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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDING SEPTEMBER 30, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-9900
HBO & COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 37-0986839
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 PERIMETER CENTER NORTH
--------------------------
ATLANTA, GEORGIA
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30346
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(Address of principal executive offices)
( Zip Code)
(404) 393-6000
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(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1995
- ----------------------------- -------------------------------
Common Stock, $.05 par value 39,780,002 Shares
Page 1
Exhibit Index is on Page 4
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following required financial statements are incorporated by reference from
the Registrant's Quarterly Report to Stockholders for the quarter ended
September 30, 1995 (attached as Exhibit 19):
Consolidated Statements of Income
Consolidated Condensed Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The financial information included in this Quarterly Report on Form 10-Q has
been reviewed by Arthur Andersen LLP, independent public accountants, in
accordance with established professional standards and procedures for such a
review as set forth in their review letter presented on page 3 of this report.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required in Item 2 is incorporated by reference from the
Financial Review in the Registrant's Quarterly Report to Stockholders for the
quarter ended September 30, 1995 (attached as Exhibit 19).
Page 2
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ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and
Board of Directors of
HBO & Company:
We have reviewed the accompanying consolidated condensed balance sheet of HBO &
COMPANY (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1995 and
the related statements of income for the three- and nine-month periods and cash
flows for the nine-month period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of HBO & Company as of December 31, 1994 (not
presented herein), and in our report dated February 8, 1995, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated condensed balance sheet as of December
31, 1994 is fairly stated in all material respects in relation to the balance
sheet from which it has been derived.
Arthur Andersen LLP
Atlanta, Georgia
October 19, 1995
Page 3
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information required in Item 1 is incorporated by reference from the Notes
to Consolidated Financial Statements in the Registrant's Quarterly Report to
Stockholders for the quarter ended September 30, 1995 (attached as Exhibit 19).
ITEM 5. OTHER INFORMATION
For the month ended October 31, 1995, HBO & Company reported revenue of $37,016
and net income of $2,797. For the month ended October 31, 1994, revenue was
$26,323 and net income was $(1,885) (dollars are in thousands). These results
are unaudited.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: Page
----
11 Statement regarding computation of per share earnings (loss). 7
15 Letter re: unaudited interim financial information. 8
19 Report furnished to security holders. 9
27 Financial Data Schedule 16
(b) Reports on Form 8-K during the quarter ended September 30, or subsequent to
that date but prior to the filing date of this Form 10-Q:
FORM 8-K REPORT DATED JULY 10, 1995, was filed under ITEM 5 reporting the
acquisition of Pegasus Medical, LTD, a privately held Israeli software company
that markets a computer-based patient record known as the Smart Medical Record.
FORM 8-K REPORT DATED JULY 18, 1995, was filed under ITEM 5 reporting that the
Company signed a definitive agreement to acquire CliniCom Incorporated
(CliniCom) in exhange for 0.4 of a share of HBOC Common Stock for each of the
approximately 8,660,000 shares outstanding of CliniCom stock.
FORM 8-K(A) REPORT DATED JULY 31, 1995, was filed under ITEMS 2 AND 7 reporting
that the Company acquired First Data Health Systems Corporation, a wholly owned
subsidiary of First Data Corporation, in exchange for 4 million shares of Common
Stock of HBOC valued at approximately $200 million, $500,000 in cash and a
promissory note for $100,000.
Page 4
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FORM 8-K(A)2 REPORT DATED AUGUST 8, 1995, was filed under ITEM 7 reporting the
results of operations for the First Data Health Systems Corporation Health
Services Business for the period from January 1, 1995, through June 17, 1995.
FORM 8-K REPORT DATED AUGUST 16, 1995, was filed under ITEMS 5 AND 7 reporting
the Pro Forma financial information related to the proposed acquisition of
CliniCom Incorporated by HBO & Company and CliniCom Incorporated financial
statements.
FORM 8-K REPORT DATED OCTOBER 4, 1995, was filed under ITEMS 2 AND 7 reporting
that the acquisition of CliniCom Incorporated (CliniCom) by HBO & Company of
Georgia, a wholly owned subsidiary of HBO & Company (HBOC) was complete.
CliniCom stockholders received 0.4 of a share of HBOC Common Stock for each
CliniCom share.
Page 5
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HBO & COMPANY
(Registrant)
Date:November 2, 1995 By: /s/ Jay P. Gilbertson
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Jay P. Gilbertson
Vice President-Finance,
Chief Financial Officer,
Treasurer and
Assistant Secretary
Page 6
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Exhibit 11
HBO & COMPANY AND SUBSIDIARIES
Computation of Earnings (Loss) Per Share of Common Stock
For the Three-Month and Nine-Month Periods Ended September 30, 1995 and 1994
(000 Omitted Except for Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 39,698 34,996 37,099 34,750
ADD - Shares of common stock assumed
issued upon exercise of stock
options using the "treasury stock"
method as it applies to the compu-
tation of primary earnings per
share 1,805 1,761 - 1,721
------- ------- ------- -------
NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 41,503 36,757 37,099 36,471
ADD - Additional shares of common stock assumed
issued upon exercise of stock options
using the "treasury stock" method as
it applies to the computation of
fully diluted earnings per share 93 77 - 153
------- ------- ------- -------
NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING ASSUMING FULL DILUTION 41,596 36,834 37,099 36,624
------- ------- ------- -------
------- ------- ------- -------
NET EARNINGS FOR PRIMARY AND FULLY
DILUTED EARNINGS (LOSS) PER SHARE: $9,273 $7,526 ($42,737) $20,828
------- ------- ------- -------
------- ------- ------- -------
EARNINGS (LOSS) PER SHARE:
PRIMARY $0.22 $0.20 ($1.15) $0.57
------- ------- ------- -------
------- ------- ------- -------
FULLY DILUTED $0.22 $0.20 ($1.15) $0.57
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Note: No common stock was assumed issued upon exercise of stock options
for the computation of loss per share.
Note: All prior period amounts have been restated to reflect the
acquisition of CliniCom Incorporated.
PAGE 7
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EXHIBIT 15
ARTHUR ANDERSEN LLP
To HBO & Company:
We are aware that HBO & Company has incorporated by reference in its previously
filed registration statements on Form S-8 its Form 10-Q for the quarter ended
September 30, 1995, which includes our report dated October 19, 1995 covering
the unaudited interim consolidated financial information contained therein.
Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), that report
is not considered a part of the registration statement prepared or certified by
our firm or a report prepared or certified by our firm within the meaning of
Sections 7 and 11 of the Act.
Arthur Andersen LLP
Atlanta, Georgia
October 19, 1995
Page 8
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EXHIBIT 19
THIRD QUARTER REPORT
TO OUR STOCKHOLDERS
[Photograph of Charles W. McCall]
AS WE HEAD INTO THE HOME STRETCH FOR 1995, HBO & COMPANY IS WELL POSITIONED TO
DELIVER ITS BEST PERFORMANCE EVER. WITH TWO MORE ACQUISITIONS COMPLETED IN THE
THIRD QUARTER, SOLID FINANCIAL RESULTS AND CONTINUED STRONG SALES ACTIVITY, HBOC
BELIEVES IT HAS THE MOMENTUM NEEDED TO REACH OR EXCEED ITS GOALS FOR THE YEAR.
As healthcare continues to move toward managed care and capitation, clinical
information will play a central role in reducing costs and improving the quality
of care. That's why we believe the third quarter additions of CliniCom
Incorporated and Pegasus Medical Ltd. will be of particular benefit to HBOC as
we continue our efforts to deliver solutions that meet the needs of caregivers
across multiple settings of care. CliniCom brings extensive experience in the
acute-care arena with innovative point-of-care solutions that capture
information at the bedside, while Pegasus, led by physicians, complements those
capabilities with its Smart Medical Record (SMR-TM-), a pen-based system
designed for use in the physician office and across the continuum of care.
These two strategic acquisitions are just part of what has been a very positive
quarter for HBOC. On the financial side, HBOC once again announced record
earnings per share and revenue growth. Excluding a nonrecurring charge related
to the acquisition of CliniCom, earnings per share stood at $.38, a 90 percent
increase over the same period last year. Including the charge, quarterly per
share earnings came to $.22. Revenue reached a record $138 million, up 51
percent over third quarter 1994. Those strong results hold true from a broader
perspective as well. Comparing the nine months ended September 30, 1995, with
the same period in 1994, revenue increased by 39 percent to $347 million, while
earnings per share increased 75 percent to $1.00, using fully diluted shares and
excluding the nonrecurring charges.
While acquisitions have bolstered our 1995 growth, software license fees and
service revenue from STAR, Pathways 2000-Registered Trademark- and TRENDSTAR-
Registered Trademark- systems continue to drive HBOC's strong financial
performance. Sales highlights this quarter included an agreement with Science
Applications International Corporation (SAIC) to install TRENDSTAR decision
support in 120 United States Department of Defense Hospitals and the decision by
Quorum Health Group, Inc., to purchase Pathways Managed Care and Pathways
Contract Management for its 13 subsidiary facilities throughout the country. In
the outsourcing area, Maricopa County Health Care System in Phoenix, Ariz.,
signed a five-year, approximately $70 million contract with HBOC's Outsourcing
Services Group.
In addition, HBOC has also begun to make progress in the transition of First
Data Corporation's former "First Family" customers to Pathways 2000. At the end
of the quarter, Ball Memorial Hospital of Muncie, Ind., signed a replacement
contract that calls for the installation of STAR, Pathways 2000 and TRENDSTAR
products beginning in the fourth quarter 1995. This sale is larger than the
original contract signed with First Data and solidifies HBOC's relationship with
a valued customer.
Given the solid foundation laid through our growth strategy in terms of critical
mass and strategic capabilities, I believe we have what it takes to deliver on
our commitments and continue striving to be the No. 1 vendor in the industry --
not only in revenue but in the quality of our products and services as well.
Sincerely,
/s/ Charles W. McCall
Charles W. McCall
President & Chief Executive Officer
October 23, 1995
Page 9
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HBO&Company and Subsidiaries
Financial Review
RESULTS OF OPERATIONS
QUARTER AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995, COMPARED TO QUARTER AND
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1994:
HBO & Company posted record quarterly revenue and earnings and completed the
acquisitions of both Pegasus Medical Ltd. and CliniCom Incorporated during the
third quarter. The CliniCom transaction was accounted for as a pooling
of interests; therefore, all prior period amounts have been restated and the
following discussion is based on restated information.
The Company's revenue increased 51% for the quarter and 39% for the nine-month
period. Operating expense increased only 41% and 31% over the same periods,
excluding nonrecurring charges. The third quarter nonrecurring charge of $11
million was primarily for severance and acquisition costs related to the
CliniCom acquisition. The second quarter nonrecurring charge of $126 million
was primarily related to the purchase of First Data Health Systems Corporation
(now known as the Charlotte Product Group or CPG).
As a result of the growth in revenue exceeding the growth in operating expense,
operating income, excluding the nonrecurring charges, increased 108% and 92% for
the quarter and nine-month period compared to the same periods in 1994.
Excluding the nonrecurring charges, earnings per share for the third quarter
increased 90% to $.38, compared to $.20 for the same period last year, and
earnings per share for the nine-month period increased 86% (75% fully diluted)
to $1.06 ($1.00 fully diluted), compared to $.57 for the same period last year.
Including the nonrecurring charges, the Company's earnings (loss) per share for
the quarter and nine-month period ended September 30, 1995, were $.22 and
$(1.15). The reported loss per share for the nine-month period was not adjusted
for the effect of stock options outstanding, since the effect was anti-dilutive.
Fully diluted earnings per share information, excluding nonrecurring charges, is
presented above to aid in the analysis of results.
The Company's strong revenue growth was due in part to the healthcare industry's
interest in enterprisewide solutions, resulting in the success of the Company's
Pathways 2000 product line. Additional service and maintenance revenue due to
acquisitions also contributed to the strong revenue growth.
Software license fee revenue increased 34% for the quarter and 29% for the nine-
month period. The increase was due to the continued success of the Pathways 2000
line of enterprisewide solutions, strong market demand for TRENDSTAR decision
support products and software sales from the newly acquired CPG. Strong
software license fee revenue is an indication that the breadth of HBOC's product
line continues to meet the unique software application needs of customers
throughout the healthcare marketplace, including evolving enterprisewide and
managed care organizations.
Hardware revenue increased 65% for the quarter and 25% for the nine-month period
primarily due to strong revenue growth for Pathways Care Manager and hardware
revenue from CPG. A key component to hardware revenue growth for Pathways
Care Manager, the Company's primary point-of-care solution, is a hand-held,
wireless, pen-based unit that can significantly improve the productivity of
clinicians by reducing paperwork and enhancing the quality of care.
Support and maintenance revenue increased 68% for the quarter and 80% for the
nine-month period, compared to the same periods last year and accounted for 29%
of the Company's revenue for the third quarter of 1995. This revenue growth was
related primarily to the increase in the number of customers using HBOC systems
due both to acquisitions and internal growth.
Implementation services revenue increased 12% for the quarter and 24% for the
nine-month period. In addition to revenue added by new business units,
implementation of Pathways 2000 products, accomplished using the Company's new
Service Tracks methodology, increased as more customers worked with HBOC to
bring their new enterprisewide solutions live.
Recurring revenue increased to 45% of total revenue for the third quarter of
1995 and 41% for the nine-month period, compared to 39% and 35% for the same
periods in 1994. This shift, which should enhance the stability and
predictability of HBOC's earnings and cash flow, was due in part to the host
based systems managed by CPG, which represent a new set of products and services
for the Company. In addition, HBOC completed its first month of operations
under a new five-year, approximately $70 million outsourcing contract with
Maricopa County Health Care System, which serves the Phoenix, Ariz. metropolitan
area.
Cost of operations expense dropped to 47% of revenue compared to 53% in 1994 for
both the quarter and nine-month period. This improvement was due primarily to
increased productivity of implementation personnel and the shift in the
Page 10
<PAGE>
revenue mix toward higher margin service and maintenance offerings. For the
quarter, cost of operations expense increased 35%, and for the nine-month
period, 25%, compared to the same periods in 1994. Hardware cost was higher due
to higher hardware revenue. Salary and related expense was higher primarily
related to the addition of support and implementation personnel due to
acquisitions. CPG's data center charges related to host based processing
activities contributed to higher expense, but margins for this business
contributed to improved overall margins. Hardware and software maintenance
expense has increased due to growth in the number of customers covered by
maintenance contracts.
Marketing expense was 14% of revenue for the quarter and nine-month periods
compared to 13% and 14% for the same periods in 1994. Salary, commission and
travel expense has increased as the sales force has grown to support increased
demand and the resulting higher sales volume.
Research and development (R&D) expense dropped to 8% of revenue for the quarter
compared to 10% for the same period in 1994, but remained stable at 9% of
revenue for both nine-month periods. The drop for the quarter was primarily due
to a higher R&D capitalization rate in 1995 -- 25% vs. 24%. For both the nine-
month periods ended September 30, 1995 and 1994, the capitalization rate was
25%. R&D expense increased 33% for the quarter and 30% for the nine-month
period, due primarily to acquisition related personnel costs that were partially
offset by higher capitalization and a reduced reliance on consultants. HBOC is
aggressively developing enhancements to existing products and bringing new
products to the point of general availability.
General and administrative (G&A) expense was 11% of revenue for the quarter and
nine-month period compared to 11% for the quarter and 10% for nine-month period
last year. G&A expense increased primarily due to higher expense for incentive
programs such as the HBOC companywide gainsharing program, increased
depreciation expense resulting from a larger fixed asset base and higher
intangible asset amortization related to acquisitions.
The $11 million nonrecurring charge related to the CliniCom acquisition reduced
operating income to $16 million, or 12% of revenue for the quarter. For the
nine-month period, this nonrecurring charge plus the $126 million nonrecurring
purchased R&D charge related to the CPG acquisition resulted in an operating
loss of $70 million. Excluding the nonrecurring charges, operating income as a
percent of revenue was 19% for both the quarter and nine-month periods, compared
to 14% for the comparable periods in 1994.
The tax rate remained constant at 40% for all periods presented.
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1995, COMPARED TO DECEMBER 31, 1994:
HBOC generated $33.5 million of cash flow from operations for the nine-month
period ended September 30, 1995. The Company used $28.9 million in investing
activities, including $12.6 million for acquisitions, $9.9 million for software
development capitalization and $6.7 million for capital expenditures. In
addition, the Company used $2.7 million to reduce indebtedness and pay
dividends. As a result, the Company's cash balance increased by $1.9 million
during the nine-month period to $16.8 million.
The Company's current ratio remained constant at 1.1:1 at both September 30,
1995, and December 31, 1994. Current assets increased $45.3 million, or 31%,
primarily due to acquisitions. The bulk of this growth came from increased
receivables acquired in the purchase of CPG. Receivables management is a key
factor determining HBOC's success, and although the Company already has better
receivables performance than some of its competitors, management continues to
focus on this area. Current liabilities increased $43.7 million or 32%
primarily due to accrued liabilities related to the CPG acquisition.
The Company has access to several financing sources, including $5 million
available on two lines of credit totalling $10 million and $25 million available
under a revolving credit agreement. As of September 30, 1995, HBOC had $5
million outstanding on one line of credit.
HBOC is well positioned to generate strong positive cash flow from operations
through continued focus on receivables and expense controls. The Company has a
strong base of recurring revenue that provides a stable, growing source of cash
for operating, investing and financing needs. This, combined with significant
expense reductions resulting from the synergies created as HBOC merges the
operations of newly acquired companies, should result in continued strong cash
flow. The Company has flexibility in completing future acquisitions on a non-
cash basis if desired. Management believes positive future cash flow from
operations and access to financing sources will enable HBOC to continue to make
strategic investments to enhance quality, increase efficiency and promote
growth.
Page 11
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HBO&Company and Subsidiaries
Financial Statements
(000 Omitted Except for Per Share Data)
CONSOLIDATED STATEMENTS OF INCOME -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
REVENUE $137,907 $ 91,565 $347,006 $249,109
OPERATING EXPENSE:
Cost of Operations 65,448 48,317 164,018 131,730
Marketing 18,837 11,669 47,972 33,634
Research and Development 11,629 8,749 30,318 23,246
General and Administrative 15,177 9,961 38,260 25,848
Nonrecurring Charge 10,961 --- 136,481 ---
-------- -------- -------- --------
Total Operating Expense 122,052 78,696 417,049 214,458
-------- -------- -------- --------
OPERATING INCOME (LOSS) 15,855 12,869 (70,043) 34,651
OTHER INCOME (EXPENSE), NET (399) (326) (1,184) 62
-------- -------- -------- --------
Income (Loss) Before Provision
(Credit) for Income Taxes 15,456 12,543 (71,227) 34,713
Provision (Credit) for Income Taxes 6,183 5,017 (28,490) 13,885
-------- -------- -------- --------
NET INCOME (LOSS) $ 9,273 $ 7,526 $(42,737) $ 20,828
-------- -------- -------- --------
-------- -------- -------- --------
EARNINGS (LOSS) PER SHARE:
PRIMARY $ .22 $ .20 $ (1.15) $ .57
Fully Diluted $ .22 $ .20 $ (1.15) $ .57
-------- -------- -------- --------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary 41,503 36,757 37,099 36,471
Fully Diluted 41,596 36,834 37,099 36,624
-------- -------- -------- --------
CASH DIVIDENDS DECLARED PER SHARE $ .04 $ .04 $ .12 $ .12
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS -- Unaudited
<TABLE>
<CAPTION>
ASSETS
- ------
SEPTEMBER 30, DECEMBER 31,
1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $ 16,835 $ 14,951
Receivables, Net of $10,119 and $2,475 Allowance for Doubtful Accounts 152,698 115,845
Current Deferred Income Taxes 9,981 5,133
Inventories 2,896 3,526
Prepaids and Other Current Assets 10,257 7,917
-------- --------
Total Current Assets 192,667 147,372
-------- --------
INTANGIBLES, Net of $9,975 and $3,567 Accumulated Amortization 187,800 57,595
DEFERRED INCOME TAXES 35,377 ---
PROPERTY AND EQUIPMENT, Net of $69,159 and $63,758 Accumulated Depreciation 33,147 29,103
CAPITALIZED SOFTWARE, Net of $20,953 and $16,878 Accumulated Amortization 30,608 27,916
OTHER NONCURRENT ASSETS, NET 6,005 2,146
-------- --------
$485,604 $264,132
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES $179,903 $136,212
LONG-TERM DEBT AND OTHER LIABILITIES 16,352 1,397
DEFERRED INCOME TAXES --- 1,746
STOCKHOLDERS' EQUITY 289,349 124,777
-------- --------
$485,604 $264,132
-------- --------
-------- --------
</TABLE>
All prior period amounts have been restated to reflect the acquisition of
CliniCom Incorporated in a pooling transaction.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
Page 12
<PAGE>
HBO&Company and Subsidiaries
Financial Statements
(OOO Omitted)
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995 1994
- ----------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (42,737) $ 20,828
--------- ---------
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities:
Nonrecurring Charge 136,481 ---
Depreciation and Amortization 21,812 13,212
Credit for Noncurrent Deferred Income Taxes (1,644) (24)
Changes in Assets and Liabilities:
Receivables (13,510) (35,209)
Current Deferred Income Taxes (4,830) 807
Inventories (1,370) (2,271)
Prepaids and Other Current Assets (1,347) 1,210
Deferred Income Taxes (35,377) ---
Other Noncurrent Assets, Net (301) 729
Current Liabilities (23,676) 9,618
Other, Net (15) (539)
--------- ---------
Total Adjustments 76,223 (12,467)
--------- ---------
Net Cash Provided by Operating Activities 33,486 8,361
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Property and Equipment 255 32
Purchase of Facility --- (2,698)
Capital Expenditures (6,731) (5,108)
Capitalized Software (9,862) (7,415)
Purchase of Businesses, Net of Cash Acquired (12,594) (43,495)
--------- ---------
Net Cash Used in Investing Activities (28,932) (58,684)
--------- ---------
NET CASH PROVIDED (USED) BEFORE FINANCING ACTIVITIES 4,554 (50,323)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 60,500 53,000
Proceeds from Short-Term Debt 23,000 ---
Proceeds from Issuance of Common Stock 6,976 6,550
Payment of Dividends (4,000) (3,508)
Repayment of Short-Term Debt (28,000) ---
Repayment of Long-Term Debt (61,146) (27,882)
--------- ---------
Net Cash Provided by (Used in) Financing Activities (2,670) 28,160
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,884 (22,163)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,951 41,150
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,835 $ 18,987
--------- ---------
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,603 $ 1,816
Income Taxes $ 13,961 $ 5,223
</TABLE>
All prior period amounts have been restated to reflect the acquisition of
CliniCom Incorporated in a pooling transaction.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
Page 13
<PAGE>
HBO&COMPANY and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include all adjustments that, in the
opinion of management, are necessary for a fair presentation of the results
for the periods indicated. Quarterly results of operations are not
necessarily indicative of annual results. These statements should be read
in conjunction with the consolidated financial statements and the notes
thereto included in the Company's 1994 Annual Report to Stockholders.
2. Earnings per share is based upon the weighted average number of shares and
the dilutive effect of stock options outstanding. The loss per share is
based upon the weighted average number of shares outstanding, since the
effect of stock options was anti-dilutive.
3. At September 30, 1995, HBOC had a long-term revolving credit agreement for
$25 million with interest payable at the Company's option of prime or LIBOR
plus a margin determined by certain of the Company's financial ratios
(6 7/8% as of September 30, 1995). The commitment fee on the revolving
credit agreement is 3/8% payable quarterly on the unused portion of the
commitment. The agreement, which expires on June 30, 1997, contains
certain net worth, income, cash flow and financial ratio covenants. The
Company is in compliance with these covenants at September 30, 1995.
HBOC also has available a committed, unsecured line of credit for $5
million with no commitment fee, and an uncommitted, unsecured line of
credit for $5 million with interest payable at prime less .5% and no
commitment fee. As of September 30, 1995, HBOC had $5 million outstanding
on the uncommitted line of credit.
Additionally, the Company has repaid, in advance, all amounts outstanding
related to the $25 million five-year loan entered into in 1994.
During the second quarter of 1994, the Company entered into an agreement
with a financial institution whereby the Company can sell on an ongoing
basis, with partial recourse, an undivided interest in a pool of customer
receivables. During the first quarter of 1995, the Company increased the
amount available to be sold and the amount sold from $20 million to $30
million. Interest is payable at the Company's option of prime or LIBOR
plus a margin determined by certain of the Company's financial ratios
(6 7/8% as of September 30, 1995). The two-year agreement expires
June 25, 1996. The Company, as agent for the purchaser, retains collection
and administrative responsibilities for the receivables sold.
4. On February 22, 1995, the Company completed the acquisition of Advanced
Laboratory Systems, Inc. for approximately $7 million, net of cash
acquired. Advanced Laboratory Systems, Inc. was a Eugene, Oregon-based
developer of laboratory software for the healthcare and commercial
marketplace. The transaction was accounted for as a purchase.
5. On June 17, 1995, the Company acquired First Data Health Systems
Corporation, now known as the Charlotte Product Group (CPG), a wholly owned
subsidiary of First Data Corporation, in exchange for 4 million shares of
common stock of HBOC valued at approximately $200 million, $500,000 in cash
and a promissory note for $100,000. First Data Health Systems Corporation
provided information systems and services to hospitals, medical group
practices and medical facilities throughout the United States, United
Kingdom, Australia, Puerto Rico and other countries.
The transaction was accounted for as a purchase. The cost of the
acquisition has been allocated on the basis of an outside appraisal of
the tangible ($58 million) and intangible assets acquired and the
liabilities assumed ($83 million). HBOC recorded approximately $115
million of intangibles after adjusting for the nonrecurring purchased
research and development charge (note 8), which are being amortized on a
straight-line basis over periods ranging from seven to 15 years.
The results of operations of CPG are included in the accompanying financial
statements since the date of acquisition. The following unaudited pro
forma information was prepared assuming the
Page 14
<PAGE>
transaction was consummated on January 1 of each year presented and
excludes the effect of the 1995 nonrecurring charges:
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
Revenue $415,201 $364,758
Net Income $ 43,087 $ 26,244
Earnings Per Share $ 1.04 $ .65
This pro forma information is not necessarily indicative of the results of
operations that would have been attained had the acquisition been
consummated on January 1 of each year presented or that may be attained in
the future.
6. On July 10, 1995, the Company completed the acquisition of Pegasus Medical
Ltd. for approximately $8 million of cash and contingent payments, based on
certain deliverables, of up to $7 million. Pegasus was a privately held
Israeli software company that markets the Smart Medical Record, a computer-
based patient record. The transaction was accounted for as a purchase.
7. In September 1995 the Company completed the acquisition of CliniCom
Incorporated, in exchange for approximately 3.5 million shares of HBOC
common stock, in a transaction accounted for as a pooling of interests.
Accordingly, all financial information presented herein has been restated
and acquisition related expenses are being expensed as incurred. CliniCom
was a developer of point-of-care clinical information systems.
8. During the second quarter of 1995, the Company recorded a $126 million
nonrecurring charge primarily related to research and development purchased
as part of the CPG acquisition that had not reached the stage of
technological feasibility ($115 million). The charge also included
severance and other acquisition related costs ($8 million) and a mainframe
capitalized research and development net book value adjustment ($3
million). During the third quarter of 1995, the Company recorded a
nonrecurring charge of $11 million related to the acquisition of CliniCom.
The nonrecurring charge consisted primarily of severance pay and
acquisition costs.
9. In October 1986 a class action lawsuit was filed against the Company by a
plaintiff who purchased 500 shares of the Company's stock in 1985. In April
1991 the United States Federal District Court for the Northern District of
Georgia, Atlanta Division (the "District Court"), certified the case as a
class action on behalf of all purchasers of the Company's common stock on
the open market during the period from March 29, 1985, to April 20, 1986.
The plaintiff alleges that HBOC's filings with the Securities and Exchange
Commission did not fairly present the Company's financial position and
results of operations for the years ended December 31, 1984 and 1985, and
the intervening quarters with respect to, among other things, reporting the
effect of discounting service agreement contracts. In November 1992 the
lawsuit was amended to add a claim regarding the timeliness of recognition
and disclosure of various expense items by the Company during fiscal year
1985. The plaintiff also alleges that the market price of the Company's
common stock during the period was inflated due to the alleged
nondisclosures and misrepresentations in the Company's filings. In early
February 1993 the plaintiff evidenced an intention to allege substantial
damages. Management believes that the members of the class have suffered
no damages that entitle them to compensation and that, in any event, the
plaintiff's calculation of alleged damages is unrealistic and without
merit.
On April 1, 1994, the District Court issued an Order granting the Company's
motion for summary judgement and dismissed the suit. On April 20, 1994,
the District Court issued an Order setting forth the reasons for dismissing
the suit. The plaintiff appealed the District Court's determination. On
September 6, 1995, the Eleventh Circuit Court of Appeals affirmed the
District Court's decision. The Company does not know whether the plaintiff
will seek further review of the District Court's order. In the event that
the outcome is ultimately unfavorable, the amount of loss could be
substantial. Management believes, however, that the Company should be able
to continue to defend the suit successfully.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount
of potential liability with respect to these actions will not materially
affect the Company's financial position or results of operations.
Page 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED 9/30/95 AND
HBO & COMPANY CONDENSED BALANCE SHEETS AT 9/30/95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 16835
<SECURITIES> 0
<RECEIVABLES> 162817
<ALLOWANCES> 10119
<INVENTORY> 2896
<CURRENT-ASSETS> 192667
<PP&E> 102306
<DEPRECIATION> 69159
<TOTAL-ASSETS> 485604
<CURRENT-LIABILITIES> 179903
<BONDS> 0
<COMMON> 2830
0
0
<OTHER-SE> 286519
<TOTAL-LIABILITY-AND-EQUITY> 485604
<SALES> 138839
<TOTAL-REVENUES> 347006
<CGS> 52209
<TOTAL-COSTS> 164018
<OTHER-EXPENSES> 253031
<LOSS-PROVISION> 599
<INTEREST-EXPENSE> 2726
<INCOME-PRETAX> (71277)
<INCOME-TAX> (28490)
<INCOME-CONTINUING> (42737)
<DISCONTINUED> 0
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