduct was unlawful. In the case of
proceedings by or in the right of the corporation, the Florida Act provides
that, in general, a corporation may indemnify any person who was or is a party
to any such proceeding by reason of the fact that he is or was a director or
officer of the corporation against expenses and amounts paid in settlement
actually and reasonably incurred in connection with the defense or settlement of
such proceeding, including any appeal thereof, provided that such person acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation, except that no indemnification shall
be made in respect of any claim as to which such person is adjudged liable
unless a court of competent jurisdiction determines upon application that such
person is fairly and reasonably entitled to indemnity. To the extent that any
officers or directors are successful on the merits or otherwise in the defense
of any of the proceedings described above, the Florida Act provides that the
corporation is required to indemnify such officers or directors against expenses
actually and reasonably incurred in connection therewith. However, the Florida
Act further provides that, in general, indemnification or advancement of
expenses shall not be made to or on behalf of any officer or director if a
judgment or other final adjudication establishes that his actions, or omissions
to act, were material to the cause of action so adjudicated and constitute: (i)
a violation of the criminal law, unless the director or officer had reasonable
cause to believe his conduct was lawful or had no reasonable cause to believe it
was unlawful; (ii) a transaction from which the director or officer derived an
improper personal benefit; (iii) in the case of a director, a circumstance under
which the director has voted for or assented to a distribution made in violation
of the Florida Act or the corporation's articles of incorporation; or (iv)
willful misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by or in the right of the corporation to procure a
judgment in its favor or in a proceeding by or in the right of a shareholder.
Article V of the Company's Bylaws provides that the Company shall indemnify any
director, officer, employee or agent or any former director, officer, employee
or agent to the full extent permitted by Florida law.
II-1
<PAGE> 150
The underwriters also will agree to indemnify the directors and officers of
the Company against certain liabilities as set forth in Section of the
Underwriting Agreement (see Exhibit 1).
The Company has purchased insurance with respect to, among other things,
any liabilities that may arise under the statutory provisions referred to above.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The securities issued or sold by the Company since December 18, 1997, the
date of inception, which were not registered under the Securities Act are listed
below:
(i) On December 18, 1997, the Company issued 2,910,000 shares of
common stock, par value $.01 per share to Sykes Enterprises, Incorporated
for an aggregate cash price of $17.0 million.
(ii) On December 18, 1997, the Company issued 2,910,000 shares of
common stock, par value $.01 per share to HealthPlan Services Corporation
for an aggregate cash price of $17.0 million.
Simultaneously with the completion of the Offerings, the Company will issue
1,700,000 shares of common stock, par value $.01 per share, to HealthPlan
Services Corporation at the initial public offering price, less an amount equal
to the underwriting discount, per share.
The shares of capital stock issued in the above transactions were offered
and sold in reliance upon the exemption from registration under Section 4(2) as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transaction. All recipients had adequate access,
through their relationship with the Company to information about the Company.
II-2
<PAGE> 151
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.0+ -- U.S. Purchase Agreement
3.1* -- Articles of Incorporation of the Company
3.2* -- Bylaws of the Company
3.3* -- Amended and Restated Articles of Incorporation of the
Company
3.4* -- Amended and Restated Bylaws of the Company
4.1* -- Shareholder Agreement, dated as of December 18, 1997,
between Sykes and HPS
4.2* -- Amendment to Shareholder Agreement, dated as of January 31,
1998
4.3* -- Form of Common Stock Certificate of the Company
5.1 -- Opinion of Holland & Knight LLP
10.1* -- 1997 Stock Option Plan
10.2* -- Employment Agreement, dated as of December 31, 1997, between
the Company and Stephen K. Holland, M.D.
10.3* -- Employment Agreement, dated as of December 31, 1997, between
the Company and James K. Murray, III
10.4* -- Employment Agreement, dated as of December 31, 1997, between
the Company and David E. Garner
10.5* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Donald K. Kelly, M.D.
10.6* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Michael C. Peerboom
10.7* -- Employment Agreement, dated as of December 31, 1997, between
the Company and Owen McKenna
10.8* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Suzanne D. Kelly
10.9* -- Stock Purchase Agreement, dated as of March 9, 1998, between
the Company and Prudential
10.10* -- Acquisition Agreement, dated as of December 31, 1997,
between the Company and SHPS Acquisition Corporation, OMS
Holding Corporation ("OMS Holding") and certain selling
shareholders of OMS
10.11* -- Plan and Agreement of Merger, dated as of February 11, 1998,
between the Company, Sykes HealthPlan Services Acquisition
Corporation and HI
10.12* -- Amendment to Plan and Agreement of Merger, dated as of March
30, 1998, between the Company, Sykes Healthplan Services
Acquisition Corporation and HI
10.13* -- Credit Agreement, dated as of March 27, 1998, between the
Company and NationsBank, National Association -- 0176044.19
10.14* -- Amendment Agreement No. 1 to Credit Agreement, dated as of
May 13, 1998, between the Company and NationsBank, N.A.
10.15* -- Amendment Agreement No. 2 to Credit Agreement, dated as of
June 9, 1998, between the Company and NationsBank, N.A.
10.16* -- Outsourcing Agreement, dated as of January 1, 1998, between
the Company and HPS
10.17* -- Administrative Services Agreement, dated as of March 9,
1998, between the Company and PHC
10.18 -- Commitment Letter from NationsBank, N.A., dated July 16,
1998
21.1* -- List of Subsidiaries
23.1 -- Consent of Holland & Knight LLP (included in Exhibit 5.1)
</TABLE>
II-3
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
23.2 -- Consent of Arthur Andersen LLP, independent auditors
23.3 -- Consent of Arthur Andersen LLP, independent auditors
23.4 -- Consent of Deloitte & Touche LLP, independent auditors
23.5 -- Consent of Price Waterhouse LLP independent auditors
23.6 -- Consent of Ernst & Young LLP, independent auditors
24.1* -- Power of Attorney
27.1* -- Financial Data Schedule (For SEC use only)
</TABLE>
- ---------------
+ To be filed by amendment.
* Previously filed.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tampa, State of Florida, on the 20th day of July, 1998.
SYKES HEALTHPLAN SERVICES, INC.
By: /s/ DAVID E. GARNER
------------------------------------
David E. Garner
President, and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
DAVID E. GARNER President, Chief Executive July 20, 1998
------------------------------------------------------ Officer and Director
David E. Garner (Principal Executive
Officer)
* Executive Vice President, July 20, 1998
------------------------------------------------------ Treasurer and Chief
James K. Murray, III Financial Officer (Principal
Financial Officer and
Principal Accounting
Officer)
* Director July 20, 1998
------------------------------------------------------
James K. Murray, Jr.
* Director July 20, 1998
------------------------------------------------------
William L. Bennett
* Director July 20, 1998
------------------------------------------------------
Linda McClintock-Greco, M.D.
</TABLE>
*By: /s/ DAVID E. GARNER
-------------------------------
David E. Garner
Attorney-in-Fact
<PAGE> 154
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.0+ -- U.S. Purchase Agreement
3.1* -- Articles of Incorporation of the Company
3.2* -- Bylaws of the Company
3.3* -- Amended and Restated Articles of Incorporation of the
Company
3.4* -- Amended and Restated Bylaws of the Company
4.1* -- Shareholder Agreement, dated as of December 18, 1997,
between Sykes and HPS
4.2* -- Amendment to Shareholder Agreement, dated as of January 31,
1998
4.3* -- Form of Common Stock Certificate of the Company
5.1 -- Opinion of Holland & Knight LLP
10.1* -- 1997 Stock Option Plan
10.2* -- Employment Agreement, dated as of December 31, 1997, between
the Company and Stephen K. Holland, M.D.
10.3* -- Employment Agreement, dated as of December 31, 1997, between
the Company and James K. Murray, III
10.4* -- Employment Agreement, dated as of December 31, 1997, between
the Company and David E. Garner
10.5* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Donald K. Kelly, M.D.
10.6* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Michael C. Peerboom
10.7* -- Employment Agreement, dated as of December 31, 1997, between
the Company and Owen McKenna
10.8* -- Employment Agreement, dated as of March 31, 1998, between
the Company and Suzanne D. Kelly
10.9* -- Stock Purchase Agreement, dated as of March 9, 1998, between
the Company and Prudential
10.10* -- Acquisition Agreement, dated as of December 31, 1997,
between the Company and SHPS Acquisition Corporation, OMS
Holding Corporation ("OMS Holding") and certain selling
shareholders of OMS
10.11* -- Plan and Agreement of Merger, dated as of February 11, 1998,
between the Company, Sykes HealthPlan Services Acquisition
Corporation and HI
10.12* -- Amendment to Plan and Agreement of Merger, dated as of March
30, 1998, between the Company, Sykes Healthplan Services
Acquisition Corporation and HI
10.13* -- Credit Agreement, dated as of March 27, 1998, between the
Company and NationsBank, National Association -- 0176044.19
10.14* -- Amendment Agreement No. 1 to Credit Agreement, dated as of
May 13, 1998 between the Company and NationsBank, N.A.
10.15* -- Amendment Agreement No. 2 to Credit Agreement, dated as of
June 9, 1998, between the Company and NationsBank, N.A.
10.16* -- Outsourcing Agreement, dated as of January 1, 1998, between
the Company and HPS
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.17* -- Administrative Services Agreement, dated as of March 9,
1998, between the Company and PHC
10.18 -- Commitment Letter from NationsBank, N.A., dated July 16,
1998
21.1* -- List of Subsidiaries
23.1 -- Consent of Holland & Knight LLP (included in Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP, independent auditors
23.3 -- Consent of Arthur Andersen LLP, independent auditors
23.4 -- Consent of Deloitte & Touche LLP, independent auditors
23.5 -- Consent of Price Waterhouse LLP, independent auditors
23.6 -- Consent of Ernst & Young LLP, independent auditors
24.1* -- Power of Attorney
27.1* -- Financial Data Schedule (For SEC use only)
</TABLE>
- ---------------
+ To be filed by amendment.
* Previously filed.
<PAGE> 1
EXHIBIT 5.1
July 17, 1998
Sykes HealthPlan Services, Inc.
11405 Bluegrass Parkway
Louisville, Kentucky 40299
Re: Registration Statement on Form S-1
(File No. 333-50891)
Gentlemen:
We refer to the Registration Statement on Form S-1 (File No. 333-50891)
(the "Registration Statement"), filed by Sykes HealthPlan Services, Inc. (the
"Company"), with the Securities and Exchange Commission, for the purpose of
registering under the Securities Act of 1933 (the "Securities Act"), an
aggregate of 2,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company being offered to the public pursuant to a U.S.
Purchase Agreement and an International Purchase Agreement (collectively the
"Purchase Agreements"), between the Company, certain shareholders of the
Company, and Merrill Lynch & Co., Furman Selz LLC, NationsBanc Montgomery
Securities LLC and Raymond James & Associates, Inc., as representatives of the
U.S. Underwriters and the International Underwriters.
In connection with the above registration, we have acted as counsel for
the Company, and have examined originals, or copies certified to our
satisfaction, of all such corporate records of the Company, certificates of
public officials and representatives of the Company, and other documents as we
deemed necessary to require as a basis for the opinion expressed below.
Based upon the foregoing, and having regard for legal considerations that
we deem relevant, it is our opinion, assuming the filing of the Amended and
Restated Articles of Incorporation of the Company, that the Common Stock will
be, when and if sold in accordance with the Purchase Agreements, duly
authorized, legally issued and fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement, and to the reference to this firm under the caption
"Legal Matters" contained in the prospectus filed as part of the Registration
Statement. In giving such consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act.
Very truly yours,
HOLLAND & KNIGHT LLP
<PAGE> 1
EXHIBIT 10.18
July 16, 1998
PERSONAL AND CONFIDENTIAL
Sykes Health Plan Services, Inc.
11405 Pinegrass Parkway
Louisville, Kentucky 40299
Re: $15,000,000 Revolving Credit Facility
Gentlemen:
You have advised us that Sykes Health Plan Services, Inc., as Borrower
(the "Borrower") desire to borrow amounts which will be used to refinance a
portion of existing indebtedness, provide for payment of various letters of
credit issued pursuant to its relating bank facility and to provide working
capital. In order to meet these financing needs, you have requested that
NationsBank make available to you a revolving credit facility of $15,000,000
(the "Facility"). NationsBank, N.A. ("NationsBank") is pleased to advise you of
its commitment to provide the Facility upon the terms and conditions described
in the term sheet attached hereto (the "Term Sheet").
The commitment of NationsBank hereunder is subject, however, to each of the
following terms and conditions being satisfied in a manner acceptable to
NationsBank in its sole discretion:
(a) satisfaction of each of the terms and conditions set forth herein;
(b) satisfaction of each of the terms and conditions set forth in the
Term Sheet;
(c) the negotiation, execution and delivery of definitive documentation
with respect to the Facility consistent with the Term Sheet and
otherwise satisfactory to NationsBank; and
(d) there not having occurred and being continuing since the date hereof
a material adverse change in the market for syndicated bank credit
facilities similar in nature to the Facility or a material
disruption of, or a material adverse change in, financial, banking
or capital market conditions, in each case as determined by
NationsBank in its sole discretion based upon reasonable judgment.
<PAGE> 2
Sykes Health Plan Services, Inc.
July 16, 1998
Page 2
The commitment of NationsBank hereunder is based upon the financial information
and other information regarding the Borrower previously provided to NationsBank.
The commitment hereunder is subject to the condition, among others, that there
shall not have occurred after the date of such financial information any
material adverse change in the business, assets, liabilities (actual or
contingent), operations, condition (financial or otherwise) or prospects of the
Borrower and its subsidiaries and affiliates and continuing satisfaction of
NationsBank, upon completion of due diligence, with the condition, assets,
properties, business, operations and prospects of the Borrower and its
Subsidiaries and affiliates. If the continuing review by NationsBank of the
Borrower discloses information relating to conditions or events not previously
disclosed to NationsBank or relating to new information or additional
developments concerning conditions or events previously disclosed to NationsBank
which NationsBank in its sole discretion believes may have a material adverse
effect on the condition (financial or otherwise), assets, properties, business,
operations or prospects of the Borrower, NationsBank may, in its sole
discretion, suggest alternative financing amounts or structures that ensure
adequate protection for NationsBank or decline to participate in the proposed
financing.
You hereby represent and covenant that (i) all information, other than the
Projections (as defined below), which has been or is hereafter made available to
NationsBank by you or any of your representatives in connection with the
transactions contemplated hereby ("Information") is and will be complete and
correct in all material respects and does not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements contained therein not materially misleading and (ii) all
financial projections concerning the Borrower and its Subsidiaries that have
been or are hereafter made available to NationsBank by you (the "Projections")
have been or will be prepared in good faith based upon reasonable assumptions.
You agree to supplement the Information and the Projections from time to time
until the closing date so that the representation and the warranty in the first
sentence of this paragraph is correct on the closing date.
By our delivery of this letter agreement to you, you agree to reimburse
NationsBank from time to time on demand for all reasonable out-of-pocket fees
and expenses (including, but not limited to, documentation expenses, travel fees
and the reasonable fees, disbursements and other charges of Smith Helms Mullins
& Moore, L.L.P., as counsel to NationsBank) incurred in connection with the
Facility and the preparation of the definitive documentation for the Facility
and the other transactions contemplated hereby.
The Borrower agrees to indemnify and hold harmless NationsBank and each
director, officer, employee, attorney and affiliate of NationsBank and each
director, officer, employee or attorney of such affiliate of NationsBank (each
such person or entity referred to hereafter in this paragraph as an "Indemnified
Person") from any losses,
<PAGE> 3
Sykes Health Plan Services, Inc.
July 16, 1998
Page 3
claims, costs, damages, expenses or liabilities (or actions, suits or
proceedings, including any inquiry or investigation, with respect thereto)
in which any Indemnified Person may become subject, insofar as such losses,
claims, costs, damages, expenses or liabilities (or actions, suits, or
proceedings, including any inquiry or investigation, with respect thereto)
arise out of, in any way relate to, or result from, this letter, the
Facility or the other transactions contemplated hereby and thereby and to
reimburse upon demand each Indemnified Person for any and all legal and
other expenses incurred in connection with investigating, preparing to
defend or defending any such loss, claim, cost, damage, expense or
liability (or actions, suits or proceedings, including any inquiry or
investigation, with respect thereto); provided that the Borrower shall not
have any obligation under this indemnity provision for liabilities
resulting from gross negligence or willful misconduct of any Indemnified
Person. The foregoing provisions of this paragraph shall be in addition to
any right that an Indemnified Person shall have at common law or otherwise.
No Indemnified Person shall be responsible or liable for consequential
damages which may be alleged as a result of this letter.
The provisions of the immediately preceding two paragraphs shall remain in
full force and effect regardless of whether definitive financing
documentation shall be executed and delivered and notwithstanding the
termination of this letter agreement or the commitment of NationsBank
hereunder.
This letter may not be assigned by the Borrower without the prior written
consent of NationsBank.
If you are in agreement with the foregoing, please execute and return the
enclosed copy of this letter no later than 5:00 P.M. Eastern Standard
Daylight Savings Time on July 24, 1998. This letter will become effective
upon your delivery to us of executed counterparts of this letter. As a
condition to our making the Facility available you shall pay to NationsBank
at closing an upfront fee of $20,000. This commitment shall terminate if
not so accepted by you prior to that time. Following acceptance by you,
this commitment will terminate on July 31, 1998, unless the Facility is
closed by such time or unless Agent shall consent in writing to an
extension, which consent shall not be unreasonably withheld.
Except as required by applicable law, this letter and the contents hereof
(including the Term Sheet) shall not be disclosed by you to any third party
without the prior consent of NationsBank. You may permit your attorneys and
accountants to examine this letter and the Term Sheet. Without limiting the
foregoing, in the event that you disclose the contents of this letter
(including the Term Sheet) in contravention of the preceding sentence, you
shall be deemed to have accepted the terms of this letter (including the
Term Sheet).
<PAGE> 4
Sykes Health Plan Services, Inc.
July 16, 1998
Page 4
This letter may be executed in counterparts which, when together, shall
constitute an original. This letter, together with the Term Sheet embodies
the entire agreement and understanding between NationsBank and the Borrower
with respect to the specific matters set forth herein and supersedes all
prior agreements and understandings relating to the subject matter hereof.
No party has been authorized by NationsBank to make any oral or written
statements inconsistent with this letter. THIS LETTER SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA, WITHOUT
REGARD TO THE PRINCIPALS OF CONFLICTS OF LAW.
Very truly yours,
NATIONSBANK, N.A.
By: /s/ Sadahri W. Berry
--------------------------------------
Title: Vice President
ACCEPTED AND AGREED this
17th day of July, 1998.
SYKES HEALTH PLAN SERVICES, INC.
By:/S/ Christine L. Beckler
---------------------------------------
Title: Corporate Controller and Secretary
<PAGE> 5
SUMMARY OF TERMS AND CONDITIONS
July 16, 1998
This Summary is confidential and shall not be disclosed to any other
Person.
<TABLE>
<S> <C>
BORROWER: Sykes Health Plan Services, Inc. (the "Borrower").
GUARANTORS: All existing and hereafter acquired or created Subsidiaries of
the Borrower, and all existing and hereafter acquired or
created Partnerships in which the Borrower or any Subsidiary
serves as General Partner.
LENDER: NationsBank, N.A.
FACILITY: A $15 million Revolving Credit
Facility will be available under
the conditions hereinafter set
forth. The Facility will include a
subfacility for issuance of letters
of credit in an amount not to
exceed $6 million. Letters of
Credit reduce availability to the
Revolving Credit Facility only to
the extent actually issued.
PURPOSE: Proceeds of the Facility shall be used for general corporate
purposes, including letters of credit and repayment of a
portion of existing indebtedness.
MATURITY: Earlier of 90 days from the Closing Date or closing of a new
revolving credit facility.
SECURITY: Negative pledge on all material assets of Borrower and its
Subsidiaries. A pledge of all of the capital stock of the
Borrower's domestic Subsidiaries.
INTEREST RATE AND FEES: 30 day daily floating LIBOR Rate plus 1 1/4% on loans. A per
annum fee of 1 1/4% on the undrawn amount of outstanding
letters of credit payable quarterly in arrears. The default rate
shall be 2% over the actual interest rate. The Borrower shall
pay to the Lender an unused fee of 1/4% percent per annum.
All interest and fees shall be calculated on a 360 day basis.
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
REPRESENTATIONS AND
WARRANTIES: Customary for credit agreements of this nature, including but
not limited to (i) corporate existence, (ii) corporate and
governmental authorization to conduct business, to enter into
credit facility documentation, (iii) accuracy of financial
information, (iv) no material adverse change, (v) compliance
with laws, including environmental laws, (vi) compliance
with ERISA, (vii) no material litigation, (viii) payment of
taxes, (ix) no untrue statements, (x) no liens or indebtedness
except as acceptable to the Lender, (xi) Investment Company
Act and Regulation U Compliance, and (xii) ownership of
assets.
OTHER COVENANTS: Affirmative and negative covenants customary in credit
agreements of this nature and including, without limitation:
(i) delivery of financial statements, other reports and
information, and compliance certificates, (ii) maintenance of
corporate existence, qualifications, franchises, governmental
licenses and permits, and intellectual property rights, (iii)
maintenance of property and insurance, (iv) continued
conduct of business in same lines of business, (v) payment of
taxes, (vi) compliance with laws, (vii) rights of inspection,
(viii) compliance with environmental laws and notices of
environmental compliance matters, (ix) ERISA compliance,
(x) restrictions on use of proceeds, (xi) notice of defaults,
suits and other proceeding, (xii) prohibition on acquisitions,
(xiii) limitations on sale of assets other than in the normal
course of business, (xiv) limitation on additional
indebtedness, (xv) limitation on investments other than
eligible securities, (xvi) limitation on liens other than
permitted liens, (xvii) limitation on mergers or consolidations
except where Borrower or a Subsidiary is the surviving entity,
(xviii) limitation on transactions with affiliates,
(xix) limitations on cash dividends and stock redemptions and
the redemption and/or prepayment of other debt.
EVENTS OF DEFAULT: Customary in credit agreements of this nature, and including,
among others, (i) failure to pay any interest, principal, fees or
other amounts when due, (ii) breach of any covenant or
agreement, (iii) any representation or warranty shall be false
or misleading, (iv) cross default, (v) voluntary or involuntary
insolvency, bankruptcy or similar proceedings or events, (vi)
certain ERISA events, (vii) judgment defaults, (viii) actual or
</TABLE>
2
<PAGE> 7
<TABLE>
<S> <C>
asserted invalidity (other than by the Lender) of any of the loan
documents or security, (ix) suspension or termination of
operations material to the Borrower and its Subsidiaries, and (x)
change in control.
CONDITIONS PRECEDENT
TO CLOSING: Customary for transactions of this type, including but not
limited to, (i) the completion of all due diligence with respect
to the Borrower and Guarantors in scope and determination
satisfactory to NationsBank in its sole discretion, (ii) the
negotiation, execution and delivery of definitive
documentation with respect to the Facility, (iii) NationsBank
shall have received satisfactory opinions of counsel to the
Borrower and the Guarantors (which opinions shall cover,
among other things, authority, legality, validity, binding
effect and enforceability of the documents for the Facility),
and such corporate resolutions, certificates and other
documents as NationsBank shall reasonably require, (iv) there
shall not have occurred a material adverse change since
March 31, 1998 in the business, assets, operations, condition
(financial or otherwise) or prospects of the Borrower or its
Subsidiaries, or in the facts and information regarding such
entities (including litigation) as represented to date, (vii) the
absence of any action, suit, investigation or proceeding
pending or threatened in any court or before any arbitrator or
governmental authority that purports to affect the Borrower
or its Subsidiaries (other than existing litigation which shall
be disclosed to, and in their discretion shall be acceptable to,
NationsBank), or any transaction contemplated hereby, or that
could have a material adverse effect on the Borrower or its
Subsidiaries or any transaction contemplated hereby or on the
ability of the Borrower and its Subsidiaries to perform their
obligations under the documents to be executed in connection
with the Facility, (viii) the absence of any disruption or
adverse change in the financial or capital markets generally,
(ix) receipt of fees, (x) receipt of pledged stock and stock
powers, (xi) evidence of insurance and (xii) representations
and warranties are true and correct.
CONDITIONS TO MAKING
INITIAL ADVANCE: The obligation of the Lender to make an initial advance shall
be subject to (i) receipt of June 30, 1998 financial statements
of the Borrower and its subsidiaries demonstrating actual
consolidated EBITDA of not less than $2,300,000 for the
</TABLE>
3
<PAGE> 8
<TABLE>
<S> <C>
three month period ending June 30, 1998; and (ii) receipt of $40
Million of net proceeds from an initial public offering or an
equity investment from an existing parent company and termination of
the existing Credit Agreement dated March 27, 1998 among the Borrower,
NationsBank, National Association and the Lenders party thereto.
INDEMNIFICATION: NationsBank will be indemnified against all losses, liabilities,
claims, damages or expenses relating to their loans, the
Borrower's use of loan proceeds or the commitments,
including but not limited to reasonable attorney's fees and
settlement costs. NationsBank shall not be entitled to
indemnity where they are guilty of gross negligence or willful
misconduct. Additionally, the Borrower will indemnify
NationsBank against all liabilities, claims damages or
expenses arising due to environmental issues.
CLOSING: On or before July 31, 1998 or such later date as the Borrower
and NationsBank shall agree.
EXPENSES: The Borrower will reimburse NationsBank all reasonable
costs and expenses associated with the preparation, due
diligence, travel expenses, administration, and enforcement
of all documents executed in connection with the Facility,
including without limitation, the legal fees of NationsBank's
counsel regardless of whether the Facility is closed. In
addition, the Borrower will be responsible to Smith Helms
Mulliss & Moore, L.L.P. for payment, without limitation, of
all reasonable legal fees and reasonable expenses associated
with the preparation, negotiation and ongoing maintenance of
the Facility.
DOCUMENTATION: This SUMMARY OF TERMS AND CONDITIONS is not meant to be
all inclusive. Final terms and conditions are subject to due
diligence and documentation to be negotiated to the mutual
satisfaction of the Borrower, the Guarantors and
NationsBank.
</TABLE>
4
<PAGE> 1
EXHIBIT 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement [Form S-1 No. 333-50891].
/s/ Arthur Andersen LLP
Tampa, Florida,
July 17, 1998
<PAGE> 1
EXHIBIT 23.3
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our reports (and to all references to our firm) included in or made a part of
this registration statement [Form S-1 No. 333-50891]
/s/ Arthur Andersen LLP
Los Angeles, California,
July 17, 1998
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 5 to Registration
Statement No. 333-50891 of Sykes HealthPlan Services, Inc. on Form S-1 of our
report dated May 24, 1996 (March 31, 1998 as to Note 10) on the financial
statements of Sykes HealthPlan Service Bureau Inc. (formerly Prudential Service
Bureau, Incorporated), appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
July 17, 1998
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Pre-Effective Amendment No. 5 to the Registration Statement on Form S-1 of our
report dated April 16, 1998, relating to the financial statements of Prudential
Service Bureau, Incorporated, as of December 31, 1996 and 1997 and for the years
then ended, which appears in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
July 17, 1998
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 21, 1997, with respect to the financial
statements of OMS, Inc. as of and for the years ended December 31, 1996 and 1995
included in Pre-Effective Amendment No. 5 to the Registration Statement (Form
S-1 No. 333-50891) of Sykes HealthPlan Services, Inc. for the initial
registration of its common stock.
Ernst & Young LLP
Boston, Massachusetts
July 17, 1998
