<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 October 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File Number: 0-24132
ABR INFORMATION SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3228107
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34125 U.S. Highway 19 North, Palm Harbor, Florida 34684-2141
------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 813-785-2819
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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
<TABLE>
<S> <C> <C> <C>
Class: Voting Common Stock, $.01 Par Value Outstanding at December 8, 1997: 27,388,430
Class: Nonvoting Common Stock, $.01 Par Value Outstanding at December 8, 1997: None
</TABLE>
1
<PAGE> 2
ABR INFORMATION SERVICES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
months ended October 31, 1996 and 1997 3
Consolidated Balance Sheets as of July 31, 1997 and
October 31, 1997 4
Consolidated Statements of Cash Flows for the three months
ended October 31, 1996 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
ABR INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
October 31
------------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenue $10,389,193 $15,234,938
Operating expenses:
Cost of services 5,975,245 8,824,316
Selling, general and administrative 2,146,940 2,675,148
----------- -----------
Operating income 2,267,008 3,735,474
Interest income 1,960,062 1,432,776
---------- -----------
Income before income taxes 4,227,070 5,168,250
Income taxes 1,615,707 1,667,290
----------- -----------
Net income $ 2,611,363 $ 3,500,960
=========== ===========
Net income per common share $ .09 $ .13
=========== ===========
Weighted average shares outstanding 28,019,074 27,862,158
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ABR INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
July 31, 1997 October 31, 1997
(Unaudited)
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 33,322,734 $ 34,144,270
Investments 108,499,196 110,471,406
Accounts receivable, net 8,295,884 6,951,764
Prepaid expenses and other 2,595,306 3,006,837
-------------- -------------
Total current assets 152,713,120 154,574,277
LONG-TERM INVESTMENTS 14,128,644 2,811,208
PROPERTY AND EQUIPMENT, net 27,790,354 43,297,442
SOFTWARE DEVELOPMENT COSTS, net 11,767,211 15,362,060
GOODWILL, INTANGIBLES AND OTHER ASSETS, net 15,617,519 15,395,768
-------------- -------------
TOTAL ASSETS $ 222,016,848 $ 231,440,755
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 613,138 $ 1,051,311
Accrued expenses 512,035 1,034,493
Customer account deposits 23,133,381 26,793,284
Unearned revenue 594,524 599,424
Income taxes payable 20,770 277,990
-------------- -------------
Total current liabilities 24,873,848 29,756,502
-------------- -------------
DEFERRED INCOME TAXES 3,047,243 4,031,417
-------------- -------------
SHAREHOLDERS' EQUITY
Preferred Stock - authorized 2,000,000 shares of
$.01 par value; no shares issued -- --
Common Stock - authorized, 100,250,000
shares of $.01 par value; issued and outstanding,
27,376,356 and 27,386,984 shares, respectively 273,763 273,870
Additional paid in capital 170,459,157 170,515,170
Retained earnings 23,362,837 26,863,796
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 194,095,757 197,652,836
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 222,016,848 $ 231,440,755
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ABR INFORMATION SERVICES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
October 31,
------------------------------------
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,611,363 $ 3,500,960
Adjustments to reconcile net income to
Net cash provided by operating activities:
Depreciation and other amortization 628,223 801,309
Amortization of software 107,009 306,470
Deferred income taxes 553,786 984,174
Increase in allowance for doubtful accounts 4,718 738
Tax benefit related to exercise of certain stock options 56,606 --
Change in operating assets and liabilities:
Accounts receivable (1,830,739) 1,343,382
Prepaid expenses and other (490,911) (411,531)
Other assets 3,488 221,751
Accounts payable 182,144 438,173
Accrued expenses 56,520 522,458
Unearned revenue (647,093) 4,900
Customer accounts deposits 1,171,353 3,659,903
Income taxes payable 821,318 257,220
------------- -------------
Net cash provided by operating activities 3,227,785 11,629,907
------------- -------------
Cash flows from investing activities:
Additions to investments (118,333,913) (138,054,774)
Maturity of investments 120,886,246 147,400,000
Additions to property and equipment (1,050,267) (16,308,397)
Additions to software development costs (720,820) (3,901,319)
Disposal of fixed assets 1,875 --
------------- -------------
Net cash provided by (used in) investing activities 783,121 (10,864,490)
------------- -------------
Cash flows from financing activities:
Exercise of common stock options 273,356 56,119
------------- -------------
Net cash provided by financing activities 273,356 56,119
------------- -------------
Net increase in cash and cash equivalents 4,284,262 821,536
Cash and cash equivalents at beginning of year 14,088,396 33,322,734
------------- -------------
Cash and cash equivalents at end of period $ 18,372,658 $ 34,144,270
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ABR INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1997
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
ABR Information Services, Inc. (the "Company") is a leading provider of
comprehensive benefits administration, compliance and information services to
employers seeking to outsource their benefits administration functions. The
Company believes it is the largest provider of COBRA (the "Consolidated Omnibus
Reconciliation Act") compliance services. COBRA is a federally mandated law
related to the portability of employee group health insurance. Additionally, the
Company provides compliance services related to the federally mandated Health
Insurance Portability and Accountability Act of 1996 ("HIPAA").
The Company also provides benefits administration services with respect to
benefits provided to retirees and inactive employees, including retiree
healthcare, disability, surviving dependent, family leave and severance
benefits. Additionally, the Company provides benefits administration services
with respect to benefits provided to active employees, including enrollment,
eligibility verification, qualified domestic relations order ("QDRO")
administration, 401(k) administration services, flexible spending account
("FSA") administration and pension services. All services are offered on either
an "a la carte" or a total outsourcing basis, allowing customers to outsource
certain benefits administration tasks which they find too costly or burdensome
to perform in-house, or to outsource the entire benefits administration
function.
The Company is headquartered in Palm Harbor, Florida and provides
information and support services to more than 25,000 employers, including
Fortune 500 companies, insurance companies and other employers. The Company's
operations are in a single business segment, the information services business.
Effective September 8, 1997, the Company consolidated a number of its
subsidiaries into one operating subsidiary called ABR Benefits Services, Inc.
The financial statements have been restated to reflect a two-for-one stock
split completed February 1997.
NOTE B - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all the information and
footnote disclosure required by generally accepted accounting principles for
complete financial statements. The financial statements as of October 31, 1997
and for the three months ended October 31, 1996 and October 31, 1997 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The results of operations for the three months ended October 31, 1997
are not necessarily indicative of results that may be expected for the year
ending July 31, 1998. These financial statements should be read in conjunction
with the audited financial statements of the Company as of July 31, 1996 and
1997, and for each of the three years in the period ended July 31, 1997,
included in the Company's 1997 Annual Report to Shareholders.
The FASB has issued Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which is effective for financial statements issued after
December 15, 1997 and will be adopted by the Company during its quarter ended
January 31, 1998. Early adoption of the new standard is not permitted. The new
standard eliminates primary and fully diluted earnings per share and requires
presentation of basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The effect of adopting this new
standard has not been determined.
NOTE C - NET INCOME PER COMMON SHARE
Net income per common share has been computed using the weighted average of
the outstanding Common Stock plus the dilutive Common Stock equivalents (stock
options), using the treasury or the modified treasury stock method. Primary and
fully dilutive calculations result in the same net income per common share.
6
<PAGE> 7
NOTE D - COMMITMENTS
On October 2, 1997, the Company acquired a 383,000 square foot office
campus in St. Petersburg, Florida for $13.5 million. No formal construction
commitments presently exist for this proposed expansion. The Company expects to
occupy portions of this facility starting in calendar 1998. The former owner of
the facility has signed a short-term agreement to lease back portions of the
campus, prior to the Company occupying the entire facility in approximately
2000. The Company's lease income on the campus is dependent upon the amount of
square footage being utilized by the former owner.
The Company estimates that as of October 31, 1997, approximately $12.2
million will be required in order for the Company to purchase additional
equipment, furniture and hardware, and to complete currently defined software
projects.
NOTE E - BUSINESS ACQUISITIONS
On December 15, 1995, the Company, in an acquisition accounted for as a
purchase, acquired all of the outstanding capital stock of Bullock Associates,
Inc. ("Bullock"), for $12.5 million, with an additional $2.0 million payable
upon the attainment of certain revenue requirements during 1996 and 1997. During
fiscal 1997, $863,053 of this additional amount was paid for the attainment of
these revenue requirements leaving a balance of $1,136,947 that could be paid in
fiscal 1998. Bullock, now part of ABR Benefits Services, Inc., is located in
Princeton, New Jersey and provides COBRA administration, retiree insurance
administration, insurance continuation billing and collection, pension benefits
administration services, QDRO administration and educational benefit
administration services as well as administration for other employee benefits
programs such as employee discount plans, adoption programs, program rebates and
emergency loans.
NOTE F - LITIGATION
The Company is involved in various litigation arising from the ordinary
course of its business. In the opinion of management, the ultimate outcome of
litigation is not expected to be material to the Company's financial position,
results of operations or liquidity.
7
<PAGE> 8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in the following discussion and analysis that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve a number of risks
and uncertainties and are based on information available to the Company on the
date hereof. The Company assumes no obligation to update any such
forward-looking statements.
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere in this Form
10-Q.
OVERVIEW
The Company's revenues currently are generated from three sources:
portability compliance services, administration services with respect to
benefits provided to retirees and inactive employees, and administration
services with respect to benefits provided to active employees.
The first source of the Company's revenue is providing portability
compliance services primarily through its qualifying event agreements with
employers and capitation agreements with insurance companies. Through qualifying
event agreements, the Company receives a fixed, per occurrence, fee from its
customers for each qualifying event. A qualifying event occurs when an employee
or his or her dependents experience a loss or change of coverage under a group
healthcare plan. The amount of the fixed fee varies depending on the type of
qualifying event (i.e., COBRA (the "Consolidated Omnibus Budget Reconciliation
Act") or HIPAA (the "Health Insurance Portability and Accountability Act of
1996")) and the method of the qualifying event notification mailing, which is
selected by the customer. Through capitation agreements, insurance companies
designate the Company as the administrator of compliance for their group
insurance clients that are subject to COBRA, HIPAA or state mandated
continuation coverage health portability laws. The Company is paid a monthly fee
for each employee covered by the group plan. The revenue generated under a
capitation agreement is not dependent on the triggering of a qualifying event,
but is determined based on the number of employees covered by the group plan at
the beginning of each month. The Company also receives an administrative fee
typically equal to 2% of the monthly health insurance premium that is paid by or
on behalf of each COBRA continuant. In addition, the Company generates revenues
from customers for additional compliance and healthcare administration services,
both on a one-time and continuous basis. During the first three months of fiscal
1997 and 1998, 63.0% and 62.8%, respectively, of the Company's revenues were
attributable to portability compliance services.
The second source of the Company's revenue is providing administration
services with respect to benefits provided to retirees and inactive employees,
including retiree healthcare, disability, surviving dependent, family leave and
severance benefits. During the first three months of fiscal 1997 and 1998, 17.1%
and 11.9%, respectively, of the Company's revenues were attributable to
administration services for retirees and inactive employees.
The third source of the Company's revenue is providing administration
services with respect to benefits provided to active employees, including open
enrollment, employee enrollment and eligibility, QDRO ("Qualified Domestic
Relations Order") administration, flexible spending account administration,
401(k) plan administration, and other pension services. During the first three
months of fiscal 1997 and 1998, 19.9% and 25.3%, respectively, of the Company's
revenues were attributable to benefits administration services for active
employees.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's statements of income.
<TABLE>
<CAPTION>
Three months ended
October 31,
-----------
1996 1997
------ ------
<S> <C> <C>
Revenue 100.0% 100.0%
Cost of services 57.5 57.9
Selling, general and administrative expenses 20.7 17.6
----- -----
Operating income 21.8 24.5
Interest income 18.9 9.4
Income taxes 15.6 10.9
----- -----
Net income 25.1% 23.0%
===== =====
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1997 COMPARED TO THREE MONTHS ENDED OCTOBER 31,
1996
Revenues increased $4.8 million, or 46.6%, to $15.2 million during the
three months ended October 31, 1997 from $10.4 million in the three months ended
October 31, 1996. Of the $4.8 million increase in revenues, $3.0 million was
attributable to increased revenues from portability compliance services, $38,000
was attributable to increased revenues from retiree/inactive employee benefits
administration and $1.8 million was due to increased revenues from active
employee benefits administration.
The increase in portability compliance revenues was primarily attributable
to the addition of new customers and new service product offerings. New products
pertain to clients having to comply with state-mandated continuation coverage
health portability laws and the federally-mandated HIPAA law.
The increase in active employee benefits administration revenues was
primarily attributable to the addition of new customers obtained by the Company
and new service product offerings in enrollment and eligibility administration.
Cost of services increased $2.8 million, or 47.7%, to $8.8 million during
the three months ended October 31, 1997 from $6.0 million during the three
months ended October 31, 1996. The increase in cost of services was attributable
to the addition of data processing, information systems and customer service
personnel to support revenue growth, the amortization of software placed in
service as completed and the transition and consolidation of certain operational
duties into the Florida operations center. As a percentage of revenues, cost of
services increased slightly to 57.9% from 57.5%.
Selling, general and administrative expenses increased $500,000, or 24.6%,
to $2.7 million during the three months ended October 31, 1997 from $2.2 million
in the three months ended October 31, 1996. The increase in selling, general and
administrative expenses was primarily attributable to the addition of marketing,
management and administrative personnel and equipment necessary to support the
Company's growth. As a percentage of revenues, selling, general and
administrative expenses decreased to 17.6% from 20.7% for the same periods. The
decrease as a percentage of revenues resulted primarily from operating
efficiencies from allocating expenses over a larger revenue base.
Interest income decreased $.6 million to $1.4 million during the three
months ended October 31, 1997 from $2.0 million in the three months ended
October 31, 1996. This decrease is a result of less cash available for investing
due to capital purchases and increased utilization of tax-free investment
instruments which yield a lower interest rate.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Income taxes increased 3.2% to $1.7 million during the three months ended
October 31, 1997 from $1.6 million during the three months ended October 31,
1996. The Company's effective tax rate decreased to 32.3% from 38.2% for the
same period in the previous year. This decrease reflects the Company's greater
utilization of tax-free investments as well as an approximately $75,000 one-time
benefit relating to revision of prior year state income tax returns.
As a result of the foregoing, the Company's net income increased $900,000,
or 34.1%, to $3.5 million during the three months ended October 31, 1997 from
$2.6 million in the three months ended October 31, 1996. Net income per share
was $.13 for the quarter ended October 31, 1997 compared to $.09 for the
corresponding prior year period, after adjustment for the February 1997 stock
split.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended October 31, 1997, net cash provided by operating
activities was $11.6 million compared to $3.2 million for the same period of
fiscal 1997. As of October 31, 1997 and July 31, 1997, the Company's working
capital and current ratio were $118.6 million and 5.0-to-1 and $127.8 million
and 6.1-to-1, respectively. The Company invests excess cash balances in
short-term investment grade securities, such as money market investments,
obligations of the U.S. government and its agencies and obligations of state and
local government agencies.
During the three months ended October 31, 1997, the Company's capital
expenditures were $20.2 million.
On October 2, 1997, the Company acquired a 383,000 square foot office
campus in St. Petersburg, Florida for $13.5 million. No formal construction
commitments presently exist for this proposed expansion. Management estimates
that as of October 31, 1997, approximately $12.2 million will be required in
order for the Company to purchase additional equipment, furniture and hardware,
and to complete its currently defined software projects.
The Company has a five-year, $15.0 million unsecured credit facility. The
Company has agreed to maintain all of its assets free and clear of all liens,
encumbrances and pledges, except purchase money security interests in specific
equipment in an aggregate amount of less than $500,000 as long as the credit
facility remains outstanding or any indebtedness thereunder remains unpaid.
Interest on the principal balance outstanding under this line of credit accrues
at a floating interest rate equal to the prime rate or, at the Company's option,
to the 30-day London Interbank Offering Rate (LIBOR), plus an applicable
interest rate margin between 1% and 2% based on certain financial ratios. The
credit facility contains certain financial covenants requiring the maintenance
of cash and cash equivalents and investments equal to or greater than customer
account deposits, a funded debt to earnings before interest, taxes, depreciation
and amortization (EBITDA) ratio of a maximum of 2.25-to-1, a debt service
coverage ratio of not less than 1.35-to-1, as well as the maintenance of certain
funded debt to tangible net worth ratio. As of October 31, 1997, the Company was
in compliance with all such covenants and there were no amounts outstanding
under the credit facility.
The Company believes that its cash, investments, cash flows from operations
and funds available from its credit facility will be adequate to meet the
Company's expected capital requirements for the foreseeable future.
10
<PAGE> 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.14 Agreement for sale and purchase of property, dated October
2, 1997, by and between Florida Power Corporation (Seller)
and ABR Properties, Inc. (Buyer) including commercial lease
as of the same date.*
27.1 Financial Data Schedule (for SEC use only)
- --------------
*Previously filed as part of the Company's Form 10-K for the fiscal
year ended July 31, 1997.
(b) Reports on Form 8-K
None
11
<PAGE> 12
SIGNATURES
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.
Date: December 15, 1997 ABR INFORMATION SERVICES, INC.
(Registrant)
/s/ James P. O'Drobinak
------------------------------
James P. O'Drobinak
Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ABR
INFORMATION SERVICES, INC. FIRST QUARTER AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 34,144,270
<SECURITIES> 110,471,406
<RECEIVABLES> 7,082,677
<ALLOWANCES> 130,913
<INVENTORY> 0
<CURRENT-ASSETS> 154,574,277
<PP&E> 48,091,353
<DEPRECIATION> 4,793,911
<TOTAL-ASSETS> 231,440,755
<CURRENT-LIABILITIES> 29,756,502
<BONDS> 0
0
0
<COMMON> 273,870
<OTHER-SE> 197,378,966
<TOTAL-LIABILITY-AND-EQUITY> 231,440,755
<SALES> 15,234,938
<TOTAL-REVENUES> 15,234,938
<CGS> 8,824,316
<TOTAL-COSTS> 2,675,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,432,776
<INCOME-PRETAX> 5,168,250
<INCOME-TAX> 1,667,290
<INCOME-CONTINUING> 3,500,960
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,500,960
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
