<PAGE> 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, 1997
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 x 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. 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 Outstanding at January 31, 1997
- ------------------------------- ---------------------------------------
Common Stock, $.01 Par Value 17,677,805 Shares
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JANUARY 31, 1997
PART I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of January 31, 1997 1
(unaudited) and October 31, 1996
Consolidated Statements of Operations (unaudited) for the 2
three month periods ended January 31, 1997 and
January 31, 1996
Consolidated Statement of Shareholders' Equity (unaudited) 3
for the three month period ended January 31, 1997
Consolidated Statements of Cash Flows (unaudited) for the 4
three month periods ended January 31, 1997 and
January 31, 1996
Notes to Interim Consolidated Financial Statements 5
(unaudited)
Item 2 Management's Discussion and Analysis of Results of Operations 6
and Financial Condition
PART II OTHER INFORMATION 9
SIGNATURES 10
EXHIBIT INDEX 11
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31, October 31,
1997 1996
------------ ------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 18,008 22,340
Short-term investments 17,299 17,181
Accounts receivable, net 44,983 42,730
Other current assets 6,564 4,706
------------ ------------
Total current assets 86,854 86,957
Property and equipment, net 7,649 7,823
Intangible assets, net 5,211 5,257
Capitalized software costs, net 1,585 1,472
Investments in affiliates 6,808 6,824
Other assets 1,506 1,310
------------ ------------
Total assets $ 109,613 109,643
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,868 19,359
Amounts payable to affiliates 740 902
Deferred revenue 4,305 4,975
Deferred income taxes 7,739 6,968
------------ ------------
Total current liabilities 25,652 32,204
Other liabilities 3,165 2,770
Deferred income taxes 0 57
------------ ------------
Total liabilities 28,817 35,031
------------ ------------
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; 17,677,805
shares issued and outstanding at January 31, 1997;
17,520,991 shares issued and outstanding at October 31, 1996 177 175
Capital in excess of par value 66,882 62,541
Retained earnings 13,228 11,425
Unrealized appreciation on short-term investments 509 471
------------ ------------
Total shareholders' equity 80,796 74,612
------------ ------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 109,613 109,643
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE> 4
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
January 31,
----------------------------
1997 1996
------------ ------------
Revenue:
<S> <C> <C>
Trade $ 21,308 23,467
Affiliates 964 2,152
------------ ------------
22,272 25,619
Cost of services:
Compensation 11,659 11,755
Data processing 1,793 2,165
Occupancy 2,143 1,708
Other 3,350 4,292
------------ ------------
18,945 19,920
------------ ------------
Operating margin before amortization of intangibles 3,327 5,699
Amortization of intangibles 46 55
------------ ------------
Operating income 3,281 5,644
Other income:
Net interest income 441 251
Merger related costs (500) 0
Equity in (loss) earnings of affiliate (16) 123
------------ ------------
(75) 374
Income before income taxes 3,206 6,018
Income tax expense (1,403) (2,408)
------------ ------------
Net income $ 1,803 3,610
============ ============
Earnings per share data:
Net income per weighted average share of common stock outstanding $ 0.10 0.20
============ ============
Weighted average shares outstanding 18,236 18,180
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Common Stock Capital In Appreciation Total
-----------------------
Par Excess Of Retained on Short-term Shareholders'
Shares Value Par Value Earnings Investments Equity
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996, as originally reported 17,348,841 $ 174 57,583 18,301 471 76,529
Adjustments for Quality Standards in
Medicine, Inc. ("QSM") pooling of interests 172,150 1 4,958 (6,876) 0 (1,917)
Balance at October 31, 1996, as restated 17,520,991 175 62,541 11,425 471 74,612
Net income 0 0 0 1,803 0 1,803
Stock option activity 31,975 0 156 0 0 156
Employee Stock Purchase Plan activity 36,989 1 430 0 0 431
Stock issued to retire QSM debt 87,850 1 1,181 1,182
Disqualifying dispositions 0 0 2,574 0 0 2,574
Appreciation on
short-term investments 0 0 0 0 38 38
========== ========== ========== ========== ========== ==========
Balance at January 31, 1997 17,677,805 $ 177 66,882 13,228 509 80,796
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
January 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 1,803 3,610
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 729 729
Software capitalization (305) (279)
Amortization of intangibles 46 55
Provision for doubtful accounts (17) 283
Deferred tax expense 561 355
Equity in loss (earnings) of affiliate 16 (123)
Changes in assets and liabilities:
Increase in accounts receivable (2,236) (5,440)
Decrease(increase) in other current assets 716 (471)
Decrease in accounts payable and accrued expenses (5,309) (2,243)
Decrease in amounts payable to affiliates (162) 0
(Decrease)increase in deferred revenue (670) 1,246
Increase in other assets and liabilities, net 352 911
----------- -----------
Total adjustments (6,279) (4,977)
----------- -----------
Net cash used in operating activities (4,476) (1,367)
----------- -----------
Investing activities:
Capital asset expenditures (363) (560)
Proceeds from sale of short-term investments (80) (244)
----------- -----------
Net cash used in investing activities (443) (804)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 431 1,567
Proceeds from exercise of stock options 156 1,521
Proceeds from issuance of notes payable 0 148
----------- -----------
Net cash provided by financing activities 587 3,236
----------- -----------
Net increase (decrease) in cash and cash equivalents (4,332) 1,065
Cash and cash equivalents at beginning of period 22,340 10,825
=========== ===========
Cash and cash equivalents at end of period $ 18,008 11,890
=========== ===========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM UNAUDITED FINANCIAL INFORMATION
Health Management Systems, Inc. ("HMS" or the "Company") management is
responsible for the accompanying unaudited interim consolidated financial
statements and the related information included in these notes to the
interim consolidated financial statements. In the opinion of management, the
interim consolidated financial statements reflect all adjustments,
consisting of 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 of interim
periods are not necessarily indicative of the results to be expected for the
entire year. The Company completed an acquisition during the first quarter
of fiscal year 1997. The acquisition transaction was accounted for using the
pooling of interests method of accounting. Accordingly, the historical
financial statements have been retroactively restated for all periods
presented to reflect the financial position, results of operations, and cash
flows for the new consolidated entity. For further details see Note 2 to the
Interim Consolidated Financial Statements.
These interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of and for the year ended October 31, 1996 included in the
Company's Annual Report on Form 10-K for such year as filed with the
Securities and Exchange Commission (the "Commission"). However, the reader
should be aware that the October 31, 1996 financial statements have been
retroactively restated as noted in the preceding paragraph.
2. MERGER WITH QUALITY STANDARDS IN MEDICINE, INC. ("QSM")
On November 25, 1996, the Company acquired all the outstanding stock of QSM
in exchange for 260,000 of the Company's stock in a merger transaction which
was accounted for using the pooling of interests method of accounting.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes during the quarters ended January 31, 1997 and
1996 was $129,000 and $1,896,000, respectively.
The Company recorded significant non-cash transactions during the quarters
ended January 31, 1997 and 1996. The non-cash transactions included the
issuance of 87,850 shares of the Company's common stock to settle $1,182,000
of QSM notes payable plus accrued interest in the quarter ended January 31,
1997. Additionally, the Company recorded $2,574,000 and $407,000 for the
quarters ended January 31, 1997 and 1996 as disqualified dispositions
related to certain compensatory stock option exercises, which has the effect
of reducing the Company's tax liability with an offsetting increase to
shareholders' equity.
5
<PAGE> 8
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION--THREE MONTH PERIODS ENDED JANUARY 31, 1997 AND 1996
OPERATING RESULTS
THREE MONTHS ENDED JANUARY 31, 1997
Revenue for the quarter ended January 31, 1997 was $22,272,000, a decrease of
$3,347,000 or 13% from the comparable period in 1996. The Company's proprietary
services, Retroactive Claims Reprocessing (RCR)sm, Comprehensive Account
Management Services (CAMS)sm, and Third Party Liability Recovery (TPLR)sm,
accounted for $14,512,000 or 65% of the Company's consolidated revenue for the
first quarter of 1997, compared to $19,385,000 or 76% of consolidated revenue
for the comparable period in 1996. Revenue from core proprietary services
(proprietary service revenue excluding affiliates) decreased 21% from the
comparable period in 1996 principally due to the Company's inability to repeat
the strong results in a number of non-recurring TPLR engagements in the quarter
ended January 31, 1996. The Company's Electronic Data Interchange (EDI) services
revenue was $1,844,000 for the first quarter of 1997, a decrease of $153,000 or
8% from the comparable period in 1996. Revenue from Managed Care Support (MCS)
services was $5,916,000, an increase of $1,679,000 or 40% over the comparable
period in 1996.
Cost of services for the first quarter of 1997 was $18,945,000, a decrease of
$975,000 or 5% from the comparable period in 1996.
Compensation expense, the Company's largest expense component, totalled
$11,659,000, a decrease of $96,000 or 1% over the comparable prior period. The
slight decrease in compensation expense was primarily the result of lower bonus
and profit sharing expense accruals offset by an increase in salary expense.
Salaries increased by 11% due primarily to a 19% growth in the average number of
employees, offset by salary savings associated with employee turnover.
Data processing expense for the first quarter of 1997 was $1,793,000, a decrease
of $372,000 or 17% from the comparable period in 1996. This decrease was
attributable to savings associated with the postponement of discretionary
purchases.
Occupancy expense for the first quarter of 1997 was $2,143,000, an increase of
$435,000 or 25% over the comparable period in 1996. This increase reflects the
additional rent and depreciation expense for expansion at the New York corporate
facility and expansion in satellite offices.
Other operating expense for the first quarter of 1997 was $3,350,000, a decrease
of $942,000 or 22% from the comparable period in 1996. This decrease was
principally attributable to lower levels of costs associated with revenue
producing projects and professional fees.
Operating margin before amortization of intangible assets for the quarter ended
January 31, 1997 was $3,327,000, a decrease of $2,372,000 or 42% from the
$5,699,000 amount realized in the comparable period in 1996. The Company's
operating margin rate during the first quarter of 1997 was 15%, compared to the
22% rate experienced in the comparable period in 1996.
Net interest income of $441,000 in the first quarter of 1997 increased by
$190,000 from $251,000 in the comparable period in 1996. Additionally, QSM
merger related costs of $500,000 were incurred in the
6
<PAGE> 9
first quarter of 1997, compared to none in the comparable period in 1996. The
Company reported equity in the loss of affiliate of $16,000 during the first
quarter of 1997 as compared to a profit of $123,000 for the comparable period in
1996.
The Company's income tax expense for the first quarter of 1997 was $1,403,000,
resulting in an effective tax rate of approximately 43.8%. This compares to
income tax expense of $2,408,000 and an effective tax rate of approximately
40.0% for the comparable period in 1996. The decrease in income tax expense was
primarily due to the Company's lower pre-tax profit. The increase in effective
tax rate was primarily attributable to an abnormally low tax rate in 1996 due to
the non-taxability of income from CDR Associates, Inc., which was an S
corporation prior to its merger with the Company in April 1996.
Net income for the three month period ended January 31, 1997 decreased to
$1,803,000, a 50% decrease compared to $3,610,000 reported in the comparable
prior year period. After excluding the QSM merger-related costs, net income
decreased by 36%, from $3,610,000 to $2,303,000.
The Company's performance translates to earnings per share for the three month
period ended January 31, 1997 of $0.10, a decrease of $0.10 or 50% from the
$0.20 per share reported in the comparable period in 1996. After excluding the
QSM merger-related costs, earnings per share decreased by $0.07, or 35%.
7
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company had $61,202,000 in net working capital, an
increase of $6,449,000 over the level at October 31, 1996. The Company's
principal sources of liquidity at January 31, 1997 consisted of cash, cash
equivalents, and short-term investments aggregating $35,307,000, net accounts
receivable of $44,983,000, and an unused $40,000,000 line of credit. Accounts
receivable at January 31, 1997 reflected an increase of $2,253,000 or 5% over
the October 31, 1996 balance. There has been no significant change in the
nature, age, or composition of the Company's accounts receivable portfolio.
* * * * *
This document contains forward-looking statements. Such statements by their
nature entail various risks, reflecting the dynamic, complex, and rapidly
changing nature of the health care industry. Results actually achieved may
differ materially from those currently anticipated. The various risks include
but are not necessarily limited to: (i) the continued ability of HMS to grow
internally or by acquisition, (ii) the success experienced in integrating
acquired businesses into the HMS group of companies, (iii) changing conditions
in the health care industry which could simplify the reimbursement process
and/or data management requirements associated with the health care transfer
payment process and adversely affect HMS's business, (iv) government regulatory
and political pressures which could reduce the rate of growth of health care
expenditures, (v) competitive actions by other companies, and (vi) other risks,
as noted in HMS's registration statements and periodic reports filed with the
Commission.
8
<PAGE> 11
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
Item 1 Legal Proceedings--No material legal proceedings are pending
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--None
Item 5 Other Information--None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits--See Exhibit Index
(b) Reports on Form 8-K
Current Report on Form 8-K, dated November 25, 1996 - Item 5.
Other Matters, Item 7. Financial Statements and Exhibits
Current Report on Form 8-K, dated December 31, 1996 - Item 5.
Other Matters
9
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 13, 1997 HEALTH MANAGEMENT SYSTEMS, INC.
--------------------------------
(Registrant)
/s/Phillip Siegel
--------------------------------
Phillip Siegel
Vice President and Chief Financial Officer
10
<PAGE> 13
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
11 Computations of Earnings Per Share
27 Financial Data Schedule
11
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATIONS OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
January 31,
---------------------------------
1997 1996
------------ ------------
Primary Earnings Per Share:
Earnings data:
<S> <C> <C>
Net income $ 1,803 3,610
============ ============
Weighted average shares outstanding:
Average shares of common stock outstanding 17,632 16,733
Net effect of dilutive stock options--based on the
treasury stock method using average market price 604 1,447
------------ ------------
Weighted average shares outstanding 18,236 18,180
============ ============
Earnings per common share:
Net income $ .10 .20
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at January 31, 1997(unaudited) and 1996(unaudited)
and the Consolidated Statement of Operations for the three months ended July
31, 1997(unaudited) and 1996(unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JAN-31-1997 JAN-31-1996
<CASH> 18,008 11,890
<SECURITIES> 17,299 19,587
<RECEIVABLES> 44,983 37,206
<ALLOWANCES> (1,665) (509)
<INVENTORY> 0 0
<CURRENT-ASSETS> 86,854 74,102
<PP&E> 7,649 5,876
<DEPRECIATION> (14,784) (9,902)
<TOTAL-ASSETS> 109,613 95,299
<CURRENT-LIABILITIES> 25,652 24,826
<BONDS> 0 0
0 0
0 0
<COMMON> 177 170
<OTHER-SE> 80,619 65,193
<TOTAL-LIABILITY-AND-EQUITY> 109,613 95,299
<SALES> 22,272 25,619
<TOTAL-REVENUES> 22,272 25,619
<CGS> 18,945 19,920
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (17) 283
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,206 6,018
<INCOME-TAX> 1,403 2,408
<INCOME-CONTINUING> 3,206 6,018
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,803 3,610
<EPS-PRIMARY> 0.10 0.20
<EPS-DILUTED> 0.10 0.20
</TABLE>
