-----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, PaX85y1k/g9nzOZe/82enhi6X1qxikm3h+RiMyQg1i2uqHLT70O7h9haJS7//UD5 FqVQRHM2tcj/7hjRQkO4zA== /in/edgar/work/20000614/0000950123-00-005778/0000950123-00-005778.txt : 20000919 0000950123-00-005778.hdr.sgml : 20000919 ACCESSION NUMBER: 0000950123-00-005778 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000861179 STANDARD INDUSTRIAL CLASSIFICATION: [7374 ] IRS NUMBER: 132770433 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20946 FILM NUMBER: 655127 BUSINESS ADDRESS: STREET 1: 401 PARK AVE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126854545 MAIL ADDRESS: STREET 1: 401 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 10-Q 1 0001.txt HEALTH MANAGEMENT SYSTEMS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission File Number 0-20946 Health Management Systems, Inc. (Exact name of registrant as specified in its charter) New York 13-2770433 State of Incorporation (I.R.S. Employer Identification Number) 401 Park Avenue South, New York, New York 10016 (Address of principal executive offices, zip code) (212) 685-4545 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report.) 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 and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at June 5, 2000 ----- --------------------------- Common Stock, $.01 Par Value 17,486,369 Shares
2 HEALTH MANAGEMENT SYSTEMS, INC. INDEX TO FORM 10-Q QUARTER ENDED APRIL 30, 2000
PART I FINANCIAL INFORMATION Page No. Item 1 Interim Financial Statements Condensed Consolidated Balance Sheets as of April 30, 2000 (unaudited) 1 and October 31, 1999 Condensed Consolidated Statements of Operations (unaudited) for the 2 three month and six month periods ended April 30, 2000 and April 30, 1999 Consolidated Statements of Comprehensive Income (unaudited) for the 3 three month and six month periods ended April 30, 2000 and April 30, 1999 Consolidated Statement of Shareholders' Equity (unaudited) for the six 4 month period ended April 30, 2000 Condensed Consolidated Statements of Cash Flows (unaudited) for the six 5 month periods ended April 30, 2000 and April 30, 1999 Notes to Interim Consolidated Financial Statements (unaudited) 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of 10 Operations Item 3 Quantitative and Qualitative Disclosures About Market Risks 13 PART II OTHER INFORMATION 14 SIGNATURES 15 EXHIBIT INDEX 16
3 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($ In Thousands)
April 30, October 31, 2000 1999 ---------- ----------- Assets (unaudited) Current assets: Cash and cash equivalents $ 8,401 $ 16,310 Short-term investments 13,759 17,507 Accounts receivable, billed, net 19,957 17,001 Accounts receivable, unbilled, net 46,771 41,661 Other current assets 6,031 4,516 --------- --------- Total current assets 94,919 96,995 Long term accounts receivable, unbilled, net 353 0 Property and equipment, net 7,494 7,766 Capitalized software costs, net 8,897 7,286 Goodwill, net 12,428 12,762 Notes receivable from officer 1,500 900 Other assets 5,122 5,212 --------- --------- Total assets $ 130,713 $ 130,921 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 17,195 $ 18,050 Deferred revenue 3,500 4,541 Deferred income taxes 16,293 15,967 --------- --------- Total current liabilities 36,988 38,558 Other liabilities 1,037 1,131 --------- --------- Total liabilities 38,025 39,689 --------- --------- Shareholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued and outstanding 0 0 Common stock - $.01 par value; 45,000,000 shares authorized; 18,529,020 shares issued and 17,480,020 shares outstanding at April 30, 2000 18,450,737 shares issued and 17,401,737 shares outstanding at October 31, 1999 185 184 Capital in excess of par value 72,110 71,714 Retained earnings 28,086 27,078 Accumulated other comprehensive income 57 6 --------- --------- 100,438 98,982 Less treasury stock, at cost (1,049,000 shares at April 30, 2000 and October 31, 1999) (7,750) (7,750) --------- --------- Total shareholders' equity 92,688 91,232 --------- --------- Total liabilities and shareholders' equity $ 130,713 $ 130,921 ========= =========
See accompanying notes to interim consolidated financial statements. 1 4 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ($ In Thousands, Except Per Share Amounts) (unaudited)
Three months ended Six months ended April 30, April 30, --------------------- --------------------- 2000 1999 2000 1999 ------- ------- ------- ------- Revenue $27,600 $28,857 $54,174 $56,226 ------- ------- ------- ------- Cost of services: Compensation 16,382 16,407 32,168 31,742 Direct project costs 3,372 2,917 6,771 5,847 Data processing 1,123 1,704 3,008 3,539 Occupancy 2,447 2,209 5,048 4,391 Other 3,138 2,589 5,667 5,061 ------- ------- ------- ------- 26,462 25,826 52,662 50,580 ------- ------- ------- ------- Operating margin before amortization of intangibles 1,138 3,031 1,512 5,646 Amortization of intangibles 228 200 455 400 ------- ------- ------- ------- Operating income 910 2,831 1,057 5,246 Net interest and net other income 289 289 614 597 ------- ------- ------- ------- Income before income taxes 1,199 3,120 1,671 5,843 Income tax expense 490 1,317 663 2,434 ------- ------- ------- ------- Net income $ 709 1,803 $ 1,008 $ 3,409 ======= ======= ======= ======= Earnings per share data: Basic: Basic earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.20 ======= ======= ======= ======= Weighted average common shares outstanding 17,480 17,360 17,451 17,334 ======= ======= ======= ======= Diluted: Diluted earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.19 ======= ======= ======= ======= Weighted average common shares and common share equivalents 17,544 17,402 17,561 17,485 ======= ======= ======= =======
See accompanying notes to interim consolidated financial statements. 2 5 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ In Thousands) (unaudited)
Three months ended Six months ended April 30, April 30, -------------------- -------------------- 2000 1999 2000 1999 ------ ------- ------ ------- Net income $ 709 $ 1,803 $1,008 $ 3,409 Other comprehensive income, net of tax: Change in net unrealized appreciation (depreciation) on short-term investments 44 (27) 51 (28) ------ ------- ------ ------- Comprehensive income $ 753 1,776 $1,059 $ 3,381 ====== ======= ====== =======
See accompanying notes to interim consolidated financial statements. 3 6 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ($ In Thousands) (unaudited)
Common Stock Accumulated ------------------- Capital In Other Total # of Shares Par Excess Of Retained Comprehensive Treasury Shareholders' Outstanding Value Par Value Earnings Income Stock Equity ----------- ----- --------- -------- ------------- --------- -------------- Balance at October 31, 1999 17,401,737 $184 $71,714 $27,078 $ 6 ($7,750) $91,232 Net income 0 0 0 1,008 0 0 1,008 Stock option activity 66,916 1 308 0 0 0 309 Employee stock purchase plan 11,367 0 52 0 0 0 52 activity Disqualifying dispositions 0 0 36 0 0 0 36 Change in net unrealized appreciation on short-term investments 0 0 0 0 51 0 51 ---------- ---- ------- ------- ------------- -------- --------- Balance at April 30, 2000 17,480,020 $185 $72,110 $28,086 $57 ($7,750) $92,688 ========== ==== ======= ======= ============= ======== =========
See accompanying notes to interim consolidated financial statements. 4 7 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ In Thousands) (unaudited)
Six months ended April 30, ------------------------ 2000 1999 -------- -------- Net cash provided by (used in) operating activities $ (7,541) $ 3,641 -------- -------- Investing activities: Capital asset expenditures (1,364) (1,194) Software capitalization (2,564) (2,008) Increase in note receivable from officer (600) 0 Net proceeds from sales (purchases) of short-term investments 3,799 (4,993) -------- -------- Net cash used in investing activities (729) (8,195) -------- -------- Financing activities: Proceeds from issuance of common stock 309 160 Proceeds from exercise of stock options 52 206 -------- -------- Net cash provided by financing activities 361 366 -------- -------- Net decrease in cash and cash equivalents (7,909) (4,188) Cash and cash equivalents at beginning of period 16,310 13,883 -------- -------- Cash and cash equivalents at end of period $ 8,401 $ 9,695 ======== ========
See accompanying notes to interim consolidated financial statements. 5 8 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Unaudited Interim Financial Information The management of Health Management Systems, Inc. ("HMS" or the "Company") is responsible for the accompanying unaudited interim consolidated financial statements and the related information included in these notes to the unaudited interim consolidated financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, including normal recurring adjustments necessary for the fair presentation of the Company's financial position and results of operations and cash flows for the periods presented. Results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of and for the fiscal year ended October 31, 1999 included in the Company's Annual Report on Form 10-K for such year, and the unaudited interim consolidated financial statements as of and for the quarterly period ended January 31, 2000 included in the Company's Quarterly Report on Form 10-Q, both as filed with the Securities and Exchange Commission. 2. Reclassifications Certain reclassifications were made to prior year amounts to conform to the current presentation. 3. Business Combinations In June 1999, the Company's Quality Standards in Medicine, Inc. ("QSM") subsidiary acquired substantially all of the assets and assumed specified liabilities of Health Receivables, LLC ("Old HRM") for $4,024,000, net of cash acquired and subject to certain purchase price adjustments. In connection with the transaction, QSM changed its name to Health Receivables Management, Inc. ("HRM"). HRM currently furnishes Medicaid application services, electronic billing, eligibility verification, accounts receivable management, and collection services to healthcare providers, principally in the State of Illinois. The acquisition was accounted for using the purchase method of accounting. HRM's results are included in the Company's Provider Revenue Services Group. The $1,618,000 excess of the purchase price over the fair market value of the identifiable assets acquired was recorded as goodwill and is being amortized over a period not to exceed 15 years. 4. Long term accounts receivable Certain of the Company's newer offerings have resulted in accounts receivable whose collection cycles are expected to exceed 12 months. Accordingly, these receivables are classified as long term and are recorded at their discounted present value using the Company's borrowing rate of 10.125%, with imputed interest income recognized over the expected period of collection. During the period ended April 30, 2000, "long term accounts receivable, unbilled, net" and "interest income" of $353,000, net of discount, and $3,000, respectively, were recognized. 5. Credit Facility The facility is comprised of a $10 million committed revolver and a $20 million advised line of credit, with a major money center bank. The facility expires in February 2001, bears interest at LIBOR plus 87.5 basis points, and carries an unused commitment fee of 37.5 basis points. The interest rate and unused commitment fee on the revolver are adjustable, subject to certain earnings thresholds at November 1, 2000 to a maximum rate of LIBOR plus 1.125 percent and 0.625 percent, respectively. 6 9 This revolving facility contains, among other things, restrictions on additional borrowings, capital expenditures, leases, sales of assets, and payments of dividends and contains covenants that require the Company, among other things, to maintain minimum asset, debt coverage, and consolidated tangible shareholders' equity, as defined in the agreement. As of April 30, 2000 and 1999, no amounts were outstanding under this or the predecessor credit facility. 6. Supplemental Cash Flow Disclosures Cash paid for income taxes during the six months ended April 30, 2000 and 1999 was $86,000 and $316,000, respectively. Cash paid for interest during the six months ended April 30, 2000 and 1999 was $49,000 and $53,000, respectively. The Company recorded $36,000 and $29,000 for the six months ended April 30, 2000 and 1999, respectively, as disqualified dispositions related to the sale of stock acquired through the exercise of certain compensatory stock options, thereby reducing the Company's tax liability and increasing shareholders' equity in like amounts. 7. Earnings Per Share Basic earnings per share is calculated as net income divided by the weighted average common shares outstanding. Diluted earnings per share is calculated as net income divided by the weighted average common shares outstanding including the dilutive effects of potential common shares, which include the Company's stock options. A reconciliation of the numerator and denominator of the calculations for the three-month and six-month periods ended April 30, 2000 and 1999, respectively, is presented below.
($ and shares in 000's, except per share data) Three months ended Six months ended April 30, April 30, ------------------- --------------------- 2000 1999 2000 1999 ------ ------ ------- ------- Numerator: Net Income $ 709 $1,803 $ 1,008 $ 3,409 ====== ====== ======= ======= Denominator: Weighted average common shares 17,480 17,360 17,451 17,334 Potential common shares: stock options 64 42 110 151 ------ ------ ------- ------- Weighted average common shares and common share equivalents 17,544 17,402 17,561 17,485 ====== ====== ======= ======= Basic earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.20 ====== ====== ======= ======= Diluted earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.19 ====== ====== ======= =======
7 10 8. Segment Information The Company measures the performance of its operating segments utilizing "Operating Income" as defined on the accompanying condensed consolidated statements of operations. Certain reclassifications were made to prior year amounts to conform to the current presentation.
TOTAL Provider Payor REVENUE Revenue Revenue TOTAL Decision Payor TOTAL SERVICES Services Services SOFTWARE Support Systems ($ in Thousands) HMS DIVISION Group Group DIVISION Group Group ----------------------------------------------------------------------------------------------------------- Three months ended April 30, 2000 Revenue $27,600 $19,232 $14,294 $ 4,938 $ 8,368 $ 5,113 $ 3,255 Operating income (loss) 910 378 1,383 (1,005) 532 427 105 ----------------------------------------------------------------------------------------------------------- Three months ended April 30, 1999 Revenue 28,857 15,993 9,567 6,426 12,864 5,111 7,753 Operating income (loss) 2,831 (46) (981) 935 2,877 572 2,305 ----------------------------------------------------------------------------------------------------------- Six months ended April 30, 2000 Revenue 54,174 37,049 26,057 10,992 17,125 9,968 7,157 Operating income (loss) 1,057 (632) 17 (649) 1,689 1,180 509 ----------------------------------------------------------------------------------------------------------- Six months ended April 30, 1999 Revenue 56,226 30,469 18,187 12,282 25,757 11,651 14,106 Operating income (loss) $5,246 $ (796) $(2,867) $ 2,071 $ 6,042 $ 2,468 $3,574 -----------------------------------------------------------------------------------------------------------
The difference between "Operating income" and "Income before income taxes" is "Net interest and net other income," which was $289,000 for both quarters ended April 30, 2000 and 1999, and $614,000 and $597,000 for the six months ended April 30, 2000 and 1999, respectively. 9. Legal Proceedings In April and May 1997, five purported class action lawsuits were commenced in the United States District Court for the Southern District of New York against the Company and certain of its present and former officers and directors alleging violations of the Securities Exchange Act of 1934 in connection with certain allegedly false and misleading statements. These lawsuits, which sought damages in an unspecified amount, were consolidated into a single proceeding captioned In re Health Management Systems, Inc. Securities Litigation (97 CIV-1965 (HB)) and a Consolidated Amended Complaint was filed. Defendants made a motion to dismiss the Consolidated Amended Complaint, which was submitted to the Court on December 18, 1997 following oral argument. On May 27, 1998, the Consolidated Amended Complaint was dismissed by the Court for failure to state a claim under the federal securities laws, with leave for the plaintiffs to replead. On July 17, 1998, a Second Consolidated Amended Complaint was filed in the United States District Court for the Southern District of New York, which reiterated plaintiffs' allegations in their prior Complaint. On September 11, 1998, the Company and the other defendants filed a motion to dismiss the Second Consolidated Amended Complaint. The motion was fully briefed in late November 1998, at which time the motion was submitted to the Court. The consolidated proceeding was reassigned to another Judge. The Court 8 11 heard oral argument on the motion to dismiss on June 11, 1999. Prior to rendering its decision on the motion to dismiss, the Court ordered the parties to attempt to settle the case, and meetings toward that end were conducted. On December 20, 1999, the parties reached a tentative agreement on the principal terms of settlement of the litigation against all defendants. Pursuant to this understanding, without admitting any wrongdoing, certain of the defendants have agreed to pay, in complete settlement of this lawsuit, the sum of $4,500,000, not less than 75 percent of which will be paid by the Company's insurance carriers. The Company recorded a charge of $845,000 in the fourth quarter ended October 31, 1999 related to this proposed settlement. On March 23, 2000, the Company and plaintiffs entered into a Stipulation and Agreement of Settlement, which is subject to review and approval by the Court. A fairness hearing on the proposed settlement is scheduled to be held before the Court on June 28, 2000. In the event a final settlement is not consummated, the Company intends to resubmit a motion to dismiss the Second Consolidated Amended Complaint and to continue its vigorous defense of the lawsuit. On June 28, 1998, eight holders of promissory notes (the "Notes") of HHL Financial Services, Inc. ("HHL") commenced a lawsuit against the Company and others in the Supreme Court of the State of New York, County of Nassau, alleging various breaches of fiduciary duty on the part of the defendants against HHL. The complaint alleges that, as a result of these breaches of duty, HHL was caused to make substantial unjustified payments to the Company which, ultimately, led to defaults on the Notes and to HHL's filing for Chapter 11 bankruptcy protection. On June 30, 1998, the same Note holders commenced a virtually identical action (the "Adversary Proceeding") in the United States Bankruptcy Court for the District of Delaware, where HHL's Chapter 11 proceeding is pending. The Adversary Proceeding alleges the same wrongdoing as the New York State Court proceeding and seeks the same damages, i.e., $2,300,000 (the unpaid amount of the Notes) plus interest. Plaintiffs have moved in the Bankruptcy Court to have the Court abstain from hearing the Adversary Proceeding in deference to the New York State Court action. The Company has opposed plaintiffs' motion for abstention and on September 15, 1998 filed a motion in the Bankruptcy Court to dismiss the Adversary Proceeding. This motion was briefed in December 1998. Oral argument on the motions was heard by the Court on April 22, 1999 and the motions are now sub judice. The Company intends to continue its vigorous defense of this lawsuit. Management believes the risk of loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company's financial position or cash flows, although it could be material to the Company's operating results in any one accounting period. Other legal proceedings to which the Company is a party, in the opinion of the Company's management, are not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flows. 9 12 Certain statements in this document constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of HMS, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. The important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to (i) the information being of a preliminary nature and therefore subject to further adjustment; (ii) the ability of HMS to contain costs in view of its revised revenue outlook to grow internally or by acquisition and to integrate acquired businesses into the HMS group of companies; (iii) the uncertainties of litigation; (iv) HMS's dependence on significant customers; (v) changing conditions in the healthcare industry which could simplify the reimbursement process and adversely affect HMS's business; (vi) government regulatory and political pressures which could reduce the rate of growth of healthcare expenditures; (vii) competitive actions by other companies, including the development by competitors of new or superior services or products or the entry into the market of new competitors; (viii) all the risks inherent in the development, introduction, and implementation of new products and services; and other factors both referenced and not referenced in this document. When used in this document, the words "estimate," "project," "anticipate," "expect," "intend," "believe," and similar expressions are intended to identify forward-looking statements, and the above described risks inherent therein. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999 Consolidated revenue for the second quarter of fiscal year 2000 was $27.6 million, a decrease of approximately $1.3 million or 4% from the comparable period in 1999, with the decrease in the Software Systems and Services ("Software") Division partially offset by the increase in the Revenue Services Division. The Revenue Services Division, comprised of the Provider Revenue Services Group and the Payor Revenue Services Group, achieved revenue of $19.2 million, an increase of $3.2 million or 20.3% from the comparable prior year second quarter. Of these amounts, the Provider Revenue Services Group, the largest segment of the Company, produced revenue of $14.3 million, an increase of $4.7 million or 49.4% from the comparable prior year second quarter, including $2.0 million in revenue attributable to the Company's acquisition of HRM in June 1999. The additional $2.7 million revenue increase realized by the Provider Revenue Services Group was generated from internal growth attributable to both (1) new clients, and (2) delivery of services of expanded scope to existing clients. The Payor Revenue Services Group produced revenue of $4.9 million, a decrease in revenue of approximately $1.5 million or 23.2% from the comparable prior year second quarter, principally reflective of the successful commencements of new recovery projects for three states in the comparable prior period and of delays in obtaining client data, securing client approvals to bill and executing certain field work in the second quarter of the current fiscal year. Revenue from the Software Division, comprised of the Decision Support Group and the Payor Systems Group, was $8.4 million, a decrease of $4.5 million or 34.9% from the comparable prior year second quarter. Of these amounts, the Payor Systems Group generated revenue of $3.3 million, a decrease of $4.5 million or 58.0% from the comparable prior year second quarter, principally attributable to (1) the winding down of an outsourcing engagement by a Blue Cross client who was acquired and converted to its new affiliate's internal data center, (2) non-recurrence of substantial amounts of Y2K remediation work accomplished for clients during the comparable prior year period, (3) a non-recurring revenue incentive bonus received in the comparable prior year period, and (4) an elongated sales cycle attributable to clients' residual Y2K concerns and delayed purchasing of this Group's large systems and software offerings. Revenue generated by the Decision Support Group was $5.1 million, slightly ahead of 10 13 the $5.1 million from the comparable prior year second quarter. The Decision Support Group's elongated sales cycle, attributable to clients' financial constraints and their reluctance to implement new software so quickly after expending funds for their own internal Y2K conversions, was offset by both the increase in revenue earned from the Company's recurring base of clients and new installations. Cost of services for the second fiscal quarter ended April 30, 2000 was $26.5 million, a decrease of $636,000 or 2% from the comparable prior year second quarter. Compensation expense, the largest component of cost of services, was $16.4 million for the second fiscal quarter ended April 30, 2000, slightly lower than the $16.4 million in the comparable prior year second quarter, as the increase in personnel to support the increased revenue in the Revenue Services Division, including the approximately 100 employees added through the acquisition of HRM in June 1999, was more than offset by reduced compensation expense in the Software Division. Direct project costs were $3.4 million for the fiscal quarter ended April 30, 2000, an increase of $455,000 or 16% from the comparable prior year second quarter, primarily attributable to the Company's increased use of revenue-generating subcontractors and related project consulting services. Data processing costs were $1.1 million for the fiscal quarter ended April 30, 2000, a decrease of $581,000 or 34% from the comparable prior year second quarter, primarily attributable to the Company reallocation of resources to develop additional service offerings and major systems enhancements, as reflected by increased capitalized software costs. Occupancy costs were $2.4 million for the fiscal quarter ended April 30, 2000, an increase of $238,000 or 11% from the comparable prior year second quarter, principally attributable to the acquisition of HRM in June 1999. Other indirect expenses were $3.1 million for the fiscal quarter ended April 30, 2000, an increase of $549,000 or 21% from the comparable prior year second quarter, primarily attributable to the Company's increased marketing, advertising, travel, and strategic planning costs. Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 1999 Consolidated revenue for the six months ended April 30, 2000 of $54.2 million represented decrease of $2.1 million or 3.6% from the comparable period in 1999, with the decrease in the Software Division partially offset by the increase in the Revenue Services Division. The Revenue Services Division achieved revenues of $37.0 million for the six months ended April 30, 2000, an increase of $6.6 million or 21.6% from the comparable period in 1999. Of these amounts, the Provider Revenue Services Group produced revenue of $26.1 million, an increase of $7.9 million or 43.3% from the comparable period in 1999, including $4.1 million in revenue attributable to the Company's acquisition of HRM in June 1999. The additional $3.8 million revenue increase realized by the Provider Revenue Services Group was generated from internal growth attributable to both (1) new clients, and (2) delivery of services of expanded scope to existing clients. The Payor Revenue Services Group produced revenue of $11.0 million, a decrease of $1.3 million or 10.5% from the comparable period in 1999, principally reflective of the successful commencement of new recovery projects for multiple states in the comparable prior period and of delays in obtaining client data, securing client approvals to bill and executing certain field work in the current fiscal year. Revenue from the Software Systems and Services Division totaled $17.1 million, a decrease of $8.6 million or 33.5% from the comparable period in 1999. Of these amounts, the Payor Systems Group produced revenue of $7.2 million, a decrease of $6.9 million or 49.3% from the comparable period in 1999, principally attributable to (1) the winding down of an outsourcing engagement by a Blue Cross client who was acquired and converted to its affiliate's internal data center, (2) non-recurrence of substantial amounts of Y2K remediation work accomplished for clients during the comparable prior year period, (3) a non-recurring revenue incentive bonus received in the comparable prior year period, and (4) an elongated sales cycle attributable to clients' residual Y2K concerns and delayed purchasing of this Group's large systems and software offerings. Revenue generated by the Decision Support Group Decision Support Group was $10.0 million, a decrease of $1.7 million or 14.4% from the comparable period in 1999, principally attributable to clients' financial constraints and their reluctance to implement new 11 14 software so quickly after expending funds for their own internal Y2K conversions, partially offset by the increase in revenue earned from the Company's recurring base of clients. Cost of services for the six months ended April 30, 2000 of $52.7 million, increased $2.1 million or 4% from the comparable period in 1999. Compensation expense totaled $32.2 million for the six months ended April 30, 2000, an increase of $400,000 or 1% over the comparable period in 1999, as the increase in personnel to support the increased revenue in the Revenue Services Division, including the approximately 100 employees added through the acquisition of HRM in June 1999, was partially offset by reduced compensation expense in the Software Division. Direct project costs were $6.8 million for the six months ended April 30, 2000, an increase of $924,000 or 16% from the comparable prior year six-month period, primarily attributable to the Company's increased use of revenue-generating subcontractors and related project consulting services. Data processing costs were $3.0 million for the six months ended April 30, 2000, a decrease of $531,000 or 15% from the comparable prior year six-month period, primarily attributable to the Company reallocation of resources to develop additional service offerings and major systems enhancements, as reflected by increased capitalized software costs. Occupancy costs were $5.0 million for the six months ended April 30, 2000, an increase of $657,000 or 15% from the comparable prior year six-month period, principally attributable to the acquisition of HRM in June 1999. Other indirect expenses were $5.7 million for the six months ended April 30, 2000, an increase of $606,000 or 12% from the comparable prior year second quarter, primarily attributable to the Company's increased marketing, advertising, travel and strategic planning costs. Liquidity and Capital Resources At April 30, 2000 and October 31, 1999, the Company had net working capital of $57.9 million and $58.4 million, respectively. The Company's principal sources of liquidity at April 30, 2000 consisted of cash, cash equivalents, and short-term investments aggregating $22.2 million, net accounts receivable of $67.1 million, of which $353,000 is classified as long term, and a $10.0 million committed revolver and $20.0 advised line of credit from a major money center bank, expiring in February 2001 and to which no amounts are currently outstanding. Accounts receivable at April 30, 2000 reflected an increase of $8.4 million or 14% from the balance at October 31, 1999, primarily attributable to (1) a significant increase in the portion of the Company's revenue being generated by the Revenue Services Division, whose receivables conversion cycle is more elongated than that of the Software Division, and (2) delays in the timing of receipts and governmental appropriation processes until after the close of the quarter ended April 30, 2000. During the second fiscal quarter ended April 30, 2000, the Company funded $1.1 million of the proposed settlement of the class action lawsuits, for which the Company expects to receive partial reimbursement (see Note 9 of the Notes to Interim Consolidated Financial Statements for discussion of certain pending legal proceedings). On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of its Common Stock that have an aggregate purchase price not in excess of $10,000,000. The Company may repurchase these shares from time to time on the open market or in negotiated transactions at prices deemed appropriate by the Company. Repurchased shares are deposited in the Company's treasury and used for general corporate purposes. Since the inception of the repurchase program in June 1997, the Company has repurchased in the open market 1,049,000 shares having an aggregate purchase price of $7,750,000. No shares were repurchased during the six months ended April 30, 2000. The Company expects to continue to use a portion of its working capital to finance product and systems development, system enhancements, and revenue growth. The Company also continues to seek to acquire companies that supply healthcare providers and/or payors with information management software, systems, or services if the offerings of the Company or such companies would benefit from access to the other's technology, software applications, or client base. The Company believes that such acquisition opportunities 12 15 exist due, in part, to competitive pressures on local service businesses that lack adequate capital, technical, and management resources. Year 2000 In common with many other organizations, the Y2K computer issue created risks for the Company. The Company responded to the enactment of the Y2K Information and Disclosure Act ("Y2K Act") on October 19, 1998. The purpose of the Y2K Act is to encourage and promote disclosure regarding Y2K issues and to provide limitations for claims on tort liability. The Company believes that it has completed its Y2K remediation work in accordance with a schedule which was responsive to the time sensitivity of the clients. To the extent future unforeseen Y2K issues should arise, the Company believes its capacity to stage, resequence, and reschedule much of its operational processing work should enable mitigation, in whole or part, of the potential negative impact of such events. To date, the Company has not experienced any material Y2K issues, nor does it expect to experience any in the future. Item 3. Quantitative and Qualitative Disclosures About Market Risks The Company's holdings of financial instruments are comprised of federal, state, and local government debt, and corporate debt. All such instruments are classified as securities available for sale. The Company does not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. The Company's debt security portfolio represents funds held temporarily, pending use in the Company's business and operations. The Company manages these funds accordingly. The Company seeks reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while, at the same time, seeking to achieve a favorable rate of return. The Company's market risk exposure consists principally of exposure to changes in interest rates. The Company's holdings are also exposed to the risks of changes in the credit quality of issuers. The Company typically invests in the shorter-end of the maturity spectrum or highly liquid investments. The table below presents the historic cost basis, and the fair value for the Company's investment portfolio as of April 30, 2000, and the related weighted average interest rates by fiscal year of maturity:
Maturity Dates ---------------------------------------- ($ in Thousands) 2000 2001 2002 Total Fair value - ----------------------------------------------------------------------------------------------------------------- Cash equivalents: Money Market Fund $ 6,293 $ -- $ -- $ 6,293 $ 6,293 Average interest rate 5.46% Short-term investments: Fixed income assets Governmental Securities 2,607 9,647 1,140 13,394 13,256 Average interest rate 4.92% 5.48% 5.63% 5.46% Corporate debt 500 503 Average interest rate 4.55% - -----------------------------------------------------------------------------------------------------------------
13 16 PART II -- OTHER INFORMATION Item 1. Legal Proceedings -- See Note 9 of the Notes to Interim Consolidated Financial Statements for discussion of certain pending legal proceedings Item 2. Changes in Securities -- None Item 3. Defaults Upon Senior Securities -- Not applicable Item 4. Submission of Matters to a Vote of Security Holders -- The Annual Meeting ("Meeting") of Shareholders of the Company was held on March 14, 2000. The 15,602,620 shares of common stock ("Common Stock") present at the Meeting out of a then total 17,462,321 shares outstanding and entitled to vote, acted as follows with respect to the following proposals: Approved, by a vote of: 15,459,750 shares of Common Stock for and 142,470 shares against the election of Randolph G. Brown as a director of the Company; 15,433,548 shares of Common Stock for and 168,672 shares against the election of Robert V. Nagelhout as a director of the Company; 15,455,665 shares of Common Stock for and 146,555 shares against the election of Galen D. Powers as a director of the Company. In addition, 133,263 shares of Common Stock were voted against the election of all of the nominees. Ratified, by a vote of 15,502,072 shares of Common Stock for and 51,075 shares against the selection of KPMG LLP as the Company's independent certified public accountants for the fiscal year ending October 31, 2000. Rejected, by a vote of 2,119,670 shares of Common Stock for and 5,949,341 shares against the shareholder proposal to urge the Board of Directors to arrange for the prompt sale of the Company to the highest bidder. Item 5. Other Information -- None Item 6. Exhibits and Reports on Form 8-K Exhibits - See exhibit index Reports on Form 8-K - None 14 17 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: June 14, 2000 HEALTH MANAGEMENT SYSTEMS, INC. -------------------------------- (Registrant) By: /s/ Paul J. Kerz ------------------------------------- Paul J. Kerz President and Chief Executive Officer By: /s/ Alan L. Bendes ------------------------------------- Alan L. Bendes Senior Vice President and Chief Financial Officer By: /s/ Ernest W. D'Ambrose ------------------------------------- Ernest W. D'Ambrose Corporate Controller and Chief Accounting Officer 15 18 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description of Exhibit to Interim Consolidated Financial Statements 10.3 Amendment No. 1 to the Credit Agreement and Guaranty, dated as of February 15, 2000, among Health Management Systems, Inc., as Borrower, Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates, Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. as Guarantors, and The Chase Manhattan Bank as Bank 27 Financial Data Schedule (Submitted for informational purposes only and not deemed to be filed) 16 EX-10.3 2 0002.txt AMENDMENT #1 TO THE CREDIT AGREEMENT 1 AMENDMENT NO. 1 AMENDMENT NO. 1 dated as of February 15, 2000 among the following: (a) HEALTH MANAGEMENT SYSTEMS, INC., a corporation duly organized and validly existing under the laws of the State of New York (the "Borrower"); (b) each of the Subsidiaries of the Borrower identified under the caption "Guarantors" on the signature pages hereto (individually, a "Guarantor" and, collectively, the "Guarantors"); and (c) THE CHASE MANHATTAN BANK, a New York State bank (the "Bank"). The Borrower, the Guarantors and the Bank are parties to a Credit Agreement and Guaranty dated as of February 15, 2000 (as heretofore modified and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit (by making loans and issuing letters of credit) to be made by the Bank to the Borrower in an aggregate principal or face amount not exceeding $10,000,000. The Borrower, the Guarantors and the Bank wish to amend the Credit Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 1, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendment. Subject to the satisfaction of the conditions precedent specified in Section 4 below, but effective as of the date hereof, Section 8.06 of the Credit Agreement (Investments) shall be amended by deleting the word "and" at the end of clause (5) thereof, by replacing the period at the end of clause (6) thereof with "; and" and by adding the following new clause (7) to read as follows: "; and (7) Investments consisting of advances made by the Borrower to subcontractors in the ordinary course of business as currently conducted in an aggregate amount not to exceed $3,000,000 at any one time outstanding." Section 3. Representations and Warranties. Each of the Borrower and the Guarantors represents and warrants to the Bank that the representations and warranties set forth in Article VI of the Credit Agreement are true and complete on the date hereof as if made on and as of the date hereof and as if each reference in said Article VI to "this Agreement" or the "Loan Documents" included reference to this Amendment No. 1. Section 4. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section 2 shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 1 shall have been executed and delivered by each of the parties hereto. 4.02. Amendment Fee. The Borrower shall have paid to the Bank an amendment fee in an amount equal to $3,500. 2 4.03. Legal Fees and Expenses. The Borrower shall have paid to the Bank the reasonable fees and expenses of the Bank's counsel in connection with this Amendment No. 1. Section 5. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 1 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 1 by signing any such counterpart. This Amendment No. 1 shall be governed by, and construed in accordance with, the law of the State of New York. -2- 3 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to be duly executed and delivered as of the day and year first above written. BORROWER HEALTH MANAGEMENT SERVICES, INC. By_____________________________________________________ Alan L. Bendes Senior Vice President and Chief Financial Officer GUARANTORS ACCELERATED CLAIMS PROCESSING, INC. By_____________________________________________________ Paul J. Kerz Secretary QUALITY MEDI-CAL ADJUDICATION INCORPORATED By_____________________________________________________ Paul J. Kerz Secretary HEALTH CARE MICROSYSTEMS, INC. By_____________________________________________________ Paul J. Kerz Secretary CDR ASSOCIATES, INC. By_____________________________________________________ Paul J. Kerz Secretary HSA MANAGED CARE SYSTEMS, INC. By_____________________________________________________ Paul J. Kerz President -3- 4 HEALTH RECEIVABLES MANAGEMENT, INC. By_____________________________________________________ Alan L. Bendes Vice President BANK THE CHASE MANHATTAN BANK By_____________________________________________________ Dele Akinla II Vice President -4- EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AT APRIL 30, 2000 (UNAUDITED) AND THE INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2000 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000861179 HEALTH MANAGEMENT SYSTEMS, INC. 1,000 U.S. DOLLARS 6-MOS OCT-31-2000 NOV-01-1999 APR-30-2000 1 8,401 13,759 68,703 1,622 0 94,919 31,739 24,245 130,713 36,988 0 0 0 185 92,503 130,713 54,174 54,174 52,662 52,662 0 34 49 1,671 663 1,008 0 0 0 1,008 0.06 0.06
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