SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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: 0-26348
HPR Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-2985551
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No)
245 First Street
Cambridge, MA 02142
(Address of principal executive offices)
(617) 679-8000
(Registrant's telephone number, including area code)
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 ___
As of October 31, 1997, there were 15,387,719 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
5
HPR INC.
Form 10-Q for the Three Months Ended September 30, 1997
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of
September 30, 1997 and June 30, 1997 . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996 .. . . . . . . . 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1997 and 1996. . . . . . . . . 5
Notes to Interim Consolidated Financial Statements. . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation . . . . . 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . .. .14
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .14
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 16
Signatures . . . . . . . . . . . . . . . . . . . . . . 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HPR Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
<S> <C> <C>
September 30, June 30,
1997 1997
ASSETS:
Current Assets:
Cash and cash equivalents .............................................. $ 7,410,152 $ 13,943,693
Investments in marketable securities ................................... 14,095,815 10,842,696
Accounts receivable, net of allowances for doubtful
accounts of $608,000 and $651,500 for September
30, 1997 and June 30, 1997, respectively ............................ 5,804,276 6,952,573
Contract receivables ................................................... 7,767,721 6,890,342
Deferred income taxes .................................................. 698,022 698,022
Prepaid expenses and other current assets .............................. 1,458,593 1,257,276
Total current assets ............................................ 37,234,579 40,584,602
Investments in marketable securities, long term........................... 5,582,122 2,984,465
Property and equipment, net .............................................. 2,602,666 2,509,775
Software development costs, net .......................................... 1,611,818 1,347,654
Other assets ............................................................. 177,785 104,570
Total assets .................................................... $ 47,208,970 $ 47,531,066
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Accounts payable ....................................................... $ 1,085,776 $ 749,138
Accrued royalties ...................................................... 1,017,798 1,025,979
Accrued expenses ....................................................... 985,809 1,181,450
Accrued support costs .................................................. 1,875,391 1,792,584
Accrued employee compensation and benefits ............................. 1,252,835 2,247,295
Deferred revenue ....................................................... 913,467 1,498,147
Income taxes payable ................................................... 99,250 --
Sales taxes payable .................................................... 114,419 209,067
Total current liabilities ....................................... 7,344,745 8,703,660
Deferred income taxes .................................................... 558,791 558,791
Total liabilities ............................................... 7,903,536 9,262,451
Stockholders' Equity:
Convertible preferred stock, par value $0.10,
3,000,000 shares authorized; zero shares
outstanding at September 30, 1997 and
June 30, 1997, respectively .......................................... -- --
Common stock, par value $0.01, 35,000,000 shares
authorized; 15,352,722 and 15,325,303 shares
issued and outstanding at September 30, 1997 and
June 30, 1997, respectively........................................... 153,527 153,253
Additional paid-in capital ............................................. 18,450,740 18,335,055
Unrealized net losses on investments ................................... (77,777) --
Retained earnings ...................................................... 20,778,944 19,780,307
Total stockholders' equity ...................................... 39,305,434 38,268,615
Total liabilities and stockholders' equity ...................... $ 47,208,970 $ 47,531,066
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
HPR Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30
<S> <C> <C>
1997 1996
Revenues ....................................................... $ 9,300,228 $ 7,070,994
Expenses:
Cost of revenues ............................................. 2,242,771 1,640,030
Marketing and sales .......................................... 2,213,515 1,586,588
Research and development ..................................... 1,620,086 1,530,969
General and administrative ................................... 1,207,775 1,015,812
Cost of Acquisition .......................................... 670,726 --
Total expenses ................................................. 7,954,873 5,773,399
Operating income ............................................... 1,345,355 1,297,595
Interest income, net ........................................... 361,891 301,418
Income before provision for
income taxes ................................................... 1,707,246 1,599,013
Provision for income taxes ..................................... 708,609 663,591
Net income ..................................................... $ 998,637 $ 935,422
Net income per share ........................................... $ 0.06 $ 0.06
Weighted average common shares
and equivalents ................................................ 16,324,000 16,098,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
HPR Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended September 30,
<S> <C> <C>
1997 1996
Cash flows from (for) operating activities:
Net income ......................................................................... $ 998,637 $ 935,422
Adjustments to reconcile net income to
cash provided by (used in) operating
activities:
Depreciation and amortization ................................................... 344,118 351,849
Provision for doubtful accounts ................................................. -- 125,000
Loss on disposal of equipment ................................................... -- 2,565
Amortization of discount on
investments ................................................................... (129,029) (27,630)
Change in operating assets and
liabilities:
Accounts and contract receivables ............................................... 270,918 (652,560)
Prepaid expenses and other current assets ....................................... (201,317) (577,375)
Other assets .................................................................... (73,215) (3,977)
Accounts payable and other accrued
liabilities ................................................................... (778,837) 23,362
Sales taxes payable ............................................................. (94,648) (151,939)
Deferred revenue ................................................................ (584,680) (468,161)
Income taxes payable ............................................................ 99,250 (438,758)
------------ ------------
Net cash used in
operating activities ....................................................... (148,803) (882,202)
------------ ------------
Cash flows from (for) investing activities:
Capitalized software development
costs ........................................................................... (347,207) (131,847)
Proceeds from disposal of fixed assets ............................................ -- 15,903
Capital expenditures ............................................................... (353,966) (202,912)
Sale of marketable securities ...................................................... 5,400,000 2,500,000
Purchase of marketable securities .................................................. (11,199,524) (2,165,680)
------------ ------------
Net cash provided by (used in)
investing activities ........................................................ (6,500,697) 15,464
------------ ------------
Cash flows from (for) financing
activities:
Proceeds from exercise of stock
options ......................................................................... 115,959 89,247
Payments to acquire treasury stock ................................................. -- (4,875)
------------ ------------
Net cash provided by financing
activities ................................................................. 115,959 84,372
------------ ------------
Net decrease in cash and cash
equivalents ........................................................................ (6,533,541) (782,366)
------------ ------------
Cash and cash equivalents, beginning of
period ............................................................................. 13,943,693 8,479,122
------------ ------------
Cash and cash equivalents, end of
period ............................................................................. $ 7,410,152 $ 7,696,756
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
HPR INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business
HPR Inc. (the "Company") was formed in 1987. The Company develops and
markets software and proprietary database products incorporating clinical
knowledge that enable payors and providers to better manage the financial
risk associated with the delivery of healthcare and the quality of care.
The Company's products are used to contain the costs of healthcare by
clinically evaluating claims for payment; measuring efficiency, quality and
outcomes; determining appropriate utilization; influencing physician
referral patterns and profiling providers. The Company's products are
developed and maintained in consultation with board certified physicians
serving on Company-organized panels.
(2) Summary of Significant Accounting Policies
Accounting
The accompanying consolidated financial statements are unaudited and have
been prepared in accordance with generally accepted accounting principles.
These statements include the accounts of HPR and its subsidiaries. Certain
information and footnote disclosures normally included in the Company's
annual consolidated financial statements have been condensed or omitted.
The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair statement of the results for the interim
periods ended September 30, 1997 and 1996, respectively.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the entire year.
It is suggested that these interim consolidated financial statements be
read in conjunction with the audited consolidated financial statements for
the year ended June 30, 1997, which are contained in the Company's Annual
Report on Form 10-K/A filed with the Securities and Exchange Commission on
September 8, 1997.
(3) Investment in Marketable Securities
In accordance with FAS 115, management determines the appropriate
classification of its investments in debt and equity securities at the time
of purchase and reevaluates such determination at each balance sheet date.
On July 1, 1997, the Company transferred all of its debt securities from
the held to maturity classification to available for sale. At the date of
the transfer, the Company recorded its investments at fair value and
recognized the unrealized holding loss as a separate component of
stockholders' equity. Any subsequent changes in fair value have been
recorded as a separate component of stockholders' equity. The Company holds
no investments in equity securities at September 30, 1997 and June 30,
1997.
(4) Merger
On September 29, 1997 the Company announced that it had signed a
definitive agreement to be acquired by HBO & Company ("HBOC"). Pursuant to
the Agreement of Merger dated September 27, 1997 (the "Merger Agreement"),
the Company will merge into a wholly-owned subsidiary of HBOC and each
outstanding share of common stock of the Company will be converted into the
right to receive six-tenths (0.6) of a share of common stock of HBOC (all
such actions collectively, the "Merger"). All outstanding options to
purchase the Company's common stock will be assumed by HBOC and will become
options to purchase shares of HBOC common stock. The transaction is
intended to be accounted for as a pooling of interests and to qualify as a
tax-free reorganization. The Merger has been approved by the Boards of
Directors of the Company and HBOC, but is still subject to various
conditions, including regulatory review and approval, stockholder approval
and other conditions to closing. A proxy statement of the Company and a
prospectus of HBOC will be delivered to the stockholders of the Company in
connection with the special meeting of stockholders of the Company to vote
on the Merger.
Pursuant to Section 10.1 of the Merger Agreement, the Merger Agreement
may be terminated by either party under certain circumstances. The Company
has agreed that if the Merger Agreement is terminated by the Board of
Directors of the Company in the exercise of its good faith determination as
to its fiduciary duties to the Company's stockholders imposed by law that
such termination is required, the Company will pay HBOC (i) a fee in the
amount of $10,000,000 and (ii) the amount of HBOC's reasonable costs and
expenses in connection with the negotiation and performance of the Merger
Agreement. Payment of the foregoing amounts shall not be in lieu of damages
incurred if the Company breaches certain covenants in the Merger Agreement.
(5) New Accounting Pronouncement
In February 1997, the FASB issued Statement No. 128 ("SFAS 128"), "Earnings
per Share," which modifies the way in which earnings per share ("EPS") is
calculated and disclosed. Currently, the Company discloses primary EPS.
Upon adoption of this standard for the period ending December 31, 1997, the
Company will be required to disclose either basic EPS or both basic and
dilutive EPS, the principal difference being that common stock equivalents
would not be considered in the computation of basic EPS. Basic EPS for the
Company would have been $0.07 and $0.05 for the quarter ended September 30,
1997 and September 30, 1996, respectively. The impact of SFAS No. 128 on
the calculation of diluted EPS is not expected to be materially different
than primary EPS.
Item 2.
Management's Discussion And Analysis of Financial Condition
and Results of Operations
See Risk Factors Relating to Forward-Looking Statements at the end of this item.
Overview
The Company licenses its products primarily pursuant to multi-year
non-cancellable agreements that, in general, provide for payment of equal
annual license fees over their terms. This type of arrangement provides the
Company with a significant recurring component to its revenues each year.
Revenue from software license agreements is recognized upon execution of a
contract and shipment of the software provided that no significant vendor
obligations remain outstanding and the related receivable is due within one
year of the contract date and collection is deemed probable by management.
For recurring license fees, revenues are recognized on the contract
anniversary date. The Company accrues incidental support costs associated
with these licenses when revenues are recognized. Revenues from services
are recognized when the services are delivered. There can be no assurance
that the Company will be able to enter into new license agreements at the
current rate or to maintain the current pricing for its products.
The Company has experienced a seasonal pattern in its operating results
with the second and fourth fiscal quarters typically having the highest
revenues and net income, while the first and third fiscal quarters
typically have lower revenue and net income. The Company believes the
seasonality of its revenue and net income will continue for the foreseeable
future. In order to account for the effect of seasonal revenues, comments
with respect to prospective expenses as a percentages of revenues reflect
annualized estimates and are not necessarily representative of expected
interim results.
Revenues
Total revenues for the three months ended September 30, 1997 increased
31.5% to $9,300,000 from $7,071,000 for the same period in 1996. The
Company attributed the growth in revenues to new license activity
associated with existing products within the Clinical Payment Management
System (CPMS) and Clinical Resource Management System (CRMS) product lines,
as well as revenues generated from two new products released in the first
quarter of fiscal 1998. During the first quarter CRMS Fundamentals, a
client server software application that generates per-member-per month
(PMPM) and rates-per-1000 reports was released to the market, as well as
the CCMS Core application, which is the first in a suite of Clinical Care
Management System products.
Cost of Revenues
Cost of revenues for the three months ended September 30, 1997 increased
36.8% to $2,243,000 or 24.1% of revenues from $1,640,000 or 23.2% of
revenues during the same three month period a year ago. The increase in
expense was due primarily to personnel growth in the customer support
function necessary to support a product line which has increased in number
to twelve, covering three distinct product families. In addition, the
Company recognized incremental costs for co-development partner royalty
payments associated with the release of CCMS Core. Both of these factors
are the result of an increase in the Company's product offerings as well as
an increase in the Company's number of customers from the same period last
year. The Company expects cost of revenues to remain relatively constant,
or increase slightly, as a percentage of revenues for the foreseeable
future.
Marketing and Sales
Marketing and sales expenses increased 39.5% to $2,214,000 from $1,587,000
for the three months ended September 30, 1997 versus the same period one
year earlier. As a percentage of revenues, marketing and sales expenses
increased to 23.8% from 22.4% for the three months ended September 30, 1997
and 1996, respectively. The Company has continued to expand its sales force
in response to increased demand for its products. The increase in the size
of the sales force, along with the addition of new product lines in the
past year, were strong contributing factors to the increase in the
Company's overall revenues for the quarter. The Company expects to continue
its investment in marketing and sales in line with demand for its products
and as a result the Company expects marketing and sales expenses to remain
constant or increase slightly as a percentage of sales.
Research and Development
Research and development expenses increased to $1,620,000 or 17.4% of
revenues for the three months ended September 30, 1997 from $1,531,000 or
21.7% of revenues for the same period in the prior year. During the three
month period ending September 30, 1997, the Company capitalized software
development expenditures in an amount equal to 18% of total research and
development costs which compares with a capitalization rate of 8% for the
three month period ended September 30, 1996. The increase in research and
development expenditures resulted from efforts to successfully bring CCMS
Core and CRMS Fundamentals to market in the first quarter of fiscal 1998.
As recently released products mature in their development life cycles, and
work continues on the CCMS product line offerings, the Company expects that
research and development expenses as a percentage of revenues will remain
substantially the same, or decrease slightly, for the foreseeable future.
General and Administrative
General and administrative expenses for the three months ended September
30, 1997 increased to $1,879,000 or 20.2% of revenue from $1,016,000 or
14.4% for the same period in the prior year. The current period's expenses
include $670,000 of incremental costs incurred by the Company related to
its proposed merger with HBO & Company. Excluding these incremental costs,
general and administrative expenses decreased as a percentage of revenues
to 13.0% for the current period. The increased expenditures quarter over
quarter, excluding merger related costs, are primarily the result of an
increase in costs associated with the recruiting and hiring of new
employees in the first quarter of fiscal 1998. It is believed that as
revenues continue to increase, general and administrative expenses
(excluding expenses related to the proposed merger) will remain
substantially the same, or decrease slightly, as a percentage of revenues
for the foreseeable future.
Net Interest
Interest income increased to $362,000 from $301,000 for the three months
ended September 30, 1997 compared with the prior year. The increase was due
to the interest earned on the cash balances the Company generated from
operations during the twelve months ended September 30, 1997.
Liquidity and Capital Resources
The Company's working capital as of September 30, 1997 of $29,890,000
decreased compared with $31,881,000 in working capital as of June 30, 1997.
The change was mainly due to the maturing of current investments in
marketable securities, which were reinvested in securities with longer
maturity periods.
The Company believes that available funds, cash generated from
operations and an available unused line of credit of $7,500,000 will be
sufficient to meet the Company's operating and capital requirements,
assuming no change in the operations of the Company's business, for the
foreseeable future.
Risk Factors Relating to Forward-Looking Statements
Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking"
statements as defined in the Securities Act of 1933 and the Securities
Exchange Act of 1934. Investors are cautioned that information contained in
these forward-looking statements is inherently uncertain, and that actual
performance and results may differ materially due to numerous risk factors,
including but not limited to the following:
Announcement of the Proposed Combination with HBOC.
Various risks related to the announcement of the proposed Merger with HBOC
could have a material adverse effect on the Company's results of
operations, financial condition or business. Among other things, there can
be no assurance customers of the Company will continue their current or
historical licensing patterns without regard to the proposed Merger, or
that certain customers will not defer licensing decisions as they evaluate,
among other things, the proposed Merger, or that certain existing and
prospective customers will not decide to license products from the
Company's competitors instead of licensing the Company's products. The
Company's continued success depends to a significant degree upon the
continuing contribution of key employees in management, development, sales,
technical support and administration. Existing employees are likely to have
uncertainty as to their future roles within HBOC. Persons being recruited
for positions in the Company may have similar uncertainty and defer or
reverse decisions to become employed by the Company. In addition,
competitors of the Company may use this uncertainty to attempt to recruit
such employees or prospective employees and make it more difficult for the
Company to retain and attract key employees. If the Merger is not
consummated, the foregoing factors could have a material adverse effect on
the Company's results of operations, financial condition or business. In
addition, the Company expects to incur significant expenses in connection
with the proposed Merger, whether or not it is consummated. If the Merger
is not consummated, such expenses, which may include the expenses of HBOC
and the "break-up" fee described under "Merger" above, could have a
material adverse effect on the Company's results of operations.
If the proposed Merger occurs, each share of the Company's common stock
outstanding at the time of the Merger will be converted into the right to
receive 0.6 of a share (the "Exchange Ratio") of HBOC common stock. Because
the Exchange Ratio is fixed, it will not increase or decrease due to
fluctuations in the market price of either HBOC or the Company's common
stock. However, because the Exchange Ratio is fixed, the market price of
the Company's common stock will likely move in the same general direction
as does HBOC's stock before the effective time of the Merger. If the market
price of HBOC common stock decreases or increases before the effective time
of the Merger, the market value of the HBOC common stock to be received by
Company stockholders at the effective time of the proposed Merger would
correspondingly decrease or increase.
After the announcement of the proposed Merger, the Company's stock price,
as reported on the Nasdaq National Market, increased significantly. If for
any reason the proposed merger is terminated, the announcement of such
termination may trigger an equivalent or greater decrease in the Company's
stock price.
Seasonality and Variable Operating Results.
The Company has experienced a seasonal pattern in its operating results,
with the fourth and second fiscal quarters typically having the highest
revenues and net income and the first and third fiscal quarters typically
having lower revenues and net income. The timing of revenues is influenced
by a number of factors, including the timing of individual orders and
shipments, seasonal customer buying patterns and changes in product
development and sales and marketing expenditures. The Company believes the
seasonality of its revenues and net income for the fourth fiscal quarter
can be attributed to due dates for payment obligations under multi-year
license agreements, renewals of existing agreements and the Company's sales
compensation program, which is based significantly on fiscal year sales
levels. The Company believes the seasonality of its revenues and net income
in the second fiscal quarter can be attributed to the seasonal purchasing
patterns of its customers. The Company most recently reported a net loss in
the first and third quarters of fiscal 1994 and there can be no assurance
that the Company will be profitable during future quarters. In addition,
although the Company has no present agreements or commitments to enter into
any major contracts, the signing of a major contract could generate a large
increase in revenues and net income for any given quarter or fiscal year,
which increase may prove anomalous when compared to changes in revenues and
net income in other periods. Furthermore, the Company typically experiences
long sales cycles for new customers, which may extend over several quarters
before a sale is consummated. As a result, the Company believes that
quarterly results of operations will continue to be subject to significant
fluctuations and that its results of operations for any particular quarter
or fiscal year may not be indicative of results of operations for future
periods.
Dependence Upon New Product Development, Acceptance and Enhancement.
The market for the Company's products is characterized by rapid
technological progress and changing customer needs. The Company believes
that as the markets for CodeReview and Pattern Review mature, the continued
growth of the Company will require the successful introduction of new
products. Accordingly, the Company's future success will depend on its
ability to successfully develop and introduce new products, including
HealthPlan Reporter, CCMS Core, and the other modules of the Clinical Care
Management System ("CCMS"), and to enhance its existing products. There can
be no assurance that the Company will be successful in developing,
introducing on a timely basis, and marketing such products or enhancements
or that they will be accepted by the market. Significant research and
development expenditures will be required in the future. There can be no
assurance that the Company's expected new product releases and product
enhancements will adequately address customer requirements for performance
and functionality or that its software will not contain "bugs" that would
delay product introduction or shipment.
Dependence on Third Party for Component of Episode Profiler.
A principal component of Episode Profiler, the "Episode Treatment Groups"
product, is licensed from a third-party vendor, Symmetry Health Data
Systems, Inc. ("Symmetry"), under the terms of a 63-month license which
commenced November 17, 1994 and has a 24-month renewal term which is
contingent on the Company meeting minimum royalty requirements. Symmetry
has agreed, subject to certain conditions, that it will not license Episode
Treatment Groups to certain other companies which might be considered
competitors of the Company. While the Company believes that the terms of
such license are adequate to protect the Company's investment in Episode
Profiler, any factor adversely affecting the Company's ability to retain
the benefits of such license or to obtain the updated Episode Treatment
Groups would have a material adverse effect on the Company's results of
operations, financial condition and business.
Risk of Inability to Grow Through Acquisitions.
The Company has grown, and (if the proposed merger is not consummated)
intends to continue to grow, in part through acquisitions of products,
technologies and businesses. The Company's ability to expand successfully
through acquisitions depends on many factors, including the successful
identification and acquisition of products, technologies and businesses and
management's ability to effectively integrate and operate the new products,
technologies or businesses. There is significant competition for
acquisition opportunities in the industry, which may intensify due to
consolidation in the industry, increasing the costs of capitalizing on such
opportunities. The Company competes for acquisition opportunities with
other companies that have significantly greater financial and management
resources.
Management of Growth.
The Company is currently experiencing a period of rapid growth and
expansion which could place a significant strain on the Company's personnel
and resources. The Company's growth has resulted in an increase in the
level of responsibility for both existing and new management personnel. The
Company has sought to manage its current and anticipated growth through the
recruitment of additional management and technical personnel and the
implementation of internal systems and controls. However, the failure to
manage growth effectively could adversely affect the Company's results of
operations, financial condition or business.
Inability to Retain or Attract Customers Due to Competition and Consolidation.
The market in which HPR's products are licensed is highly competitive. Most
of the Company's competitors have significantly greater financial,
technical, product development and marketing resources than the Company.
The Company's potential competitors for customers include healthcare
information companies and large data processing and information companies
that may have more diverse product offerings covering a broader spectrum of
the healthcare industry. Many of these competitors have substantial
installed customer bases in the healthcare industry and the ability to fund
significant product development and acquisition efforts. In addition, the
Company has noted a trend towards consolidation of customers within its
market. While this consolidation results in substantially larger potential
customers, the Company also is faced with a risk of existing customers
being acquired by entities that use a competitor's product. The Company
continues to believe that the principal competitive factors in its market
are clinical credibility and integrity and product innovation. These
factors address both customer needs for cost containment tools and
increasing industry concerns about quality control. Other important
competitive factors include product reputation and reliability, system
features, client service, price, and the effectiveness of marketing and
sales efforts. There can be no assurance that future competition will not
have a material adverse effect on the Company's results of operations,
financial condition or business.
Dependence on Proprietary Software and Clinical Knowledge-Bases.
The Company's success is dependent to a significant extent on its ability
to maintain the proprietary and confidential software and clinical
knowledge-bases incorporated in CodeReview, ProMatch, Patterns Review,
Episode Profiler, Quality Profiler, Referral Profiler, HealthPlan Reporter,
Patterns Profiler, CRMS Fundamentals, CCMS Core and other products as they
are released. The Company relies on a combination of patent, trade secret,
copyright and contractual protections to establish and protect its
proprietary rights. There can, however, be no assurance that the legal
protections and the precautions taken by the Company will be adequate to
prevent misappropriation of the Company's technology. Any infringement or
misappropriation of the Company's proprietary software and clinical
knowledge-bases would disadvantage the Company in its efforts to retain and
attract new customers in a highly competitive market, and could cause the
Company to lose revenues or incur substantial litigation expense. In
addition, these protections and precautions do not prevent independent
third-party development of competitive technology or products. Further, the
Company depends on third-party suppliers to license to HPR necessary
technology that is incorporated into certain of the Company's products,
including Episode Profiler. The inability of the Company for any reason to
continue using or otherwise acquire such technology could prevent
distribution of such products, which would have a material adverse effect
on the Company's results of operations, financial condition or business.
Dependence on Certain Key Personnel.
The Company depends to a significant extent on key management, technical
and marketing personnel. The Company's growth and future success will
depend in large part on its ability to attract, motivate and retain highly
qualified personnel. The Company does not have employment agreements with
any of its officers or key employees providing for their employment for any
specific term. The Company does not have "key person" life insurance on any
of its personnel other than Marcia J. Radosevich, the Company's Chairman of
the Board, Chief Executive Officer, and President. The loss of key
personnel or the inability to hire or retain qualified personnel could have
a material adverse effect on the Company's results of operations, financial
condition or business.
Uncertainty in the Healthcare Industry.
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and
operation of healthcare organizations. The Company's products are designed
to function within the structure of the current national healthcare
financing and reimbursement system currently being used in the United
States. The Company believes that the commercial value and appeal of its
products may be adversely affected if that system were to be materially
changed. During the past several years, the United States healthcare
industry has been subject to an increase in governmental regulation of,
among other things, reimbursement rates. Proposals to reform the United
States healthcare system are from time to time under consideration by the
U.S. Congress. These programs may contain proposals to increase government
involvement in healthcare and otherwise change the operating environment
for the Company's customers. Healthcare organizations may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments in cost containment tools and related technology such
as the Company's products. The Company cannot predict what impact, if any,
such factors might have on its results of operations, financial condition
or business. In addition, many healthcare providers are consolidating to
create integrated healthcare delivery systems with greater regional market
power. As a result, these emerging systems could have greater bargaining
power, which may lead to price erosion of the Company's products. The
failure of the Company to maintain adequate price levels would have a
material adverse effect on the Company's results of operations, financial
condition or business. Other legislative or market-driven reforms could
have unpredictable effects on the Company's results of operations,
financial condition or business.
Risk of Product Liability Claims.
The Company's products provide information that relates to payment of
healthcare claims and to the appropriateness of medical treatment in
particular cases and in general. Any failure by the Company's products to
process such claims or to review such treatments accurately could result in
claims against the Company by its customers. Further, successful use of the
Company's products could influence the treatments rendered by providers and
give rise to claims against the Company by patients or providers. The
Company maintains insurance to protect against certain claims associated
with the use of its products, but there can be no assurance that its
insurance coverage would adequately cover any claim asserted against the
Company. A successful claim brought against the Company in excess of, or
excluded from, its insurance coverage could have a material adverse effect
on the Company's results of operations, financial condition or business.
Even unsuccessful claims could result in the Company's expenditure of funds
in litigation and management time and resources. While to date the Company
has not experienced any product liability claims against it, the Company is
aware of claims made against payors by patients for coverage decisions
which adversely influenced medical treatment. There can be no assurance
that the Company will not be subject to product liability claims, that such
claims will not result in liability in excess of its insurance coverage,
that the Company's insurance will cover such claims or that appropriate
insurance will continue to be available to the Company in the future at
commercially reasonable rates. In addition, if liability of the Company
were to be established, substantial revisions to its products could be
required that may cause the Company to incur additional unanticipated
research and development expenses.
Possible Volatility of Stock Price.
Prior to August 10, 1995, there was no public market for the Common Stock,
and there can be no assurance that an active trading market will be
sustained or that the market price of the Common Stock will not decline
below its current price. The stock market historically has experienced
volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating
performance of such companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
quarterly results of operations, announcements of new products or
acquisitions by the Company or its competitors, governmental regulatory
action, other developments or disputes with respect to proprietary rights,
general trends in the industry and overall market conditions, and other
factors. The market price of the Common Stock may be significantly affected
by factors such as announcements of new products by the Company's
competitors, as well as variations in the market conditions in the medical
cost containment or software industries in general. The market price may
also be affected by movements in prices of equity securities in general.
PART II. OTHER INFORMATION
Item 2 Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Use of Proceeds
Use of proceeds information is disclosed with respect to the Company's
registration statement on Form S-1, Securities and Exchange Commission No.
33-94132, which became effective on August 10, 1995. There were no changes
to information to Form SR since its last filing on November 10, 1996.
Item 4 Submission of matters to a vote of security holders
(a) The annual meeting of shareholders was held on October 31, 1997.
(b) The meeting involved the election of the following directors:
Marcia J. Radosevich, Ph.D., Harris A. Berman, M.D., Howard E.
Cox, Jr., Richard H. Egdahl, M.D., and William G. Nelson, Ph.D.
(c) The matters voted upon and the results of the voting were as
follows:
(for a more detailed description of items 2 please reference the
Company's Proxy Statement filed with the Securities and Exchange
Commission on September 26, 1997)
(1) To fix the number of persons constituting the full Board of
Directors at five and to elect the following nominees as
Directors.
Number of Shares
Withheld
For Authority
Marcia J. Radosevich 12,572,448 449,840
Harris A. Berman 12,571,448 450,840
Howard E. Cox, Jr. 12,571,448 450,840
Richard H. Egdahl 12,569,948 452,340
William G. Nelson 12,577,448 444,840
(2) Approval of amendment to HPR 1995 Stock Plan.
Number of Shares
For 6,943,281
Against 3,868,781
Abstain 22,212
Broker Non-Vote 2,188,014
(3) Ratification of the selection of Coopers & Lybrand L.L.P. as
accountants for fiscal year ending June 30, 1998.
Number of Shares
For 13,001,207
Against 17,000
Abstain 4,081
Item 5 Other Information
On September 29, 1997 the Company announced that it had signed a
definitive agreement to be acquired by HBO & Company ("HBOC"). Pursuant to
the Agreement of Merger dated September 27, 1997 (the "Merger Agreement"),
the Company will merge into a wholly-owned subsidiary of HBOC and each
outstanding share of common stock of the Company will be converted into the
right to receive six-tenths (0.6) of a share of common stock of HBOC (all
such actions collectively, the "Merger"). All outstanding options to
purchase the Company's common stock will be assumed by HBOC and will become
options to purchase shares of HBOC common stock. The transaction is
intended to be accounted for as a pooling of interests and to qualify as a
tax-free reorganization. The Merger has been approved by the Boards of
Directors of the Company and HBOC, but is still subject to various
conditions, including regulatory review and approval, stockholder approval
and other conditions to closing. A proxy statement of the Company and a
prospectus of HBOC will be delivered to the stockholders of the Company in
connection with the special meeting of stockholders of the Company to vote
on the Merger.
Pursuant to Section 10.1 of the Merger Agreement, the Merger Agreement
may be terminated by either party under certain circumstances. The Company
has agreed that if the Merger Agreement is terminated by the Board of
Directors of the Company in the exercise of its good faith determination as
to its fiduciary duties to the Company's stockholders imposed by law that
such termination is required, the Company will pay HBOC (i) a fee in the
amount of $10,000,000 and (ii) the amount of HBOC's reasonable costs and
expenses in connection with the negotiation and performance of the Merger
Agreement. Payment of the foregoing amounts shall not be in lieu of damages
incurred if the Company breaches certain covenants in the Merger Agreement.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re Computation of Earnings Per Share
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended September 30, 1997.
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.
HPR INC.
(Registrant)
Dated: November 12, 1997 /s/ Marcia J. Radosevich
Marcia J. Radosevich
Chairman of the Board, Chief Executive
Officer, and President
(Principal Executive Officer)
Dated: November 12, 1997 /s/ Brian D. Cahill
Brian D. Cahill
Chief Operating Officer and Chief
Financial Officer(Principal Financial
and Accounting Officer)
<TABLE>
<CAPTION>
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
HPR INC.
<S> <C> <C>
Type of security
For the quarter ended September 30, 1997 1996
Common stock outstanding, beginning of period ................................... 15,325,000 15,012,000
Weighted average common stock issued during the period .......................... 22,000 63,000
Assumed exercise of common share options ........................................ 1,960,000 1,340,000
Purchase of common stock under the treasury stock method ........................ (983,000) (317,000)
Weighted average number of common shares and common equivalent shares outstanding 16,324,000 16,098,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000947482
<NAME> HPR Inc.
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1.00
<CASH> 7,410,152
<SECURITIES> 14,095,815
<RECEIVABLES> 6,412,276
<ALLOWANCES> (608,000)
<INVENTORY> 0
<CURRENT-ASSETS> 37,234,579
<PP&E> 4,816,103
<DEPRECIATION> (2,213,437)
<TOTAL-ASSETS> 47,208,970
<CURRENT-LIABILITIES> 7,344,745
<BONDS> 0
0
0
<COMMON> 153,527
<OTHER-SE> 39,151,907
<TOTAL-LIABILITY-AND-EQUITY> 47,208,970
<SALES> 9,300,228
<TOTAL-REVENUES> 9,300,228
<CGS> 2,242,771
<TOTAL-COSTS> 7,954,873
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,707,246
<INCOME-TAX> 708,609
<INCOME-CONTINUING> 998,637
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<NET-INCOME> 998,637
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