<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 April 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: 0-24132
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 organizations) Identification No.)
34125 U.S. Highway 19 North, Palm Harbor, Florida 34684-2141
- ------------------------------------------------- ----------
(Address of Principal Executive Office) (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 June 10, 1998: 28,694,070
Class: Nonvoting Common Stock, $.01 Par Value Outstanding at June 10, 1998: 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
and nine months ended April 30, 1997 and 1998 3
Consolidated Balance Sheets as of July 31, 1997 and
April 30, 1998 4
Consolidated Statements of Cash Flows for the nine months
ended April 30, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1.
ABR INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
--------------------------- ---------------------------
1997* 1998 1997* 1998*
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $15,078,827 $20,984,286 $40,954,409 $57,796,368
Operating expenses:
Cost of services 8,941,815 11,633,197 24,140,658 33,138,519
Selling, general and administrative 2,904,203 4,013,870 8,340,227 11,213,397
Acquisition costs -- 440,022 -- 440,022
----------- ----------- ----------- -----------
Operating income 3,232,809 4,897,197 8,473,524 13,004,430
---------- ----------- ----------- -----------
Other income:
Interest income 1,635,135 1,239,015 5,504,243 4,042,292
Lease revenue, net -- 864,639 -- 2,004,940
----------- ----------- ----------- -----------
Total other income 1,635,135 2,103,654 5,504,243 6,047,232
----------- ----------- ----------- -----------
Income before income taxes 4,867,944 7,000,851 13,977,767 19,051,662
Income taxes 1,711,309 2,427,974 5,158,254 6,614,300
----------- ----------- ----------- -----------
Net income $ 3,156,635 $ 4,572,877 $ 8,819,513 $12,437,362
=========== =========== =========== ===========
Net income per share:
Basic $ .11 $ .16 $ .31 $ .43
=========== =========== =========== ===========
Diluted $ .11 $ .16 $ .30 $ .43
=========== =========== =========== ===========
</TABLE>
*Restated for the effect of the pooling of Business Computer Services, Inc.
The accompanying notes are an integral part of these statements.
3
<PAGE> 4
ABR INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
July 31, 1997* April 30, 1998
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents, net $ 34,286,493 $ 25,937,415
Investments 110,198,759 115,753,334
Accounts receivable, net 8,283,527 12,755,393
Prepaid expenses and other 2,633,260 3,104,822
------------ ------------
Total current assets 155,402,039 157,550,964
LONG-TERM INVESTMENTS 14,128,644 4,801,778
PROPERTY AND EQUIPMENT, net 28,290,154 45,191,151
SOFTWARE DEVELOPMENT COSTS, net 11,767,211 19,767,804
GOODWILL, INTANGIBLES AND OTHER ASSETS, net 15,617,519 26,398,587
------------ ------------
TOTAL ASSETS $225,205,567 $253,710,284
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 760,161 $ 655,701
Accrued expenses 1,872,432 4,048,261
Customer account deposits 23,133,381 31,555,545
Unearned revenue 594,524 24,195
Income taxes payable 52,520 1,229,531
------------ ------------
Total current liabilities 26,413,018 37,513,233
------------ ------------
DEFERRED INCOME TAXES 3,312,969 7,307,309
------------ ------------
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,
28,574,364 and 28,691,792 shares, respectively 285,744 286,918
Additional paid in capital 171,359,690 172,331,316
Retained earnings 23,834,146 36,271,508
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 195,479,580 208,889,742
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $225,205,567 $253,710,284
============ ============
</TABLE>
* Restated for the effect of the pooling of Business Computer Services, Inc.
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
ABR INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 30,
------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,819,513 $ 12,437,362
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and other amortization 2,107,163 3,658,247
Amortization of software 417,845 1,276,182
Deferred income taxes 1,055,490 3,994,339
Provision for losses on accounts receivable 17,318 28,241
Tax benefit related to exercise of certain stock options 56,606 --
Change in operating assets and liabilities:
Accounts receivable (3,600,657) (4,500,107)
Prepaid expenses and other (881,774) (471,562)
Other assets (24,362) (60,880)
Accounts payable 1,313,408 (104,460)
Accrued expenses 1,118,238 2,175,829
Unearned revenue (49,822) (570,329)
Customer account deposits 2,937,142 8,422,164
Income taxes payable 62,389 1,177,011
------------- -------------
Net cash provided by operating activities 13,348,497 27,462,037
------------- -------------
Cash flows from investing activities:
Additions to investments (317,068,724) (496,565,700)
Maturity of investments 335,761,414 500,337,992
Additions to property and equipment (10,692,685) (19,768,415)
Additions to software development costs (4,177,154) (9,276,775)
Cash paid for acquisitions, net (860,315) (11,511,017)
------------- -------------
Net cash provided by (used in) investing activities 2,962,536 (36,783,915)
------------- -------------
Cash flows from financing activities:
Exercise of common stock options 652,217 972,800
------------- -------------
Net cash provided by financing activities 652,217 972,800
------------- -------------
Net increase (decrease) in cash and cash equivalents 16,963,250 (8,349,078)
Cash and cash equivalents at beginning of year 14,449,390 34,286,493
------------- -------------
Cash and cash equivalents at end of period $ 31,412,640 $ 25,937,415
============= =============
</TABLE>
* Restated for the effect of the pooling of Business Computer Services, Inc.
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
ABR INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 1998
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
ABR Information Services, Inc. (the "Company"), through its wholly-owned
subsidiaries, ABR Benefits Services, Inc., Charing Company, Inc., Matthews,
Malone & Associates, Ltd. and Business Computer Services, Inc., is a leading
provider of comprehensive benefits administration, payroll, and human resource
services to employers seeking to outsource these functions. The Company's
operating revenues currently are generated from three sources: employee health
and welfare administration services, qualified plan administration services,
and payroll and human resource administration 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. Additionally, the Company generates
non-operating revenue from the short-term lease of its St. Petersburg, Florida
operations center through its wholly-owned subsidiary, ABR Properties, Inc.
The Company provides outsourced benefits administration, payroll, and
human resource services to more than 30,000 employers, ranging in size from 20
to 200,000 employees, including approximately 100 of the Fortune 500 companies.
ABR provides portability (COBRA and HIPAA) services through the trade name
CobraServ(SM) and payroll and tax deposit services through the trade name
PayAmerica(SM). The Company is headquartered in Palm Harbor, Florida, and
employs approximately 1,400 people in marketing/operations centers in Florida,
New Jersey, Virginia, Maryland, California, Wisconsin and Arizona. The
Company's operations are in a single business segment, the information services
business.
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 April 30, 1998
and for the three and nine months ended April 30, 1998 and April 30, 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 and nine months ended April
30, 1998 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.
As discussed in Note E, the Company's historical financial statements have
been restated to reflect the pooling of Business Computer Services, Inc. in
April 1998.
The Company presents Cash and Cash Equivalents net of tax deposits held
for future payment on behalf of its payroll customers. The amount of such tax
deposits netted against Cash and Cash Equivalents was approximately $42.2
million and $21.3 million at April 30, 1998 and July 31, 1997, respectively.
During fiscal 1998, the Company adopted Statement of Financial Accounting
Standard No. 128 "Earnings Per Share" (FAS 128). This Standard became effective
for financial statements issued after December 15, 1997 and eliminates primary
and fully diluted income per share and replaces them with basic and diluted
income per share. Accordingly, all income per share amounts for the prior
periods presented have been restated to conform to the new standard (see Note
C).
6
<PAGE> 7
NOTE C - NET INCOME PER COMMON SHARE
The following table reconciles the numerators and denominators of the
basic and diluted income per share computations, as computed in accordance with
FAS 128:
<TABLE>
<CAPTION>
Three months ended Nine months ended
April 30, April 30,
--------------------------- ---------------------------
1997 1998 1997 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Basic
Net income (numerator):
Net income available to common shareholders $ 3,156,635 $ 4,572,877 $ 8,819,513 $ 12,437,362
=========== =========== =========== ============
Shares (denominator):
Weighted average shares 28,571,417 28,632,398 28,499,567 28,601,372
=========== =========== =========== ============
Basic per share earnings $ .11 $ .16 $ .31 $ .43
=========== =========== =========== ============
Diluted
Net income (numerator):
Net income available to common shareholders $ 3,156,635 $ 4,572,877 $ 8,819,513 $ 12,437,362
=========== =========== =========== ============
Shares (denominator):
Weighted average shares 28,571,417 28,632,398 28,499,567 28,601,372
Effect of dilutive stock options 435,212 473,908 600,282 485,952
----------- ----------- ----------- -----------
Adjusted weighted average shares 29,006,629 29,106,306 29,099,849 29,087,324
=========== =========== =========== ============
Diluted per share earnings $ .11 $ .16 $ .30 $ .43
=========== =========== =========== ============
Options not included in diluted income per share
because exercise price was greater than average
market price: First Quarter N/A N/A 0 815,834
Second Quarter 2,000 921,418 2,000 921,418
Third Quarter 512,771 62,000 423,771 2,000
Price Range $ 22.37 to $ 27.84 to $ 26.64 to $ 34.33
$ 34.33 $ 34.33 $ 34.33 $
</TABLE>
The options which expire on various dates through 2007 were still outstanding
at April 30, 1998.
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. The Company expects to
spend approximately $23 million to expand and renovate the facility over the
next three years. The Company expects to occupy portions of this facility
starting in calendar 1999. 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
revenue on the campus is dependent upon the amount of square footage being
utilized by the former owner and is recorded net of the direct expenses of
operating the facility.
The Company estimates that as of April 30, 1998, approximately $14.0
million will be required in order of the company to purchase additional
equipment, furniture and hardware, and to complete currently defined software
projects.
7
<PAGE> 8
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 and 1998, $863,053 and $1,136,947, respectively, of this
additional amount was paid for the attainment of these revenue requirements.
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.
On February 26, 1998, the Company, in an acquisition accounted for as a
purchase, acquired all of the outstanding capital stock of Charing Company,
Inc. ("Charing") for $7.5 million in cash and an additional amount to be paid
contingent upon future earnings. Charing is located in Wisconsin and provides
qualified plan administration, Section 125 administration, consulting services
and comprehensive employee benefits statement reporting. The results of
operations of Charing are included in the Company's results of operations as of
February 1, 1998. Goodwill of approximately $7.5 million resulting from the
acquisition is being amortized over a period of 25 years on a straight-line
method.
On February 27, 1998, the Company, in an acquisition accounted for as a
purchase, acquired all of the outstanding capital stock of Matthews, Malone &
Associates, Ltd. ("Matthews/Malone.") for $2.9 million in cash and an additional
amount to be paid contingent upon future earnings. Matthews/Malone is located
in Arizona and provides defined benefit and defined contribution plan
administration services as well as Section 125 administration and
non-qualified plan administration services. The results of operations of
Matthews/Malone are included in the Company's results of operations as of
February 1, 1998. Goodwill of approximately $2.5 million resulting from the
acquisition is being amortized over a period of 25 years on a straight-line
method.
The Company has not provided pro froma financial information with respect
to the Charing and Matthews/Malone acquisitions as they are not significant
acquisitions.
On April 30, 1998, the Company acquired all of the outstanding capital
stock of Business Computer Services, Inc./dba PayAmerica ("PayAmerica") in
exchange for 1,198,008 shares of the Company's voting common stock. In
connection with this transaction, approximately $440,022 of acquisitions costs
were accrued and charged to expense during the quarter ended April 30, 1998.
PayAmerica is located in MacLean, Virginia and has offices in Maryland and New
Jersey. PayAmerica provides payroll and tax deposit services, along with human
resource administration services.
The acquisition of PayAmerica was accounted for as a pooling of interests.
Accordingly, the Company's accompanying historical financial statements have
been restated to include the accounts and operations of PayAmerica for all
periods prior to the acquisition, including restating the Company's retained
earnings at July 31, 1996 to reflect the difference between the par value of
the Company Stock issued and the total shareholders' equity of PayAmerica at the
time.
Restated results of the combined entities for previously reported periods
are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended Six months ended
April 30, 1997 April 30, 1997 January 31, 1998
-------------------------------------------------------------------------------------------
Previously Previously Previously
Reported As Restated Reported As Restated Reported As Restated
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue $13,188,827 $15,078,827 $35,292,409 $40,954,409 $31,946,082 $36,812,082
=========== =========== =========== =========== =========== ===========
Net Income $ 3,184,585 $ 3,156,635 $ 8,732,413 $ 8,819,513 $ 7,651,935 $ 7,864,485
=========== =========== =========== =========== =========== ===========
Earnings per Share - Diluted $ .12 $ .11 $ .32 $ .30 $ .27 $ .27
=========== =========== =========== =========== =========== ===========
</TABLE>
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.
8
<PAGE> 9
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 1993 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 obligations 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 operating revenues currently are generated from three
sources: employee health and welfare administration services, qualified plan
administration services, and payroll and human resource administration
services. Additionally, the Company generates non-operating revenue from the
short-term lease of its St. Petersburg, Florida operations center through its
wholly-owned subsidiary, ABR Properties, Inc.
The first source of the Company's revenue is providing employee health and
welfare administration outsourcing services. In particular, the Company
provides portability (i.e., COBRA (the "Consolidated Omnibus Budget
Reconciliation Act"), HIPAA (the "Health Insurance Portability and
Accountability Act of 1996") or state-mandated continuation coverage, health
portability law 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 portability qualifying event 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 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 health and welfare
administration services revenues by providing administration services for
benefits provided to active employees, including open enrollment and
eligibility, and flexible spending account administration, along with providing
administration services for benefits provided to retired and inactive
employees, including retiree healthcare, disability, surviving dependent,
family leave and severance benefits. Most services are provided both on a
one-time and continuous basis. During the first nine months of fiscal 1997 and
1998, 83.6% and 81.1%, respectively, of the Company's revenues were
attributable to employee health and welfare administration services.
The second source of the Company's revenue is providing employee qualified
plan administration services, including 401(k) plan administration, profit
sharing administration, defined benefit plan administration, ESOP
administration and Qualified Domestic Relations Order ("QDRO") administration.
During the first nine months of fiscal 1997 and 1998, 1.8% and 5.8%,
respectively, of the Company's revenues were attributable to employee qualified
retirement plans administration.
The third source of the Company's revenue is providing payroll and human
resource administration services, including tax deposit services and integrated
human resource solutions. During the first nine months of fiscal 1997 and 1998,
14.6% and 13.1%, respectively, of the Company's revenues were attributable to
payroll and human resource administration services.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In 1996, the
Company initiated the process of modifying existing software programs to become
Year 2000 compliant. Management has determined that the Year 2000 issue will
not pose significant operational problems for its computer systems. As a
result, all costs associated with this conversion are being expensed as
incurred.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project no later than March 1999, which is
prior to any anticipated impact on its operating systems. The remaining cost of
the Year 2000 project is estimated at approximately $150,000 and is being funded
through operating cash flows and is not expected to have a material effect on
the results of operations.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 Issue. There can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have a material adverse effect on the Company's systems and in
turn, the Company's business, financial condition and results of operations.
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 Nine months ended
April 30, April 30,
-------------------------- --------------------------
1997 1998 1997 1998
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Services (59.3) (55.4) (58.9) (57.3)
Selling, general and administrative expenses (19.3) (19.2) (20.4) (19.4)
Acquisition costs -- (2.1) -- (.8)
----- ----- ----- -----
Operating income 21.4 23.3 20.7 22.5
Interest income 10.8 5.9 13.4 7.0
Lease revenue, net -- 4.1 -- 3.4
Income taxes (11.3) (11.5) (12.6) (11.4)
----- ----- ----- -----
Net income 20.9% 21.8% 21.5% 21.5%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
The Company's results of operations for the three months ended April 30,
1997 were restated to reflect the acquisition of Business Computer Services,
Inc. (d/b/a PayAmerica) on April 30, 1998, which was accounted for as a pooling
of interests.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
Revenues increased $5.9 million, or 39.1%, to $21.0 million during the
three months ended April 30, 1998 from $15.1 million during the three months
ended April 30, 1997. Of the $5.9 million increase in revenues, $3.1 million
was attributable to increased employee health and welfare administration
revenues, $2.3 million was attributable to increased employee qualified plan
administration revenues and $.5 million was due to increased revenues from
payroll and human resource administration services. For the quarter ended April
30, 1998, health and welfare administration revenue was $15.9 million,
qualified plan administration revenue was $2.6 million, and payroll and human
resource administration revenue was $2.5 million.
The increase in employee health and welfare administration revenue was
primarily attributable to the addition of new customers and new service product
offerings related to the federally-mandated HIPAA law. The increase in employee
qualified retirement plans administration revenue was primarily attributable to
the two new subsidiaries acquired by the Company effective February 1, 1998. The
increase in payroll and human resource administration revenue was primarily
attributable to the addition of new customers.
Cost of services increased $2.7 million, or 30.3%, to $11.6 million during
the three months ended April 30, 1998 from $8.9 million during the three months
ended April 30, 1997. 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, the transition and consolidation of certain operations duties into
the Florida operations center and the addition of two subsidiaries during the
quarter ended April 30, 1998. As a percentage of revenues, the 1998 cost of
services decreased to 55.4% from 59.3% in the previous year. The decrease as a
percent of revenues resulted primarily from allocating expenses over an
increasingly larger revenue base.
Selling, general and administrative expenses increased $1.1 million, or
37.9%, to $4.0 million during the three months ended April 30, 1998 from $2.9
million during the three months ended April 30, 1997. 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 and the acquisition of two subsidiaries during the
quarter ended April 30, 1998. As a percentage of revenues, selling, general and
administrative expenses decreased to 19.2% from 19.3% in the previous year.
Acquisition costs increased to $440,022 during the three months ended
April 30, 1998 from $0 for the three months ended April 30, 1997. The expenses
relate to acquisition costs associated with the acquisition of Business
Computer Services, Inc. (d/b/a PayAmerica), on April 30, 1998, which has
been accounted for as a pooling of interests.
Interest income decreased $.4 million to $1.2 million during the three
months ended April 30, 1998 from $1.6 million during the three months ended
April 30, 1997. This decrease was the result of less cash available for
investing due to capital purchases, cash payments for acquisitions of two new
subsidiaries, increased utilization of tax-free investment instruments which
yield a lower stated interest rate, and an overall decline in short-term
interest rates.
Lease revenue increased to $.9 million for the three months ended April
30, 1998 as compared to $0 for the corresponding period in 1997 due to the
purchase of an office campus (with an existing tenant) in St. Petersburg,
Florida. Lease revenue is presented net of direct costs associated with
operating the campus. This net revenue will decrease as the Company begins to
occupy the campus in phases beginning in calendar 1999 and will decrease to $0
by April 1999, at the latest. Final occupancy by the Company is expected in
2000.
Income taxes increased 41.2% to $2.4 million during the three months ended
April 30, 1998 from $1.7 million during the three months ended April 30, 1997.
The company's effective tax rate decreased slightly to 34.7% for the three
months ended April 30, 1998 from 35.2% for the corresponding period in the
previous year. This decrease reflected the Company's greater utilization of
tax-free investments.
As a result of the foregoing, the Company's net income increased $1.4
million, or 43.8%, to $4.6 million during the three months ended April 30, 1998
from $3.2 million during the three months ended April 30, 1997. Basic and
diluted net income per share was $.16 for the quarter ended April 30, 1998 as
compared to $.11 (basic and diluted) for the corresponding prior year period.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
The Company's results of operations for the nine months ended April 30,
1998 and 1997 were restated to reflect the acquisition of Business Computer
Services, Inc. (d/b/a PayAmerica) on April 30, 1998, which was accounted for as
a pooling of interests.
Revenues increased $16.8 million, or 41.0%, to $57.8 million during the
nine months ended April 30, 1998 from $41.0 million in the corresponding period
of 1997. Of the $16.8 million increase in revenues, $12.7 million was
attributable to increased employee health and welfare administration revenues,
$2.6 million was attributable to increased employee qualified plan
administration revenues and $1.5 million was due to increased revenues from
payroll and human resource administration services. For the nine months ended
April 30, 1998, health and welfare administration revenue was $46.9 million,
qualified plan administration revenue was $3.4 million and human resource
administration revenue was $7.5 million.
The increase in employee health and welfare administration revenue was
primarily attributable to the addition of new customers and new service product
offerings related to the federally-mandated HIPAA law. The increase in employee
qualified retirement plans administration revenue was primarily attributable
to the addition of two new subsidiaries acquired by the Company effective
revenue February 1, 1998. The increase in payroll and human resource
administration revenue was primarily attributable to the addition of new
customers.
Cost of services increased $9.0 million, or 37.3%, to $33.1 million during
the nine months ended April 30, 1998 from $24.1 million during the nine months
ended April 30, 1997. 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, the transition and consolidation of certain operational duties into
the Florida operations center and the addition of two subsidiaries during the
quarter ended April 30, 1998. As a percentage of revenues, cost of services
decreased to 57.3% from 58.9% for the corresponding period of 1997.
Selling, general and administrative expenses increased $2.9 million, or
34.9%, to $11.2 million during the nine months ended April 30, 1998 from $8.3
million during the nine months ended April 30, 1997. As a percentage of
revenues, selling, general and administrative expense decreased to 19.4% during
the nine months ended April 30, 1998 from 20.4% during the nine months ended
April 30, 1997. The decrease as a percent of revenues resulted primarily from
allocating expenses over an increasingly larger revenue base.
Acquisition costs increased to $440,022 during the nine months ended April
30, 1998 from $0 for the nine months ended April 30, 1997. The expenses relate
to acquisition costs associated with the acquisition of Business Computer
Services, Inc. (d/b/a PayAmerica), on April 30, 1998, which has been accounted
for as a pooling of interests.
Interest income decreased $1.5 million to $4.0 million during the nine
months ended April 30, 1998 from $5.5 million during the nine months ended April
30, 1997. This decrease was the result of less cash available for investing due
to capital purchases, cash payments for acquisitions of two new subsidiaries,
increased utilization of tax-free investment instruments which yield a lower
interest rate and an overall decline in short-term interest rates.
Lease revenue increased to $2.0 million during the nine months ended April
30, 1998 as compared to $0 for the corresponding period in 1997 due to the
purchase of an office campus (with an existing tenant) in St. Petersburg,
Florida. Lease revenue is presented net of direct costs associated with
operating the campus. This net revenue will decrease as the Company begins to
occupy the campus in phases beginning in calendar 1999 and will decrease to $0
by April 1999, at the latest. Final occupancy by the Company is expected in
2000.
Income taxes increased 26.9% to $6.6 million during the nine months ended
April 30, 1998 from $5.2 million during the nine months ended April 30, 1997.
The Company's effective tax rate decreased to 34.7% for the nine months ended
April 30, 1998 from 36.9% for the corresponding period in the previous year
primarily due to greater utilization of tax-free investments.
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
As a result of the foregoing, the Company's net income increased $3.6
million, or 40.9%, to $12.4 million during the nine months ended April 30, 1998
from $8.8 million during the nine months ended April 30, 1997. Basic and
diluted net income per share was $.43 for the nine months ended April 30, 1998
as compared to $.31 and $.30, basic and diluted, respectively, for the
corresponding prior year period after adjustment for the Company's 2-for-1
stock split in February 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended April 30, 1998, net cash provided by operating
activities was $27.5 million as compared to $13.3 million for the corresponding
period of fiscal 1997. As of April 30, 1998 and July 31, 1997, the Company's
working capital and current ratio were $120.0 million and 4.2:1 and $129.0
million and 5.9:1, 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 nine months ended April 30, 1998, the Company's capital
expenditures were $40.6 million.
On October 2, 1997, the Company acquired a 383,000 square foot office
campus in St. Petersburg, Florida for $13.5 million. The Company expects to
spend approximately $23 million to expand and renovate the facility over the
next three years. Management estimates that as of April 30, 1998, approximately
$14.0 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 believes that its cash, investments, cash flows from
operations and potential additional borrowing capacity will be adequate to meet
the Company's expected capital requirements for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 30, 1998, the Company acquired (the "Acquisition") all of the
issued and outstanding capital stock of Business Computer Services, Inc. (d/b/a
PayAmerica), a Virginia corporation ("BSCI"), in exchange for 1,198,008 shares
of the Company's voting common stock, $.01 par value per share ("ABR Stock").
The Acquisition was consummated in accordance with the terms of an Agreement
and Plan of reorganization, dated April 30, 1998, by and among the Company,
BCSI, Joseph M. Speroni, Paul J. Speroni, Robert S. Speroni, Stephen J. Speroni,
Joseph F. Speroni, David M. Speroni, Richard B. Speroni, Rex Haverty, E. Hale
Waller, Nikky Losapio and Christopher Mantua, as the Shareholders of BCSI, and
Samuel N. Klewans, as Shareholders' Agent.
Pursuant to the terms of the Acquisition Agreement, all of the issued and
outstanding shares of BCSI common stock were sold and transferred to the
Company in exchange for an aggregate number of shares of ABR Stock determined
by dividing $36,000,000 by the average closing price of the ABR Stock on the
Nasdaq National Market for the ten trading days immediately preceding the day
before the closing date. As of the closing date of the Acquisition, there were
1,580 shares of BCSI common stock outstanding.
The issuance of shares of ABR Stock described above is claimed to be
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof.
13
<PAGE> 14
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 Stock purchase agreement dated February 26, 1998 and effective
February 1, 1998, by and among ABR Information Services, Inc. and the
shareholders of Charing Company, Inc.*
10.16 Stock purchase agreement dated February 27, 1998 and effective
February 1, 1998, by and among ABR Information Services, Inc.,
Matthews, Malone & Associates, Ltd. and the shareholders of Matthews,
Malone & Associates, Ltd.*
10.17 Agreement and Plan of Reorganization, dated April 30, 1998, by and
among ABR Information Services, Inc., Business Computer Services, Inc.
("BCSI"), Joseph M. Speroni, Paul J. Speroni, Robert S. Speroni,
Stephen J. Speroni, Joseph F. Speroni, David M. Speroni, Richard B.
Speroni, Rex Haverty, E. Hale Waller, Nikky Losapio and Christopher
Mantua, as the Shareholders of BCSI, and Samuel N. Klewans, as
Shareholders Agent.**
27.1 Financial Data Schedule (Edgar Version Only)
* Previously filed as part of the Company's Form 10-Q for the
quarterly period ended January 31, 1998.
**Previously filed as part of the Company's Form 8-K, dated April 30,
1998 and filed May 15, 1998.
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 15, 1998 reporting the acquisition of
Business Computer Services, Inc., (d/b/a PayAmerica) on April 30, 1998.
Included with the filing was the "Agreement and Plan of Reorganization by
and among ABR Information Services, Inc., a Florida Corporation, Business
Computer Services, Inc., a Virginia Corporation, the Shareholders of
Business Computer Services, Inc., and Samuel N. Klewans, as Shareholders'
Agent". No financial statements were required to be filed with this Form
8-K.
14
<PAGE> 15
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: June 11, 1998 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)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ABR INFORMATION SERVICES, INC. FOR THE THIRD QUARTER
ENDED APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> AUG-01-1997
<PERIOD-END> APR-30-1998
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<CASH> 25,937,415
<SECURITIES> 115,753,334
<RECEIVABLES> 12,755,393
<ALLOWANCES> 0
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<CURRENT-ASSETS> 157,550,964
<PP&E> 45,191,151
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0
0
<COMMON> 286,918
<OTHER-SE> 208,602,824
<TOTAL-LIABILITY-AND-EQUITY> 253,710,284
<SALES> 57,796,368
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