-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DO8c/TPfDm5S2gtCZnmf6N7vDAYEKKWeZ4YC9YmAjQEiA63nisebMR93btdvKdQd X8IX7w5wdMNUMYmPW/60+Q== 0000950144-98-013819.txt : 19981215 0000950144-98-013819.hdr.sgml : 19981215 ACCESSION NUMBER: 0000950144-98-013819 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ABR INFORMATION SERVICES INC CENTRAL INDEX KEY: 0000920985 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 593228107 STATE OF INCORPORATION: FL FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24132 FILM NUMBER: 98769128 BUSINESS ADDRESS: STREET 1: 34125 US HGHWY 19 N CITY: PALM HARBOR STATE: FL ZIP: 34684 BUSINESS PHONE: 7277852819 MAIL ADDRESS: STREET 1: 34125 US HGHWY 19 N CITY: PALM HARBOR STATE: FL ZIP: 34684 10-Q 1 ABR INFORMATION SERVICES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 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 ____________ 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: 727-785-2819 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 December 9, 1998: 28,738,737 Class: Nonvoting Common Stock, $.01 Par Value Outstanding at December 9, 1998: None
1 2 ABR INFORMATION SERVICES, INC. INDEX TO FORM 10-Q
Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations for the three months ended October 31, 1998 and 1997 3 Consolidated Balance Sheets as of October 31, 1998 and July 31, 1998 4 Consolidated Statements of Cash Flows for the three months ended October 31, 1998 and 1997 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13
The statements contained in this report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, beliefs, intentions, or strategies regarding the future. Forward-looking statements include statements regarding, among other things: (i) the potential loss of material customers; (ii) the failure to properly manage growth ad successfully integrate acquired businesses; (iii) the Company's financing plans; (iv) trends affecting the Company's financial condition or results of operations; (v) the Company's growth and operating strategies; (vi) the ability to attract and retain qualified sales, information services and management personnel; (vii) the impact of competition from new and existing competitors; (viii) the financial condition of the Company's clients; (ix) potential increases in the Company's costs; (x) the declaration and payment of dividends; (xi) the potential for unfavorable interpretation of existing government regulations or new government legislation; (xii) the development of a comprehensive and fully integrated suite of benefits administrative services; (xiii) the sufficiency of the Company's back-up facilities and disaster recovery procedures; (xiv) the ability of the Company and its significant suppliers and large customers to address the Year 2000 Issue; (xv) the Company's ability to minimize the impact of interest rate fluctuations; and (xvi) the outcome of certain litigation involving the Company. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Prospective investors should also consult the risks described from time to time in the Company's Reports on Form 8-K, 10-K and Annual Reports to Shareholders. 2 3 PART I. FINANCIAL INFORMATION Item 1. ABR INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three months ended October 31, ------------------------------- 1998 1997 ------------ ------------ Revenue $ 24,070,490 $ 15,234,938 Operating expenses: Cost of services 13,792,641 8,824,316 Selling, general and administrative 4,610,810 2,675,148 Software write-off 13,804,305 -- ------------ ------------ Operating income (loss) (8,137,266) 3,735,474 Interest income 1,335,293 1,432,776 Lease revenue, net 187,335 -- ------------ ------------ Income (loss) before income taxes (6,614,638) 5,168,250 Income taxes (benefit) (2,467,000) 1,667,290 ------------ ------------ Net income (loss) $ (4,147,638) $ 3,500,960 ============ ============ Net income (loss) per share $ (0.14) $ 0.13 ============ ============
The accompanying notes are an integral part of these statements. 3 4 ABR INFORMATION SERVICES, INC. CONSOLIDATED BALANCE SHEETS
October 31, 1998 July 31, 1998 (Unaudited) ---------------- ------------- ASSETS Current Assets: Cash and cash equivalents, net $ 71,466,413 $ 54,427,446 Investments 31,298,545 85,912,690 Accounts receivable, net 16,281,386 13,102,473 Prepaid expenses and other 3,150,751 2,582,277 ------------ ------------ Total current assets 122,197,095 156,024,886 Long-Term Investments 7,005,985 6,021,873 Property and Equipment, net 52,027,851 47,713,155 Software Development Costs, net 9,433,879 21,276,073 Goodwill, Intangibles and Other Assets, net 78,276,184 42,154,560 ------------ ------------ Total Assets $268,940,994 $273,190,547 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 832,105 $ 1,336,504 Accrued expenses 9,137,865 2,882,668 Customer account deposits 24,755,563 29,147,418 Unearned revenue 1,187,123 361,782 Income taxes payable 1,858,486 126,508 ------------ ------------ Total current liabilities 37,771,142 33,854,880 ------------ ------------ Deferred Income Taxes 4,620,312 8,720,312 ------------ ------------ Shareholders' Equity: Preferred Stock - authorized 2,000,000 shares of $.01 par value; no shares issued -- -- Common Stock - authorized, 100,250,000 shares of $.01 par value; issued and outstanding, 28,712,906 and 28,695,592 shares, respectively 287,129 286,956 Additional paid-in capital 200,320,454 200,238,804 Retained earnings 25,941,957 30,089,595 ------------ ------------ Total Shareholders' Equity 226,549,540 230,615,355 ------------ ------------ Total Liabilities and Shareholders' Equity $268,940,994 $273,190,547 ============ ============
The accompanying notes are an integral part of these statements. 4 5 ABR INFORMATION SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended October 31, --------------------------------- 1998 1997 -------------- ------------- Cash flows from operating activities: Net income (loss) $ (4,147,638) $ 3,500,960 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,159,712 1,107,779 Software write-off 13,804,755 -- Deferred income taxes (4,100,000) 984,174 Provision for losses on accounts receivable 39,000 738 Change in operating assets and liabilities net of effects from purchases: Accounts receivable (838,788) 1,343,382 Prepaid expenses and other (529,064) (411,531) Other assets (62,275) 221,751 Accounts payable (807,629) 438,173 Accrued expenses (818,237) 522,458 Customer account deposits (4,391,855) 3,659,903 Unearned revenue 167,341 4,900 Income taxes payable 731,978 257,220 ------------- ------------- Net cash provided by operating activities 1,207,300 11,629,907 ------------- ------------- Cash flows from investing activities: Additions to investments (55,701,862) (138,054,774) Maturity of investments 109,331,895 147,400,000 Additions to property and equipment (3,572,908) (16,308,397) Additions to software development costs (2,156,727) (3,901,319) Acquisitions, net of cash acquired (32,150,554) -- ------------- ------------- Net cash provided by (used in) investing activities 15,749,844 (10,864,490) ------------- ------------- Cash flows from financing activities: Proceeds from bank borrowings 10,290,849 -- Principal payments under bank borrowings (10,290,849) -- Exercise of stock options 81,823 56,119 ------------- ------------- Net cash provided by financing activities 81,823 56,119 ------------- ------------- Net increase in cash and cash equivalents 17,038,967 821,536 Cash and cash equivalents at beginning of year 54,427,446 33,322,734 ------------- ------------- Cash and cash equivalents at end of period $ 71,466,413 $ 34,144,270 ============= =============
The accompanying notes are an integral part of these statements. 5 6 ABR INFORMATION SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS October 31, 1998 NOTE A - DESCRIPTION OF ORGANIZATION AND BUSINESS ABR Information Services, Inc. (the "Company"), through its wholly-owned subsidiaries, ABR Benefits Services, Inc., Charing Company, Inc., Matthews, Malone & Associates, Ltd., Business Computer Services, Inc., MidAtlantic 401(K) Services, Inc., Chowning, Ltd., Western Pension Service Corporation and BMC Consultants, Inc., is a leading provider of comprehensive benefits administration, payroll and human resource services to employers seeking to outsource these functions. The Company's operating revenues currently are generated from three sources: employee health and welfare administration services, qualified plan administration services, and payroll and human resource administration services. All services are offered on either an "a la carte" or a total outsourcing basis, allowing customers to outsource certain benefits administration tasks which they find too costly or burdensome to perform in-house, or to outsource the entire benefits administration function. Additionally, the Company generates non-operating revenue from the short-term lease (expiring in April 1999) of its St. Petersburg, Florida, operations center through its wholly-owned subsidiary, ABR Properties, Inc. The Company provides outsourced benefits administration, payroll, and human resource services to employers ranging in size from 20 to 200,000 employees. ABR provides portability (primarily COBRA and HIPAA) services through the trade name CobraServ(R) and payroll and tax deposit services through the trade name PayAmerica(R). The Company is headquartered in Palm Harbor, Florida, and employs approximately 1,400 people in marketing/operations centers in Florida, New Jersey, Virginia, Maryland, California, Wisconsin, Arizona, Pennsylvania, South Carolina, and Colorado. 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 October 31, 1998 and for the three months ended October 31, 1998 and October 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 months ended October 31, 1998 are not necessarily indicative of results that may be expected for the year ending July 31, 1999. These financial statements should be read in conjunction with the audited financial statements of the Company as of July 31, 1998 and 1997, and for each of the three years in the period ended July 31, 1998, included in the Company's 1998 Annual Report on Form 10-K. The Company presents Cash and Cash Equivalents exclusive of PayAmerica(R) tax deposits held for future payment on behalf of its payroll customers due to their restricted and short-term nature. The amount of such tax deposits and related liability was approximately $54.7 million and $65.9 million at October 31, 1998, and July 31, 1998, respectively. During fiscal 1998, the Company adopted Statement of Financial Accounting Standard No. 128 "Earnings Per Share" (FAS 128). This Standard became effective for financial statements issued after December 15, 1997, and eliminates primary and fully diluted income per share and replaces them with basic and diluted income per share. Accordingly, all income per share amounts for the prior periods presented have been restated to conform to the new Standard (see Note D). NOTE C - SOFTWARE WRITE-OFF During the first quarter of fiscal 1999, the Company recorded a non-cash pre-tax software write-off of approximately $13.8 million. The write-off was a result of the Company's Board of Directors decision in September 1998 to redefine the strategic design of certain completed and in-process software projects. The projected future undiscounted cash flows expected to be generated by the use of the affected software is less than the carrying value of the related assets; therefore, an impairment loss has been recognized. The recognition of this impairment was in accordance with the provisions of "Statement of Financial Accounting Standards No. 121 -- Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." NOTE D - 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: 6 7
Three months ended October 31, ------------------------------- 1998 1997 ------------ ------------ Basic Net income (loss) $ (4,147,638) $ 3,500,960 ============ ============ Weighted average shares 28,699,649 27,381,670 ============ ============ Basic income (loss) per share $ (0.14) $ 0.13 ============ ============ Diluted Net income (loss) $ (4,147,638) $ 3,500,960 ============ ============ Shares (denominator): Weighted average shares 28,699,649 27,381,670 Effect of dilutive stock options N/A 513,010 ------------ ------------ Adjusted weighted average shares 28,699,649 27,894,680 ============ ============ Diluted income (loss) per share $ (0.14) $ 0.13 ============ ============ Options not included in diluted income per share because exercise price was greater than average market price: N/A 815,884 Price Range N/A $26.12 to N/A $34.33
The options which expire on various dates through 2008 were still outstanding at October 31, 1998. NOTE E - COMMITMENTS On October 2, 1997, the Company acquired a 383,000 square foot office campus in St. Petersburg, Florida for $13.5 million. The Company expects to spend approximately $23 million, of which $4.8 million has been spent as of October 31, 1998, to expand and renovate the facility over the next three years. The Company expects to occupy portions of this facility starting in calendar 1999. The former owner of the facility has signed a short-term agreement to lease back portions of the campus, prior to the Company occupying the entire facility in approximately 2000. The Company's lease revenue on the campus is dependent upon the amount of square footage being utilized by the former owner and is recorded net of the direct expenses of operating the facility. The Company estimates that as of October 31, 1998, approximately $11.0 million will be required in order for the Company to purchase additional equipment, furniture and hardware, and to complete currently defined software projects. NOTE F - BUSINESS ACQUISITIONS Effective August 1, 1998, the Company, in an acquisition accounted for as a purchase, acquired all of the capital stock of MidAtlantic 401(K) Services, Inc. ("MidAtlantic") for $10.9 million in cash and an additional amount to be paid contingent upon future earnings. Potential contingent payments could range between $0 and $2.0 million and would be charged to goodwill if paid. Goodwill of approximately $10.4 million resulting from the acquisition is being amortized over a period of 25 years on a straight-line method. Pro forma financial information is not provided for MidAtlantic due to its immateriality. Effective October 22, 1998, the Company, in an acquisition accounted for as a purchase, acquired all of the outstanding capital stock of Chowning, Ltd., including its sole operating subsidiary, The Barrington Group, Ltd., for $15.9 million in cash. Chowning is headquartered in Milwaukee, Wisconsin, and has additional offices in Maryland, Pennsylvania and California. The Barrington Group, Ltd., administers Section 125 benefit plans (full cafeteria plans, 7 8 flexible spending accounts and pre-tax premium plans). Goodwill of approximately $13.1 million resulting from the acquisition is being amortized over a period of 25 years on a straight-line method. Pro forma financial information is not provided for Chowning due to its immateriality. Effective October 1, 1998, the Company, in an acquisition accounted for as a purchase, acquired all of the outstanding capital stock of Western Pension Service Corporation ("Western Pension") for $7.0 million in cash and an additional amount to be paid contingent upon future earnings. The potential contingent payment could be $1.0 million and would be charged to goodwill if paid. Western Pension is headquartered in San Rafael, California, and administers qualified retirement plans. Goodwill of approximately $7.1 million resulting from the acquisition is being amortized over a period of 25 years on a straight-line method. Pro forma financial information is not provided for Western Pension due to its immateriality. Effective November 1, 1998, the Company, in an acquisition accounted for as a purchase, acquired all of the outstanding capital stock of BMC Consultants, Inc. ("BMC") for $3.0 million in cash and an additional amount to be paid contingent upon future earnings. Potential contingent payments could range between $0 and $800,000 and would be charged to goodwill if paid. BMC is headquartered in Englewood, Colorado, and provides defined contribution and defined benefit plan administration services. Goodwill of approximately $2.7 million resulting from the acquisition is being amortized over a period of 25 years on a straight-line method. NOTE G - LITIGATION The Company is engaged in various litigation arising from the ordinary course of its business. In the opinion of management, the ultimate outcome of such litigation is not expected to be material to the Company's financial position, results of operations or liquidity. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing elsewhere in this Form 10-Q. OVERVIEW The Company's operating revenues currently are generated from three sources: employee health and welfare administration services, qualified plan administration services, and integrated HRIS/payroll administration services. Additionally, the Company generates non-operating revenue from the short-term lease of its St. Petersburg, Florida facility through its wholly-owned subsidiary, ABR Properties, Inc. The first source of the Company's revenue is providing employee health and welfare administration outsourcing services. In particular, the Company provides portability (i.e., COBRA (the "Consolidated Omnibus Budget Reconciliation Act"), HIPAA (the "Health Insurance Portability and Accountability Act of 1996") or state-mandated continuation coverage) compliance services primarily through its qualifying event agreements with employers and capitation agreements with insurance companies. Through qualifying event agreements, the Company receives a fixed, per occurrence, fee from its customers for each qualifying event. A qualifying event occurs when an employee or his or her dependents experience a loss or change of coverage under a group healthcare plan. The amount of the fixed fee varies depending on the type of portability qualifying event and the method of the qualifying event notification mailing, which is selected by the customer. Through capitation agreements, insurance companies designate the Company as the administrator of compliance for their group insurance clients that are subject to health portability laws. The Company is paid a monthly fee for each employee covered by the group plan. The revenue generated under a capitation agreement is not dependent on the triggering of a qualifying event, but is determined based on the number of employees covered by the group plan at the beginning of each month. The 8 9 Company also receives an administrative fee typically equal to 2% of the monthly health insurance premium that is paid by or on behalf of each COBRA continuant. In addition, the Company generates health and welfare administration services revenues by providing administration services for benefits provided to active employees, including open enrollment, employee enrollment and eligibility, and flexible spending account administration, along with providing administration services for benefits provided to retired and inactive employees, including retiree healthcare, disability, surviving dependent, family leave and severance benefits. Most services are provided both on a one-time or continuous basis. During the first three months of fiscal 1999 and 1998, 73.0% and 98.0%, respectively, of the Company's revenues were attributable to employee health and welfare administration services. The second source of the Company's revenue is providing employee qualified plan administration services, including 401(k) plan administration, profit sharing administration, defined benefit plan administration, ESOP administration and Qualified Domestic Relations Order ("QDRO") administration. During the first three months of fiscal 1999 and 1998, 16.1% and 1.4%, respectively, of the Company's revenues were attributable to employee qualified retirement plans administration. The third source of the Company's revenue is providing integrated payroll and human resource administration services, including tax deposit services and integrated human resource solutions. During the first three months of fiscal 1999 and 1998, 10.9% and .6%, respectively, of the Company's revenues were attributable to payroll and human resource administration services. Costs of services include 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. 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 a significant operational problem for its computer systems. The Company is utilizing both internal and external resources to test and reprogram, or replace, the software for Year 2000 compliance. The Company is also in the process of identifying non-IT systems in which Year 2000 problems could be embedded, testing those systems for Year 2000 compliance and correcting or replacing those systems having Year 2000 problems. The Company anticipates completing the Year 2000 project for both IT and non-IT systems 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 $250,000. Approximately $150,000 in costs has been incurred to date. These costs are being funded through operating cash flows and are not expected to have a material adverse effect on the Company's business, financial condition or results of operations. All costs associated with addressing the Year 2000 Issue are being expensed as incurred. 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. While some suppliers and customers have responded affirmatively, a majority have not as yet provided the necessary feedback. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have a material adverse effect on the Company's systems and in turn, the Company's business, financial condition and results of operations. 9 10 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 October 31, ------------------------- 1998 1997 ------ ------ Revenue 100.0% 100.0% Cost of services 57.3 57.9 Selling, general and administrative 19.2 17.6 Software write-off 57.3 -- ----- ----- Operating income (loss) (33.8) 24.5 Interest income 5.5 9.4 Lease revenue, net 0.8 -- Income taxes (benefit) (10.2) 10.9 ----- ----- Net income (loss) (17.3)% 23.0% ===== =====
THREE MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THREE MONTHS ENDED OCTOBER 31, 1997 Revenues increased $8.9 million, or 58.6%, to $24.1 million during the three months ended October 31, 1998 from $15.2 million during the three months ended October 31, 1997. Of the $8.9 million increase in revenues, $2.7 million was attributable to increased employee health and welfare administration revenues, $3.7 million was attributable to increased employee qualified plan administration revenues and $2.5 million was attributable to payroll and human resource administration services revenue. For the quarter ended October 31, 1998, health and welfare administration revenue was $17.6 million, qualified plan administration revenue was $3.9 million, and payroll and human resource administration was $2.6 million. The increase in employee health and welfare administration revenues was primarily attributable to the addition of new customers and new service product offerings. The increase in employee qualified retirement plans administration revenues was primarily attributable to certain subsidiaries acquired by the Company during calendar year 1998. Payroll and human resource administration was primarily attributable to the acquisition of PayAmerica effective April 30, 1998. Cost of services increased $5.0 million, or 56.8%, to $13.8 million during the three months ended October 31, 1998 from $8.8 million during the three months ended October 31, 1997. The dollar increase in cost of services was attributable to the addition of data processing, information systems and customer service personnel to support revenue growth, the transition and consolidation of certain operational duties into the Florida operations center and the addition of seven subsidiaries acquired through acquisitions during calendar 1998. As a percentage of revenues, the 1998 cost of services decreased to 57.3% from 57.9% in the previous year. Selling, general and administrative expenses increased $1.9 million, or 70.4%, to $4.6 million during the three months ended October 31, 1998 from $2.7 million during the three months ended October 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 and the addition of seven subsidiaries acquired through acquisitions during calendar 1998. As a percentage of revenues, selling, general and administrative expenses increased to 19.2% from 17.6% in the previous year. Software write-off increased to $13.8 million for the three months ended October 31, 1998, compared to $0 for the three months ended October 31, 1997. The software write-off was a result of the Company's Board of Directors decision in September 1998 to redefine the strategic design of certain completed and in-process software projects. As a result of the strategic change, these projects were superceded or eliminated. 10 11 Interest income decreased $.1 million to $1.3 million during the three months ended October 31, 1998, from $1.4 million during the three months ended October 31, 1997. This decrease was the result of less cash available for investing due to capital purchases, cash payments for acquisitions and an overall decline in short-term interest rates. Lease revenue increased to $.2 million for the three months ended October 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 1999 and will decrease to $0 by April 1999, at the latest. Final occupancy by the Company is expected in fiscal 2000. Income taxes decreased to $2.5 million (benefit) during the three months ended October 31, 1998 from $1.7 million during the three months ended October 31, 1997. The Company's effective tax rate increased to 37.3% for the three months ended October 31, 1998, from 32.3% for the corresponding period in the previous fiscal year. This increase in the effective rate is the result of less investments in tax-free instruments and non-deductible amortization from certain acquisitions. As a result of the foregoing, the Company had a net loss of $4.1 million during the three months ended October 31, 1998, as compared to net income of $3.5 million during the three months ended October 31, 1997. Basic and diluted net loss per share was $.14 for the quarter ended October 31, 1998, as compared to income per share of $.13 basic and diluted, respectively, for the corresponding prior year period. LIQUIDITY AND CAPITAL RESOURCES For the three months ended October 31, 1998, net cash provided by operating activities was $1.2 million as compared to $11.6 million for the corresponding period in 1997. The change in net cash provided by operating activities is primarily due to the change in customer account deposits. As of October 31, 1998 and July 31, 1998, the Company's working capital and current ratio were $84.4 million and 3.2:1 and $122.1 million and 4.6:1, respectively. The decrease in working capital is primarily due to the purchase of three subsidiaries during the three months ended October 31, 1998, and the related purchase price holdbacks of approximately $3.5 million included in accrued expenses at October 31, 1998. 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 three months ended October 31, 1998, the Company's capital expenditures were $5.7 million. On October 2, 1997, the Company acquired a 383,000 square foot office campus in St. Petersburg, Florida for $13.5 million. The Company expects to spend approximately $23.0 million, of which $4.8 million has been spent as of October 31, 1998, to expand and renovate the facility over the next three years. Management estimates that as of October 31, 1998, approximately $11.0 million will be required in order for the Company to purchase additional equipment, furniture and hardware, and to complete its currently defined software projects. In September 1998, the Company announced that the Board of Directors had authorized the repurchase of up to 3.0 million shares of its outstanding common stock. The Company believes that its cash, investments, cash flows from operations and potential additional borrowing capacity will be adequate to meet the Company's expected capital requirements for the foreseeable future. The Company has a three-year, $25.0 million unsecured credit facility. The Company has agreed to maintain all of its assets free and clear of all liens, encumbrances and pledges, except for purchase money security interests in specific equipment in an aggregate amount of less than $1,500,000 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 30-day London Interbank Offering Rule (LIBOR), plus an applicable interest rate margin between 62.5 and 150 basis points based on 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 2.5-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 October 31, 1998, the Company was in compliance with all such covenants and there were no amounts outstanding under the credit facility. 11 12 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Registrant's investment portfolio consists primarily of high grade fixed income investments, such as AA or better rated fixed income municipal instruments, and consequently the Company believes such portfolio does not subject it to material market risk exposures. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (Edgar Version Only) (b) Reports on Form 8-K The Company filed a Report on Form 8-K on November 5, 1998, reporting the acquisition of Chowning, Ltd. on October 22, 1998. Included as an exhibit to such filing is the Stock Purchase Agreement dated October 22, 1998, by and among ABR Information Services, Inc.; Chowning, Ltd.; The Barrington Group, Ltd.; Mark G. FitzGerald, Timothy D. Dyer and Laura J. LaPinske, as Shareholders of Chowning, Ltd.; and Mark G. FitzGerald, as Shareholders' Agent. No financial statements were required to be filed as part of this Form 8-K. The Company filed a Report on Form 8-K on May 15, 1998, reporting the acquisition of Business Computer Services, Inc. (d.b.a. PayAmerica(R)) on April 30, 1998. This Report was amended and restated in its entirety pursuant to a Report on Form 8-K/A filed on November 13, 1998. Included as an exhibit to such filing is the Agreement and Plan of Reorganization by and among ABR Information Services, Inc., Business Computer Services, Inc., the Shareholders of Business Computer Services, Inc., and Samuel N. Klewans, as Shareholders' Agent. No financial statements were required to be filed as part of either the Form 8-K or Form 8-K/A. 12 13 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: December 14, 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) 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ABR INFORMATION SERVICES, INC. FOR THE THREE MONTHS ENDED OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 3-MOS JUL-31-1999 AUG-01-1998 OCT-31-1998 1 71,466,413 31,298,545 16,281,386 0 0 122,197,095 52,027,851 0 268,940,994 37,771,142 0 0 0 287,129 200,320,454 268,940,994 24,070,490 24,070,490 13,792,641 4,610,810 13,804,305 0 (1,335,293) (6,614,638) (2,467,000) 0 0 0 0 (4,147,638) (.14) (.14)
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