<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 April 30, 1998
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 [root] 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.
<TABLE>
<CAPTION>
Class Outstanding at May 31, 1998
<S> <C>
Common Stock, $.01 Par Value 17,576,093 Shares
</TABLE>
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED APRIL 30, 1998
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1 Financial Statements
Consolidated Balance Sheets as of April 1
30, 1998 (unaudited) and October 31, 1997
Consolidated Statements of Operations 2
(unaudited) for the three month and six
month periods ended April 30, 1998 and
April 30, 1997
Consolidated Statement of Shareholders' 3
Equity (unaudited) for the six month
period ended April 30, 1998
Consolidated Statement of Cash Flows 4
(unaudited) for the three month and six
month periods ended April 30, 1998 and
April 30, 1997
Notes to Interim Consolidated Financial 5
Statements (unaudited)
Item 2 Management's Discussion and Analysis of 8
Results of Operations and Financial
Condition
PART II OTHER INFORMATION 13
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
---- ----
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,713 20,694
Short-term investments 19,568 18,386
Accounts receivable, net 44,864 39,519
Other current assets 3,940 3,384
--------- ---------
Total current assets 86,085 81,983
Property and equipment, net 7,171 7,988
Goodwill, net 12,022 12,316
Capitalized software costs, net 3,312 3,060
Deferred income taxes 2,550 2,721
Other assets 1,441 1,626
--------- ---------
Total assets $ 112,581 109,694
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 16,059 16,153
Deferred revenue 4,818 5,122
Deferred income taxes 7,282 6,909
--------- ---------
Total current liabilities 28,159 28,184
Other liabilities 1,699 1,704
--------- ---------
Total liabilities 29,858 29,888
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; 18,109,884
shares issued and 17,545,884 shares outstanding at April 30, 1998;
17,773,653 shares issued and 17,459,153 shares outstanding at October 31, 1997 181 178
Capital in excess of par value 69,713 67,304
Retained earnings 15,563 13,506
Unrealized appreciation on short-term investments 731 681
--------- ---------
86,188 81,669
Less treasury stock, at cost
564,000 shares at April 30, 1998 and 314,500 shares at October 31, 1997 (3,465) (1,863)
--------- ---------
Total shareholders' equity 82,723 79,806
Total liabilities and shareholders' equity $ 112,581 109,694
========= =========
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
1
<PAGE> 4
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Trade $ 25,636 19,821 50,673 42,049
Affiliates 0 287 0 331
-------- -------- -------- --------
25,636 20,108 50,673 42,380
Cost of services:
Compensation 14,754 13,505 29,166 25,164
Data processing 2,232 1,795 4,741 3,588
Occupancy 2,414 2,416 4,668 4,559
Other 4,123 4,603 8,460 7,953
-------- -------- -------- --------
23,523 22,319 47,035 41,264
-------- -------- --------
Operating margin (loss) before amortization of intangibles 2,113 (2,211) 3,638 1,116
Amortization of intangibles 504 239 1,027 285
-------- -------- -------- --------
Operating income (loss) 1,609 (2,450) 2,611 831
Other income (expense):
Net interest and net other income 460 1,331 920 1,772
Merger related costs 0 (37) 0 (537)
Equity in loss of affiliate 0 (294) 0 (310)
-------- -------- -------- --------
460 1,000 920 925
Income (loss) before income taxes 2,069 (1,450) 3,531 1,756
Income tax (expense) benefit (884) 1,731 (1,474) 328
-------- -------- -------- --------
Net income $ 1,185 281 2,057 2,084
======== ======== ======== ========
Earnings per share data:
Basic:
Basic earnings per share $ 0.07 0.02 0.12 0.12
======== ======== ======== ========
Weighted average common shares outstanding 17,361 17,688 17,354 17,660
======== ======== ======== ========
Diluted:
Diluted earnings per share $ 0.07 0.02 0.12 0.12
======== ======== ======== ========
Weighted average common shares and common share equivalents 18,094 17,832 17,807 18,034
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Common Stock Capital In Retained Appreciation
Par Excess Of Earnings on Short-term
Shares Value Par Value (Deficit) Investments
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1997 17,459,153 $178 67,304 13,506 681
Net income 0 0 0 2,057 0
Stock option activity 311,097 3 1,979 0 0
Employee stock purchase plan activity 25,134 0 47 0 0
Treasury stock acquisition (249,500) 0 0 0 0
Disqualifying dispositions 0 0 383 0 0
Appreciation on short-term investments 0 0 0 0 50
----------------------------------------------------------------------------
Balance at April 30, 1998 17,545,884 $181 69,713 15,563 731
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Treasury Shareholders'
Stock Equity
<S> <C> <C>
Balance at October 31, 1997 (1,863) 79,806
Net income 0 2,057
Stock option activity 0 1,982
Employee stock purchase plan activity 0 47
Treasury stock acquisition (1,602) (1,602)
Disqualifying dispositions 0 383
Appreciation on short-term investments 0 50
-------------------------------
Balance at April 30, 1998 (3,465) 82,723
===============================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 1,185 281 2,057 2,084
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 966 1,219 1,801 1,994
Software capitalization (762) (477) (1,355) (782)
Amortization of intangibles 575 0 1,098
Provision for doubtful accounts 0 (109) 0 (126)
Deferred tax expense 373 (932) 543 (371)
Equity in loss of affiliate 0 295 0 311
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (2,641) 4,888 (5,347) 2,652
Decrease (increase) in other current assets (675) 161 (557) 877
Increase (decrease) in accounts payable and
accrued expenses 2,019 569 293 (4,740)
Decrease in amounts payable to affiliates 0 (585) 0 (747)
Increase (decrease) in deferred revenue (213) 264 (304) (406)
Increase (decrease) in other assets and liabilities,
net (175) (906) 60 (554)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities 652 4,668 (1,711) 192
-------- -------- -------- --------
Investing activities:
Capital asset expenditures (329) (458) (567) (821)
Acquisition of remainder of Health Information Systems Corp.,
net of cash acquired 0 (3,689) 0 (3,689)
Net increase in short-term investments (248) (266) (1,131) (346)
-------- -------- -------- --------
Net cash used in investing activities (577) (4,413) (1,698) (4,856)
-------- -------- -------- --------
Financing activities:
Proceeds from issuance of common stock 44 122 47 553
Proceeds from exercise of stock options 1,906 77 1,982 233
Common stock repurchases (103) 0 (1,602) 0
-------- -------- -------- --------
Net cash provided by financing activities 1,847 199 427 786
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 1,922 454 (2,982) (3,878)
Cash and cash equivalents at beginning of period 15,790 18,008 20,694 22,340
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 17,712 18,462 17,712 18,462
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM 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
unaudited interim consolidated financial statements. In the opinion of
management, the unaudited 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.
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 year ended October 31, 1997 included in the
Company's Annual Report on Form 10-K for such year as filed with the
Securities and Exchange Commission (the "Commission").
2. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes during the quarters ended April 30, 1998 and
1997 was $1,643,000 and $50,000, respectively. Cash paid for income taxes
during the six months ended April 30, 1998 and 1997 was $2,417,000 and
$179,000, respectively.
The Company recorded $383,000 and $2,574,000 for the six months ended April
30, 1998 and 1997, respectively, as disqualified dispositions related to
certain compensatory stock option exercises, which had the effect of
reducing the Company's tax liability with an offsetting increase to
shareholders' equity. Additionally, the Company recorded non-cash
transactions during the six months ended April 30, 1997, which included in
connection with the Company's acquisition of Quality Standards in Medicine,
Inc. ("QSM") the issuance of 87,850 shares of the Company's common stock
(the "Common Stock") to settle $1,435,000 of QSM notes payable plus accrued
interest.
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). The Company adopted SFAS 128 during the quarter ended January 31,
1998, and earnings per share amounts for all periods presented in the
accompanying unaudited interim consolidated statement of operations are
calculated and presented in accordance with SFAS 128. The statement
specifies new standards for the computation and presentation of earnings
per share, requiring the presentation of both "basic" and "diluted"
earnings per share. Basic earnings per share is calculated as net earnings
divided by the weighted average common shares outstanding. Diluted earnings
per share is calculated as net earnings divided by the weighted average
common shares outstanding including the dilutive effects of potential
common shares, which include the Company's stock options.
5
<PAGE> 8
A reconciliation of the numerator and denominator of the calculations for
the three month periods ended April 30, 1998 and 1997 is presented below.
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
($ in thousands, except per share data)
Numerator:
Net Income $ 1,185 281 2,057 2,084
======= ======= ======= =======
Denominator:
Weighted average common shares 17,361 17,688 17,354 17,660
Potential common shares:
Stock options 733 144 453 374
------- ------- ------- -------
Weighted average common shares and
common share equivalents 18,094 17,832 17,807 18,034
======= ======= ======= =======
Basic earnings per share $ 0.07 0.02 0.12 0.12
======= ======= ======= =======
Diluted earnings per share $ 0.07 0.02 0.12 0.12
======= ======= ======= =======
</TABLE>
4. SUBSEQUENT EVENTS
Related Parties -
In April 1997 the Company guaranteed a loan by The Chase Manhattan Bank
(the "Bank") in the original principal amount of $1,600,000 to Robert V.
Nagelhout, the Chief Operating Officer and a director of the Company. Mr.
Nagelhout granted the Company a security interest in 500,000 shares of
Common Stock as collateral for its guarantee. On June 11, 1998, Mr.
Nagelhout repaid the loan in its entirety, the Bank released the Company's
guaranty, and the available balance under the Company's line of credit with
the Bank was increased by $1,600,000 to $30,000,000.
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 Court entered an order
granting the Company's motion and dismissed the Consolidated Amended
Complaint for failure to state a claim under federal securities laws, with
leave for the plaintiffs to replead within 30 days of the Court's decision.
On June 1, 1998, MEDE America Corp. commenced a lawsuit against the Company
and others in the United States District Court for the Southern District of
New York. In its complaint, plaintiff alleges copyright infringement and
other violations of its rights relating to the Company's development and
sale of certain computer software, known as the Universal Billing Platform,
which was developed for the Company by certain former employees of
plaintiff, who are also defendants in the action, acting as independent
contractors. Plaintiff seeks (i) to restrain the Company from continuing to
market and
6
<PAGE> 9
sell the Universal Billing Platform, (ii) monetary damages in excess of
$10,000,000, and (iii) other relief. The parties engaged in an extensive
exchange of communications over a period in excess of six months prior to
the filing of the complaint as a result of which the Company concluded,
after investigation, that plaintiff's claims were without merit. The
Company is continuing its investigation and intends to vigorously contest
plaintiff's claims.
7
<PAGE> 10
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- THREE MONTH AND SIX MONTH PERIODS ENDED APRIL 30, 1998
AND 1997
OPERATING RESULTS
THREE MONTHS ENDED APRIL 30, 1998
Revenue for the second quarter of fiscal year 1998 was $25,636,000, an increase
of $5,528,000 or 27% from the comparable period in 1997. The Company's Transfer
Payment Services ("TPS") division, which includes both Provider and Payor
services, accounted for $14,349,000 (56% of the Company's consolidated revenue
for the second quarter of fiscal year 1998), an increase of $2,137,000 or 17%
from the comparable period in 1997. Revenue from Provider services, comprised of
Retroactive Claims Reprocessing ("RCR"), Comprehensive Account Management
Services ("CAMS"), and Outsourcing, totaled $8,503,000, a decrease of $815,000
or 9% from the comparable period in 1997. Outsourcing included $613,000 in
revenue attributable to the assets of Global Health Systems, Inc. and GHS
Management Services, Inc., subsidiaries of GHS, Inc. (collectively, "Global"),
acquired on July 17, 1997, for which there was no revenue in the comparable
period in 1997. Revenue from Payor services, comprised of Third Party Liability
Recovery ("TPLR") services and the Company's CDR Associates, Inc. subsidiary,
totaled $5,846,000, an increase of $2,952,000 or 102% from the comparable prior
year period.
Revenue from the Software Systems and Services ("Software") division, comprised
of Decision Support Software ("DSS"), provided by the Company's Health Care
microsystems, Inc. ("HCm") subsidiary, and Managed Care Information Systems
("MCIS"), provided by the Company's HSA Managed Care Systems, Inc. ("HSA")
subsidiary, totaled $11,287,000 (44% of the Company's consolidated revenue for
the second quarter of fiscal year 1998), an increase of $3,391,000 or 43% from
the comparable period in 1997. Revenue from DSS was $5,735,000, a decrease of
$367,000 or 6% from the comparable period in 1997. Revenue from MCIS was
$5,552,000, compared to a partial quarter's revenue of $1,794,000 during the
corresponding prior year period associated with the acquisition of HSA on March
18, 1997 in a transaction accounted for under the purchase method of accounting.
Cost of services for the second quarter of fiscal year 1998 was $23,524,000, an
increase of $1,205,000 or 5% from the comparable period in 1997. The increase
was due primarily to the additional cost of services associated with the
acquisitions of HSA and Global, which were acquired on March 18, 1997 and July
17, 1997, respectively.
Compensation expense (the Company's largest expense component) for the second
quarter of fiscal year 1998 totaled $14,754,000, an increase of $1,249,000 or 9%
over the comparable period in 1997. The increase in compensation expense was due
primarily to personnel costs incurred by HSA and Global of $2,021,000 and
$300,000, respectively. This increase was offset by decreased costs associated
with lower headcount in the TPS division.
Data processing expense for the second quarter of fiscal year 1998 was
$2,232,000, an increase of $437,000 or 24% from the comparable period in 1997.
This increase was attributable to additional data processing expense incurred by
HSA and Global.
Occupancy expense for the second quarter of fiscal year 1998 was $2,414,000, a
decrease of $2,000 from the comparable period in 1997. The slight decrease in
occupancy cost was attributable to the sublease of two floors at the Company's
New York City offices, offset by additional occupancy costs incurred by the
Software division.
Other operating expense for the second quarter of fiscal year 1998 was
$4,123,000, a decrease of $478,000 or 10% from the comparable period in 1997.
8
<PAGE> 11
Operating margin for the second quarter of fiscal year 1998 before amortization
of intangible assets was $2,113,000, an increase of $4,324,000 or 196% from the
comparable period in 1997. The Company's operating margin rate before
amortization of intangible assets was 8.2%, compared with a negative 11.0% in
the comparable prior year period.
Net interest income for the second quarter of fiscal year 1998 was $460,000, a
decrease of $871,000 or 65% from $1,331,000 in the comparable period in 1997.
The decrease in interest income was primarily attributable to a reversal of
interest expense of $887,000 as a result of a favorable resolution to an
Internal Revenue Services audit ("IRS audit resolution") concluded in the second
quarter of fiscal year 1997. The Company did not report any equity in the loss
of affiliates during the second quarter of fiscal year 1998, in contrast to the
loss of $294,000 for the comparable period in 1997.
The Company's income tax expense for the second quarter of fiscal year 1998 was
$884,000, compared to an income tax benefit of $1,731,000 for the comparable
period in 1997, which included the reversal of an accrued income tax expense of
$1,093,000 as a consequence of the IRS audit resolution concluded in the
comparable period in 1997. Exclusive of the effect of the IRS audit resolution
in the comparable period in 1997, the Company's effective tax rate for the
second quarter of fiscal years 1998 and 1997 was approximately 42.7% and 44.0%,
respectively.
Net income for the second quarter of fiscal year 1998 was $1,185,000 an increase
of $904,000 or 321% compared to $281,000 in the comparable period in 1997.
Excluding the one-time benefit resulting from the IRS audit resolution in the
comparable period in 1997, the Company's net income increased $2,490,000 or
890%.
The Company's basic earnings per share for the second quarter of fiscal year
1998 was $0.07, an increase of $0.05 or 240% from the $0.02 per share in the
comparable period in 1997. Excluding all one-time events from the comparable
period in 1997, the Company's basic earnings per share increased $0.14 per share
from a loss per basic share of $0.07.
SIX MONTHS ENDED APRIL 30, 1998
Revenue for the six months ended April 30, 1998 was $50,673,000, an increase of
$8,293,000 or 20% from the comparable period in 1997. Revenue from the TPS
division accounted for $27,219,000 (53% of the Company's consolidated revenue
for the first half of fiscal year 1998), a decrease of $1,348,000 or 5% from the
comparable prior year period in 1997. Revenue from Provider services totaled
$17,061,000, a decrease of $3,583,000 or 17% from the comparable six month
period in 1997. Included in Provider revenue was $1,278,000 attributable to
Global, for which there was no revenue in the comparable six month period in
1997. Revenue from Payor services totaled $10,158,000, an increase of $2,233,000
or 28% from the comparable six month period in 1997.
Revenue from the Software division was $23,454,000 (46% of the Company's
consolidated revenue for the first half of fiscal year 1998), an increase of
$9,642,000 or 70% over the comparable six month period in 1997. Revenue from DSS
was $12,638,000, a decrease of $620,000 or 5% from the comparable six month
period in 1997. Revenue from MCIS was $10,816,000, for which there was a partial
quarter's revenue of $1,794,000 during the comparable period in 1997.
Cost of services for the six months ended April 30, 1998 was $47,034,000, an
increase of $5,770,000 or 14% over the comparable six month period in 1997. This
increase was attributable to the additional costs incurred by HSA and Global.
Compensation expense for the six months ended April 30, 1998 totaled
$29,166,000, an increase of $4,002,000 or 16% over the comparable six month
period in 1997. This increase in compensation expense was due primarily to
personnel costs of $4,966,000 incurred by HSA, offset by a decrease in costs
associated with lower headcount in the TPS division.
9
<PAGE> 12
Data processing expense for the six months ended April 30, 1998 was $4,741,000,
an increase of $1,153,000 or 32% from the comparable six month period in 1997.
This increase was attributable to the additional data processing expense of
$890,000 from HSA.
Occupancy expense for the six months ended April 30, 1998 was $4,668,000, an
increase of $109,000 or 2% over the comparable six month period in 1997. This
increase was due to additional occupancy costs incurred by the Software
division, offset by the sublease of two floors in the Company's New York City
offices.
Other operating expense for the six months ended April 30, 1998 was $8,459,000,
an increase of $506,000 or 6% from the comparable six month period in 1997. This
increase was attributable to operating expenses incurred by HSA of $671,000,
offset by decreases in direct project expenses and professional fees.
Operating margin for the six months ended April 30, 1998 before amortization of
intangible assets was $3,639,000, an increase of $2,522,000 or 226% from the
comparable six month period in 1997. The Company's operating margin rate before
amortization of intangible assets was 7.2%, compared to 2.6% for the comparable
prior year period in 1997.
Net interest income for the six months ended April 30, 1998 was $920,000, a
decrease of $852,000, which was primarily attributable to the reversal of an
accrued interest expense of $887,000 as a consequence of the IRS audit
resolution concluded in the comparable prior year period in 1997. The Company
did not incur any merger related costs for the six month's ended April 30, 1998,
compared to $537,000 incurred in the comparable prior year period related to the
merger with QSM in November 1996. The Company did not report any equity in the
loss of affiliates for the six months ended April 30, 1998, compared to a loss
of $310,000 in the comparable six month period in 1997.
The Company's income tax expense for the six months ended April 30, 1998 was
$1,474,000, compared to an income tax benefit of $328,000 in the comparable six
month period in 1997 due to the $1,093,000 benefit derived from the IRS audit
resolution. The Company's effective tax rate for the six months ended April 30,
1998 was approximately 41.7%, compared to an effective tax rate of 43.6% (before
the income tax effect of the IRS audit resolution) in the comparable six month
period in 1997.
Net income for the six month period ended April 30, 1998 was $2,057,000, a
decrease of $27,000 from the comparable six month period in 1997. Excluding all
one-time events in the comparable six month period in 1997, the Company's net
income increased $1,020,000 or 98%.
The Company's basic earnings per share for the six month period ended April 30,
1998 was $0.12, unchanged from the comparable six month period in 1997.
Excluding all one-time events from the comparable six month period in 1997, the
Company's basic earnings per share increased $0.06 or 100%.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1998, the Company had $57,926,000 in net working capital an
increase of $4,127,000 from the level at October 31, 1997. The Company's
principal sources of liquidity at April 30, 1998 consisted of cash, cash
equivalents, and short-term investments aggregating $37,281,000, net accounts
receivable of $44,864,000, and an available balance of $28,400,000 under its
Bank line of credit. On June 11, 1998, an officer and director of the Company
repaid a loan guaranteed by the Company to the Bank and the available balance
under the Company's line of credit with the Bank was increased by $1,600,000 to
$30,000,000. See Note 4 to the unaudited interim consolidated financial
statements. Accounts receivable at April 30, 1998 reflected an increase of
$5,345,000 or 13.5% from the October 31, 1997 balance. There has been no
significant change in the nature, age, or composition of the Company's accounts
receivable portfolio.
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 would repurchase these shares from
time to time on the open market or in negotiated transactions at prices deemed
appropriate by the Company. Repurchased shares will be deposited in the
Company's treasury and used for general corporate purposes. In the second
quarter of fiscal year 1998, the Company repurchased in the open market 10,000
shares at a purchase price of $102,000. Subsequent to the end of the second
quarter of fiscal year 1998, the Company repurchased 250,000 shares of Common
Stock from an officer and director of the Company in a private transaction for
an aggregate purchase price of $2,602,000. Since the inception of the repurchase
program in June 1997, the Company has repurchased in the open market and in a
private transaction 814,000 shares having an aggregate purchase price of
$6,066,000.
Also on May 28, 1997, the Board of Directors authorized a stock option exchange
program for employee participants in the Company's Stock Option and Restricted
Stock Purchase Plan (the "Plan"). Eligible employees who held stock options
("Old Options") with exercise prices in excess of $10.00 per share were able to
exchange them for stock options ("New Options") exercisable for a lesser number
of shares with an exercise price of $5.88 per share, the average price of the
Company's Common Stock on the Nasdaq National Market System on June 2, 1997
("Grant Date"). Approximately 1,600,000 Old Options were eligible to be
exchanged for 900,000 New Options. At the end of the exchange program, 1,209,100
Old Options were exchanged for 606,300 New Options. The New Options received in
the exchange entailed a new vesting schedule where one quarter vested
immediately on the Grant Date, with an additional quarter vesting on each of
November 1, 1998, 1999, and 2000, respectively. To the extent that the fair
market value of the Company's Common Stock exceeded $12.50 on each day for ten
consecutive trading days, the vesting of all New Options not otherwise vested
would become accelerated and 100% fully vested. On March 30, 1998, these New
Options became fully vested as a consequence of the fair market value of the
Company's Common Stock having exceeded $12.50 for the requisite ten consecutive
trading day period.
* * * * *
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. 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
11
<PAGE> 14
the rate of growth of health care 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) the
ability of HMS to deal with the Year 2000 Problem on a timely basis; (ix) 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.
12
<PAGE> 15
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1 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 within 30 days of the Court's decision.
On June 1, 1998, MEDE America Corp. commenced a lawsuit against the
Company and others in the United States District Court for the
Southern District of New York. In its complaint, plaintiff alleges
copyright infringement and other violations of its rights relating to
the Company's development and sale of certain computer software, known
as the Universal Billing Platform, which was developed for the Company
by certain former employees of plaintiff, who are also defendants in
the action, acting as independent contractors. Plaintiff seeks (i) to
restrain the Company from continuing to market and sell the Universal
Billing Platform, (ii) monetary damages in excess of $10,000,000, and
(iii) other relief. The parties engaged in an extensive exchange of
communications over a period in excess of six months prior to the
filing of the complaint, as a result of which the Company concluded,
after investigation, that plaintiff's claims were without merit. The
Company is continuing its investigation and intends to vigorously
contest plaintiff's claims.
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 3, 1998. The 14,613,846 shares of common stock ("Common
Stock") present at the Meeting out of a total of 17,220,069 shares
outstanding and entitled to vote, acted as follows with respect to the
following proposals:
i. Approved, by a vote of: 14,464,404 shares of Common Stock for,
and 149,442 shares of Common Stock against, the election of
Russell L. Carson as a director of the Company; 14,467,257
shares of Common Stock for, and 146,589 shares of Common Stock
against, the election of Robert V. Nagelhout as a director of
the Company; 14,489,804 shares of Common Stock for, and 124,042
shares of Common Stock against, the election of Galen D. Powers
as a director of the Company; and 14,457,699 shares of Common
Stock for, and 156,147 shares of Common Stock against, the
election of Donald J. Staffa as a director of the Company. In
addition, the vote of 117,192 shares of Common Stock was
withheld with respect to the
13
<PAGE> 16
election of all of the nominees.
ii. Approved, by a vote of 13,624,339 shares of Common Stock for,
890,523 shares of Common Stock against, and 98,984 shares of
Common Stock abstained, the adoption of an amendment to the Plan
to limit the maximum number of shares of Common Stock that may
be subject to a stock option or stock purchase right awarded to
any single employee in any fiscal year to 150,000 shares of
Common Stock.
iii. Ratified, by a vote of 14,521,483 shares of Common Stock for,
53,504 shares of Common Stock against, and 38,859 shares of
Common Stock abstained, the selection of KPMG Peat Marwick LLP
as the Company's independent certified public accountants for
the Fiscal Year ending October 31, 1998.
Item 5 Other Information --
On March 18, 1998 Russell L. Carson resigned as a director of the
Company for personal reasons. Mr. Carson's resignation was not based
on a disagreement with the Company on any matter relating to the
Company's operations, policies or practices.
On May 27, 1998 the Board of Directors elected Randolph G. Brown as a
director of the Company to fill the vacancy created by the resignation
of Mr. Carson. Mr. Brown will be a nominee for election as a director
at the Company's 1999 Annual Meeting of Shareholders.
Item 6 Exhibits and Reports on Form 8-K -- None
14
<PAGE> 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 12, 1998 HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------
(Registrant)
/s/ Paul J. Kerz
-------------------------------------------
Paul J. Kerz
President and Chief Executive Officer
15
<PAGE> 18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
11 Computations of Earnings Per Share
27 Financial Data Schedule (Submitted for informational
purposes only and not deemed to be filed)
16
<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 Six months ended
April 30, April 30,
------------------------------- ----------------------------------
1998 1997 1998 1997
------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Basic and Diluted Earnings Per Share:
Earnings data:
Net income $1,185 281 2,057 2,084
============ =============== ============== ===============
Weighted average shares outstanding:
Average shares of common stock outstanding 17,361 17,688 17,354 17,660
Net effect of dilutive stock options -- based on the
treasury stock method using average market price 733 144 453 374
------------ --------------- -------------- ---------------
Weighted average common shares and common share
equivalents outstanding 18,094 17,832 17,807 18,034
============ =============== ============== ===============
Earnings per common share:
Basic earnings per share $0.07 0.02 0.12 0.12
============ =============== ============== ===============
Diluted earnings per share $0.07 0.02 0.12 0.12
============ =============== ============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT APRIL 30, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30,
1998 (UNAUDITED) AND 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997
<PERIOD-START> NOV-01-1997 NOV-01-1996
<PERIOD-END> APR-30-1998 APR-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 17,713 18,462
<SECURITIES> 19,568 17,588
<RECEIVABLES> 46,058 41,670
<ALLOWANCES> (1,194) (1,556)
<INVENTORY> 0 0
<CURRENT-ASSETS> 86,085 84,728
<PP&E> 25,776 23,620
<DEPRECIATION> (18,605) (15,912)
<TOTAL-ASSETS> 117,581 109,949
<CURRENT-LIABILITIES> 28,159 26,418
<BONDS> 0 0
0 0
0 0
<COMMON> 181 177
<OTHER-SE> 86,007 81,344
<TOTAL-LIABILITY-AND-EQUITY> 112,581 109,949
<SALES> 50,673 42,380
<TOTAL-REVENUES> 50,673 42,380
<CGS> 47,035 41,264
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (14) (114)
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 3,531 1,756
<INCOME-TAX> 1,474 (328)
<INCOME-CONTINUING> 3,531 1,756
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,057 2,084
<EPS-PRIMARY> 0.07 0.12
<EPS-DILUTED> 0.07 0.12
</TABLE>
