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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-24132
ABR INFORMATION SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
Florida 59-3228107
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
34125 U.S. Highway 19 North, Palm Harbor, Florida 34684-2141
- ------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code: 813-785-2819
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Voting Common Stock, $.01 Par Value Outstanding at March 9, 1998: 27,422,792
Class: Nonvoting Common Stock, $.01 Par Value Outstanding at March 9, 1998: None
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ABR INFORMATION SERVICES, INC.
INDEX TO FORM 10-Q
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
and six months ended January 31, 1997 and 1998 3
Consolidated Balance Sheets as of July 31, 1997 and
January 31, 1998 4
Consolidated Statements of Cash Flows for the six months
ended January 31, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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PART I. FINANCIAL INFORMATION
Item 1.
ABR INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
January 31, January 31,
----------------------------- ------------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Revenue $11,714,389 $16,711,144 $22,103,582 $31,946,082
Operating expenses:
Cost of services 6,549,598 9,353,006 12,524,843 18,177,322
Selling, general and administrative 2,368,084 3,313,379 4,515,024 5,988,527
----------- ----------- ----------- -----------
Operating income 2,796,707 4,044,759 5,063,715 7,780,233
----------- ----------- ----------- -----------
Other income:
Interest income 1,909,046 1,370,501 3,869,108 2,803,277
Lease revenue, net - 1,140,301 - 1,140,301
----------- ----------- ----------- -----------
Total other income 1,909,046 2,510,802 3,869,108 3,943,578
----------- ----------- ----------- -----------
Income before income taxes 4,705,753 6,555,561 8,932,823 11,723,811
Income taxes 1,769,288 2,404,586 3,384,995 4,071,876
----------- ----------- ----------- -----------
Net income $ 2,936,465 $ 4,150,975 $ 5,547,828 $ 7,651,935
=========== =========== =========== ===========
Net income per share:
Basic $ .11 $ .15 $ .20 $ .28
=========== =========== =========== ===========
Diluted $ .11 $ .15 $ .20 $ .27
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
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ABR INFORMATION SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31, 1997 January 31, 1998
(Unaudited)
--------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 33,322,734 $ 34,513,809
Investments 108,499,196 107,553,794
Accounts receivable, net 8,295,884 10,614,289
Prepaid expenses and other 2,595,306 3,024,335
------------ ------------
Total current assets 152,713,120 155,706,227
LONG-TERM INVESTMENTS 14,128,644 4,812,131
PROPERTY AND EQUIPMENT, net 27,790,354 43,259,254
SOFTWARE DEVELOPMENT COSTS, net 11,767,211 17,348,217
GOODWILL, INTANGIBLES AND OTHER ASSETS, net 15,617,519 16,380,385
------------ ------------
TOTAL ASSETS $222,016,848 $237,506,214
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 613,138 $ 788,566
Accrued expenses 512,035 695,164
Customer account deposits 23,133,381 27,082,441
Unearned revenue 594,524 583,210
Income taxes payable 20,770 733,934
------------ ------------
Total current liabilities 24,873,848 29,883,315
------------ ------------
DEFERRED INCOME TAXES 3,047,243 5,785,059
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SHAREHOLDERS' EQUITY
Preferred Stock - authorized 2,000,000 shares of
$.01 par value; no shares issued -- --
Common Stock - authorized, 100,250,000
shares of $.01 par value; issued and outstanding,
27,376,356 and 27,403,542 shares, respectively 273,763 274,035
Additional paid in capital 170,459,157 170,549,033
Retained earnings 23,362,837 31,014,772
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 194,095,757 201,837,840
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $222,016,848 $237,506,214
============ ============
The accompanying notes are an integral part of these statements.
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ABR INFORMATION SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
January 31,
-------------------------------------
1997 1998
------------- -------------
Cash flows from operating activities:
Net income $ 5,547,828 $ 7,651,935
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and other amortization 1,259,182 2,106,025
Amortization of software 231,042 766,581
Deferred income taxes 877,240 2,737,816
Provision for losses on accounts receivable 11,517 18,000
Tax benefit related to exercise of certain stock options 56,606 --
Change in operating assets and liabilities:
Accounts receivable (1,287,727) (2,336,405)
Prepaid expenses and other (826,760) (429,029)
Other assets 3,737 (56,552)
Accounts payable (42,551) 175,428
Accrued expenses 300,059 183,129
Unearned revenue (47,991) (11,314)
Customer account deposits 882,274 3,949,060
Income taxes payable (77,208) 713,164
------------- -------------
Net cash provided by operating activities 6,887,248 15,467,838
------------- -------------
Cash flows from investing activities:
Additions to investments (265,579,923) (341,101,076)
Maturity of investments 281,578,092 351,362,991
Additions to property and equipment (5,038,339) (17,132,923)
Additions to software development costs (2,226,125) (6,347,587)
Cash paid for acquisition, net (863,053) (1,148,316)
------------- -------------
Net cash provided by (used in) investing activities 7,870,652 (14,366,911)
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Cash flows from financing activities:
Exercise of common stock options 604,980 90,148
------------- -------------
Net cash provided by financing activities 604,980 90,148
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Net increase in cash and cash equivalents 15,362,880 1,191,075
Cash and cash equivalents at beginning of year 14,088,396 33,322,734
------------- -------------
Cash and cash equivalents at end of period $ 29,451,276 $ 34,513,809
============= =============
The accompanying notes are an integral part of these statements.
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ABR INFORMATION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 1998
NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS
ABR Information Services, Inc. (the "Company") is a leading provider of
comprehensive benefits administration, compliance and information services to
employers seeking to outsource their benefits administration functions. The
Company believes it is the largest provider of COBRA (the "Consolidated Omnibus
Reconciliation Act") compliance services. COBRA is a federally mandated law
related to the portability of employee group health insurance. Additionally, the
Company provides compliance services related to the federally mandated Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"). The Company
provides portability (COBRA and HIPAA) services through the trade name
CobraServSM.
The Company also provides benefits administration services with respect to
benefits provided to retirees and inactive employees, including retiree
healthcare, disability, surviving dependent, family leave and severance
benefits. Additionally, the Company provides benefits administration services
with respect to benefits provided to active employees, including enrollment,
eligibility verification, qualified domestic relations order ("QDRO")
administration, 401(k) administration services, flexible spending account
("FSA") administration and pension services. All services are offered on either
an "a la carte" or a total outsourcing basis, allowing customers to outsource
certain benefits administration tasks which they find too costly or burdensome
to perform in-house, or to outsource the entire benefits administration
function.
The Company provides information and support services to more than 25,000
employers, ranging in size from 2 to 200,000 employees, including approximately
100 of the Fortune 500 companies, insurance companies and other employers. The
Company is headquartered in Palm Harbor, Florida, and employs approximately
1,000 people in marketing/operations centers in Florida, New Jersey, Virginia
and California. 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.
NOTE B - BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
the instructions to Form 10-Q and do not include all the information and
footnote disclosure required by generally accepted accounting principles for
complete financial statements. The financial statements as of January 31, 1998
and for the three and six months ended January 31, 1998 and January 31, 1997 are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. The results of operations for the three and six months ended January
31, 1998 are not necessarily indicative of results that may be expected for the
year ending July 31, 1998. These financial statements should be read in
conjunction with the audited financial statements of the Company as of July 31,
1996 and 1997, and for each of the three years in the period ended July 31,
1997, included in the Company's 1997 Annual Report to Shareholders.
During the period ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standard No. 128 "Earnings Per Share" (FAS 128). This
Standard became effective for financial statements issued after December 15,
1997 and eliminates primary and fully diluted income per share and replaces them
with basic and diluted income per share. Accordingly, all income per share
amounts for the prior periods presented have been restated to conform to the new
Standard (see Note C).
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NOTE C - NET INCOME PER COMMON SHARE
The following table reconciles the numerators and denominators of the
basic and diluted income per share computations, as computed in accordance with
FAS 128:
Three months ended Six months ended
January 31, January 31,
---------------------------- ----------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Basic
Net income (numerator):
Net income available to common stockholders $ 2,936,465 $ 4,150,975 $ 5,547,828 $ 7,651,935
=========== =========== =========== ===========
Shares (denominator):
Weighted average shares 27,317,897 27,396,114 27,265,634 27,388,357
=========== =========== =========== ===========
Basic per share earnings $ .11 $ .15 $ .20 $ .28
=========== =========== =========== ===========
Diluted:
Net income (numerator):
Net income available to common stockholders $ 2,936,465 $ 4,150,975 $ 5,547,828 $ 7,651,935
=========== =========== =========== ===========
Shares (denominator):
Weighted average shares 27,317,897 27,396,114 27,265,634 27,388,357
Effect of dilutive stock options 569,678 485,486 682,817 499,248
----------- ----------- ----------- -----------
Adjusted weighted average shares 27,887,575 27,881,600 27,948,451 27,887,605
=========== =========== =========== ===========
Diluted per share earnings $ .11 $ .15 $ .20 $ .27
=========== =========== =========== ===========
Options not included in diluted income per share
because exercise price was greater than average
market price: First Quarter N/A N/A 0 815,834
Second Quarter 2,000 921,418 2,000 921,418
Price Range $34.33 $24.08 to $34.33 $24.08 to
$34.33 $34.33
These options which expire on various dates through 2007 were still outstanding
at January 31, 1998.
NOTE D - COMMITMENTS
On October 2, 1997, the Company acquired a 383,000 square foot office
campus in St. Petersburg, Florida for $13.5 million. Although no formal
construction commitments exist for this facility, the Company expects to spend
approximately $20 million to expand and renovate the facility over the next
three years. The Company expects to occupy portions of this facility starting in
calendar 1998. The former owner of the facility has signed a short-term
agreement to lease back portions of the campus, prior to the Company occupying
the entire facility in approximately 2000. The Company's lease revenue on the
campus is dependent upon the amount of square footage being utilized by the
former owner and is recorded net of the direct expenses of operating the
facility.
The Company estimates that as of January 31, 1998, approximately $9.1
million will be required in order for the Company to purchase additional
equipment, furniture and hardware, and to complete currently defined software
projects.
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NOTE E - BUSINESS ACQUISITIONS
On December 15, 1995, the Company, in an acquisition accounted for as a
purchase, acquired all of the outstanding capital stock of Bullock Associates,
Inc. ("Bullock"), for $12.5 million, with an additional $2.0 million payable
upon the attainment of certain revenue requirements during 1996 and 1997. During
fiscal 1997 and 1998, $863,053 and $1,136,947, respectively, of this additional
amount was paid for the attainment of these revenue requirements. Bullock, now
part of ABR Benefits Services, Inc., is located in Princeton, New Jersey and
provides COBRA administration, retiree insurance administration, insurance
continuation billing and collection, pension benefits administration services,
QDRO administration and educational benefit administration services as well as
administration for other employee benefits programs such as employee discount
plans, adoption programs, program rebates and emergency loans.
On February 26, 1998, the Company, in an acquisition accounted for as a
purchase, acquired all of the outstanding capital stock of Charing Company, Inc.
("Charing") for $7.5 million in cash and an additional amount to be paid
contingent upon future earnings. Charing is located in Wisconsin and provides
retirement plan administration, Section 125 administration, consulting services
and comprehensive employee benefits statement reporting. The results of
operations of Charing will be included in the Company's results of operations as
of February 1, 1998. Goodwill resulting from the acquisition will be amortized
over a period of 25 years on a straight-line method.
On February 27, 1998, the Company, in an acquisition accounted for as a
purchase, acquired all the outstanding capital stock of Matthews, Malone &
Associates, Ltd. ("Matthews/Malone") for $2.9 million in cash and an additional
amount to be paid contingent upon future earnings. Matthews/Malone is located in
Arizona and provides defined benefit and defined contribution plan services as
well as Section 125 administration and non-qualified plan administration
services. The results of operations of Matthews/Malone will be included in the
Company's results of operations as of February 1, 1998. Goodwill resulting from
the acquisition will be amortized over a period of 25 years on a straight-line
method.
The Company has not provided pro forma financial information with respect
to the Charing and Matthews/Malone acquisitions as they are not significant
acquisitions.
NOTE F - LITIGATION
The Company is involved in various litigation arising from the ordinary
course of its business. In the opinion of management, the ultimate outcome of
litigation is not expected to be material to the Company's financial position,
results of operations or liquidity.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in the following discussion and analysis that are
not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such forward-looking statements involve a number of risks
and uncertainties and are based on information available to the Company on the
date hereof. The Company assumes no obligation to update any such
forward-looking statements.
The following discussion and analysis should be read in conjunction with
the Financial Statements and notes thereto appearing elsewhere in this Form
10-Q.
OVERVIEW
The Company's operating 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. Additionally,
the Company generates non-operating revenue from the short-term lease of its St.
Petersburg, Florida operations center.
The first source of the Company's revenue is providing portability
compliance services primarily through its qualifying event agreements with
employers and capitation agreements with insurance companies. Through qualifying
event agreements, the Company receives a fixed, per occurrence, fee from its
customers for each qualifying event. A qualifying event occurs when an employee
or his or her dependents experience a loss or change of coverage under a group
healthcare plan. The amount of the fixed fee varies depending on the type of
qualifying event (i.e., COBRA (the "Consolidated Omnibus Budget Reconciliation
Act") or HIPAA (the "Health Insurance Portability and Accountability Act of
1996")) and the method of the qualifying event notification mailing, which is
selected by the customer. Through capitation agreements, insurance companies
designate the Company as the administrator of compliance for their group
insurance clients that are subject to COBRA, HIPAA or state mandated
continuation coverage health portability laws. The Company is paid a monthly fee
for each employee covered by the group plan. The revenue generated under a
capitation agreement is not dependent on the triggering of a qualifying event,
but is determined based on the number of employees covered by the group plan at
the beginning of each month. The Company also receives an administrative fee
typically equal to 2% of the monthly health insurance premium that is paid by or
on behalf of each COBRA continuant. In addition, the Company generates revenues
from customers for additional compliance and healthcare administration services,
both on a one-time and continuous basis. During the first six months of fiscal
1997 and 1998, 62.2% and 60.0%, respectively, of the Company's revenues were
attributable to portability compliance services.
The second source of the Company's service revenue is providing
administration services with respect to benefits provided to retirees and
inactive employees, including retiree healthcare, disability, surviving
dependent, family leave and severance benefits. During the first six months of
fiscal 1997 and 1998, 16.0% and 11.6%, respectively, of the Company's revenues
were attributable to administration services for retirees and inactive
employees.
The third source of the Company's service revenue is providing
administration services with respect to benefits provided to active employees,
including open enrollment, employee enrollment and eligibility, QDRO ("Qualified
Domestic Relations Order") administration, flexible spending account
administration, 401(k) plan administration, and other pension services. During
the first six months of fiscal 1997 and 1998, 21.8% and 28.4%, respectively, of
the Company's revenues were attributable to benefits administration services for
active employees.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
YEAR 2000 MATTERS
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In 1996, the Company
initiated the process of modifying existing software programs to become year
2000 compliant. Management has determined that the year 2000 issue will not pose
significant operational problems for its computer systems. As a result, all
costs associated with this conversion are being expensed as incurred.
The Company will utilize both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project no later than March 1999, which is
prior to any anticipated impact on its operating systems. The total cost of the
Year 2000 project is estimated at approximately $225,000 and is being funded
through operating cash flows and is not expected to have a material effect on
the results of operations.
The cost of the project and the date on which the Company believes it will
complete the year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issue. There can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems.
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenue represented by
certain items reflected in the Company's statements of income.
Three months ended Six months ended
January 31, January 31,
------------------------ -----------------------
1997 1998 1997 1998
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services (55.9) (56.0) (56.7) (56.9)
Selling, general and administrative expenses (20.2) (19.8) (20.4) (18.7)
----- ----- ----- -----
Operating income 23.9 24.2 22.9 24.4
Interest income 16.3 8.2 17.5 8.8
Lease revenue, net - 6.8 - 3.5
Income taxes (15.1) (14.4) (15.3) (12.7)
----- ----- ----- -----
Net income 25.1% 24.8% 25.1% 24.0%
===== ===== ===== =====
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
Revenues increased $5.0 million, or 42.7%, to $16.7 million during the
three months ended January 31, 1998 from $11.7 million during the three months
ended January 31, 1997. Of the $5.0 million increase in revenues, $2.3 million
was attributable to increased revenues from portability compliance services,
$128,000 was attributable to increased revenues from retiree/inactive employee
benefits administration and $2.6 million was due to increased revenues from
active employee benefits administration.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The increase in portability compliance revenues was primarily attributable
to the addition of new customers and new service product offerings. New products
pertain to clients having to comply with state-mandated continuation coverage
health portability laws and the federally-mandated HIPAA law.
The increase in active employee benefits administration revenues was
primarily attributable to the addition of new customers obtained by the Company
and new service product offerings in enrollment and eligibility administration
and qualified retirement plan services.
Cost of services increased $2.9 million, or 42.8%, to $9.4 million during
the three months ended January 31, 1998 from $6.5 million during the three
months ended January 31, 1997. The increase in cost of services was attributable
to the addition of data processing, information systems and customer service
personnel to support revenue growth, the amortization of software placed in
service as completed and the transition and consolidation of certain operational
duties into the Florida operations center. As a percentage of revenues, the 1998
cost of services increased slightly to 56.0% from 55.9% in the previous year.
Selling, general and administrative expenses increased $.9 million, or
39.9%, to $3.3 million during the three months ended January 31, 1998 from $2.4
million during the three months ended January 31, 1997. The increase in selling,
general and administrative expenses was primarily attributable to the addition
of marketing, management and administrative personnel and equipment necessary to
support the Company's growth. As a percentage of revenues, selling, general and
administrative expenses decreased slightly to 19.8% from 20.2% for the
corresponding periods.
Interest income decreased $.5 million to $1.4 million during the three
months ended January 31, 1998 from $1.9 million during the three months ended
January 31, 1997. This decrease was the result of less cash available for
investing due to capital purchases, increased utilization of tax-free investment
instruments which yield a lower stated interest rate, and an overall decline in
short-term interest rates.
Lease revenue increased to $1.1 million for the three months ended January
31, 1998 as compared to $0 for the corresponding period in 1997 due to the
purchase of an office campus (with an existing tenant) in St. Petersburg,
Florida. Lease revenue is presented net of direct costs associated with
operating the campus. This net revenue will decrease as the Company begins to
occupy the campus in phases beginning in calendar 1998 and will decrease to $0
by April 1999, at the latest. Final occupancy by the Company is expected in
2000.
Income taxes increased 35.9% to $2.4 million during the three months ended
January 31, 1998 from $1.8 million during the three months ended January 31,
1997. The Company's effective tax rate decreased to 36.7% for the three months
ended January 31, 1998 from 37.6% for the corresponding period in the previous
year. This decrease reflected the Company's greater utilization of tax-free
investments.
As a result of the foregoing, the Company's net income increased $1.2
million, or 41.4%, to $4.2 million during the three months ended January 31,
1998 from $2.9 million in the three months ended January 31, 1997. Basic and
diluted net income per share was $.15 for the quarter ended January 31, 1998 as
compared to $.11 (basic and diluted) for the corresponding prior year period,
after adjustment for the Company's 2-for-1 stock split in February 1997.
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
Revenues increased $9.8 million, or 44.5%, to $31.9 million in the six
months ended January 31, 1998 from $22.1 million in the corresponding period of
1997. Of the $9.8 million increase in revenues, $5.3 million was attributable to
increased revenues from portability compliance services, $166,000 was
attributable to increased revenues from retiree/inactive employee benefits
administration and $4.3 million was due to increased revenues from active
employee benefits administration.
The increase in portability compliance revenues was primarily attributable
to the addition of new customers and new service product offerings. New products
pertain to clients having to comply with state-mandated continuation coverage
health portability laws and the federally-mandated HIPAA law.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The increase in active employee benefits administration revenues was
primarily attributable to the addition of new customers obtained by the Company
and new service product offerings in enrollment and eligibility administration
and qualified retirement plan services.
Cost of services increased $5.7 million, or 45.1%, to $18.2 million during
the six months ended January 31, 1998 from $12.5 million during the six months
ended January 31, 1997. As a percentage of revenues, cost of services increased
slightly to 56.9% from 56.7% for the corresponding period of 1997.
Selling, general and administrative expenses increased $1.5 million, or
32.6%, to $6.0 million during the six months ended January 31, 1998 from $4.5
million during the six months ended January 31, 1997. As a percentage of service
revenues, selling, general and administrative expense decreased to 18.7% during
the six months ended January 31, 1998 from 20.4% during the six months ended
January 31, 1997. The decrease as a percent of revenues resulted primarily from
allocating expenses over an increasingly larger revenue base.
Interest income decreased $1.1 million to $2.8 million during the six
months ended January 31, 1998 from $3.9 million during the six months ended
January 31, 1997. This decrease was the result of less cash available for
investing due to capital purchases, increased utilization of tax-free investment
instruments which yield a lower interest rate and an overall decline in
short-term interest rates.
Lease revenue increased to $1.1 million during the six months ended January
31, 1998 as compared to $0 for the corresponding period in 1997 due to the
purchase of an office campus (with an existing tenant) in St. Petersburg,
Florida. Lease revenue is presented net of direct costs associated with
operating the campus. This net revenue will decrease as the Company begins to
occupy the campus in phases beginning in calendar 1998 and will decrease to $0
by April 1999, at the latest. Final occupancy by the Company is expected in
2000.
Income taxes increased 20.3% to $4.1 million during the six months ended
January 31, 1998 from $3.4 million during the six months ended January 31, 1997.
The Company's effective tax rate decreased to 34.7%, for the six months ended
January 31, 1998 from 37.9% for the corresponding period in the previous year
primarily due to greater utilization of tax-free investments.
As a result of the foregoing, the Company's net income increased $2.1
million, or 37.9%, to $7.7 million during the six months ended January 31, 1998
from $5.6 million during the six months ended January 31, 1997. Basic and
diluted net income per share were $.28 and $.27, respectively, for the six
months ended January 31, 1998 as compared to $.20 (basic and diluted) for the
corresponding prior year period after adjustment for the Company's 2-for-1 stock
split in February 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended January 31, 1998, net cash provided by operating
activities was $15.5 million as compared to $6.9 million for the corresponding
period of fiscal 1997. As of January 31, 1998 and July 31, 1997, the Company's
working capital and current ratio were $125.8 million and 5.2-to-1 and $127.8
million and 6.1-to-1, respectively. The Company invests excess cash balances in
short-term investment grade securities, such as money market investments,
obligations of the U.S. government and its agencies and obligations of state and
local government agencies.
During the six months ended January 31, 1998, the Company's capital
expenditures were $23.5 million.
On October 2, 1997, the Company acquired a 383,000 square foot office
campus in St. Petersburg, Florida for $13.5 million. Although no formal
construction commitments exist for this facility, the Company expects to spend
approximately $20 million to expand and renovate the facility over the next
three years. Management estimates that as of January 31, 1998, approximately
$9.1 million will be required in order for the Company to purchase additional
equipment, furniture and hardware, and to complete its currently defined
software projects.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
The Company has a two-year, $15.0 million unsecured credit facility with a
financial institution. The Company has agreed to maintain all of its assets free
and clear of all liens, encumbrances and pledges, except purchase money security
interests in specific equipment in an aggregate amount of less than $500,000 as
long as the credit facility remains outstanding or any indebtedness thereunder
remains unpaid. Interest on the principal balance outstanding under this line of
credit accrues at a floating interest rate equal to the prime rate or, at the
Company's option, to the 30-day London Interbank Offering Rate (LIBOR), plus an
applicable interest rate margin between 1% and 2% based on certain financial
ratios. The credit facility contains certain financial covenants requiring the
maintenance of cash and cash equivalents and investments equal to or greater
than customer account deposits, a funded debt to earnings before interest,
taxes, depreciation and amortization (EBITDA) ratio of a maximum of 2.25-to-1, a
debt service coverage ratio of not less than 1.35-to-1, as well as the
maintenance of certain funded debt to tangible net worth ratio. As of January
31, 1998, the Company was in compliance with all such covenants and there were
no amounts outstanding under the credit facility. This facility expires in March
1998. The Company presently intends to renew and increase the amount of the
facility, although no assurance can be given that the Company can or will do so.
The Company believes that its cash, investments, cash flows from operations
and funds available from its credit facility will be adequate to meet the
Company's expected capital requirements for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's 1997 Annual Meeting of Shareholders held on December 5,
1997, two matters were submitted to a vote of shareholders. Suzanne M.
MacDougald and Peter A. Sullivan were elected as directors of the Company for
terms expiring in 2000. The following table sets forth certain information with
respect to the election of directors at the annual meeting:
Shares Withholding
Name of Nominee Shares Voted For Authority
--------------------- ---------------- -------------------
Suzanne M. MacDougald 24,097,183 114,221
Peter A. Sullivan 24,100,183 111,221
The following table sets forth the other directors of the Company whose
terms of office continued after the 1997 annual meeting of the shareholders:
Name of Director Term Expires
------------------------ ---------------
Mark M. Goldman 1998
James E. MacDougald 1999
Thomas F. Costello 1999
Second, the Company's shareholders approved the ABR Information Services,
Inc. 1997 Employee Stock Option Plan. The following table sets forth certain
information with respect to the vote on such matter:
Shares Voted Shares Voted
For Against Abstentions
--------------- ---------------- ---------------
15,199,349 2,727,357 1,411,512
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 Stock purchase agreement dated February 26, 1998 and
effective February 1, 1998, by and among ABR Information
Services, Inc. and the shareholders of Charing Company, Inc.
10.16 Stock purchase agreement dated February 27, 1998 and
effective February 1, 1998, by and among ABR Information
Services, Inc., Matthews, Malone & Associates, Ltd. and the
shareholders of Matthews, Malone & Associates, Ltd.
27.1 Financial Data Schedule - six months (Edgar Version Only)
27.2 Financial Data Schedule - nine months (Edgar Version Only)
27.3 Financial Data Schedule - year (Edgar Version Only)
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 13, 1998 ABR INFORMATION SERVICES, INC.
(Registrant)
/s/ James P. O'Drobinak
---------------------------------
James P. O'Drobinak
Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
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