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EXHIBIT 13.1
1997 ANNUAL REPORT OF ABR INFORMATION SERVICES, INC.
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1997
ANNUAL REPORT
ABR INFORMATION SERVICES, INC.
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A STRATEGY OF GROWTH
CONTENTS
1 Financial Highlights
2 Letter to Shareholders
3 1997 Accomplishments
4 Company Overview
10 Selected Financial Data
11 Management's Discussion & Analysis
14 Consolidated Statements of Income
15 Consolidated Balance Sheets
16 Consolidated Statements of
Shareholders' Equity
17 Consolidated Statements of Cash Flows
18 Notes to Consolidated Financial Statements
29 Report of Independent CPA
30 Market Price Information
31 Corporate and Shareholder Information
32 Directors and Officers
ABR Information Services, Inc. is a company that has distinguished itself in the
marketplace through a history of rapid growth.
In the field of Portability Administration Services, ABR has excelled. When a
new law called COBRA (the Consolidated Omnibus Budget Reconciliation Act) took
effect in 1986, ABR was among the first to offer comprehensive services to deal
with its requirements on behalf of employers. ABR's CobraServ operation is now
the largest independent COBRA compliance service provider in the country.
Subsequently, when another new law called HIPAA (Health Insurance Portability
and Accountability Act of 1996) began its phase-in period in 1997, ABR responded
by leveraging its existing systems to quickly provide compliance services to its
existing client base. Now, ABR believes that it is the largest independent
provider of HIPAA compliance services in the nation.
ABR's ability to quickly adapt to marketplace opportunities and client demands
defines our strategy of growth. This responsiveness has enabled us to position
ourselves favorably to benefit from one of today's largest business trends --
benefits administration outsourcing. No longer limited to a single niche of the
employee benefits administration industry (COBRA compliance), ABR's suite of
services has expanded to encompass more than 20 service lines that address the
many needs of the $10 billion potential market for full-range benefits
administration services.
In contrast to its primary competitors, consultants and insurance carriers, ABR
takes a service bureau approach to the business -- offering efficiency and value
through economies of scale, technology and location.
A final element of ABR's growth strategy is the accumulation of complementary
and supplementary resources through acquisition. To date, key acquisitions have
expanded the scope of ABR's service capabilities, significantly enhanced
revenues and opened doors to major business opportunities.
ABR continues to actively pursue major opportunities in the rapidly developing
benefits outsourcing market. We expect to continue our success through a
well-planned "Strategy of Growth."
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*FINANCIAL HIGHLIGHTS
(In Thousands Except Per Share Data)
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Results of Operations - Year Ended July 31, 1996 1997 Change
- ---------------------------------------------------------------------------------------------
Revenue $31,162 $50,079 60.7%
Operating income $ 6,362 $12,135 90.7%
Net income $ 5,674 $12,229 115.5%
Net income per share $ .25 $ .44 76.0%
Weighted average shares outstanding, primary 23,067 27,815 20.6%
[CHART] [CHART]
[CHART] [CHART]
*Restated for a two-for-one stock split completed on February 19, 1997.
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TO OUR SHAREHOLDERS
[PICTURE]
James E. MacDougald
Chairman of the Board
President and Chief Executive Officer
Fiscal 1997 was a great year for ABR. Revenues were $50.1 million, an increase
of 60.7% from the prior year, and profits increased to $12.2 million, up 115.5%
from 1996. For our shareholders, these numbers translated into earnings per
share of $.44, up 76% in fiscal 1997. Further, we believe our three-plus year
track record as a public company is unparalleled in our industry. Since going
public in 1994, ABR has posted 14 consecutive quarters of revenue growth over
30% and compound annual profitability increases of 110%. To our original public
shareholders, this financial performance has translated into an 1150% increase
in the value of their ABR common stock as of July 31, 1997. As we look forward
into 1998 and beyond, the strength of ABR's financial condition, including $156
million in cash and investments, zero debt, and a current ratio of 6.1 to 1,
positions us to take full advantage of the continuing trend toward outsourcing
and our enviable status as the industry leader in benefits outsourcing
administration.
During 1997, we added to our core services in a number of exciting ways. First,
federal legislation mandated compliance with the Health Insurance Portability
and Accountability Act of 1996 (HIPAA) for most American employers. The short-
and long-term benefits to ABR from the enactment of HIPAA are profound.
Foremost, we believe HIPAA entrenches COBRA as the driver of healthcare
portability. As the nation's leading provider of COBRA services, we were able to
leverage our technology, compliance expertise and large client base to leap to
the forefront of HIPAA outsourcing administration. Longer-term, we feel the
effect of our combined portability product (COBRA and HIPAA) will continue to be
the driving engine of ABR's industry dominance. In addition, ABR also added
401(k) and state "mini-COBRA" administrative services in 1997. The extension of
our services into these growing service areas meshes well with our existing core
compliance competencies.
Late in 1997, our vision of the benefits outsourcing operations center of the
future became reality. ABR Center, a 118,000 square foot state-of-the-art
facility, opened on-time and on-budget in May. In addition, shortly after our
fiscal year-end, we announced the acquisition of a 380,000 square foot complex
in St. Petersburg, Florida, sufficient to serve our needs for the next 3-5
years.
Subsequent to year-end, ABR consolidated its five operating subsidiaries into a
single operating unit, ABR Benefits Services, Inc. This new name better
represents our mission, to be a large, national benefits outsourcing
administrator. To our customers, this change will be seen in a merged marketing
and service presence. To our valued shareholders, this change typifies the theme
of this year's annual report, "A Strategy of Growth." Through this and other
changes, we believe that 1998 will continue our trend of being "ABR's best year
ever." We appreciate your support for this and the upcoming year.
Cordially,
/s/ James E. MacDougald
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1997 ACCOMPLISHMENTS
- - Fourteen consecutive record quarters of more than 30% growth in revenues.
- - Fourteen consecutive quarters of meeting or exceeding analysts' consensus
earnings estimates.
- - Increased analyst coverage to four nationally-known brokerage firms: Robert W.
Baird, Montgomery Securities, Raymond James and Salomon Brothers.
- - Stock split two-for-one on February 19, 1997.
- - Customer base increased to more than 25,000 employers.
- - Integrated operations of three subsidiaries into Florida location.
- - Opened ABR Center, believed to be the nation's largest operations center
devoted to employee benefits administration outsourcing.
- - Achieved full integration of several complementary technologies, including
OCR (Optical Character Recognition), IVR (Interactive Voice Response),
and EDI (Electronic Data Interchange).
- - Implemented internally-developed software applications to greatly increase
efficiency, including Double Data Entry (DDE), Automated Fax-Back and
Electronic Client Notification systems.
- - Named by Forbes magazine for the third year in a row as one of the "200 Best
Small Companies in America."
- - Launched new service lines to administer requirements of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA), 401(k) plans and state-
mandated portability laws.
IMPROVING PROFIT MARGINS
[GRAPH]
REVENUE DIVERSIFICATION
[GRAPH]
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A STRATEGY OF GROWTH
MARKET LEADERSHIP
Through our growth and the breadth of our expertise and service
offerings, ABR has secured its leadership position in the benefits
administration outsourcing industry. We are one of the industry leaders in
revenues, and our client base and resources devoted exclusively to benefits
administration outsourcing are impressive. We believe such leadership can only
be achieved through years of developing systems, procedures and staff. Our
experience puts us at the leading edge of our industry.
As ABR continues to leverage its existing capabilities and grow from a starting
point that our competition is still trying to attain, we believe we can further
solidify our position of industry leadership.
ABR enjoys a competitive advantage through the realization of economies of scale
and technology. These economies are a direct result of our growth -- and, in
turn, they facilitate continued, more efficient growth. We continuously leverage
these economies when responding to a new market opportunity, such as HIPAA, by
being able to respond more quickly, offer greater value, and adapt our existing
systems to these demands. These capabilities distinguish ABR from its
competitors.
An additional distinction that sets ABR apart from its competition is that we
operate as a true service bureau. Whereas many of our competitors derive a
substantial portion of their revenues from consultation and planning services,
or often sell administration services as a non-core service accommodation to
their
MARKET POTENTIAL
Benefits Administration
Outsourcing Opportunity
$10 Billion
Existing
Business
$50 Million
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[PICTURE]
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- - Providing 20 different benefits administration services, all of which are
available "a la carte."
- - Serving more than 25,000 employers and their employees, dependents and
retirees.
- - Portability prospect universe of more than 650,000 employers with more than
20 employees.
- - More than 12,000 large employer prospects who employ more than 1,000
employees each.
- - Most employers, approximately 94%, administer in-house.
- - Increasingly complex government regulations make in-house administration by
employers more difficult.
- - State-of-the-art technology in place provides competitive advantage and
barrier to entry.
- - Blue chip customer base with approximately 100 of Fortune 500 companies.
clients, ABR derives its revenue from our core competency of supplying fist-rate
administration services.
Given our commitment to benefits administration outsourcing, we offer
something far different than many of our competitors -- independence. Every
dollar invested in a relationship with ABR goes directly toward providing
administrative services -- and not proprietary insurance or consulting products.
Our goal is to sell benefits administration services. Therefore, we provide the
highest possible value by delivering the maximum amount of administrative work
for each dollar spent by our clients.
[PICTURE]
This distinction is much more significant than a simple difference in our
advertising, positioning or mission statements. The value of our service bureau
status is the advantage it provides in competitive bidding situations. In this
regard, we enjoy an extremely high success rate. As a result, we have taken on
numerous large-scale benefits administration outsourcing contracts with major
employers -- approximately 100 of the Fortune 500 companies. To date, our
commitment to administrative excellence has propelled the expansion of our
benefits administration outsourcing operations beyond even our optimistic
projections.
[PICTURE]
This year, our leadership position was clearly demonstrated following the
enactment of a new law -- the Health Insurance Portability and Accountability
Act (HIPAA) -- which imposed new benefits administration mandates on more than
5.5 million employers in the U.S. We were able to rapidly modify our systems to
fulfill the administrative requirements of the new law, then quickly communicate
with the market to offer expertise that could not be found elsewhere. By
offering rapid compliance with extremely tight deadlines, ABR established itself
as the market leader in HIPAA compliance services within months of the issuance
of the law's interim final regulations.
We believe ABR is in a strong position to further leverage its leadership
position in the area of portability administration services and to establish
itself as a market leader among each of the specialized areas of benefits
administration that we are targeting. In each, we expect to apply our
capabilities, leverage and resources to gain an immediate advantage.
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A STRATEGY OF GROWTH
INFRASTRUCTURE AND RESOURCES
Facilities -- and their location -- have always been factors critical to ABR's
success. Our headquarters location in west-central Florida provides us fixed
cost advantages that provide immediate savings over administration costs
experienced by employers elsewhere in the country.
In response to our rapid growth, ABR has embarked on a program of
rapidly-expanding physical infrastructure. In May 1997, ABR completed a major
renovation and moved into the 118,000 square foot ABR Center -- the only
facility we know of designed specifically for the purpose of employee benefits
administration. ABR Center is operated as a "hot site" and configured with a
special disaster recovery area -- literally a hardened bunker with reinforced
concrete and the ability to remain operational under virtually any
circumstances. Specially constructed features of the bunker include dual power
and telephone feeds and redundant information systems which ensure continuous
operation. Other facilities have been purchased to accommodate our rapid
expansion for the coming years, with an additional 380,000 square feet of office
space purchased in October 1997 available to meet our needs starting in late
1998.
[PICTURE]
ABR has also established a physical presence nationally with sales and service
centers on the East and West Coasts of the United States, as well as in Florida.
This geographic diversity affords ABR ready access to prospective business
regardless of the area of the country. Sales functions take place in all ABR
locations, while several back-office operations have been consolidated in
Florida for greater efficiency.
Strategic growth requires more than facilities -- it requires capabilities that
are in demand in the marketplace. ABR is a company built on capabilities and
commitment that cannot be found elsewhere. The best people. Compliance
expertise. The best information systems, refined through ten years of
operations. Our experience in the industry puts us years ahead of our
competition.
This expertise has been developed internally and acquired by recruiting the best
industry talent available. It is supported by the latest technology. Our
practices are kept current through daily online research into the industry's
most comprehensive databases of legal, legislative and industry research. Our
information systems make that research instantly accessible at the touch of a
key. Through continual training, all ABR staff members are kept current on
industry trends and compliance requirements. Also, our customer service
department is fully equipped to provide timely and accurate answers for clients
and their employees who call on us for our expertise.
Technology fuels the flow of information to and from our operations. At the
heart of our systems is one of the most powerful client-server computer
platforms available in the world. Our system can be accessed 24 hours a day via
Interactive Voice Response (IVR) technology,
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supplemented by automated fax-back fulfillment of information requests.
Electronic Data Interchange (EDI) systems and Optical Character Recognition
(OCR) aid in the processing of hundreds of thousands of documents on an ongoing
basis. Wherever possible, online communications is being phased in as a
replacement for paper transactions. When data is obtained, much of it is
"double-entered" and cross-verified to ensure accuracy -- especially where legal
compliance is of concern.
At the heart of ABR's operations is the new ABR Center (above)--the only
facility we know of designed and remodeled specifically for the purpose of
benefits administration. Service center facilities are also located in
Virginia, New Jersey and California.
[PICTURE] [PICTURE] [PICTURE]
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A STRATEGY OF GROWTH
CAPABILITIES AND SERVICES
ABR has targeted key areas of benefits administration most commonly needed by
employers of all sizes -- with the goal of providing all of those services
through a "one-stop" benefits administration outsourcing resource. Capabilities
to perform those services are being developed or acquired at a rapid pace. Some
of this development is being fueled by the needs of clients who have already
entered into multi-service benefits administration outsourcing arrangements with
ABR. Other capabilities are added as we acquire complementary businesses with
extensive experience in specialized benefits administration fields.
All of our services are available "a la carte." Delivery of our services is
transparent to our clients and to their employees and dependents, although
various ABR operations throughout the country may be involved in the
administrative activities required. Delivery of our services is enhanced through
an integrated system that takes advantage of ABR's expertise, systems, and the
efficiency of its operations.
Our services fall into three categories:
Portable Healthcare -- ABR delivers employee health benefits "portability"
administration services primarily through its CobraServ operation, the nation's
largest independent COBRA and HIPAA compliance service bureau. ABR helps
employers deal with these two complex federal portability laws by performing the
most difficult, time-consuming and risky aspects of these laws on their behalf.
We also perform administrative functions related to state-level COBRA-like
portability laws.
[PICTURE] [PICTURE]
Retiree and Inactive Employee Services--ABR assists employers by servicing the
benefits needs of their ex-employees and their dependents. Employers must
deliver their benefits commitments to these individuals, but must also retain a
primary focus on their active employees, dependents and operations. ABR
provides services such as retiree billing, vestee servicing, retiree services,
open enrollment administration and general billing services for non-employees.
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Active Employee Administration -- Represents the largest and fastest-growing
market opportunity for ABR. Presently, ABR offers services to virtually every
employer, including:
Enrollment and Eligibility --
maintaining, updating and servicing clients' central benefits eligibility
databases;
Employee Communications Services --
creating and disseminating benefits-related employee communications;
Open Enrollment Administration --
coordinating new enrollments, re-enrollments and changes of group health
benefit option selections;
Section 125 Administration --
helping employers structure their benefits programs with tax-exempt status,
with services including Premium-Only Plan and Flexible Spending Account
(FSA) administration;
FMLA Administration --
meeting benefits continuation requirements of the Family Medical Leave Act;
QDRO Administration --
administering Qualified
Domestic Relations Orders;
QMCSO Administration --
administering Qualified
Medical Child Support Orders;
Qualified Plan Services --
providing defined contribution/ 401(k) pension plan
administration;
Education and Family Services --
administering emergency loan,
tuition reimbursement and educational loan programs.
[PICTURE]
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Selected Financial Data
YEARS ENDED JULY 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(In thousands except per share data)
Statement of Income Data:
Revenue $ 9,028 $13,465 $18,835 $ 31,162 $ 50,079
Cost of services 5,632 7,689 10,410 17,864 28,179
Selling, general and administrative expenses 1,878 3,250 4,448 6,575 9,765
Acquisition costs -- -- -- 361 --
------- ------- ------- -------- --------
Operating income 1,518 2,526 3,977 6,362 12,135
Interest income 4 65 572 2,872 7,081
------- ------- ------- -------- --------
Income before provision for income taxes 1,522 2,591 4,549 9,234 19,216
Income tax provision 570 981 1,755 3,560 6,987
------- ------- ------- -------- --------
Net income $ 952 $ 1,610 $ 2,794 $ 5,674 $ 12,229
======= ======= ======= ======== ========
Per share data (1):
Net income per share $ .07 $ .11 $ .14 $ .25 $ .44
======= ======= ======= ======== ========
Weighted average shares outstanding (2) 13,401 14,965 20,001 23,067 27,815
YEARS ENDED JULY 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS)
Balance Sheet Data (1):
Working capital $ 1,781 $13,676 $14,192 $145,825 $127,839
Total assets 11,947 27,186 33,191 202,574 222,017
Total long term debt, excluding current portion 476 -- -- -- --
Redeemable preferred stock, excluding current portion 127 -- -- -- --
Total shareholders' equity 2,753 16,113 19,213 181,150 194,096
(1) Restated for two-for-one stock split completed on February 19, 1997.
(2) Includes Common Stock and Common Stock equivalents.
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MANAGEMENT'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The Company's revenues currently are generated from three sources: portability
compliance services, administration services with respect to benefits provided
to retirees and inactive employees, and administration services with respect to
benefits provided to active employees.
The first source of the Company's revenue is providing portability compliance
services primarily through its qualifying event agreements with employers and
capitation agreements with insurance companies. Through qualifying event
agreements, the Company receives a fixed, per occurrence, fee from its customers
for each qualifying event. A qualifying event occurs when an employee or his or
her dependents experience a loss or change of coverage under a group healthcare
plan. The amount of the fixed fee varies depending on the type of qualifying
event (i.e., COBRA (the "Consolidated Omnibus Budget Reconciliation Act") or
HIPAA (the "Health Insurance Portability and Accountability Act of 1996")) and
the method of the qualifying event notification mailing, which is selected by
the customer. Through capitation agreements, insurance companies designate the
Company as the administrator of compliance for their group insurance clients
that are subject to COBRA, HIPAA or state mandated continuation coverage health
portability laws. The Company is paid a monthly fee for each employee covered by
the group plan. The revenue generated under a capitation agreement is not
dependent on the triggering of a qualifying event, but is determined based on
the number of employees covered by the group plan at the beginning of each
month. The Company also receives an administrative fee typically equal to 2% of
the monthly health insurance premium that is paid by or on behalf of each COBRA
continuant. In addition, the Company generates revenues from customers for
additional compliance and healthcare administration services, both on a one-time
and continuous basis. During fiscal 1996 and fiscal 1997, 69.9% and 65.6%,
respectively, of the Company's revenues were attributable to portability
compliance services.
The second source of the Company's revenue is providing administration services
with respect to benefits provided to retirees and inactive employees, including
retiree healthcare, disability, surviving dependent, family leave and severance
benefits. During fiscal 1996 and fiscal 1997, 15.5% and 14.4%, respectively, of
the Company's revenues were attributable to the Company's administration
services for retirees and inactive employees.
The third source of the Company's revenue is providing administration services
with respect to benefits provided to active employees, including open
enrollment, employee enrollment and eligibility, QDRO ("Qualified Domestic
Relations Order") administration, Flexible Spending Account administration,
401(k) plan administration, and other pension services. During fiscal 1996 and
fiscal 1997, 14.6% and 20%, respectively, of the Company's revenues were
attributable to benefits administration services for active employees.
The Company has experienced significant growth in recent years, with revenues
increasing from $13.5 million in fiscal 1994 to $50.1 million in fiscal 1997,
and net income increasing from $1.6 million in fiscal 1994 to $12.2 million in
fiscal 1997.
Cost of services includes direct personnel, occupancy and other costs associated
with providing services to customers, such as mailing and printing costs.
Selling, general and administrative expenses include administrative, marketing
and certain other indirect costs.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by certain
items reflected in the Company's statements of income.
PERCENTAGE OF REVENUES
-------------------------
YEARS ENDED JULY 31,
-------------------------
1995 1996 1997
----- ----- -----
Revenue 100.0% 100.0% 100.0%
Cost of services 55.3 57.3 56.3
Selling,
general &
administrative
expenses 23.6 21.1 19.5
Acquisition costs -- 1.2 --
----- ----- -----
Operating
income 21.1 20.4 24.2
Interest
income 3.0 9.2 14.2
Income taxes 9.3 11.4 14.0
----- ----- -----
Net income 14.8% 18.2% 24.4%
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YEAR ENDED JULY 31, 1997
COMPARED TO YEAR ENDED
JULY 31, 1996
Revenues increased $18.9 million, or 60.7%, to $50.1 million during the year
ended July 31, 1997 from $31.2 million in the year ended July 31, 1996. Of the
$18.9 million increase in revenues, $11.1 million was attributable to increased
revenues from portability compliance services, $2.4 million was attributable to
increased revenues from retiree/inactive employee benefits administration and
approximately $5.4 million was due to increased revenues from active employee
benefits administration.
The increase in portability compliance revenues was primarily attributable to
the addition of new customers and new service product offerings. New products
pertain to clients having to comply with newly passed state-mandated
continuation coverage health portability laws and the federally-mandated HIPAA
law.
The increase in retiree/inactive employee benefits administration revenues was
primarily attributable to the addition of new customers obtained by the Company
and as a result of the acquisitions during the year ended July 31, 1996 being
included for a full year in fiscal 1997.
The increase in revenues from active employee benefits administration was
primarily attributable to the addition of new customers obtained by the Company
and new service product offerings in enrollment and eligibility administration
during the year ended July 31, 1997.
Cost of services increased $10.3 million, or 57.7%, to $28.2 million during the
year ended July 31, 1997 from $17.9 million during the year ended July 31, 1996.
The increase in cost of services was attributable to the addition of data
processing, information systems and customer service personnel to support
revenue growth along with the amortization of software placed in service as
completed. As a percentage of revenues, cost of services decreased to 56.3% in
1997 from 57.3% for the prior year as a result of operating efficiencies
associated with the allocation of these expenses over a larger revenue base.
Selling, general and administrative expenses increased $3.2 million, or 48.5%,
to $9.8 million during the year ended July 31, 1997 from $6.6 million in the
year ended July 31, 1996. The increase in selling, general and administrative
expenses was primarily attributable to the addition of marketing, management and
administrative personnel to support the Company's growth, and to additional
marketing costs. As a percentage of revenues, selling, general and
administrative expenses decreased to 19.5% in 1997 from 21.1% for the prior
year. The decrease as a percentage of revenues resulted primarily from operating
efficiencies from the allocation of these expenses over a larger revenue base.
Interest income increased $4.2 million, or 146.5%, to $7.1 million during the
year ended July 31, 1997 from $2.9 million in the year ended July 31, 1996. This
increase is a result of the proceeds from the secondary stock offering completed
in March 1996 being invested for a full year in fiscal 1997.
Income taxes increased 96.3% to $7.0 million during the year ended July 31, 1997
from $3.6 million during the year ended July 31, 1996, however, the Company's
effective tax rate decreased to 36.4% for the year ended July 31, 1997 from
38.6% for the previous year. This decrease reflects the Company's move to more
tax-free investments in 1997.
As a result of the foregoing, the Company's net income increased $6.5 million,
or 115.5%, to $12.2 million during the year ended July 31, 1997 from $5.7
million in the year ended July 31, 1996. Net income per share was $.44 for the
year ended July 31, 1997 compared to $.25 for the prior year.
YEAR ENDED JULY 31, 1996
COMPARED TO YEAR ENDED
JULY 31, 1995
Revenues increased $12.3 million, or 65.5%, to $31.2 million for the year ended
July 31, 1996 from $18.8 million for the year ended July 31, 1995. Of the $12.3
million increase in revenues, $6.0 million was attributable to increased
revenues from COBRA compliance services, $3.5 million was attributable to
increased retiree/inactive employee benefits administration and approximately
$2.8 million was due to increased revenues from active employee benefits
administration.
The increase in portability compliance revenues was primarily attributable to
the addition of new customers and as a result of acquisitions during fiscal
1996.
The increase in retiree/inactive employee benefits administration revenues was
primarily attributable to the addition of new customers obtained by the Company
and as a result of the acquisitions during fiscal 1996.
The increase in active employee benefits administration revenues was primarily
attributable to the addition of new customers obtained by the Company and as a
result of an acquisition during fiscal 1996.
Cost of services increased $7.5 million, or 71.6%, to $17.9 million for the year
ended July 31, 1996 from $10.4 million for the year ended July 31, 1995. The
increase in cost of services was attributable to the
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addition of data processing, information systems and customer service personnel
to support growth as well as the result of the acquisitions. As a percentage of
revenues, cost of services increased to 57.3% from 55.3% for the same period.
This increase as a percentage of revenues resulted from increasing the operating
infrastructure to support the Company's growth.
Selling, general and administrative expenses increased $2.1 million, or 47.8%,
to $6.6 million for the year ended July 31, 1996 from $4.5 million for the year
ended July 31, 1995. The increase in selling, general and administrative
expenses was primarily attributable to the addition of marketing, management and
administrative personnel to support the Company's growth. As a percentage of
revenues, selling, general and administrative expenses decreased to 21.1% from
23.6% for the same periods. The decrease as a percentage of revenues resulted
primarily from operating efficiencies from the allocation of these expenses over
a larger revenue base.
Interest income increased $2.3 million, or 401.6%, to $2.9 million during the
year ended July 31, 1996 from $573,000 in the year ended July 31, 1995. This
increase is a result of the proceeds from the secondary stock offering completed
in March 1996 being invested.
Income taxes increased 102.9% to $3.6 million during the year ended July 31,
1996 from $1.8 million during the year ended July 31, 1995. The Company's
effective tax rate remained the same for both periods at 38.6%.
As a result of the foregoing, the Company's net income increased $2.9 million,
or 103.1%, to $5.7 million during the year ended July 31, 1996 from $2.8 million
in the year ended July 31, 1995. Net income per share was $.25 for the year
ended July 31, 1996 compared to $.14 for the prior year.
LIQUIDITY AND CAPITAL
RESOURCES
In March 1996, the Company completed a secondary stock offering which provided
net cash, after offering expenses, of $151 million. Net cash provided by
operating activities was $16.4 million for the year ended July 31, 1997 compared
to $11.5 million for the same period of 1996. As of July 31, 1997 and 1996, the
Company's working capital and current ratio were $127.8 million and 6.1-to-1 and
$145.8 million and 8.1-to-1, respectively. The Company invests excess cash
balances primarily 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 year ended July 31, 1997, the Company's capital expenditures were
$21.5 million.
In December 1995, the Company purchased a 118,000 square foot facility situated
on 12.7 acres of land in Palm Harbor, Florida. This facility became operational
in May of 1997. Total cost of the renovations and purchase was $9.2 million.
In 1996, the Company also purchased 72 acres of land in Tarpon Springs, Florida
for $2.4 million. The land is to be used for future corporate expansion,
although no formal commitments or designs presently exist for this proposed
expansion.
Subsequent to year-end, the Company purchased a complex of buildings in St.
Petersburg, Florida containing 380,000 square feet of office space for $13.5
million. No formal designs or commitments presently exist for this proposed
expansion.
Management estimates that as of July 31, 1997, approximately $9.8 million will
be required in order for the Company to purchase additional equipment, furniture
and hardware, and complete its currently defined software projects.
The Company has a five-year, $15.0 million unsecured credit facility. The
Company has agreed to maintain all of its assets free and clear of all liens,
encumbrances and pledges, except purchase money security interests in specific
equipment in an aggregate amount of less than $500,000 as long as the credit
facility remains outstanding or any indebtedness thereunder remains unpaid.
Interest on the principal balance outstanding under this line of credit accrues
at a floating interest rate equal to the prime rate or, at the Company's option,
to the 30-day London Interbank Offering Rate (LIBOR), plus an applicable
interest rate margin between 1% and 2% based on certain financial ratios. The
credit facility contains certain financial covenants requiring the maintenance
of cash and cash equivalents and investments equal to or greater than customer
account deposits, a funded debt to EBITDA ratio of a maximum of 2.25-to-1, a
debt service coverage ratio of not less than 1.35-to-1, as well as the
maintenance of a certain funded debt to tangible net worth ratio. As of July 31,
1997, the Company was in compliance with all such covenants and there were no
amounts outstanding under the credit facility.
The Company believes that its cash, investments, cash flows from operations and
the funds available from its credit facility will be adequate to meet the
Company's expected capital requirements for the foreseeable future.
13
17
ABR Information Services, Inc.
Consolidated Statements of Income
Years ended July 31, 1995, 1996 and 1997
Years ended July 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
Revenue $18,834,636 $31,162,181 $50,078,842
Operating expenses:
Cost of services 10,410,197 17,863,588 28,178,925
Selling, general and administrative 4,448,319 6,575,390 9,765,500
Acquisition costs -- 361,198 --
----------- ----------- -----------
Operating income 3,976,120 6,362,005 12,134,417
Interest income 572,569 2,872,145 7,081,238
----------- ----------- -----------
Income before provision for income taxes 4,548,689 9,234,150 19,215,655
Income tax provision 1,755,011 3,560,366 6,987,003
----------- ----------- -----------
Net income $ 2,793,678 $ 5,673,784 $12,228,652
=========== =========== ===========
Net income per share $ .14 $ .25 $ .44
=========== =========== ===========
Weighted average shares outstanding 20,001,490 23,067,054 27,814,794
=========== =========== ===========
The accompanying notes are an integral part of these statements.
14
18
ABR Information Services, Inc.
Consolidated Balance Sheets
As of July 31, 1996 and July 31, 1997
ASSETS
July 31,
---------------------------
1996 1997
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 14,088,396 $ 33,322,734
Investments 147,111,102 108,499,196
Accounts receivable, net 3,870,539 8,295,884
Prepaid expenses and other 1,282,952 2,595,306
------------ ------------
Total current assets 166,352,989 152,713,120
LONG-TERM INVESTMENTS -- 14,128,644
PROPERTY AND EQUIPMENT, net 14,539,898 27,790,354
SOFTWARE DEVELOPMENT COSTS, net 6,181,973 11,767,211
GOODWILL, INTANGIBLES AND OTHER ASSETS, net 15,498,745 15,617,519
------------ ------------
TOTAL ASSETS $202,573,605 $222,016,848
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 615,663 $ 613,138
Accrued expenses 762,442 512,035
Customer accounts deposits 18,019,405 23,133,381
Unearned revenue 647,093 594,524
Income taxes payable 483,663 20,770
------------ ------------
Total current liabilities 20,528,266 24,873,848
------------ ------------
DEFERRED INCOME TAXES 895,555 3,047,243
------------ ------------
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, 13,588,194 and 27,376,356 shares,
respectively 135,882 273,763
Additional paid in capital 169,879,717 170,459,157
Retained earnings 11,134,185 23,362,837
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 181,149,784 194,095,757
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $202,573,605 $222,016,848
============ ============
The accompanying notes are an integral part of these statements.
15
19
ABR Information Services, Inc.
Consolidated Statements of Shareholders' Equity
Years ended July 31, 1995, 1996 and 1997
Common Stock Additional
--------------------- Paid-in Retained
Shares Amount Capital Earnings Total
---------- -------- ------------- ----------- -------------
Balance at July 31, 1994 4,436,547 $ 44,365 $ 13,402,351 $ 2,666,723 $ 16,113,439
Common stock split 2,165,931 21,659 (22,364) -- (705)
Exercise of stock options 38,336 384 231,846 -- 232,230
Tax benefit related to exercise of
certain stock options -- -- 74,329 -- 74,329
Net income -- -- -- 2,793,678 2,793,678
---------- -------- ------------- ----------- -------------
Balance at July 31, 1995 6,640,814 66,408 13,686,162 5,460,401 19,212,971
Common stock split 3,248,882 32,489 (33,917) -- (1,428)
Exercise of stock options 145,911 1,459 666,890 -- 668,349
Tax benefit related to exercise of
certain stock options -- -- 1,426,563 -- 1,426,563
Shares issued in conjunction with
acquisitions 132,712 1,327 3,048,848 -- 3,050,175
Secondary stock offering, net of
offering costs of $381,092 3,419,875 34,199 151,085,171 -- 151,119,370
Net income -- -- -- 5,673,784 5,673,784
---------- -------- ------------- ----------- -------------
Balance at July 31, 1996 13,588,194 135,882 169,879,717 11,134,185 181,149,784
Common stock split 13,685,918 136,859 (136,859) -- --
Exercise of stock options 102,244 1,022 659,693 -- 660,715
Tax benefit related to exercise
of certain stock options -- -- 56,606 -- 56,606
Net income -- -- -- 12,228,652 12,228,652
---------- -------- ------------- ----------- -------------
Balance at July 31, 1997 27,376,356 $273,763 $ 170,459,157 $23,362,837 $ 194,095,757
========== ======== ============= =========== =============
The accompanying notes are an integral part of these statements.
16
20
ABR Information Services, Inc.
Consolidated Statements of Cash Flows
Years ended July 31, 1995, 1996 and 1997
Years ended July 31,
----------------------------------------------
1995 1996 1997
------------ ------------- -------------
Cash flows from operating activities:
Net income $ 2,793,678 $ 5,673,784 $ 12,228,652
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and other amortization 569,385 1,547,343 2,807,485
Amortization of software 52,217 95,411 690,549
Deferred income taxes 362,379 328,514 2,151,688
Tax benefit related to exercise of certain stock options 74,329 1,426,563 56,606
Increase in allowance for doubtful accounts 8,649 12,692 91,281
Change in operating assets and liabilities:
Accounts receivable (918,172) (771,537) (4,516,626)
Prepaid expenses and other (173,240) (528,798) (1,312,354)
Income taxes recoverable 176,165 -- --
Other assets (61,942) (8,953) (112,693)
Accounts payable 8,660 (674,980) (2,525)
Accrued expenses 420,601 (130,668) (250,407)
Customer accounts deposits 1,704,471 4,228,527 5,113,976
Unearned revenue 271,375 23,931 (52,569)
Income taxes payable 134,573 298,695 (462,893)
------------ ------------- -------------
Net cash provided by operating activities 5,423,128 11,520,524 16,430,170
------------ ------------- -------------
Cash flows from investing activities:
Additions to investments (5,445,720) (314,607,394) (394,805,395)
Maturities of investments 17,508,872 172,470,327 419,288,657
Additions to property and equipment (1,135,622) (12,537,101) (15,192,338)
Additions to software development costs (2,366,075) (3,292,648) (6,275,787)
Acquisitions, net -- (10,656,020) (871,684)
------------ ------------- -------------
Net cash provided by (used in) investing activities 8,561,455 (168,622,836) 2,143,453
------------ ------------- -------------
Cash flows from financing activities:
Proceeds from bank borrowings -- 6,000,000 --
Principal payments under bank borrowings -- (6,000,000) --
Exercise of stock options/warrants 232,230 668,349 660,715
Public offerings, net of cost -- 151,119,370 --
Other (705) (101) --
------------ ------------- -------------
Net cash provided by financing activities 231,525 151,787,618 660,715
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 14,216,108 (5,314,694) 19,234,338
Cash and cash equivalents at beginning of year 5,186,982 19,403,090 14,088,396
------------ ------------- -------------
Cash and cash equivalents at end of year $ 19,403,090 $ 14,088,396 $ 33,322,734
============ ============= =============
Cash paid for income taxes total $913,530, $1,663,102 and $5,241,601 for 1995,
1996 and 1997 respectively.
The accompanying notes are an integral part of these statements.
17
21
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
ABR Information Services, Inc. (the "Company") is a leading provider of
comprehensive benefits administration, compliance and information
services to employers seeking to outsource their benefits
administration functions. The Company believes it is the leading
provider of COBRA (the "Consolidated Omnibus Budget Reconciliation
Act") compliance services. Additionally, the Company provides
compliance services related to the federally-mandated Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"). COBRA and HIPAA
are federally-mandated laws related to the portability of employee
group health insurance.
The Company also provides benefits administration services with respect
to benefits provided to retirees and inactive employees, including
retiree healthcare, disability, surviving dependent, family leave and
severance benefits. Additionally, the Company provides benefits
administration services with respect to benefits provided to active
employees, including enrollment and eligibility verification, qualified
domestic relations order ("QDRO") administration, 401(k) administration
services, flexible spending account ("FSA") administration, and pension
services. All services are offered on either an "a la carte" basis or a
total outsourcing basis, allowing customers to outsource certain
benefits administration tasks which they find too costly or burdensome
to perform in-house, or to outsource the entire benefits administration
function.
The Company is headquartered in Palm Harbor, Florida and provides
information and support services to more than 25,000 employers,
including Fortune 500 companies, insurance companies and other
employers. The Company's operations are in a single business segment,
the information services business.
Effective September 8, 1997, the Company consolidated a number of its
subsidiaries into one operating subsidiary called ABR Benefits
Services, Inc.
The financial statements have been restated to reflect the
three-for-two stock splits completed July 1995 and February 1996, a
two-for-one stock split completed February 1997 and an acquisition (see
Note M) by a pooling of interest completed June 1996.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Principles of Consolidation
The financial statements include the accounts of ABR Information
Services, Inc. and all of its subsidiaries. All material
intercompany balances and transactions have been eliminated.
2. Revenue Recognition
Revenues are recognized when the related services have been
provided. Advance payments received from customers for services
not provided are included in unearned revenue.
3. Cost of Services
Cost of services includes personnel, occupancy and other costs
associated with providing services to customers, such as mailing
and printing costs.
4. Customer Accounts Deposits
As part of the services provided to customers, the Company bills
and collects for its customers and maintains the funds in
segregated accounts until the funds are remitted. For financial
statement purposes, the segregated funds are included in cash and
investments (as the funds are not restricted) with the
corresponding liability presented as customer accounts deposits.
5. Cash and Cash Equivalents
The Company considers all highly liquid investments, with a
maturity of 30 days or less when purchased, as cash equivalents.
18
22
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
As of July 31, 1996 and 1997, substantially all of the Company's
cash is invested in overnight repurchase agreements of
mortgage-backed or government securities. The Company has a
security interest in the specific investment underlying the
repurchase agreements.
6. Investments
Effective August 1, 1994, the Company implemented Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The Company's
investments are classified as either "Held-to-Maturity" or
"Available-for-Sale" investment securities. "Held-to-Maturity"
investments are securities which the Company has the ability and
positive intent to hold to maturity and are stated at cost,
adjusted for amortization of premiums and accretion of discounts
which are computed by the interest method. Declines in fair value
that are other than temporary are recorded as incurred.
"Available-for-Sale" securities are measured at fair value.
7. Contract Set-Up Costs
Under contractual arrangements with certain customers, the Company
incurs set-up costs. These costs are capitalized and amortized
over the contract period, but no longer than twelve months, using
the straight-line method. As of July 31, 1996 and 1997 unamortized
set-up costs of $370,335 and $1,013,789, respectively, are
included in prepaid expenses. During 1995, 1996 and 1997,
amortization of set-up costs totalled $405,299, $569,755 and
$989,612, respectively.
8. Property and Equipment
Property and equipment is stated at cost. Depreciation expense is
computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the
lives of the respective leases or the service lives of the
improvements, whichever is shorter. Accelerated methods are used
for income tax purposes.
9. Software Development Costs
Software development costs consist primarily of purchased
software, consulting services, salaries and certain other expenses
related to the development and modification of software
capitalized in accordance with the provisions of SFAS No. 86
"Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed." Capitalization of such cost begins only
upon the establishment of technological feasibility as defined in
SFAS No. 86. Such capitalized costs are amortized when the
software is available to service customers using the straight-line
method over an estimated life of four to five years or based on
the ratio of current gross revenue to the anticipated gross
revenue, whichever is greater, with amortization expense of
$52,217, $95,411 and $690,549, for the years ended 1995, 1996 and
1997, respectively. Accumulated amortization of software
development costs totalled $220,535 and $911,084 at July 31, 1996
and 1997, respectively.
Software development costs that were expensed and not capitalized
under SFAS No. 86 totalled $1,138,639, $1,312,653 and $3,113,157,
for the years ended 1995, 1996 and 1997, respectively.
The Company estimates the cost to complete the current software
projects will be $6.2 million.
10. Income Taxes
Deferred income taxes principally result from expensing certain
software development costs for income tax return purposes while
capitalizing and amortizing certain of these costs for financial
statement purposes.
11. Net Income Per Share
The FASB has issued Statement of Financial Accounting Standards
No. 128, "Earnings Per Share," which is effective for financial
statements issued after December 15, 1997. Early adoption of the
new standard is not permitted. The new standard eliminates primary
and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share together with disclosure of
how the per share amounts were computed. The effect of adopting
this new standard has not been determined.
Net income per share has been computed using the weighted average
of the outstanding Common Stock plus the dilutive Common Stock
equivalents (stock options), using the treasury or the modified
treasury stock method (see Note G). Primary and fully diluted
calculations result in the same net income per share.
19
23
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-Continued
12. Reclassifications
Certain amounts in prior years' financials statements have been
reclassified to conform with the July 31, 1997 presentation.
13. New Accounting Pronouncements
Effective in fiscal 1997, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," which required impairment
losses to be recorded on long-lived assets used in operations when
impairment indicators are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets' carrying amount. The Company's adoption and application of
SFAS No. 121 had no effect on the Company's financial statements.
Effective in fiscal 1997, the Company adopted SFAS No. 123,
"Accounting for Stock Based Compensation," which relates to stock
options granted to employees. SFAS No. 123 permits companies to
continue using the accounting method promulgated by the Accounting
Principles Board Opinion No. 25 ("APB No. 25") "Accounting for
Stock Issued to Employees" to measure compensation or to adopt the
fair value based method prescribed by SFAS No. 123. The Company
elected to continue using the method under APB No. 25 and the
required pro forma disclosures are presented in Note G to the
financial statements. The adoption of SFAS No. 123 has no effect
on the basic financial statements, except for additional
disclosures.
14. Goodwill and Other Intangibles
Amortization is based upon the allocation of the total purchase
price (see Note M) and amortization periods, using the
straight-line method, as follows:
Estimated
Useful
Allocation Lives
-------------- ---------
Non-competition agreements $ 600,000 5 years
Contracts 2,000,000 10 years
Goodwill 14,060,600 25 years
Amortization expense totaled $0, $482,708 and $865,603 for the
years ended July 31, 1995, 1996 and 1997, respectively. The
accumulated amortization totalled $482,708 and $1,348,310 at July
31, 1996 and 1997, respectively of which $237,953 and $843,311
relate to goodwill.
15. Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
16. Fair Value of Financial Instruments
At July 31, 1996 and 1997, the carrying amount of cash, accounts
receivable, accounts payable, accrued expenses and customer
account deposits approximate fair value because of the short-term
maturities of these items.
20
24
NOTE C - INVESTMENTS
The Company classifies debt and equity securities in two categories:
Available-for-Sale securities and Held-to-Maturity securities.
Available-for-Sale securities are measured at fair value, with net unrealized
gains and losses reported in equity. There were no net unrealized holding
losses at July 31, 1997 and 1996. Held-to-Maturity securities are carried at
amortized cost.
The amortized cost, unrealized gains and losses, and fair values of the
Company's Available-for-Sale and Held-to-Maturity investment securities are
summarized as follows:
Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ------------
At July 31, 1997:
Available-for-Sale Securities
Obligations of local, state and
federal governmental agencies $ 68,119,451 $ -- $ -- $ 68,119,451
Held-to-Maturity Securities
Obligations of local, state and
federal governmental agencies 54,508,389 65,363 107,178 54,466,574
------------ ------- -------- ------------
Total $122,627,840 $65,363 $107,178 $122,586,025
============ ======= ======== ============
At July 31, 1996:
Held-to-Maturity Securities
Commercial paper $146,111,102 $ -- $ 22,949 $146,088,153
Obligations of local and state
governmental agencies 1,000,000 -- -- 1,000,000
------------ ------- -------- ------------
Total $147,111,102 $ -- $ 22,949 $147,088,153
============ ======= ======== ============
The following table lists the maturities of debt securities held at July 31,
1997 and 1996 classified as Available-for-Sale and Held-to-Maturity:
Available-for-Sale Held-to-Maturity
------------------------- ---------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ------------ ------------
At July 31, 1997:
Due in one year or less $68,119,451 $68,119,451 $ 40,379,745 $ 40,340,845
Due after one year through five years -- -- 14,128,644 14,125,729
----------- ----------- ------------ ------------
Total $68,119,451 $68,119,451 $ 54,508,389 $ 54,466,574
=========== =========== ============ ============
At July 31, 1996:
Due in one year or less $ -- $ -- $147,111,102 $147,088,153
----------- ----------- ------------ ------------
Total $ -- $ -- $147,111,102 $147,088,153
=========== =========== ============ ============
There were no sales of securities classified as Available-for-Sale in 1997 and
1996. The Company uses the specific identification method to determine the cost
of securities sold.
Interest earned on investment securities and cash and cash equivalents was
$1,214,971, $3,846,102 and $8,252,011 for the years ended July 31, 1995, 1996
and 1997, respectively. A portion of these amounts is included in revenues and
the remainder is reported separately as interest income in the Consolidated
Statements of Income.
21
25
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE D - PROPERTY AND EQUIPMENT
July 31,
--------------------------- Estimated
1996 1997 Life
----------- ----------- -------------
Land and building $ 9,687,256 $17,007,404 39 Years
Equipment 6,518,977 12,908,421 5 Years
Furniture and fixtures 732,394 1,930,115 10 Years
Leasehold improvements 293,753 439,085 Life of Lease
----------- -----------
17,232,380 32,285,025
Accumulated depreciation (2,692,482) (4,494,671)
----------- -----------
Total property and equipment, net $14,539,898 $27,790,354
=========== ===========
Depreciation for the years ended 1995, 1996 and 1997 was $569,386,
$1,064,635 and $1,941,882, respectively.
NOTE E - LINES OF CREDIT
On January 30, 1996, the Company entered into a five year, $15.0
million unsecured credit facility. The Company has agreed to
maintain all of its assets free and clear of all liens,
encumbrances and pledges, except purchase money security interests
in specific equipment in an aggregate amount of less than $500,000
as long as the credit facility remains outstanding or any
indebtedness thereunder remains unpaid. Interest on the principal
balance outstanding under this line of credit accrues at a
floating interest rate equal to the prime rate or, at the
Company's option, to the 30-day London Interbank Offering Rate
(LIBOR), plus an applicable interest rate margin between 1% and 2%
based on certain financial ratios. The credit facility contains
certain financial covenants requiring the maintenance of cash and
cash equivalents and investments equal to or greater than customer
account deposits, a funded debt to EBITDA ratio of a maximum of
2.25-to-1, a debt service coverage ratio of not less than
1.35-to-1, as well as the maintenance of a certain funded debt to
tangible net worth ratio. As of July 31, 1997, the Company was in
compliance with all such covenants, and there were no amounts
outstanding under the credit facility.
NOTE F - SHAREHOLDERS' EQUITY
Common Stock
The authorized Common Stock of the Company consists of 100,000,000
shares of voting Common Stock, and 250,000 shares of nonvoting
Common Stock. The shares of nonvoting Common Stock have the same
rights as the shares of voting Common Stock, except that the
holders of nonvoting Common Stock are not entitled to vote on
matters submitted to shareholders, except as required by
applicable law. As of July 31, 1997, there were no shares of
nonvoting Common Stock issued and outstanding. On July 13, 1995
and on February 19, 1996, the Company completed three-for-two
stock splits, on February 19, 1997 the Company completed a
two-for-one stock split, and on June 28, 1996 the Company
completed an acquisition by a pooling of interest. The weighted
average shares outstanding, earnings per share and stock options
have been restated to reflect the stock splits and the acquisition
by a pooling of interest.
22
26
NOTE F - SHAREHOLDERS' EQUITY-Continued
Preferred Stock
The Board of Directors of the Company has the authority to issue
up to 2,000,000 shares of Preferred Stock (par value of $.01 per
share) in one or more series and to fix the number of shares
constituting any such series and the rights and preferences
thereof, including dividend rates, terms of redemption (including
sinking fund provision), redemption price or prices, voting
rights, conversion rights and liquidation preferences of the
shares constituting such series. As of July 31, 1997, there were
no shares of Preferred Stock issued and outstanding.
NOTE G - STOCK OPTIONS
The Company has established the 1987 and 1993 Stock Option Plans
and the 1996 Non-Employee Director Stock Option Plan. Under the
1987 and 1993 Plans, 774,000 and 1,800,000 shares of Common Stock,
respectively, have been authorized for issuance. Under the 1996
Plan (which replaces the Company's previous 1995 Non-Employee
Director Stock Option Plan), 400,000 shares of Common Stock have
been authorized for issuance. During the years ended 1995, 1996
and 1997, all option prices at date of grant equaled or exceeded
the estimated fair value of the Company's Common Stock as
determined by the terms of the stock option plans.
The Company has adopted only the disclosure provisions of
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," as it relates to employment awards. It applies APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for its plans and does not
recognize compensation expense for its stock-based compensation
plans. If the Company had elected to recognize compensation
expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by
SFAS No. 123, the Company's net income and earnings per share
would be reduced to the pro forma amounts indicated below:
1996 1997
------------- -------------
Net Income As reported $ 5,673,784 $ 12,288,652
Pro forma (unaudited) $ 4,674,893 $ 9,874,324
Net Income per share As reported $ .25 $ .44
Pro forma (unaudited) $ .20 $ .36
The fair value of each option grant is estimated on the date of
grant using the Binomial options-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1997,
respectively, no dividend yield for all years, expected volatility
of 45% for both years; risk-free interest rates of 5.6% and 6.2%
percent, and expected option holding periods of 3.5 and 2.6 years.
23
27
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE G - STOCK OPTIONS-Continued
A summary of the status of the Company's fixed stock option plans
as of July 31, 1995, 1996 and 1997, and changes during the years
ending on those dates is present below:
Weighted
Shares Average
Voting Exercise Price
--------- --------------
Options
Options outstanding at July 31, 1994 600,124 $1.63
Options granted 545,498 5.60
Options exercised (172,626) 1.35
Options cancelled (39,394) 2.92
---------
Options outstanding at July 31, 1995 933,602 3.95
Options granted 570,376 13.37
Options exercised (291,822) 2.29
Options cancelled (44,448) 5.05
---------
Options outstanding at July 31, 1996 1,167,708 8.93
Options granted 642,300 25.75
Options exercised (199,968) 3.31
Options cancelled (236,596) 16.73
---------
Options outstanding at July 31, 1997 1,373,444 16.27
=========
The following table summarizes information concerning currently
outstanding and exercisable stock options:
Weighted Average
Remaining Weighted
Range of Contractual Life Average
Exercise Prices Number Outstanding (Years) Exercise Price
--------------- ------------------ ---------------- --------------
Outstanding Shares
$ 1.55 - 4.09 112,356 1.8 $ 2.82
$ 6.49 - 6.77 356,232 8.0 6.59
$13.24 - 16.63 352,500 8.6 15.70
$20.14 - 34.33 552,356 9.2 25.60
---------
Total 1,373,444
Exercisable Shares
$ 1.55 - 4.09 112,356 N/A 2.82
$ 6.49 - 6.77 139,238 N/A 6.55
$13.24 - 16.63 86,250 N/A 15.68
$20.14 - 34.33 -- N/A --
---------
Total 337,844
24
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NOTE H - INCOME TAXES
The following tables summarize the Company's income tax position:
Years ended July 31,
------------------------------------
1995 1996 1997
---------- ---------- ----------
Currently payable
Federal $1,112,399 $1,492,683 $3,957,785
State 205,904 312,606 820,924
---------- ---------- ----------
1,318,303 1,805,289 4,778,709
Deferred 362,379 328,514 2,151,688
Tax benefit from the exercise of
certain stock options 74,329 1,426,563 56,606
---------- ---------- ----------
Total income tax provision $1,755,011 $3,560,366 $6,987,003
========== ========== ==========
Reconciliation of the federal statutory income tax rate to the
Company's effective income tax rates are as follows:
Years ended July 31,
----------------------
1995 1996 1997
---- ---- ----
Federal statutory income tax rate 34.0% 34.0% 35.0%
State income taxes, net of federal income tax benefit 3.6 3.6 4.3
Tax-exempt interest (2.2) (0.4) (2.6)
Acquisition costs -- 3.4 --
Other 3.2 (2.0) (0.3)
---- ---- ----
Effective income tax rate 38.6% 38.6% 36.4%
==== ==== ====
Deferred tax asset and liability components were as follows:
July 31,
-----------------------
1996 1997
---------- ----------
Deferred tax assets:
Acquired net operating loss carryforward (1) $ 428,000 $ 265,000
Reserve for doubtful accounts 35,900 60,000
Other -- 113,757
---------- ----------
463,900 438,757
---------- ----------
Deferred tax liabilities:
Depreciation 199,900 220,000
Software development costs 1,159,555 3,266,000
---------- ----------
1,359,455 3,486,000
---------- ----------
Net deferred tax liability $ 895,555 $3,047,243
========== ==========
(1) Expires in 2001
25
29
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases office space under noncancellable leases which
are accounted for as operating leases. The leases are subject to
an escalation clause using a CPI index. The leases expire between
November 1997 through May 2005.
Future minimum lease payments under noncancellable operating
leases are as follows as of July 31, 1997:
July 31,
-------------------------------
1998 $ 964,455
1999 780,955
2000 251,329
2001 238,523
2002 206,709
Thereafter 588,875
Rent expense for all operating leases for the years ending July
31, 1995, 1996 and 1997 was $673,391, $1,129,738 and $1,083,000,
respectively.
The Company is engaged 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.
As a provider for Portability compliance and administration
services, the Company is subject to excise taxes for noncompliance
with certain provisions of COBRA and HIPAA. In addition, the
Company accepts financial responsibility for certain liabilities
incurred by its customers that are attributable to the Company's
failure to fulfill its obligations to its customers under its
agreements. The Company maintains a professional liability policy,
with a deductible of $25,000 per occurrence, and an annual per
aggregate limit on coverage of $5.0 million. Although there can be
no assurance that the Company will not incur any material
liability for noncompliance with COBRA or HIPAA for its failure to
comply its agreement with any customer, from the Company's
inception through July 31, 1997, the Company has not incurred
material liability as a provider.
NOTE J - INCENTIVE BONUS PLAN AND SAVINGS PLAN
Effective January 1, 1992, the Company established a defined
contribution savings plan (the "Savings Plan") covering
substantially all employees. The Savings Plan consists of an
employee elective contribution and a Company matching contribution
for each eligible participant. The Company's matching contribution
is determined by the Board of Directors on a discretionary basis.
The Company's contributions under the Savings Plan in fiscal 1995,
1996 and 1997 were approximately $124,500, $167,969 and $261,944,
respectively.
Effective August 1, 1993, the Company adopted an incentive bonus
plan (the "Incentive Bonus Plan"), which provides for the
discretionary payment of annual incentive awards to key employees
from a pool equal to 10% of the Company's pre-tax profits (income
before income taxes), adjusted upward or downward based on the
attainment of pre-established goals related to the Company's
pre-tax margin (income before income taxes divided by revenues)
and its revenue growth (based on annual increases in revenues).
Payments under the Incentive Bonus Plan are discretionary, based
on the determination of the Board of Directors of the Company and
are subject to certain limitations as provided in the Incentive
Bonus Plan. In fiscal 1995, 1996 and 1997, $777,633, $790,000 and
$1,112,809, respectively, of incentive bonus was expensed.
26
30
NOTE K - MAJOR CUSTOMER
During fiscal 1996 and 1997, one of the Company's customers accounted
for approximately 15.0% and 14.5%, respectively, of revenues. This
customer became a client of the Company as a result of the New Jersey
acquisition. In fiscal 1995, no individual customer accounted for 10%
or more of revenues.
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for
the quarterly periods of fiscal 1995, 1996 and 1997:
1995 First Second Third Fourth Total
- ----
Revenue $ 4,321,754 $ 4,493,809 $ 4,734,637 $ 5,284,436 $18,834,636
Operating income 876,305 912,000 985,361 1,202,454 3,976,120
Net income 628,655 660,050 696,135 808,838 2,793,678
Net income per share $ .03 $ .03 $ .03 $ .04 $ .14
1996
- ----
Revenue $ 5,614,304 $ 6,851,136 $ 9,067,901 $ 9,628,840 $31,162,181
Operating income 1,138,977 1,597,305 1,768,907 1,856,816 6,362,005
Net income 783,436 1,047,632 1,645,273 2,197,443 5,673,784
Net income per share $ .04 $ .05 $ .07 $ .08 $ .25
1997
- ----
Revenue $10,389,193 $11,714,389 $13,188,827 $14,786,433 $50,078,842
Operating income 2,267,008 2,796,707 3,275,809 3,794,893 12,134,417
Net income 2,611,363 2,936,465 3,184,585 3,496,239 12,228,652
Net income per share $ .09 $ .11 $ .12 $ .13 $ .44
NOTE M - ACQUISITIONS
New Jersey Acquisition
On December 15, 1995, the Company, in an acquisition accounted for
as a purchase, acquired all of the outstanding capital stock of
Bullock Associates, Inc. ("Bullock") for $12.5 million, with an
additional $2.0 million payable upon the attainment of certain
revenue requirements during 1996 and 1997. During fiscal 1997,
$863,053 of this additional amount was paid for the attainment of
these revenue requirements, leaving a balance of $1,136,947 that
could be paid in fiscal 1998. Bullock 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.
The following pro forma balances have been derived from the
historical financial statements of the Company and Bullock and
adjusts such information to give effect to the acquisition of
Bullock. The balances for the years ended July 31, 1995 and 1996
assume that the acquisition of Bullock occurred on August 1, 1994.
The unaudited pro forma financial information is not necessarily
indicative of the results which would actually have occurred had
the transaction been in effect on the dates and for the periods
indicated or which may result in the future.
Years ended July 31,
-------------------------
1995 1996
------- -------
(in thousands except per share data)
Revenue $27,819 $34,740
Operating income 5,840 7,245
Net income 3,483 6,015
Net income per share $ .18 $ .26
======= =======
27
31
ABR Information Services, Inc.
Notes to Consolidated Financial Statements
July 31, 1995, 1996 and 1997
NOTE M - ACQUISITIONS-Continued
California Acquisition
Effective February 1, 1996, the Company acquired all of the
outstanding capital stock of Total Cobra Services, Inc. ("TCS")
for 265,424 shares of restricted Common Stock. This acquisition
was accounted for as a purchase. TCS is located in Irvine,
California and provides COBRA administration and retiree billing
services. For the fiscal year ended December 31, 1995, TCS had
revenues of less than $2 million. Pro forma information is not
provided for TCS due to its immateriality.
Virginia Acquisition
On June 28, 1996, the Company completed a merger of the The L.P.
Baier Company ("LPB") where 286,020 shares of the Company's
stock was exchanged for all of the outstanding stock of LPB. LPB
is located in Fairfax, Virginia and provides primarily FSA
(Flexible Spending Account) administration services and COBRA
administration. The merger was accounted for as a pooling of
interest, and accordingly, the accompanying financial statements
have been restated to include the accounts and operations of LPB
for all periods prior to the merger, including restating the
retained earnings at July 31, 1994 to reflect the difference
between the par value of the Company stock issued and the total
shareholders' equity of LPB.
Separate results of the combining entities for previously
reported periods are as follows:
Years ended July 31,
-----------------------------
1995 1996
----------- -----------
Revenue
ABR Information Services, Inc. $16,692,376 $28,449,980
The L.P. Baier Company 2,142,260 2,712,201
----------- -----------
$18,834,636 $31,162,181
=========== ===========
Net Income
ABR Information Services, Inc. $ 2,641,788 $ 5,578,144
The L.P. Baier Company 151,890 95,640
----------- -----------
$ 2,793,678 $ 5,673,784
=========== ===========
In connection with this merger, $361,198 of acquisition
costs were incurred and have been charged to expense in
the fourth quarter for 1996.
28
32
Report of Independent Certified Public Accountants
Board of Directors
ABR Information Services, Inc.
We have audited the accompanying consolidated balance sheets of ABR Information
Services, Inc. as of July 31, 1996 and 1997 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended July 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ABR Information
Services, Inc. as of July 31, 1996 and 1997, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended July 31, 1997, in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Tampa, Florida
September 11, 1997
29
33
ABR Information Services, Inc.
Market Price Information*
July 31, 1995, 1996 and 1997
The following table sets forth the high and low sale price of the
Company's Common Stock since its initial public offering on May 26,
1994 as reported by Nasdaq and restated for the three-for-two stock
splits completed on July 13, 1995 and February 19, 1996, and the
two-for-one stock split completed on February 19, 1997:
1997 1996 1995 1994
High Low High Low High Low High Low
First Quarter $37 3/4 $25 1/2 $ 9 59/64 $ 6 1/2 $3 19/32 $2 29/64 $ -- $ --
Second Quarter 33 1/2 19 11/16 16 27/64 9 43/64 4 49/64 3 1/16 -- --
Third Quarter 24 3/8 16 11/16 31 1/2 16 3/32 5 5/8 4 43/64 -- --
Fourth Quarter 32 3/4 20 5/6 32 1/2 19 7 27/32 5 13/64 2 59/64 2 9/32
Year 37 3/4 16 11/16 32 1/2 6 1/2 7 27/32 2 29/64 2 59/64 2 9/32
The Company has never declared nor paid any cash dividends on the
Common Stock. The Company currently anticipates that all of its
earnings will be retained for development and expansion of the
Company's business and does not anticipate paying any cash dividends
in the foreseeable future.
STOCK PRICE PERFORMANCE*
[GRAPH]
*As restated for the three-for-two stock splits completed on July 13, 1995
and February 19, 1996 and the two-for-one stock split completed
on February 19, 1997.
30
34
CORPORATE AND SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
ABR Information Services, Inc.
34125 U.S. Highway 19 North
Palm Harbor, Florida 34684-2141
813-785-2819
INTERNET ADDRESS
http://www.abr.com
ANNUAL MEETING
The Annual Meeting of ABR Information
Services, Inc. will be held at 3:00 p.m.
(EST) on December 5, 1997, at the Hyatt
Regency Westshore in Tampa, Florida.
FORM 10-K
A copy of the ABR Information Services, Inc.
annual report to the Securities and Exchange
Commission on Form 10-K may be obtained
without cost by request from the Corporate
Headquarters, Attention: Investor Relations.
LISTING
The Company's Common Stock trades on
The Nasdaq Stock Market under the symbol ABRX.
TRANSFER AGENT AND REGISTRAR
First Union National Bank
Corporate Trust Client Services
1525 West W.T. Harris Boulevard, 3C3, NC1153
Charlotte, North Carolina 28288-1153
704-590-7598
LEGAL COUNSEL
Foley & Lardner
Tampa, Florida
Proskauer Rose LLP
New York, New York
INDEPENDENT AUDITORS
Grant Thornton LLP
Tampa, Florida
SHAREHOLDER INFORMATION
ABR Information Services, Inc.
34125 U.S. Highway 19 North
Attention: Investor Relations
Palm Harbor, Florida 34684-2141
813-785-2819
31
35
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
JAMES E. MACDOUGALD THOMAS F. COSTELLO MARK M. GOLDMAN
Chairman of the Board, Chairman and Vice Chairman
President and Chief Chief Executive Officer Phone Programs, Inc.
Executive Officer The Costello Group
ABR Information Services, Inc.
SUZANNE M. MACDOUGALD PETER A. SULLIVAN
Senior Vice President and Secretary President
ABR Information Services, Inc. Arlen Corporation
Officers of ABR Information Services, Inc.
JAMES E. MACDOUGALD JAMES P. O'DROBINAK SUZANNE M. MACDOUGALD
Chairman of the Board, Senior Vice President and Senior Vice President and
President and Chief Chief Financial Officer Secretary
Executive Officer
Officers of ABR Benefits Services, Inc.
CHIEF EXECUTIVE
James E. MacDougald - President and
Chief Executive Officer
FINANCE
James P. O'Drobinak - Senior Vice President and
Chief Financial Officer
Reva R. Maskewitz - Vice President and Controller
Robert A. Smolinski - Vice President and Treasurer
INFORMATION SERVICES
Andrew D. Swenson - Senior Vice President and
Chief Information Officer
John E. Hazuka - Vice President, Software Development
MERGERS AND ACQUISITIONS
Dennis A. Sweeney - Senior Vice President,
Mergers and Acquisitions
OPERATIONS
William R. Povilus - Senior Vice President, Operations
Lauren M. Ringuette - Managing Vice President,
Portability Administration
Robert F. Skrok - Managing Vice President,
Enrollment and Eligibility Services
Shari N. Arzate - Vice President,
Major Account Implementation
Denise A. Elko - Vice President,
Major Account Implementation
SALES AND MARKETING
Robert H. Pariseau - Senior Vice President,
Sales and Marketing
Brian R. Annis - Vice President,
Telemarketing Operations
Dagmar S. De Stefano - Vice President
John Doyle - Vice President
Karlene K. Dunkelberger - Vice President
Patrick R. Manders - Vice President,
Communications
STRATEGIC DEVELOPMENT
Randolph C. Metcalfe - Senior Vice President,
Strategic Development
HUMAN RESOURCES
Janet H. Till - Vice President,
Corporate Human Resources
CALIFORNIA SERVICE CENTER
William E. Evans - Senior Vice President,
California Service Center
NEW JERSEY SERVICE CENTER
W. Carl Bullock - Senior Vice President,
New Jersey Service Center
Barbara A. Biasotti - Managing Vice President
Nancy L. Clark - Vice President
VIRGINIA SERVICE CENTER
Rick L. Snyder - Senior Vice President,
Virginia Service Center
Tina A. McIntosh - Managing Vice President
Glen V. Armand - Vice President,
Sales and Marketing
Christine Erickson - Vice President,
Sales and Marketing
Rhonda E. Reeves - Vice President,
Section 125 Services
Officers of ABR Properties, Inc.
James E. MacDougald - Chief Executive Officer
Joseph C. Lukason - President
James P. O'Drobinak - Senior Vice President and
Chief Financial Officer
Suzanne M. MacDougald - Senior Vice President and
Secretary
Reva R. Maskewitz - Vice President, Controller and
Treasurer
32