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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
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[_] 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 0-19340
GMIS Inc.
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Exact name of Registrant as specified in its charter
Delaware 23-2311601
- ---------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
5 Country View Road
Malvern, PA 19355 (610) 296-3838
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(Address of principal (Registrant's telephone number)
executive offices)
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 1, 1996
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Common Stock, $.01 par value 8,597,439 shares
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GMIS INC.
FORM 10-Q SEPTEMBER 30, 1996
CONTENTS
PART I. CONSOLIDATED FINANCIAL INFORMATION Page No.
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Consolidated Balance Sheets -
September 30, 1996 (Unaudited) and December 31, 1995 2
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995 (Unaudited) 3
Consolidated Statements of Operations -
Nine Months Ended September 30, 1996 and 1995 (Unaudited) 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-10
PART II. OTHER INFORMATION 11
GMIS Inc.
Consolidated Balance Sheets
September 30, December 31,
1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current Assets
Cash and cash equivalents $ 12,081,963 $ 4,692,812
Investments available-for-sale 5,516,110 5,158,928
Trade accounts receivable, less allowance:
1996 - $400,000; 1995 - $400,000 13,455,630 14,094,199
Receivables from related parties 789,153 542,209
Prepaid expenses 809,569 384,796
- ------------------------------------------------------------------------------------------------------------------------------
Total Current Assets 32,652,425 24,872,944
Property and Equipment, at cost
Furniture and fixtures 1,883,765 1,701,489
Computer equipment and software 7,222,072 6,173,576
Leasehold improvements 1,055,535 751,198
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10,161,372 8,626,263
Accumulated depreciation and amortization (5,642,691) (4,165,391)
- ------------------------------------------------------------------------------------------------------------------------------
4,518,681 4,460,872
Capitalized Software Costs, less accumulated amortization:
1996 - $ 12,480,391; 1995 - $ 9,987,219 15,144,652 14,222,193
Goodwill and Other Intangibles, less accumulated amortization:
1996 - $ 2,358,493; 1995 - $ 1,638,952 14,397,167 15,116,708
Investments in Affiliates, at cost 2,550,028 1,949,812
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 69,262,953 $ 60,622,529
==============================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 1,818,458 $ 1,962,501
Accrued expenses 4,302,197 4,993,845
Deferred income taxes 1,593,714 527,401
Deferred revenue 520,271 722,310
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Total Current Liabilites 8,234,640 8,206,057
Deferred Income Taxes 2,068,712 1,002,399
Stockholders' Equity
Preferred Stock, $.01 par value, 2,000,000 shares authorized;
no shares issued - -
Common Stock, $.01 par value, 30,000,000 shares authorized; issued
and outstanding: 1996 - 8,452,539 shares; 1995 - 8,092,866 shares 84,525 80,929
Additional paid-in capital 49,937,668 45,682,459
Retained earnings 8,937,408 5,650,685
- ------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 58,959,601 51,414,073
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Total Liabilities and Stockholders' Equity $ 69,262,953 $ 60,622,529
==============================================================================================================================
See notes to consolidated financial statements.
-2-
GMIS Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30,
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1996 1995
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Operating Revenue $ 10,310,126 $ 8,567,438
Operating Expenses
Cost of revenue 2,654,018 2,396,458
Marketing and sales 1,107,311 1,176,452
Research and development 2,077,918 2,079,179
General and administrative 1,726,548 1,922,375
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Total operating expenses 7,565,795 7,574,464
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Operating Income 2,744,331 992,974
Investment Income 178,405 145,578
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Income Before Income Taxes 2,922,736 1,138,552
Provision for Income Taxes 1,170,025 433,000
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Net Income $ 1,752,711 $ 705,552
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Per Common Share
Primary $ 0.20 $ 0.08
====================== ===================
Assuming full dilution $ 0.20 $ 0.08
======================================================================================================
Weighted average shares outstanding
Primary 8,559,695 8,537,211
====================== ===================
Assuming full dilution 8,983,581 8,537,211
======================================================================================================
See notes to consolidated financial statements.
-3-
GMIS Inc.
Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30,
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1996 1995
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Operating Revenue $ 27,251,326 $ 24,723,700
Operating Expenses
Cost of revenue 7,295,589 6,986,474
Marketing and sales 3,719,069 4,089,690
Research and development 6,082,262 6,351,495
General and administrative 5,114,532 5,698,411
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Total operating expenses 22,211,452 23,126,070
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Operating Income 5,039,874 1,597,630
Investment Income 439,574 489,660
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Income Before Income Taxes 5,479,448 2,087,290
Provision for Income Taxes 2,192,725 793,000
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Net Income $ 3,286,723 $ 1,294,290
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Per Common Share
Primary $ 0.39 $ 0.15
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Assuming full dilution $ 0.38 $ 0.15
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Weighted average shares outstanding
Primary 8,374,962 8,635,704
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Assuming full dilution 8,545,770 8,666,242
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See notes to consolidated financial statements
-4-
GMIS Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
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1996 1995
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Operating activities
Net income $ 3,286,723 $ 1,294,290
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income tax provision 2,192,725 793,000
Compensation expense 300,619 244,038
Amortization of goodwill and other intangibles 719,541 719,541
Depreciation and amortization 3,975,465 3,816,715
(Accretion) amortization of investment
(discounts) premiums (161,644) 51,543
Provision for bad debts - 145,500
Changes in operating assets and liabilities:
Trade accounts receivable 638,569 (838,506)
Receivables from related parties (246,944) (359,643)
Prepaid expenses (424,773) (435,186)
Accounts payable (144,043) (1,432,621)
Accrued expenses (853,229) (8,084,477)
Deferred revenue (202,039) 677,696
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 9,080,970 (3,408,110)
Investing activities
Expenditures for property and equipment (1,540,102) (1,889,547)
Software costs capitalized (3,415,631) (3,760,572)
Proceeds from sale or maturity of investments 7,996,310 5,622,000
Purchase of investments (8,191,848) (7,051,957)
Investment in affiliates (600,216) -
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,751,487) (7,080,076)
Financing activities
Proceeds from exercise of stock options and
employee stock purchases 4,059,668 1,557,604
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Net cash provided by financing activities 4,059,668 1,557,604
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Increase (decrease) in cash and cash equivalents 7,389,151 (8,930,582)
Cash and cash equivalents at beginning of period 4,692,812 15,544,677
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,081,963 $ 6,614,095
==================================================================================================================
See notes to consolidated financial statements.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
Note 1: Basis of Presentation
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The financial information presented as of any date other than December 31
has been prepared from the books and records without audit. Financial
information as of December 31 has been derived from the audited financial
statements of GMIS (the Company), but does not include all disclosures required
by generally accepted accounting principles. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods indicated have
been included. For further information regarding the Company's accounting
policies, refer to the consolidated financial statements and related notes
included in the Company's annual report on Form 10-K for the year ended December
31, 1995.
Note 2: Net Income Per Common Share
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Net income per common share is determined by dividing net income by the
weighted average number of common shares outstanding during the interim period.
The weighted average common shares outstanding include the effect of stock
options if dilutive.
Note 3: Merger
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On September 24, 1996 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 23, 1996 (the "Merger Agreement") among GMIS, HBOC and
HBO & Company of Georgia ("HBOC-GA"), a wholly-owned subsidiary of HBOC, (i)
GMIS will merge with and into HBOC-GA and (ii) each outstanding share of common
stock of GMIS and each right to acquire a share of GMIS common stock will be
converted into the right to receive .42 of a share of common stock of HBOC,
subject to possible adjustment as provided in the Merger Agreement and less the
amount of any fractional share, which will be paid in cash. The merger is
subject to various conditions, including the approval of the shareholders of
GMIS at a meeting scheduled to be held on December 9, 1996.
-6-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The matters discussed in this report as well as the news releases issued
from time to time by the Company contain certain forward-looking statements that
involve risks and uncertainties, including timing of consummation of contracts
with customers and delivery of products, the timely availability and acceptance
of new products, the impact of competitive products and pricing and the ability
of the Company to expand its customer base for its existing products.
Operating Revenue
The Company derives substantially all of its revenue from its data quality
(Autocoder(R) and ClaimCheck(R)) and decision support (Provider Insight(R) and
ICAS(TM) product lines. Its products are licensed primarily pursuant to
multi-year agreements that, in general, provide for payment of equal annual
license fees over their terms. The initial license fee is recognized at the time
of new product delivery and subsequent annual fees are recognized on the
contract anniversary date. Revenue from services is recognized as the work is
performed.
The Company believes the seasonality of its revenue can be attributed to
concentration in the fourth quarter of new product deliveries, contract
anniversary dates under multi-year license agreements and renewal dates of
existing agreements. Although the Company has taken certain steps to moderate
this historical seasonality, it expects the trend of recognizing greatest
revenue in the fourth quarter to continue in the foreseeable future.
Operating revenue for the third quarter of 1996 increased 20% to
$10,310,000 from $8,567,000 in the corresponding quarter of the prior year. The
increase can be attributed to strong data quality revenues including revenues
from a new module (ClaimReview) released in late 1995 and continued penetration
into the dental market. Operating revenue for the first three quarters of 1996
increased 10% to $27,251,000 from $24,724,000 in the corresponding period of the
prior year. The 1996 increase in revenue can be attributed to percentage
increases from all products.
-7-
Operating Expenses
Cost of revenue for the three months ended September 30, 1996 increased to
$2,654,000 from $2,396,000 but decreased to 26% of operating revenue compared to
28% of operating revenue for the same period in 1995. The decrease as a
percentage of revenue is primarily due to the increase in operating revenue in
the third quarter compared to expenses. The increased costs can be attributed
to higher consulting services and increased software amortization partially
offset by lower payroll and related expenses. Cost of revenue increased 4% to
$7,296,000 from $6,986,000, but decreased to 27% of operating revenue for the
nine months ended September 30, 1996 compared to 28% of operating revenue for
the same period in 1995. The decrease as a percentage of revenue is primarily
due to the increase in operating revenue.
Marketing and sales expense decreased to $1,107,000 or 11% of operating
revenue for the third quarter of 1996 compared to $1,176,000 or 14% of operating
revenue for the same quarter in 1995. The decrease is due to lower advertising,
recruiting and consulting costs partially offset by a slight increase in salary,
commission and related expenses. Marketing and sales expense for the nine month
period ended September 30, 1996 decreased to $3,719,000 as compared to
$4,090,000 for the same period of 1995. Expressed as a percentage of operating
revenue marketing and sales expense for the nine months ended September 30, 1996
decreased to 14% as compared to 17% of operating revenue for the same period in
1995. The decrease in costs as a percent of revenue is the result of lower
payroll, recruiting, and travel expenses partially offset by increased sales
incentives in 1996.
Research and development expenditures, before software capitalization,
increased by $153,000 or 5% for the third quarter of 1996 and decreased by
$614,000 or 6% for the first nine months of 1996 compared to the same periods in
1995. The decrease results from lower personnel and related costs partially
offset by increases in consulting and programming services. Capitalized
software costs increased by $154,000 or 13% for the three months ended September
30, 1996 and decreased by $345,000 or 9% for the nine months ended September 30,
1996 compared to the same periods in 1995. The amount of capitalized product
development costs as a percentage of total product development costs were 39%
for the third quarter and 36% for the nine months of 1996, respectively,
compared to 37% for the comparable periods in 1995. The product development
costs capitalized in the first nine months of 1996 were 1.4 times the amortized
amount as compared to 1.6 times in the first nine months of 1995. The following
table summarizes the Company's research and development expenditures for the
periods indicated below:
-8-
Three months Nine months
ended ended
September 30, September 30,
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1996 1995 1996 1995
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(in thousands)
Total research and development costs $3,433 $3,280 $9,498 $10,112
Amount capitalized 1,355 1,201 3,416 3,761
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Amount expensed $2,078 $2,079 $6,082 $6,351
====== ====== ====== =======
General and administrative costs for the third quarter of 1996 were
$1,727,000 or 17% of operating revenue as compared to $1,922,000 or 22% of
operating revenue for the third quarter in 1995. The decrease as a percentage of
revenue is due to both an increase in operating revenue and decrease in costs in
the third quarter of 1996. General and administrative costs for the first nine
months of 1996 decreased to $5,115,000 or 19% of operating revenue compared to
$5,698,000 or 23% for the same period in 1995. The decrease in costs for both
the third quarter and nine month periods ended September 30, 1996 were due to
decreases in payroll and related expenses and legal expense partially offset by
increases in consulting and recruiting expenses.
Investment Income
Investment income was $178,000 and $440,000 for the three and nine months
ended September 30, 1996, respectively, compared to $146,000 and $490,000 for
the same periods in 1995. The increase in investment income for the three months
ended September 30, 1996 compared to the same period in 1995, is attributed to
an increase in the invested balance during the quarter while rates were
consistent from period to period. The decrease in investment income for the nine
month period ended September 30, 1996 compared to the same period in 1995 is
attributed to the lower average invested balances during the first nine months
of 1996.
Income Taxes
The effective tax rate was 40% for the nine months ended September 30,
1996. The effective tax rate was 38% for the nine months ended September 30,
1995. The increase in the effective tax rate is primarily due to an increase in
state rates in 1996.
-9-
Net Income
Net income increased to $1,753,000 or $0.20 per share and $3,287,000 or $0.39
per share for the quarter and nine months ended September 30, 1996, respectively
from $706,000 or $0.08 per share and $1,294,000 or $0.15 per share for the same
period in 1995.
Liquidity and Capital Resources
The Company had working capital as of September 30, 1996 of $24,418,000
(including cash and investments of $17,598,000) as compared to $16,667,000
(including cash and investments of $9,852,000) as of December 31, 1995. The
increase in working capital is primarily a result of the Company's operating
results and the exercise of stock options.
The Company does not have significant commitments for capital expenditures;
however, expansion will continue to increase the Company's utilization of
working capital. The Company expects to fund future working capital requirements
from existing cash balances and cash to be generated from operations. The
Company anticipates that these resources will be sufficient to fund future
operating and capital expenditure requirements for the foreseeable future.
On September 24, 1996 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 23, 1996 (the "Merger Agreement") among
GMIS, HBOC and HBO & Company of Georgia ("HBOC-GA"), a wholly-owned subsidiary
of HBOC, (i) GMIS will merge with and into HBOC-GA and (ii) each outstanding
share of common stock of GMIS and each right to acquire a share of GMIS common
stock will be converted into the right to receive .42 of a share of common stock
of HBOC, subject to possible adjustment as provided in the Merger Agreement and
less the amount of any fractional share, which will be paid in cash. The merger
is subject to various conditions, including the approval of the shareholders of
GMIS at a meeting scheduled to be held on December 9, 1996.
-10-
GMIS INC.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings - See Note 3 of Consolidated Financial Statements.
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information -
On September 24, 1996 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 23, 1996 (the
"Merger Agreement") among GMIS, HBOC and HBO & Company of Georgia
("HBOC-GA"), a wholly-owned subsidiary of HBOC, (i) GMIS will merge
with and into HBOC-GA and (ii) each outstanding share of common stock
of GMIS and each right to acquire a share of GMIS common stock will
be converted into the right to receive .42 of a share of common stock
of HBOC, subject to possible adjustment as provided in the Merger
Agreement and less the amount of any fractional share, which will be
paid in cash. The merger is subject to various conditions, including
the approval of the shareholders of GMIS at a meeting scheduled to be
held on December 9, 1996.
Item 6. Exhibits and Reports on Form 8-K -
Exhibit 2 - Agreement of Merger made the 23 day of September 1996 by
and among HBO & Company, HBO & Company of Georgia and GMIS Inc. -
Incorporated by reference from the definitive proxy statement of GMIS
Inc. dated November 6, 1996 relating to a Special meeting of
Stockholders to be held on December 9, 1996.
-11-
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.
GMIS Inc.
by:
/s/ Timothy M. Leonard
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Timothy M. Leonard
Vice President, Finance, Treasurer & Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
Date: November 12, 1996