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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-9900
HBO & COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 37-0986839
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
301 PERIMETER CENTER NORTH
ATLANTA, GEORGIA
30346
(Address of principal executive offices)
(Zip Code)
(770) 393-6000
(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.
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AT OCTOBER 27, 1998
- ---------------------------------- -----------------------------------------------------------
<S> <C>
Common Stock, $.05 par value...... 433,070,983
</TABLE>
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PART 1--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS--UNAUDITED
(000 OMITTED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents...................................................... $ 555,875 $ 432,477
Short-Term Investments......................................................... 6,208 4,981
Receivables, Net of Allowance For Doubtful Accounts of $22,406 and $20,763..... 510,998 421,876
Current Deferred Income Taxes.................................................. 20,573 36,311
Inventories.................................................................... 5,708 6,513
Prepaids and Other Current Assets.............................................. 31,631 21,515
---------------- ------------
Total Current Assets......................................................... 1,130,993 923,673
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INTANGIBLES
Net of Accumulated Amortization of $60,016 and $48,559......................... 157,904 174,233
CAPITALIZED SOFTWARE
Net of Accumulated Amortization of $68,002 and $50,618......................... 83,277 69,535
PROPERTY AND EQUIPMENT
Net of Accumulated Depreciation of $116,985 and $102,295....................... 119,427 101,409
DEFERRED INCOME TAXES............................................................ 28,135 36,600
OTHER NONCURRENT ASSETS, NET..................................................... 14,994 7,136
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TOTAL ASSETS..................................................................... $ 1,534,730 $1,312,586
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---------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred Revenue............................................................... $ 134,794 $ 125,399
Other Current Liabilities...................................................... 206,414 279,134
---------------- ------------
Total Current Liabilities.................................................... 341,208 404,533
---------------- ------------
LONG-TERM DEBT................................................................... 696 1,022
OTHER LONG-TERM LIABILITIES...................................................... 7,687 6,449
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Total Liabilities............................................................ 349,591 412,004
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, 1,000 Shares Authorized and No Shares Issued.................. -- --
Common Stock, $.05 Par Value, 1,000,000 Shares Authorized and 431,485 and
211,380 Shares Issued........................................................ 21,574 10,569
Additional Paid-in Capital..................................................... 645,740 574,863
Retained Earnings.............................................................. 517,825 315,150
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Total Stockholders' Equity................................................... 1,185,139 900,582
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................... $ 1,534,730 $1,312,586
---------------- ------------
---------------- ------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
2
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CONSOLIDATED STATEMENTS OF INCOME--UNAUDITED
(000 OMITTED EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE:
Systems.......................................... $ 207,584 $ 163,210 $ 565,641 $ 436,871
Services......................................... 192,047 143,966 553,529 425,091
--------- --------- --------- ---------
Total Revenue.................................. 399,631 307,176 1,119,170 861,962
OPERATING EXPENSE:
Cost of Operations............................... 161,319 130,448 464,167 368,099
Marketing........................................ 54,102 44,045 153,487 128,655
Research and Development......................... 25,351 22,103 71,318 65,604
General and Administrative....................... 25,697 26,706 75,024 79,801
Nonrecurring Charge (Credit)..................... -- -- (3,000) 35,420
--------- --------- --------- ---------
Total Operating Expense........................ 266,469 223,302 760,996 677,579
--------- --------- --------- ---------
OPERATING INCOME................................... 133,162 83,874 358,174 184,383
Other Income, Net.................................. 6,317 4,471 15,428 11,606
--------- --------- --------- ---------
Income Before Income Taxes......................... 139,479 88,345 373,602 195,989
Provision for Income Taxes......................... 55,792 35,137 149,441 78,293
--------- --------- --------- ---------
NET INCOME......................................... $ 83,687 $ 53,208 $ 224,161 $ 117,696
--------- --------- --------- ---------
--------- --------- --------- ---------
EARNINGS PER SHARE:
Basic............................................ $ .19 $ .13 $ .52 $ .28
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted.......................................... $ .19 $ .12 $ .51 $ .28
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 431,141 419,082 428,927 415,401
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted.......................................... 441,832 433,173 439,379 427,405
--------- --------- --------- ---------
--------- --------- --------- ---------
CASH DIVIDENDS DECLARED PER SHARE.................. $ .02 $ .01 $ .05 $ .02
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
All share and per share amounts have been restated to reflect the June 1998
two-for-one stock split effected in the form of a stock dividend.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
3
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CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED
(000 OMITTED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income for the Period............................................. $ 224,161 $ 117,696
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization....................................... 53,994 45,303
Nonrecurring Charge................................................. (3,000) 35,420
Provision for Noncurrent Deferred Income Taxes...................... 7,070 647
Changes in Assets and Liabilities, Net of Acquisitions:
Receivables, Net.................................................. (89,837) (22,809)
Current Deferred Income Taxes..................................... 15,738 3,390
Inventories....................................................... 805 586
Prepaids and Other Current Assets................................. (10,545) (11,581)
Noncurrent Deferred Income Tax.................................... 2,985 (1,893)
Other Noncurrent Assets........................................... 2,067 2,870
Deferred Revenue.................................................. 9,364 (10,883)
Other Current Liabilities......................................... (39,371) (3,161)
Other, Net.......................................................... 46 635
--------- ---------
Total Adjustments................................................. (50,684) 38,524
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Net Cash Provided by Operating Activities......................... 173,477 156,220
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Property and Equipment........................................ 1,759 3,509
Capital Expenditures.................................................. (43,760) (44,721)
Capitalized Software.................................................. (31,417) (24,959)
Proceeds from Sale of Investments..................................... -- 76,262
Purchase of Investments............................................... (11,216) (58,709)
Other................................................................. (542) (1,035)
--------- ---------
Net Cash Used in Investing Activities............................. (85,176) (49,653)
--------- ---------
NET CASH PROVIDED BEFORE FINANCING ACTIVITIES..................... 88,301 106,567
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock................................ 52,632 48,802
Repayment of Long-Term Debt........................................... (48) (471)
Repayment of Capital Leases........................................... (357) (607)
Payment of Dividends.................................................. (17,130) (5,612)
--------- ---------
Net Cash Provided by Financing Activities......................... 35,097 42,112
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS................................... 123,398 148,679
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ 432,477 204,952
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $ 555,875 $ 353,631
--------- ---------
--------- ---------
CASH PAID DURING THE PERIOD FOR:
Interest.............................................................. $ 90 $ 125
Income Taxes.......................................................... $ 73,349 $ 30,680
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
4
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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. All such adjustments are of a normal recurring nature.
Quarterly results of operations are not necessarily indicative of annual
results. Certain previously reported amounts have been reclassified to conform
to the current presentation. These statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in the HBO
& Company (the "Company" or "HBOC") 1997 Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
2. As of September 30, 1998, there was no outstanding balance on the Company's
$50 million long-term revolving credit agreement. Interest is payable at the
Company's option of prime or LIBOR plus 0.5% (5.875% as of September 30, 1998).
A commitment fee of 0.25% per annum is payable quarterly on the unused portion
of the commitment. The agreement, which expires June 30, 1999, contains certain
net worth, cash flow and financial ratio covenants. The Company is in compliance
with these covenants at September 30, 1998.
3. During the nine months ended September 30, 1998, the Company utilized $11.2
million and $18.5 million of severance and product-related acquisition reserves,
respectively. As of September 30, 1998, remaining severance and product-related
acquisition reserves were $2.5 million and $2.6 million, respectively. The
Company periodically reviews reserves established in connection with
acquisitions. In the second quarter of 1998, the Company reduced its
product-related acquisition reserves by $3.0 million, which is reflected as a
nonrecurring credit in the accompanying Statement of Income for the nine months
ended September 30, 1998.
4. In May 1998, the Company declared a two-for-one stock split effected in the
form of a stock dividend on all common stock outstanding, which was paid on June
9, 1998, to all stockholders of record on May 27, 1998. All per share and share
amounts (except stockholders' equity) have been restated.
5. On July 23, 1998, the Company announced it had signed a definitive agreement
to acquire IMNET Systems, Inc. (IMNET), a leading provider of electronic
information and document management solutions for the healthcare industry. The
acquisition, which is subject to regulatory and IMNET stockholder approval, will
be accounted for as a pooling of interests and is scheduled to close on October
30, 1998. Terms of the acquisition call for IMNET stockholders to receive .84 of
a share of HBOC common stock for each IMNET share held, subject to certain
adjustments.
6. On September 28, 1998, the Company announced it had signed a definitive
agreement to acquire Access Health, Inc. (Access Health), a leading provider of
clinically based care management programs and healthcare information services.
The acquisition, which is subject to regulatory and Access Health stockholder
approval, will be accounted for as a pooling of interests and is anticipated to
close during the fourth quarter of 1998. Stockholders of Access Health will
receive 1.45 shares of HBOC common stock for each share of Access stock held,
subject to certain adjustments.
7. On October 1, 1998, the Company completed the acquisition of US Servis, Inc.
(USS), a leading professional management company that provides outsourcing
services for physician delivery systems and hospital business offices. The
acquisition was accounted for as a pooling of interests; however, prior period
amounts have not been restated as the impact of this acquisition is not material
to HBOC. USS stockholders received .16265 of a share of HBOC common stock for
each share of USS common stock, or approximately 1.9 million HBOC shares.
8. On October 18, 1998, McKesson Corporation (McKesson) and HBO & Company (HBOC)
announced that the two companies have signed a definitive agreement for McKesson
to acquire HBOC. Terms of the merger call for each HBOC stockholder to receive
.37 of a share of McKesson common stock for each share of HBOC stock in a
tax-free exchange. The merger, which is subject to regulatory approval,
5
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McKesson and HBOC stockholder approval and other customary conditions, will be
accounted for as a pooling of interests and is anticipated to close in the first
quarter of 1999.
9. Effective January 1, 1998, HBOC adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which requires interim
disclosure of total comprehensive income. For the three and nine-month periods
ended September 30, 1998, other comprehensive income items, as defined by SFAS
No. 130, were not significant.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
IN THE FOLLOWING DISCUSSION, ALL EXPENSE, INCOME AND PER SHARE AMOUNTS
EXCLUDE THE FOLLOWING: I) A $3.0 MILLION NONRECURRING CREDIT IN THE SECOND
QUARTER OF 1998 RELATED TO THE 1997 ACQUISITION OF HPR, INC. AND; II) A $35.4
MILLION NONRECURRING CHARGE RELATED TO THE SECOND QUARTER 1997 ACQUISITIONS OF
AMISYS MANAGED CARE SYSTEMS, INC., AND ENTERPRISE SYSTEMS, INC.
RESULTS OF OPERATIONS
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 1998, COMPARED TO QUARTER AND
NINE MONTHS ENDED SEPTEMBER 30, 1997:
SUMMARY
For the quarter and nine months ended September 30, 1998, the Company
achieved diluted earnings per share of $.19 and $.51, respectively, a 58%
increase over diluted earnings per share of $.12 for the third quarter of 1997
and a 55% increase over diluted earnings per share of $.33 for the first nine
months of 1997. Including nonrecurring charges, diluted earnings per share for
the quarter and nine months ended September 30, 1998, were $.19 and $.51,
respectively, compared to $.12 and $.28 for the quarter and nine months ended
September 30, 1997.
Total HBOC revenue for the third quarter of 1998 increased 30% to $399.6
million from $307.2 million in the third quarter of 1997, and 30% to $1.1
billion from $862.0 million for the nine months ended September 30, 1998,
compared to the same periods in 1997.
Operating expense increased 19% for the quarter and nine months ended
September 30, 1998, compared to the same periods in 1997. The Company continues
to make progress in the area of employee productivity, with revenue per average
employee at September 30, 1998, of $228,000, up from $199,000 at September 30,
1997.
These changes in revenue and expense combined to boost net income for the
quarter and nine months ended September 30, 1998, by 57% to $83.7 million and
60% to $222.4 million, respectively, compared to the same periods in 1997.
Including nonrecurring charges, net income increased 57% to $83.7 million for
the third quarter of 1998 and 90% to $224.2 for the nine months ended September
30, 1998, compared to the same periods in 1997.
REVENUE
Software license fee revenue grew 30% to $151.0 million for the third
quarter of 1998 and 25% to $382.6 million for the nine months ended September
30, 1998, compared to the same periods in 1997. Contributing to these increases
is the continuing strong demand for Pathways 2000-Registered Trademark- and STAR
2000 enterprise software solutions, as well as continually increasing demand for
products from the Payor Solutions Group. The Company also recognized strong
quarter and year-to-date sales of its decision support and physician practice
products. The continued growth in sales from developed and acquired products
validates the integration strategy of the Company as customers look for a vendor
with an enterprisewide solution set to meet their ever-expanding needs.
Hardware revenue increased 20% to $56.6 million for the third quarter of
1998 and 40% to $183.1 million for the nine months ended September 30, 1998,
compared to the same periods in 1997. This increase was primarily due to strong
sales of enterprise, Connect Technology Group, and physician practice hardware
related to increased sales of software. Hardware margins decreased for the
quarter and remained constant for the nine months ended September 30, 1998,
compared to the same periods in 1997.
7
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Implementation and one-time services revenue for the quarter and nine months
ended September 30, 1998, increased 52% to $74.0 million, from $48.6 million,
and 41% to $198.2 million from $140.5 million, compared to the same periods in
1997. This increase was primarily due to the numerous implementations resulting
from strong sales of the Company's STAR 2000 and Pathways 2000 products as well
as payor market products. In addition, strong growth in implementation revenue
was realized from the late 1997 purchase acquisition of AT&T's UK Specialist
Healthcare Services Division (AT&T Healthcare). Installation and implementation
services are offered to purchasers of all HBOC software products, and the
Company continues to focus on increasing the efficiency of the implementation
process using such things as standard project plans and best practices service
methodologies.
Maintenance and support revenue increased 15% to $68.3 million for the third
quarter of 1998 and 19% to $208.3 million for the nine months ended September
30, 1998, compared to the same periods in 1997. This increase was primarily the
result of new maintenance contracts from increased software sales and the
expansion of the customer base.
Outsourcing revenue increased 48% to $24.1 million for the third quarter of
1998 and 45% to $68.5 million for the nine months ended September 30, 1998,
compared to the same periods in 1997. This increase was mainly the result of
international outsourcing revenue from HBOC UK's October 1997 purchase
acquisition of AT&T Healthcare. The acquisition of AT&T Healthcare has expanded
HBOC's role as a provider of software solutions and remote processing services
for the financial and payroll needs of healthcare providers in the United
Kingdom.
EXPENSE
Cost of operations as a percent of revenue decreased to 40% from 42% for the
third quarter of 1998 and decreased to 41% from 43% for the nine months ended
September 30, 1998, compared to the same periods in 1997. Gross margin increased
to 60% from 58% for the third quarter of 1998 and increased to 59% from 57% for
the nine months ended September 30, 1998, compared to the same periods in 1997.
Cost of operations expense increased in both periods compared to the same
periods in 1997, primarily due to increased personnel expense as a result of the
overall growth of the Company and increased hardware costs associated with the
growth in hardware sales. The nine month increase was partially offset by lower
third-party royalty expenses.
Marketing expense as a percent of revenue remained constant at 14% for the
third quarter of 1998 and decreased to 14% from 15% for the nine months ended
September 30, 1998, compared to the same periods in 1997. Actual marketing
expense increased primarily due to higher personnel, travel and commission
expense related to the growth in size and revenue of the Company.
Research and development (R&D) expense as a percent of revenue decreased to
6% from 7% for the third quarter of 1998 and decreased to 6% from 8% for the
nine months ended September 30, 1998, compared to the same periods in 1997. The
R&D capitalization rate increased to 31% from 28% for both the third quarter and
the nine months ended September 30, 1998, compared to the same periods in 1997.
The R&D capitalization rate increased as a result of increased projects focused
on integrating the products from acquisitions and continued new development of
enterprisewide solutions. Actual R&D expense increased due to increases in
personnel-related costs associated with growth in the Company.
General and administrative (G&A) expense as a percent of revenue decreased
to 6% from 9% in the third quarter of 1998 and decreased to 7% from 9% for the
nine months ended September 30, 1998, compared to the same periods in 1997.
Actual G&A expense decreased for both periods primarily due to cost savings
realized from the integration of operations of acquired companies.
Operating expense grew at a slower rate than revenue for both the quarter
and nine months ended September 30, 1998, compared to the same periods in 1997,
due to strong system and service revenue, successful cost-control programs and
productivity enhancements. Total operating income increased 59%
8
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for the quarter and 62% for the nine months ended September 30, 1998, compared
to the same periods in 1997. In addition, operating income as a percent of
revenue increased to 33% for the third quarter of 1998 from 27% for the third
quarter of 1997, and to 32% for the nine months ended September 30, 1998,
compared to 26% for the same period in 1997.
Total operating income, including nonrecurring charges, increased 59% for
the quarter and 94% for the nine months ended September 30, 1998, compared to
the same periods in 1997. Including nonrecurring charges, operating income as a
percent of revenue increased to 33% for the third quarter of 1998 from 27% for
the third quarter of 1997, and to 32% for the nine months ended September 30,
1998, compared to 21% for the same period in 1997.
The tax rate remained constant at 40% for the quarter and nine months ended
September 30, 1998, and 1997.
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 1998, COMPARED TO DECEMBER 31, 1997:
The Company continues to improve the strength and quality of its balance
sheet. At September 30, 1998, with $562.1 million in cash and short-term
investments, no bank debt and an improving current ratio, the Company remains
well-positioned for continued growth.
During the first nine months of 1998, the Company generated $173.5 million
in cash flow from operations. The Company used cash of $85.2 million in
investing activities, primarily consisting of $31.4 million used for software
development capitalization and $43.8 million used for capital expenditures
including the construction of the Company's new headquarters building. An
additional $35.1 million was provided from financing activities, primarily
related to proceeds from the issuance of common stock pursuant to employee
benefit plans, that were partially offset by the payment of dividends. As a
result, the Company's cash balance increased to $555.9 million at September 30,
1998, from $432.5 million at December 31, 1997.
The Company's current ratio increased to 3.3:1 at September 30, 1998, from
2.3:1 at December 31, 1997. Current assets increased $207.3 million, primarily
reflecting a large increase in cash and receivables. Receivables as a percent of
current assets decreased slightly at September 30, 1998, from December 31, 1997.
The Company's management places a high priority on the area of receivables, and
the Company continues to monitor receivables performance closely. Current
liabilities decreased $63.3 million, mainly due to the pay-down of accruals
partially offset by an increase in income tax payable.
The Company has access to several financing sources, including a $5 million
line of credit and a $50 million revolving credit agreement. As of September 30,
1998, there were no outstanding balances on either. Management believes that the
Company's existing cash and short-term investment balances, anticipated future
cash flow from operations and amounts available under existing credit
arrangements are sufficient to meet ongoing operational and capital expenditure
requirements, as well as to fund costs associated with future equity
acquisitions and small acquisitions for cash.
YEAR 2000
Software applications that use only two digits to identify a year in the
date field may fail or create errors in the year 2000 (the "Year 2000 issue").
The Company began evaluating the Year 2000 issue in 1994 and has established a
Year 2000 task force, the primary functions of which are to: (i) develop and
implement HBOC's definition of Year 2000 compliance, (ii) monitor product and
internal systems compliance, (iii) review customer preparations to implement
Year 2000 releases, and (iv) provide centralization, accuracy and consistency of
HBOC communications regarding Year 2000 to customers, stockholders, employees
and the industry. HBOC's assessment of Year 2000 readiness for both internal and
product
9
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arenas has been completed, and the task force is currently reviewing and
monitoring these implementation efforts.
HBOC's assessment indicates that products available for licensing and
acquisition (where applicable) are, as of September 30, 1998, without material
deviation, Year 2000 compliant. The readiness effort has been conducted in the
ordinary course of business regarding the development of such software and the
expenditures incurred have not been material. HBOC also delivers Year 2000
compliant versions of software products to customers under its software
maintenance and support agreements, according to the terms of those agreements
including costs thereof. Finally, since there is no uniform definition of
"compliance," the Company may experience an increase in warranty claims. Such
warranty claims are subject to contractual liability limitations and are not
expected to create a material impact, if successful.
In addition, final phases are being implemented regarding the readiness of
the Company's internal systems. The Company plans to make all critical internal
systems Year 2000 compliant without material deviation on or before February 28,
1999, and anticipates that it will not incur material costs to do so. The
Company is making ongoing inquiries with respect to the Year 2000 readiness of
its third party vendors. However, while the Company's current assessment does
not suggest it, due to uncertainties associated with third party vendors being
Year 2000 compliant, the Company is unable to predict whether a material adverse
effect on business, results of operations, or financial condition may result.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, which are qualified
by the risks and uncertainties described from time to time in HBOC's reports
filed with the Securities and Exchange Commission, including the Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
10
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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, 1998 and
the related statements of income for the three-month and nine-month periods
ended September 30, 1998 and 1997, and the statements of cash flows for the
nine-month periods ended September 30, 1998 and 1997. 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.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 23, 1998
11
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<S> <C>
11 Statement regarding computation of per share earnings..................
15 Letter re: unaudited interim financial information.....................
27 Financial Data Schedule................................................
</TABLE>
(b) Reports on Form 8-K filed during the quarter ended September 30, 1998, or
subsequent to that date but prior to the filing date of this Form 10-Q:
FORM 8-K DATED OCTOBER 5, 1998:
Reporting under Item 5 that on September 28, 1998, HBO & Company (HBOC)
announced it had signed a definitive agreement to acquire Access Health, Inc.
(Access Health), a leading provider of clinically based care management programs
and healthcare information services. The acquisition, which is subject to
regulatory and Access Health stockholder approval, will be accounted for as a
pooling of interests and is anticipated to close during the fourth quarter of
1998. Stockholders of Access Health will receive 1.45 shares of HBOC common
stock for each share of Access stock held, subject to certain adjustments.
FORM 8-K DATED OCTOBER 19, 1998:
On October 18, 1998, McKesson Corporation (McKesson) and HBO & Company
(HBOC) announced that the two companies have signed a definitive agreement for
McKesson to acquire HBOC. Terms of the merger call for each HBOC stockholder to
receive .37 of a share of McKesson common stock for each share of HBOC stock in
a tax-free exchange. The merger, which is subject to regulatory approval,
McKesson and HBOC stockholder approval and other customary conditions, will be
accounted for as a pooling of interests and is anticipated to close in the first
quarter of 1999.
12
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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.
<TABLE>
<S> <C> <C>
HBO & COMPANY
(Registrant)
By: /s/ JAY P. GILBERTSON
-----------------------------------------
Jay P. Gilbertson
PRESIDENT, CO-CHIEF OPERATING OFFICER,
CHIEF FINANCIAL OFFICER, TREASURER,
Date: October 28, 1998 PRINCIPAL ACCOUNTING OFFICER AND SECRETARY
</TABLE>
13
<PAGE>
EXHIBIT 11
HBO & COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(000 OMITTED EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted Average Number of Common Shares Outstanding... 431,141 419,082 428,927 415,401
ADD--Shares of common stock assumed issued upon
exercise of stock options using the "treasury stock"
method as it applies to the computation of diluted
earnings per share................................... 10,691 14,091 10,452 12,004
--------- --------- --------- ---------
Number of Common and Common Equivalent Shares
Outstanding.......................................... 441,832 433,173 439,379 427,405
--------- --------- --------- ---------
--------- --------- --------- ---------
Net Earnings for Basic and Diluted Earnings Per
Share................................................ $ 83,687 $ 53,208 $ 224,161 $ 117,696
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings Per Share:
Basic................................................ $ .19 $ .13 $ .52 $ .28
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted.............................................. $ .19 $ .12 $ .51 $ .28
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
All share and per share amounts have been restated to reflect the 1998
two-for-one stock split effected in the form of a stock dividend.
<PAGE>
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, 1998, which includes our report dated October 23, 1998, 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 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/98 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/98 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 555,875
<SECURITIES> 6,208
<RECEIVABLES> 533,404
<ALLOWANCES> 22,406
<INVENTORY> 5,708
<CURRENT-ASSETS> 1,130,993
<PP&E> 236,412
<DEPRECIATION> 116,985
<TOTAL-ASSETS> 1,534,730
<CURRENT-LIABILITIES> 341,208
<BONDS> 696
0
0
<COMMON> 21,574
<OTHER-SE> 1,163,565
<TOTAL-LIABILITY-AND-EQUITY> 1,534,730
<SALES> 565,641
<TOTAL-REVENUES> 1,119,170
<CGS> 191,250
<TOTAL-COSTS> 763,996
<OTHER-EXPENSES> 18,428
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 373,602
<INCOME-TAX> 149,441
<INCOME-CONTINUING> 224,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224,161
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.51
</TABLE>
