-----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, LYR1iDNbNjsn9RFVKWKgozmOzx9OF/A5Hklu+R+3N5XQZaUT1fjk6GakL1twJW+V l3NrES4dIBYSBKJj7GBstA== 0000950123-01-002401.txt : 20010321 0000950123-01-002401.hdr.sgml : 20010321 ACCESSION NUMBER: 0000950123-01-002401 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000861179 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [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: 1572070 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 y46690qe10-q.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 January 31, 2001 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 March 5, 2001 Common Stock, $.01 Par Value 17,832,431 Shares
2 HEALTH MANAGEMENT SYSTEMS, INC. INDEX TO FORM 10-Q QUARTER ENDED JANUARY 31, 2001
PART I FINANCIAL INFORMATION Page No. Item 1 Interim Financial Statements Condensed Consolidated Balance Sheets as of January 31, 2001 1 (unaudited) and October 31, 2000 Condensed Consolidated Statements of Operations (unaudited) for the 2 three month periods ended January 31, 2001 and January 31, 2000 Consolidated Statements of Comprehensive Income (Loss) (unaudited) for 3 the three month periods ended January 31, 2001 and January 31, 2000 Consolidated Statement of Shareholders' Equity (unaudited) for the 4 three month period ended January 31, 2001 Condensed Consolidated Statements of Cash Flows (unaudited) for the 5 three month periods ended January 31, 2001 and January 31, 2000 Notes to Consolidated Financial Statements (unaudited) 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of 10 Operations Item 3 Quantitative and Qualitative Disclosures About Market Risks 13 PART II OTHER INFORMATION 13 SIGNATURES 14 EXHIBIT INDEX 15
3 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($ In Thousands)
January 31, October 31, 2001 2000 ---------- ---------- Assets (unaudited) Current assets: Cash and cash equivalents $ 10,140 $ 10,573 Short-term investments 6,977 6,167 Accounts receivable, net 23,703 24,261 Income tax receivable -- 829 Prepaid expenses and other current assets 7,243 6,921 -------- -------- Total current assets 48,063 48,751 Property and equipment, net 6,264 7,216 Capitalized software costs, net 9,658 9,922 Goodwill, net 11,890 12,055 Deferred income taxes, net 6,549 6,643 Other assets 2,483 746 -------- -------- Total assets $ 84,907 $ 85,333 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 13,461 $ 14,502 Deferred revenue 4,124 3,687 -------- -------- Total current liabilities 17,585 18,189 Other liabilities 1,487 1,546 -------- -------- Total liabilities 19,072 19,735 -------- -------- Commitments and contingencies Shareholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued and outstanding -- -- Common stock - $.01 par value; 45,000,000 shares authorized; 19,144,097 shares issued and 17,832,431 shares outstanding at January 31, 2001; 18,563,922 shares issued and 17,252,256 shares outstanding at October 31, 2000 191 186 Capital in excess of par value 72,912 72,170 Retained earnings 1,802 1,652 Accumulated other comprehensive income (loss) (48) (110) -------- -------- 74,857 73,898 Less: Treasury stock, at cost (1,311,666 shares at January 31, 2001 and October 31, 2000) (8,300) (8,300) Note receivable from shareholder (722) -- -------- -------- Total shareholders' equity 65,835 65,598 -------- -------- Total liabilities and shareholders' equity $ 84,907 $ 85,333 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 1 4 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts) (unaudited)
Three months ended January 31, 2001 2000 -------- -------- Revenue $ 22,879 $ 24,523 -------- -------- Cost of services: Compensation 13,271 14,752 Data processing 2,176 2,408 Occupancy 2,564 2,601 Direct project costs 2,580 3,337 Other 2,008 2,533 -------- -------- 22,599 25,631 -------- -------- Operating margin (loss) before amortization of intangibles 280 (1,108) Amortization of intangibles 225 227 -------- -------- Operating income (loss) 55 (1,335) Net interest and net other income 199 325 -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle 254 (1,010) Income tax expense (benefit) 104 (419) -------- -------- Income (loss) before cumulative effect of change in accounting principle 150 (591) Cumulative effect of change in accounting principle, net of tax benefit ("cumulative effect") -- 21,965 -------- -------- Net income (loss) $ 150 $(22,556) ======== ======== Earnings per share data: Basic: Basic earnings (loss) per share before cumulative effect $ 0.01 $ (0.03) Basic earnings (loss) per share on cumulative effect -- (1.26) -------- -------- Basic earnings (loss) per share after cumulative effect $ 0.01 $ (1.29) ======== ======== Weighted average common shares outstanding 17,394 17,422 ======== ======== Diluted: Diluted earnings (loss) per share before cumulative effect $ 0.01 $ (0.03) Diluted earnings (loss) per share on cumulative effect -- (1.26) -------- -------- Diluted earnings (loss) per share after cumulative effect $ 0.01 $ (1.29) ======== ======== Weighted average common shares and common share equivalents 17,523 17,422 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 2 5 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ($ In Thousands) (unaudited)
Three months ended January 31, 2001 2000 -------- -------- Net income (loss) $ 150 $(22,556) Other comprehensive income, net of tax: Change in net unrealized appreciation on short-term investments 62 7 -------- -------- Comprehensive income (loss) $ 212 $(22,549) ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 3 6 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY ($ In Thousands) (unaudited)
Accum- ulated Note Other Receiv- Compre- able Total Common Stock Capital In hensive From Share # of Shares Par Excess Of Retained Income Treasury Share- holders' Outstanding Value Par Value Earnings (loss) Stock holder Equity ----------- ----- --------- -------- ------ -------- ------ ------- Balance at October 31, 2000 17,252,256 $186 $72,170 $1,652 ($110) ($8,300) $ -- $ 65,598 Net income -- -- -- 150 -- -- -- 150 Common stock issued 550,000 5 717 -- -- -- -- 722 Note receivable - shareholder -- -- -- -- -- -- (722) (722) Employee stock purchase plan activity 30,175 -- 25 -- -- -- -- 25 Change in net unrealized appreciation on short-term investments -- -- -- -- 62 -- -- 62 ---------- ---- ------- ------ ----- ------- ----- -------- Balance at January 31, 2001 17,832,431 $191 $72,912 $1,802 ($ 48) ($8,300) ($722) $ 65,835 ========== ==== ======= ====== ===== ======= ===== ========
See accompanying notes to unaudited condensed consolidated financial statements. 4 7 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ In Thousands) (unaudited)
Three months ended January 31, ----------- 2001 2000 -------- -------- Net cash provided by (used in) operating activities $ 1,487 $ (2,208) -------- -------- Investing activities: Capital asset expenditures (251) (366) Software capitalization, net of cash received (1,396) (915) Proceeds from sale of EDI operations' assets 450 -- Increase in note receivable from officer -- (620) Net proceeds from sales (purchases) of short-term investments (748) 781 -------- -------- Net cash used in investing activities (1,945) (1,120) -------- -------- Financing activities: Proceeds from issuance of common stock 25 42 Proceeds from exercise of stock options -- 275 -------- -------- Net cash provided by financing activities 25 317 -------- -------- Net decrease in cash and cash equivalents (433) (3,011) Cash and cash equivalents at beginning of period 10,573 16,310 -------- -------- Cash and cash equivalents at end of period $ 10,140 $ 13,299 ======== ========
See accompanying notes to unaudited condensed 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, 2000 included in the Company's Annual Report on Form 10-K for such year 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. Divestiture Effective January 1, 2001, the Company sold its EDI business, consisting of substantially all of the assets of the Company's Quality Medi-Cal Adjudication, Incorporated ("QMA") subsidiary and certain of the assets of its Health Receivables Management, Inc. ("HRM") subsidiary, to Medi, Inc. ("Medi"), a privately held entity. Pursuant to the post closing adjustment provisions of the agreement, the service credit portion of the sales price to be received by the Company was adjusted from $2.1 million to $2.3 million. The total price of $3.0 million was comprised of a cash payment of $450,000, a one-year secured promissory note in the principal amount of $275,000 and $2.3 million of service credits, which the Company will offset against subcontracted services to be rendered by Medi to the Company pursuant to a service agreement entered into between Medi and the Company at the closing of the sale. The Company's EDI business generated a net loss of approximately $200,000 on $4.0 million in revenue for fiscal year 2000. Total assets sold and related transaction costs as of January 1, 2001 were approximately $3.0 million. Accordingly, no gain or loss was recognized as a result of this transaction. 4. Change in Accounting Principle for Revenue Recognition After analyzing the Securities and Exchange Commission's (the "SEC") "Frequently Asked Questions and Answers" bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), the Company elected early adoption in the fourth quarter of its fiscal year ended October 31, 2000, implementing a change in accounting in regard to revenue generated from clients seeking reimbursement from third party payors where the Company's fees are contingent upon the client's collections from third parties. The Company now recognizes revenue pertaining to such clients once the third-party payor has remitted payment to its client, thereby eliminating unbilled receivables and substantially reducing deferred tax liabilities. As a result of this change in accounting principle, the prior year first quarter ended January 31, 2000 has been restated to reflect the newly adopted policy. The cumulative effect of this change in accounting principle as of the beginning of the Company's fiscal year 2000 was $22.0 million, net of tax benefit. 6 9 As of October 31, 1999, the Company had unbilled accounts receivable of approximately $41.7 million under its historic accounting policy, pre-dating the SEC release of SAB 101. Of this amount, a total of $29.5 million has subsequently completed its cycle and was included in the Company's revenue and operating results through January 31, 2001 in accordance with the Company's early adoption of SAB 101, of which $4.9 million related to the first quarter of fiscal year 2001. 5. Restructuring In the fourth quarter of fiscal year 2000, having completed a full-scale strategic planning process, the Company began implementation of a restructuring plan and recorded a restructuring charge of $3,483,000. Of the portion of the restructuring charge relating to occupancy costs, all $442,000 remains as a liability at January 31, 2001, and of the $3,041,000 restructuring charge relating to compensation, $883,000 remains as a liability at January 31, 2001, of which $513,000 is a long-term liability. 6. Equity Transaction In January 2001, as a condition of the employment of William F. Miller III as President and Chief Executive Officer of the Company, the Company's Accelerated Claims Processing, Inc. subsidiary, a Delaware corporation, provided the financing for Mr. Miller to purchase directly from the Company 550,000 shares of the Company's common stock in exchange for a full recourse loan for $721,875, bearing interest at the rate of 6.5% per annum, with the principal and interest payable annually in two equal installments commencing January 9, 2002. The sale of common stock to Mr. Miller was exempt from the registration provisions of the Securities Act of 1933 pursuant to Section 4(2) of that Act relating to transactions not involving a public offering. 7. Credit Facility The Company's credit facility with a major N.Y. money center institution expired on February 13, 2001. Since the Company had not drawn and did not intend to draw on this facility, the Company did not renew the facility. 8. Segment Information The Company measures the performance of its operating segments utilizing "Operating Income" as defined on the accompanying condensed consolidated statements of operations. Certain reclassifications were made to prior year amounts to conform to the current presentation.
TOTAL Provider Payor REVENUE Revenue Revenue TOTAL Decision Payor TOTAL SERVICES Services Services SOFTWARE Support Systems ($ in Thousands) HMS DIVISION Group Group DIVISION Group Group ---------------- --- -------- ----- ----- -------- ----- ----- Three months ended January 31, 2001 Revenue $22,879 $14,694 $8,983 $5,711 $8,185 $5,774 $2,411 Operating income (loss) 55 (721) (783) 62 776 734 42 -------------------------------------------------------------------------------------------------------------- Three months ended January 31, 2000 Revenue 24,523 15,526 12,366 3,160 8,997 5,245 3,752 Operating income (loss) (1,335) (2,646) (583) (2,063) 1,311 1,054 257 --------------------------------------------------------------------------------------------------------------
The difference between "Operating income" and "Income before income taxes" is "Net interest and net other income," which was $199,000 and $325,000 for the quarters ended January 31, 2001 and 2000, respectively. 7 10 9. Legal Proceedings 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. In May 2000, the Company commenced an action in the Supreme Court of the State of New York, County of New York ("New York Supreme Court"), for summary judgment in lieu of complaint against The Institutes for Health & Human Services, Inc. ("IHHS") seeking judgment in the amount of $270,000 on an unpaid promissory note. In July 2000, the Court granted the Company judgment in that amount (together with interest and attorneys' fees assessed at an inquest in January 2001 in the amount of $27,000), but stayed enforcement of the judgment pending assertion and resolution of claims IHHS represented it had against the Company. Later in July, IHHS asserted such claims against the Company in an action filed in New York Supreme Court. The complaint alleged that the Company fraudulently withheld information from IHHS to induce it to enter into various specified contracts with the Company, and that the Company breached various contractual obligations to IHHS. The complaint sought an aggregate of $9,100,000 in compensatory damages, and punitive damages in an unspecified amount. The action came on for trial in January 2001, at which time the Court directed entry for judgement, dismissing the case, and awarding the Company damages on its counterclaims in an amount to be assessed at an inquest. IHHS has filed a notice of appeal of the Court's decision, although it has not moved for a stay of the decision pending appeal. Therefore, the Company will continue in its enforcement efforts against IHHS. The Company's position is that it will prevail on the merits on any appeal of this matter, although there can be no assurance at this time as to the ultimate outcome. On September 13, 2000, the Company was served with a complaint in a lawsuit commenced by Davis & Associates, Inc. ("D&A") in the United States District Court for the Southern District of New York. The complaint alleges, among other things, that the Company breached contractual obligations to D&A, wrongfully induced D&A to enter into various contracts with the Company, and wrongfully interfered with D&A's ability to perform under several contracts and pursue unspecified business opportunities. D&A seeks compensatory and punitive damages in unspecified amounts and injunctive and other equitable relief. The Company believes D&A's claims to be without merit, intends to contest them vigorously and has moved for summary judgment dismissing the case. Management believes that a 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. 8 11 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 liquidity. 10. 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. The common stock equivalents for the comparable prior year period are excluded from the weighted average shares as it would be antidilutive to the per share calculation. A reconciliation of the numerator and denominator of the calculations for the three-month periods ended January 31, 2001 and 2000, respectively, is presented below.
($ and shares in 000's, except per share data) Three months ended January 31, 2001 2000 ------ -------- Numerator: Net income (loss) $150 $(22,556) ====== ======== Denominator: Weighted average common shares 17,394 17,422 Potential common shares: stock options 129 - ------ -------- Weighted average common shares and 17,523 17,422 common share equivalents ====== ======== Basic earnings (loss) per share $0.01 $(1.29) ====== ======== Diluted earnings (loss) per share $0.01 $(1.29) ====== ========
11. Supplemental Cash Flow Disclosures Cash paid for income taxes during the three months ended January 31, 2001 and 2000 was $51,000 and $53,000, respectively. Cash paid for interest during the three months ended January 31, 2001 and 2000 was $9,000 and $33,000, respectively. The Company recorded $0 and $13,000 for the three months ended January 31, 2001 and 2000, 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. Non-cash financing and investing activities in relation to the sale of the EDI business is comprised of a note receivable for $275,000 and service credits for $2.3 million. Non-cash financing and investing activities also includes the sale of 550,000 shares of the Company's common stock to its Chief Executive Officer in return for a note receivable for $722,000. 9 12 Certain statements in this press release 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 HMSY, 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 HMSY to reduce costs in view of its revised revenue outlook, to grow internally or by acquisition, to integrate acquired businesses into the HMSY group of companies, and to divest non-strategic assets; (iii) the uncertainties of litigation; (iv) HMSY's dependence on significant customers; (v) changing conditions in the healthcare industry which could simplify the reimbursement process and adversely affect HMSY's business; (vi) government regulatory and political pressures which could reduce the rate of growth of healthcare expenditures and/or discourage the assertion of claims for reimbursement against and delay the ultimate receipt of payment from third party payors; (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 January 31, 2001 Compared to Three Months Ended January 31, 2000 The Company generated net income and operating income of $150,000 and $55,000, respectively, on revenue of $22.9 million in the first quarter of fiscal year 2001 as compared to a net loss of $22.6 million and operating loss of $1.3 million on $24.5 million of revenue in the first quarter of the prior fiscal year 2000. The decrease in revenue from the comparable prior year first quarter reflects increases in revenue in two of our four operating groups offset by decreases in revenue in the other two groups, including the effect of the previously reported sale of the Company's EDI business. See Note 3 to Interim Consolidated Financial Statements. The Revenue Services Division, comprised of the Provider Revenue Services Group and the Payor Revenue Services Group, generated revenue of $14.7 million for the first quarter of fiscal year 2001, a decrease of $800,000 from the comparable prior year first quarter. Of these amounts, the Provider Revenue Services Group, the largest segment of the Company, which includes our claims reprocessing, revenue recovery and outsourcing offerings for healthcare providers reported revenue of $9.0 million. The decrease of $3.4 million from the first quarter of last fiscal year reflects (1) the sale of the Company's EDI business in January 2001, (2) the change in billing protocol for a single client, (3) the previously reported revenue recorded in the prior fiscal year first quarter pertaining to an existing revenue maximization engagement for the District of Columbia and (4) lower than expected sales of additional services. The Payor Revenue Services Group, which includes our claims reprocessing and recovery activities for third-party payors of healthcare, produced revenue of $5.7 million, an increase of $2.5 million over the comparable first quarter of last fiscal year, as specific, expanded-scope projects in one state, more favorable yields in a second state, and the Group's realization of revenue from a third state that did not produce significant revenue in the prior year's comparable quarter more than offset the contract expirations of two smaller states. 10 13 Revenue from the Software Division, comprised of the Decision Support Group and the Payor Systems Group, was $8.2 million for the first quarter of fiscal year 2001, a decrease of $800,000 from the comparable prior year period, attributable entirely to the Payor Systems Group, as the Decision Support Group's revenue increased approximately 10% over the first quarter of the prior year. The Payor Systems Group, which provides large-scale transaction processing systems and services to commercial insurance and managed care payor organizations, generated revenue of $2.4 million, a decline in revenue of $1.3 million from the first quarter of last fiscal year. The decline from the prior year first quarter was due to a combination of the wind-down of a multi-year project with a single customer, the completion of the initial implementation for a single customer during last fiscal year, and the slow rate of new sales closed in the first quarter of fiscal year 2001. While increasing sequentially over the fourth quarter as to revenue, this Group continues to be severely affected by the perceived industry-wide softness in new sales of existing claims software systems and consulting services. The Decision Support Group, which provides the Company's suite of decision support software and related consulting services to providers of healthcare, generated revenue of $5.8 million, increasing over the prior year first quarter by $500,000 as the revenue generated from a single new client more than offset the decrease in revenue realized from this Group's largest client. This Group had a slow first quarter closing new sales, although the Group has demonstrated an ability to install new sales rapidly, allowing it to continue to reduce the concentration of revenue in its largest account, which, as previously reported, appears to be making a concerted effort to reverse its dependence on the Company as an outside "IT" vendor. Cost of services for the first fiscal quarter ended January 31, 2001 was $22.6 million, a reduction of $3.0 million from the prior year first quarter as the Company realized reduced costs in all operating categories including the reductions realized from the sale of the Company's EDI operations. See Note 3 to Interim Consolidated Financial Statements. As previously reported, the Company began a restructuring in order to refocus its business and generate increased operating profitability in fiscal year 2001. See Note 5 to Interim Consolidated Financial Statements. Compensation, the Company's largest cost element, comprising approximately 60% of operating costs, totaled $13.3 million, a decrease of approximately $1.5 million from the first quarter of the prior fiscal year reflecting reduced staffing levels required to support the revenue base. Data processing costs for the first quarter decreased by approximately $200,000 from the comparable prior year period, reflecting a consolidation of certain data center operations implemented during the last fiscal year. Direct project costs for the first quarter decreased by approximately $800,000 from the comparable prior year period, principally attributable to the discontinued subcontractor relationship pertaining to the previously reported District of Columbia revenue maximization projects. Other indirect costs for the first quarter decreased by approximately $500,000 from the comparable prior year period principally attributable to reductions in professional fees and people related costs such as recruiting fees and travel expenses. Principally as a result of the above factors, the Company generated operating income of approximately $55,000 as compared to an operating loss of approximately $1.3 million for the comparable prior period. Net income of $150,000 or $.01 per share compares to a net loss of $22.6 million or a $1.29 loss per share for the comparable prior year period. The prior year period includes the previously reported cumulative effect of the change in accounting principle of $22.0 million, net of tax benefit. See Note 4 to Interim Consolidated Financial Statements. Liquidity and Capital Resources At January 31, 2001 and October 31, 2000, the Company's net working capital was in excess of $30 million. The Company has historically devoted increasingly more resources to product and system development and enhancements and believes that significant continuing development efforts will be necessary to adapt to changing marketplace requirements, to sustain its operations, and to integrate the products and technologies of acquired businesses. In the first quarter of fiscal years 2001 and 2000, the Company invested $1.6 million and $1.3 million, respectively, for capitalized software development and fixed asset purchases. Each of these amounts is net of cash received from a development partner pertaining to the Payor System Group's development of a new claims adjudication system, and with whom the Company is currently pursuing negotiations as to their continued level of participation in such project in accordance with the terms of their contract, which as previously reported, is currently up for review. There can be no assurances that the development partner will continue to participate in the development of this system although there are contractual penalties in the event of early termination. 11 14 The Company's principal sources of liquidity at January 31, 2001 consisted of cash, cash equivalents, and short-term investments aggregating $17.1 million and net accounts receivable of $23.7 million. While the Company did not yet receive in excess of $2.7 million in payments from the District of Columbia and is pressing the District to bring this to fruition and from which the Company expects to retire various subcontractor advances made during the prior fiscal year, the Company received the $250,000 balance of insurance reimbursement pertaining to a previously settled long outstanding litigation, $900,000 from an income tax refund, and the first $450,000 payment pertaining to the sale of its EDI business (see Note 3 to Interim Consolidated Financial Statements), while continuing to invest in major product and system development and enhancements. Accounts receivable at January 31, 2001 reflected a decrease of $600,000 from the accounts receivable at the end of fiscal year 2000, principally attributable to both the sale of the assets of the Company's EDI business as well as the increased collections achieved in the first quarter over the collections of the fourth quarter of the prior fiscal year. As previously noted, the Company is considering divesting some of its non-strategic assets. Effective January 1, 2001, the Company sold its EDI business, consisting of substantially all of the assets of the Company's QMA subsidiary and certain of the assets of its HRM subsidiary. The Company also hired Cain Brothers and Company to assist in other potential divestitures. As previously reported, the Company has made commitments to certain key employees to induce them to stay during the Company's restructuring which it currently estimates may result in a charge in fiscal year 2001 of up to $2.4 million, depending on the completion of divestitures, and of which approximately $100,000 was charged to compensation expense during the first fiscal quarter of 2001. Further, as previously reported, the Company is also in the midst of developing additional restructuring plans focused on reducing and re-engineering information systems and administrative infrastructures which are expected to result in additional restructuring charges in fiscal year 2001. The Company's credit facility with a major N.Y. money center institution expired on February 13, 2001. Since the Company had not drawn and did not intend to draw on this facility, the Company did not pursue a renewal of the facility while it is in the process of refocusing its business. As the Company divests non-strategic assets and adds on new service offerings, it may seek to acquire companies that supply targeted 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 exist due, in part, to competitive pressures on local service businesses that lack adequate capital, technical, and management resources. There can be no assurances that the Company will have or be able to obtain the necessary resources to acquire subsequently identified candidates. 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 may be used for general corporate purposes. Since the inception of the repurchase program in June 1997, the Company has repurchased 1,311,666 shares having an aggregate purchase price of $8,300,000, including 262,666 shares repurchased in fiscal year 2000 from the co-founder and former Chief Executive Officer of the Company under the terms of a separation agreement. 12 15 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. 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 January 31, 2001, and the related weighted average interest rates by year of maturity:
Fiscal year Fiscal year Fiscal year Total Total 2001 2002 2003 Historical Cost Fair value ---- ---- ---- --------------- ---------- Fixed income assets: Governmental Securities $3,857,000 $1,140,000 $2,003,000 $7,000,000 $6,977,000 Average interest rate 6.09% 5.63% 4.23% 5.72%
PART II -- OTHER INFORMATION Item 1. Legal Proceedings -- See Note 9 to Interim Consolidated Financial Statements for discussion of certain pending legal proceedings Item 2. Changes in Securities -- See Note 6 to Interim Consolidated Financial Statements for information regarding the sale of Company securities to the Company's Chief Executive Officer Item 3. Defaults Upon Senior Securities -- Not applicable Item 4. Submission of Matters to a Vote of Security Holders -- None Item 5. Other Information -- None Item 6. Exhibits and Reports on Form 8-K Exhibits - See exhibit index Reports on Form 8-K - None 13 16 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 19, 2001 HEALTH MANAGEMENT SYSTEMS, INC. -------------------------------- (Registrant) By: /s/ William F. Miller III --------------------------------------- William F. Miller III President and Chief Executive Officer By: /s/ Alan L. Bendes --------------------------------------- Alan L. Bendes Senior Vice President and Chief Financial Officer 14 17 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Number Description of Exhibit - -------------- ------------------------------------------------------------------- 10 Supplemental letter regarding service credits
15 EX-10 2 y46690qex10.txt SUPPLEMENTAL LETTER RE: SERVICE CREDITS 1 HEALTH MANAGEMENT SYSTEMS, INC. 401 PARK AVENUE SOUTH NEW YORK, NEW YORK 10016 March 15, 2001 Larry Lai, Chief Executive Officer Medi, Inc. 241 Lombard Street Thousand Oaks, CA 91360 Re: ASSET PURCHASE AGREEMENT AMONG MEDI, INC. ("MEDI") AND QUALITY MEDI-CAL ADJUDICATION, INC., HEALTH RECEIVABLES, INC. AND HEALTH MANAGEMENT SYSTEMS, INC. ("HMS") DATED JANUARY 5, 2001 (THE "AGREEMENT") Dear Mr. Lai: This letter is to memorialize our agreement that, as a result of the reconciliation of the October 31, 2000 balance sheet detailed on Schedule 6.7.1 to the Asset Purchase Agreement with the balance sheet dated December 31, 2000, a copy of which is attached hereto, the aggregate amount of service credits available to HMS has been increased by a total of $196,498 (from $2,063,000, the "Initial Service Credits" to $2,259,498, the "Final Service Credits), as provided for on page 4 of the Agreement. We have further agreed that this incremental $196,498 increase in service credits (the "Additional Service Credits") will be separately applied by Medi and HMS to offset a portion of the remaining 50% of the fees after the Initial Service Credits are applied to each invoice. The Additional Service Credits will be applied to the cash balance remaining on invoices after application of the respective Initial Service Credits in nine (9) equal monthly installments starting January 2001, to derive the "Net Cash Due" amount with respect to each such invoice. In the event that the "Net Payment Due" in any given month is less than 1/9th of $196,498 (i.e., less than $21,833.11), the difference shall be carried forward as a cash credit to be applied against the following month's invoice, in addition to that month's 1/9th. If the foregoing correctly sets for our understanding, please sign both copies of this letter on the space provided below and return one to the undersigned in the envelope provided. Sincerely, HEALTH MANAGEMENT SYSTEMS, INC. By: /s/ Alan L. Bendes ---------------------------------------- Alan L. Bendes, Chief Financial Officer MEDI, INC. By: /s/ Larry Lai - ---------------------------------- Larry Lai, Chief Executive Officer cc: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East, 24th Floor Los Angeles, California 90067 Attention: V. Joseph Stubbs, Esq. Coleman, Rhine & Goodwin LP 750 Lexington Avenue, 26th Floor New York, New York 10022 Attention: Bruce Coleman, Esq. -----END PRIVACY-ENHANCED MESSAGE-----