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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-20946
HEALTH MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2770433
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
401 Park Avenue South
New York, New York 10016
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(Address of principal executive offices) (Zip Code)
(212) 685-4545
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
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 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 |_|
The aggregate market value of the registrant's common stock held by
non-affiliates as of January 13, 1998 was $96,461,021 based on the closing price
on the Nasdaq National Market System on that day.
Number of shares outstanding of the registrant's common stock, $.01 par value,
on January 13, 1998 was 17,220,069.
Documents Incorporated by Reference:
Document Where Incorporated
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Proxy Statement for the Annual Meeting Part III
to be held on March 3, 1998
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TABLE OF CONTENTS
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Page
Contents Number
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Cover Page......................................................................................i
PART I
Item 1. Business.......................................................................1
Item 2. Properties....................................................................12
Item 3. Legal Proceedings.............................................................13
Item 4. Submission of Matters to a Vote of Security Holders...........................13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.........13
Item 6. Selected Financial Data.......................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................14
Item 8. Financial Statements and Supplementary Data...................................14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..........................................................14
PART III
Item 10. Directors and Executive Officers of the Registrant............................14
Item 11. Executive Compensation........................................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management................14
Item 13. Certain Relationships and Related Transactions................................14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............14
Signatures ..............................................................................15
Index to Consolidated Financial Information...............................................16
Exhibit Index.............................................................................17
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PART I
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-K 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 Health Management Systems, Inc.
("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 contain costs in view of its revised revenue outlook, to grow
internally or by acquisition and to integrate acquired businesses into the HMSY
group of companies; (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; (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 HMSY 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 Form 10-K. When used in this Form 10-K, 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 1. Business
Overview
Health Management Systems, Inc. ("HMSY" or the "Company") furnishes
proprietary information management and data processing products and services to
hospitals and other healthcare providers and to government health service
agencies and other healthcare payors. These services address the various types
of data generated by the interaction of the participants in the healthcare
delivery process: the provider of care, the third-party payor, and the patient.
Through its product and service offerings, the Company acts as an outsourcer of
information management functions addressing the operational, administrative,
financial, and clinical data that result from the rendering of healthcare
services. The Company's product and service offerings benefit its clients by
enhancing revenue (achieved through improved reimbursability and
collectability), accelerating cash flow, reducing operating and administrative
costs (by supplying advanced information analytics), and improving
decision-making capabilities (via the provision of useful information).
Healthcare providers receive payment for services from patients,
third-party payors, or a combination thereof. Third-party payors include
commercial insurance companies, governments or their intermediaries, health
maintenance organizations, preferred provider organizations, third-party
administrators for self-insured companies, and managed care companies. Although
patients generally retain primary responsibility for payment for all healthcare
services, hospitals usually process claims for which third-party payors bear
responsibility. Obtaining reimbursement from third-party payors has become
increasingly difficult because of frequent changes in reimbursement formulae and
contract provisions, requirements for pre-admission certification and
utilization review, and administrative procedures instituted by third-party
payors in an effort to control costs. To be successful in obtaining payment from
third-party payors, hospitals and other healthcare providers require regulatory
knowledge and technical skills to manage complex data collection, integration,
analysis, and accounts receivable management needs. To ensure that program costs
are not greater than necessary, third-party payors require knowledge and skills
analogous to those required by providers.
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Using the operational, financial, administrative, and clinical data
generated as part of the healthcare delivery process, the Company applies
proprietary software and other analytical tools to transform data into valuable
information that clients use to (i) minimize operating and administrative costs
while improving profitability, (ii) measure the quality of care, and (iii)
optimize payments transferred between payors and providers. Customers of the
Company utilize the Company's products and services to improve their
decision-making and operating capabilities and to achieve improved operational,
administrative, financial, and clinical performance. The Company believes its
customers benefit from the Company's unique understanding of the healthcare
delivery process, from the perspective of both providers and payors.
Fiscal year 1997 was one of cost realignment and management reorganization
for HMSY. This reorganization accommodated a substantial decrease in revenue
generated from certain of the Company's service offerings and integrated into
HMSY's corporate structure three businesses acquired during the year. The
Company emerged from fiscal year 1997 with a reorganized management structure,
which further integrates and consolidates the various business units within the
Company in congruence with its strategic objectives. To better understand the
this strategy, a brief review of the Company's historic evolution is provided.
Since its founding in 1974, the Company has furnished retrospective
revenue recovery (Retroactive Claims Reprocessing ["RCR"]sm ) services to large
governmental and voluntary hospitals. In 1985, the Company introduced
retrospective revenue recovery (Third Party Liability Recovery ["TPLR"]sm )
services to governmental payors. In 1986, the Company introduced concurrent
revenue recovery outsourcing (Comprehensive Account Management Services
["CAMS"]sm ). From its inception, the Company utilized electronic data
interchange ("EDI") functionality wherever possible as part of its revenue
recovery services but offered EDI services on a stand-alone basis only
infrequently, through a wholly-owned subsidiary (Accelerated Claims Processing,
Inc. ["ACPI"]) incorporated in 1985. In 1990, the Company entered the EDI
marketplace in a more substantial manner through the acquisition of Quality
Medi-Cal Adjudication, Incorporated ("QMA").
With the advent of managed care in the early 1990's, the Company
anticipated the likely increased future relevance of functionality dealing with
the prospective aspect of healthcare reimbursement. In 1995, HMSY completed the
acquisition of Health Care microsystems, Inc. ("HCm"), a purveyor of decision
support systems ("DSS") and services to providers of healthcare, as an initial
step towards the provision of managed care support services to the healthcare
industry.
Also in 1995, anticipating the opportunity of acquiring a number of
managed care information systems entities not yet ready for the public
marketplace, the Company and Welsh, Carson, Anderson & Stowe ("WCAS"), a limited
partnership affiliated with WCAS, certain other affiliates of WCAS, independent
investors, and certain of the Company's executive officers and directors entered
into a subscription agreement pursuant to which a new company, Health
Information Systems Corporation ("HISCo"), was formed and capitalized, and in
which HMSY held a 43% equity interest. In July 1995, HISCo acquired a vendor of
indemnity and managed care legacy systems and software to healthcare payors,
Health Systems Architects, Inc.(later renamed HSA Managed Care Systems, Inc.
["HSA"]). In March 1996, the Company acquired CDR Associates, Inc. ("CDR"), a
provider of third-party liability recovery services to payors (principally Blue
Cross/Blue Shield organizations, and other commercial and managed care insurers
of healthcare risk).
As the Company began fiscal year 1997, it comprised three principal
components: (i) transfer payment services, encompassing RCR, CAMS, and TPLR
(including CDR); (ii) managed care support services, as furnished by HCm, and
(iii) electronic data interchange services, encompassing ACPI and QMA. In the
beginning of fiscal year 1997, HMSY acquired a software company offering
clinical information systems to providers of healthcare--Quality Standards in
Medicine, Inc. ("QSM")-- and integrated QSM with HCm. In March 1997, the Company
acquired the 57 % of the HISCo equity it had not previously owned, changed
HISCo's name to HSA, and added it to HCm and QSM, thereby completing the Managed
Care Support ("MCS") services division. In July 1997, the Company acquired
substantially all the assets of the Global Health Systems, Inc. and GHS
Management Services, Inc. (collectively "Global") subsidiaries of GHS, Inc.
Initially believing Global to be principally a vendor of managed care software
systems to providers of healthcare, Global was aligned with HSA. It is in this
configuration
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that the Company reported its Business Segment Information. See Note 13 to Notes
to Consolidated Financial Statements on page F-25 of this Form 10-K.
At the end of fiscal year 1997, the Company further streamlined its
organization, resulting in two operating divisions: (i) Transfer Payment
Services Division ("Transfer Payment Division"), and (ii) Software Systems and
Services Division ("Software Division"). Each of the two Divisions is led by a
senior vice president, reporting to a single chief operating officer. This
construct installed Robert V. Nagelhout as Executive Vice President and Chief
Operating Officer of HMSY, with Donald J. Staffa serving as Senior Vice
President of the Transfer Payment Division and Thomas J. Kazamek serving as
Senior Vice President of the Software Division. As part of this reorganization,
the Company also centralized its sales and marketing, finance, and human
resources functions at the corporate level, and further strengthened
accountability for corporate-wide technology, information, and development
methodology.
The Transfer Payment Division comprises three operating units: (i)
provider services, including RCR and CAMS; (ii) payor services, including TPLR
and CDR; and (iii) a new unit directed at a redefined hospital business office
outsourcing opportunity, which includes HMSY's EDI companies (ACPI and QMA) and
Global. This new unit delivers less expansive outsourcing services than those
contemplated by the Company's CAMS offerings, and views EDI as an enabling
technology rather than a stand-alone business offering. In addition, the unit
positions Global as an outsourcer of risk management functionality to provider
business offices and management services organizations.
The Software Division comprises two operating units: (i) HCm's DSS
services, and (ii) HSA's Managed Care Information Services ("MCIS"). Previously,
DSS was referred to as MCS.
Healthcare Reform and Regulatory Matters
The healthcare reimbursement process continues to change. Federal, state,
and local governments, as well as other third-party payors, have initiated
policies to reduce the rate of increase in healthcare expenditures. Many of
these policy initiatives have contributed to the complex and time-consuming
nature of obtaining healthcare reimbursement for medical services provided.
Changes occurring in the healthcare industry, most notably managed care
and capitation, have created an increasingly complex reimbursement environment
that impacts both providers and payors. This environment is made even more
complex as the historical distinction between providers and payors becomes less
clear. Providers must ensure that they are properly reimbursed by third-party
payors for healthcare services rendered in accordance with pre-established
contracts. Likewise, payors must ensure that they are making payments for only
those services for which they are responsible and in the dollar amounts
specified.
Although the Company cannot predict the nature of future healthcare
reforms that will be adopted by federal, state, and local governments, the
Company believes that the shifting of traditional insurance risk to providers of
care, the consolidation of providers, and the resulting additional information
management requirements placed on providers should increase the demand for the
Company's offerings. Moreover, the Company believes that providers, payors, and
patients--both separately and together--will benefit from the Company's
integration of cost and other financial and clinical data, enabling
identification and management by all participants (providers, payors, and
patients) of the outcomes achieved.
The Company observes the intensification of interest in ensuring
compliance by providers and payors with the statutory, regulatory, and
contractual requirements of managed care. The Company believes that the
intensifying concern regarding compliance has increased its costs, as the
Company seeks to ensure its own compliance and that of its customers. At the
same time, the Company believes that the increased focus on compliance creates a
potential market for its products and services.
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The Medicare program is administered by the Health Care Financing
Administration ("HCFA"), an agency of the U.S. Department of Health and Human
Services. HCFA currently contracts with numerous insurance carriers and
intermediaries to process regional claims for reimbursement. Although HCFA has
established the regulatory framework for Medicare claims administration,
Medicare intermediaries have the authority to develop independent procedures for
administering the claims reimbursement process. The Medicaid program is subject
to regulation by HCFA, but is administered by state governments. State
governments provide for Medicaid claims reimbursement either through the
establishment of state-owned and operated processing centers or through
contractual arrangements with third-party fiscal agents who own and operate
their own processing centers. The requirements and procedures for reimbursement
implemented by Medicaid differ from state to state. Similar to the claims
administration processes of Medicare and Medicaid, many national health
insurance companies and self-insured employers administer reimbursement of
claims through local or regional offices. Consequently, because guidelines for
the reimbursement of claims are generally established by third-party payors at
local or regional levels, hospital and other provider reimbursement managers
must remain current with the local procedures and requirements of third-party
payors.
The ownership and operation of hospitals is subject to comprehensive
federal and state regulation, which may affect hospital reimbursement. Since
adoption, the Medicare and Medicaid programs have undergone significant and
frequent changes, and it is realistic to expect additional changes in the
future. Such changes could have an adverse effect on the operations of hospitals
and other providers of healthcare, and consequently reduce the amount of the
Company's revenue. The Company's services also are subject to regulations
pertaining to billing services, which primarily involve recordkeeping
requirements and other provisions designed to prevent fraud. The Company
believes that it operates in a manner consistent with such regulations, the
enforcement of which is increasingly more stringent. Finally, the Social
Security Act imposes certain requirements on the Company with regard to
confidentiality and disclosure of Medicare and Medicaid provider and beneficiary
data. Specifically, the Company is prohibited from disclosing information that
is obtained by or from the Department of Health and Human Services except as
otherwise provided by regulations or other federal law. Generally, the Company
is required to maintain standards of confidentiality that are comparable to
those of an agency administering the Medicare or Medicaid program when the
Company uses data obtained from such programs.
The rapidity of consolidation within the healthcare industry over the past
several years has created opportunities for the Company in its role as data
consolidator. Yet the rapidity of change suggests that some of the consolidation
may be undone over the next several years, as providers are downsized and
integrated delivery networks ("IDN's") begin to unbundle. The Company believes
these dynamics constitute both a risk to its existing business relationship with
Columbia Healthcare Corporation ("C/HCA"), the Company's second largest client,
and an opportunity for new business in the future.
Principal Products and Services: Transfer Payment Division
The Transfer Payment Division offers products and services to both
providers and payors. Provider offerings comprise RCR and CAMS. Payor offerings
comprise TPLR services, including those offered by CDR.
Retroactive Claims Reprocessing (RCR) Services for Providers
Since its founding in 1974, the Company has provided its RCR services to
large public and voluntary hospitals. As a result of the magnitude and
complexity of the information requirements involved in the healthcare claims
reimbursement process, a hospital's patient accounting department processes an
enormous amount of data each day, normally recouping a majority of third-party
revenue due for patient services. Nevertheless, due to various factors, it is
virtually impossible for any hospital to identify and obtain payment for all of
the open balances that are eligible for third-party reimbursement. These factors
include (i) incorrect or incomplete billing information provided by patients,
(ii) difficulties in verifying patient insurance eligibility and payment status,
(iii) problems in controlling the completeness and accuracy of patient
information as it accumulates and flows through the frequently unintegrated
platforms comprising the hospital's overall information management system, and
(iv) the necessity for
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constant modification and reprogramming of billing, reporting, and compliance
routines due to the frequent and complex changes to payor information and
compliance requirements.
As a consequence of these and related factors, a hospital's patient
accounting department often has incorrect or incomplete information regarding
certain claims, resulting in such claims either being rejected by third-party
payors or not being billed at all. For most hospitals, rejected or unbilled
claims represent a relatively small percentage of total revenue, and the cost
for any particular hospital to install the data processing system and hire the
technical personnel that would be necessary to identify every claim covered by
insurance and to accumulate all the information needed to submit each claim on
an ongoing basis would be prohibitive. Through the application of the Company's
proprietary technology, the Company's RCR services produce for its hospital
clients incremental revenue, which otherwise would remain uncollected.
RCR services are used by a hospital (most commonly for its emergency room
and outpatient clinics) to realize third-party revenue from patient accounts
after the hospital has expended its own best efforts at billing and collection,
but before the accounts are referred to a collection agency. The Company's
specialized data aggregation, data purification, data editing, and electronic
claim preparation and transmission routines are designed to facilitate the
reimbursement of accounts that remain unpaid because necessary billing
information was missing or because third-party coverage was not known. RCR
services require the hospital to provide the Company with copies of existing
data files, demand minimal hospital staff support, and involve no patient
contact.
Each RCR client determines the scope of the services to be performed by
the Company and the frequency with which such services are delivered. The scope
of RCR services may involve a hospital's emergency room, outpatient, and/or
inpatient departments. The frequency of processing and billing on behalf of a
client is determined by a number of factors, including the client's internal
billing and follow-up processes, as well as applicable statutory and regulatory
time limitations on submission of claims.
Average contingent fees for RCR range from 15% to 25% of the incremental
revenue generated on behalf of the client. Revenue generated on behalf of new
RCR clients is generally highest during the first full year of processing
because the Company is able to liquidate the client's accounts receivable to the
maximum extent of the available statutory claiming limitation. After the initial
processing period, billings normally span shorter processing periods and
generate smaller amounts of revenue. The incremental revenue generated on behalf
of the Company's clients will vary significantly from client to client due to
differences in the sophistication of the clients' data systems and the scope and
frequency of the services performed. Since 1974, RCR services have generated in
excess of $1.2 billion for hospitals from Medicaid, Medicare, and commercial
insurers nationwide. Over the last three fiscal years, such services have
generated over $0.4 billion in incremental reimbursements. The Company currently
has 63 RCR clients in eight states and the District of Columbia.
Comprehensive Accounts Management Services (CAMS) for Providers
As a result of the technology and expertise developed in providing RCR
services, the Company is able to provide custom institutionalized data
processing, computer software, and operations support services to hospitals,
public health clinics, outpatient treatment facilities, and companies that serve
the healthcare industry. In contrast to RCR services, which retrospectively
reprocess patient accounts receivable data, CAMS delivered to healthcare
providers provide concurrent third-party claim identification, editing,
preparation, and electronic claims submission. The Company integrates data
derived from the hospital's disparate data collection systems and manages the
electronic interfaces between the hospital and the transfer payment agencies
upon which the hospital is dependent for reimbursement. CAMS is designed to
provide an integrated and comprehensive solution to a hospital's accounts
receivable liquidation requirements by combining (i) an intimate familiarity
with the principal in-house shared data collection and patient accounting
systems found in large urban hospitals with (ii) expertise in the management and
liquidation of accounts receivable, thereby offering a hospital a unique
opportunity to improve the effectiveness of its accounts receivable management
program (enhance revenue and accelerate cash flow) while decreasing its
administrative costs.
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As part of CAMS, the Company develops customized automated interfaces
between a hospital's various data collection, billing, and accounts receivable
systems, and the claims processing systems of third-party payors. To establish
these interfaces, the Company must satisfy the unique information and data
processing requirements of each hospital and of the various intermediaries used
by third-party payors in each jurisdiction. The Company obtains information from
the client hospital's internal charge capture, medical records, utilization
review, and patient accounting systems as required to submit electronically
complete and accurate reimbursement claims. The Company then performs
pre-billing edits, uses its computer platforms to facilitate correction of
pre-billing edit failures, and performs electronic billing of valid claims. Upon
payment by the third-party payors, the Company captures remittance data from
intermediaries for electronic posting to the hospital's accounts receivable
system. CAMS systems apply a variety of technologies (including bar coding
devices) to track location and document status information and to extract
requisite information from medical records, utilization review, and patient
accounting systems at the client site. CAMS also generates (for delivery in
paper or electronic media form) automated management reports for use by the
hospital's patient accounting and financial management personnel that would
otherwise be unavailable to them.
Third-party Liability Recovery (TPLR) Services for Payors
Since 1985, the Company has offered TPLR services principally to state
Medicaid agencies, as a means of identifying third parties with prior liability
for Medicaid claims. As part of its TPLR offering, the Company provides
hospital-based claims audits on behalf of payors, for the purpose of recovering
credit balances and duplicate payments. The Company provides services to state
Medicaid agencies as well as to Medicaid HMO's and to Blue Cross/Blue Shield
organizations and commercial insurers (including managed care payors).
The Medicaid program, which was established in 1965, exists as the payor
of last resort for healthcare services required by financially and medically
needy individuals. The Medicaid program is administered by the individual
states, with joint federal and state funding of costs. In 1985, the federal
government, recognizing that state Medicaid agencies were improperly paying
substantial amounts for healthcare claims for individuals having some other form
of third-party healthcare insurance, imposed statutory regulations requiring
states to take active measures to pursue the third parties.
TPLR processing is performed according to the requirements of each
individual client. In providing these services, the Company uses proprietary
information management and analytic methodologies similar to those used in
providing RCR services, although TPLR services require the creation of
independent databases of far greater magnitude.
TPL contracts generally have one to three year terms and provide for
contingent fees that typically range from 10% to 15% of the amounts recovered
for the client. The Company recognizes revenue at the time a recovery to be
submitted on behalf of the client third-party payor or its intermediary is
approved by the client for purposes of initiating the recovery process. TPLR
revenues are subject to annual fluctuations similar to those experienced with
RCR services.
In April 1996, the Company acquired CDR in a merger transaction to augment
the Company's TPLR services to state Medicaid agencies. CDR is a provider of
hospital-based claim audits on behalf of payors. CDR's principal client base is
comprised of Blue Cross/Blue Shield organizations and their related managed care
organizations. In addition, CDR's clients include several commercial insurance
carriers and HMO's.
In fiscal year 1996, the Company began application of its proprietary
information management and analysis methodologies similar to those used for
providing RCR and TPLR services, to offer services known as Employer Retroactive
Claims Reprocessing Recovery ("ERCR") services to self-insured employers. ERCR
has not yielded consistently positive results, although the Company still
maintains five such contracts; the ERCR offering has been incorporated into the
Company's TPLR services.
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Since 1985, TPLR services (exclusive of those offered by CDR) have
generated in excess of $559 million, of which $383 million has been generated in
the last three years. The Company currently has 43 TPLR engagements in 21
states, inclusive of CDR and ERCR.
Principal Products and Services: Software Division
The Software Division offers products and services for both payors and
providers. At this time, provider services comprise DSS offerings; payor
services comprise MCIS offerings.
Decision Support Software (DSS) and Services for Providers
Recent changes in the healthcare marketplace have intensified the
information demands at all levels in provider organizations, whether hospitals
or IDN's. Additionally, payors have new and/or expanded information requirements
that existing legacy systems do not support. Competition for covered lives under
various managed care paradigms is forcing providers to deliver healthcare as
efficiently and cost-effectively as possible, without compromising quality. The
focus of healthcare information technology is changing from collecting
departmental financial data (with a focus on charge capture and billing of
incidents of medical service) to gathering and aggregating enterprise-wide
information at the patient/member level, with an emphasis on clinical
operations, cost identification, cost reduction, and complex coordination of
benefits data. Two requirements emerge from these trends: (i) future information
management functionality must be tailored for complex and diverse IDN's spanning
hospital divisions, managed care business lines, physician group practices, and
ancillary services; and (ii) information systems and services must help
providers function in a capitated environment.
The growth of managed care and the consolidation of healthcare
institutions is significantly increasing the complexity of the industry and the
associated demand for decision support systems. In the managed care environment,
the Company believes that decision support is the linchpin for integrating,
analyzing, and understanding key operational, financial, administrative, and
clinical data obtained from institutions' transaction-based healthcare
information systems. As such, DSS is increasingly being relied upon to guide the
management practices of providers (in areas ranging from managed care
contracting and clinical pathways development to physician profiling) to ensure
the success and financial and operational viability of their organizations. The
current clients for the Company's DSS services include more than 500 hospitals
and IDN's located primarily in the United States. These hospitals range in size
from 50 to more than 1,000 beds, and include many of the most progressive and
complex health systems in the country, as well as some of the largest multi-site
hospital chains, managed care organizations, and long-term care institutions.
In development with several major healthcare organizations for the past
three years, the Company's new suite of DSS products and services, called HCm
Alliance(TM) for Managed Care ("Alliance"), will be available in the market in
early calendar year 1998. Alliance will enable healthcare providers to perform
clinical, cost, and contract management from the perspective of the provider,
payor, and/or administrator. Employing advanced systems integration, data
validation, and distribution methods, Alliance will support evolving data
warehousing and information systems initiatives. Alliance was built with an open
system architecture, running on a variety of platforms that support client
server processing and World Wide Web applications. In addition to purchasing the
Company's software, customers will have the option of partnering with the
Company or outsourcing part or all of the operation of the Alliance system to
the Company. The Company will continue to integrate clinical quality measures
within its DSS offering.
In partnering relationships, the Company dedicates considerable resources
to providing a wide variety of related consulting applications, including
managed care strategic consulting, systems installation, data acquisition,
development and training, contract and clinical management, and managed care
reporting.
Through its HCm Alliance(TM) for Financial Modeling ("FM") product, the
Company offers hospitals and long-term care organizations an enterprise-wide
financial analysis and modeling application, with capabilities including
productivity analysis, budgeting and forecasting, long-range planning and
analysis, and provider resource
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management. FM incorporates multi-dimensional, on-line analytical processing
technology, integrated with electronic mail applications and standard
spreadsheet tools to support communications and analysis. The Company also
provides FM-related application consulting services, focusing on analysis and
development of cost accounting, contract management, budgeting, business lines,
and treatment patterns.
Managed Care Information Systems (MCIS) and Services for Payors
Both public and private entities are rapidly embracing managed care health
plans as a means of providing healthcare coverage. With this increased demand,
the number of existing payors, the number of start-up entities, and the number
of IDN's seeking to offer managed care products has greatly increased. To
support their businesses, these payors require systems to: manage patient
membership, provider contracts, and networks; process and adjudicate claims;
manage risk; and perform medical management.
The Company's MCIS offerings provide large-scale transaction processing
systems to more than 45 large and medium-sized commercial payors and managed
care plans, including some of the largest Blue Cross/Blue Shield organizations.
The three principal offerings are Health Enterprise Systems ("HES") , Provider
Information Management System ("PIMS") , and The Capitation Facility ("TCF").
HES is a risk management solution for payors seeking a strategy to manage their
own health plans and market their own products, providing data processing for
plans offering traditional indemnity coverage through complete managed care
programs. Comprised of modular systems, HES automates four major areas of
healthcare administration: membership and billing; provider administration;
capitation; and benefits and claims. PIMS is a data repository enabling
proactive management based on information such as credentialing, accreditation,
and pricing arrangements. TCF, the Company's stand-alone capitation offering,
manages the payment to providers of pre-negotiated per capita amounts.
In conjunction with development partners and on its own, the Company
intends during fiscal year 1998 to adapt and/or migrate various of its MCIS
offerings to an open system architecture, running on platforms that support
client server and World Wide Web applications.
The Company's MCIS offerings are sold on a stand-alone basis, or can be
integrated into existing systems, the latter option enabling payors to preserve
their investments in information technology. The Company believes that these
offerings dramatically reduce the cost of processing claims through
auto-adjudication. As with all its products, the Company is able to provide its
MCIS offerings on an outsourcing or consulting basis.
Principal Products and Services: Other
Electronic Data Interchange (EDI) for Providers
Through its RCR, CAMS, and TPLR offerings, the Company has developed the
capability to submit healthcare claims data and to receive remittance data
electronically from a diverse array of third-party payors. In addition, the
Company provides electronic billing and follow-up services for claims submitted
to Medi-Cal (the California Medicaid program). The Company also provides
stand-alone EDI services to clients in Illinois, New York, and Pennsylvania. In
total, the Company provides EDI services to 137 hospitals and healthcare
organizations. The Company's strategy includes the continued development of EDI
services as an integral component of its hospital business office outsourcing
offering.
Customers
The Company's client base includes more than 600 hospitals, IDN's,
multi-hospital systems, large commercial payors, Blue Cross/Blue Shield
organizations, and state Medicaid agencies in 46 states and the District of
Columbia. The Company also has a limited number of clients in the United
Kingdom. Among the Company's domestic clients are the nation's three largest
public health systems. The Company works with selected development partners in
the research, development, and testing of its software products and services.
8
<PAGE> 11
Market Trends/Opportunities
The demands of managing the delivery of patient care with ever increasing
qualitative and quantitative rigor will continue to drive the need for increased
amounts of operational, financial, administrative, and clinical information. The
Company believes that it possesses the data content, analytic tools, technology,
and process management skills required to respond to the current and anticipated
needs of provider and payor clients for tools and services to manage this
evolving complexity.
Cost pressures continue to drive horizontal and vertical integration of
providers and payors alike. Consolidation among healthcare organizations is
creating larger healthcare delivery systems with greater regional market power.
This phenomenon is creating a new market for the Company's products, with fewer
but larger client prospects. Despite some recent analyses suggesting that the
rapidity of this change may be undone over the next several years, as providers
are downsized and IDN's begin to unbundle, the Company believes that it has the
opportunity to leverage its products and services across a larger enterprise,
making the Company's products and services more cost effective for clients. As
well, the shifting of financial risk from payors to providers creates the
opportunity for the Company to provide its MCIS offerings to providers as well
as payors.
A certain portion of the Company's traditional receivables management
services has been capitated and is no longer subject to recovery through its RCR
offering. Due to managed care, however, providers' commercial insurance
portfolios are becoming more problematic. Providers are increasingly seeking
assistance from vendors to optimize reimbursement from commercial insurance
claims, which are frequently rejected erroneously as managed care claims. In
addition, the Company expects that there will be a growing trend toward
outsourcing by healthcare provider organizations in the future.
Competition
Although the Company's products and services involve various proprietary
aspects, its business is highly competitive and has been consolidating rapidly.
While the Company believes that no one company competes with all aspects of its
business, several companies, some of which may be larger and have greater
financial resources than the Company, compete with the Company in providing one
or more of the Company's offerings. The Company also encounters competition from
companies attempting to expand the scope of their products and services within
or into the healthcare information management services industry.
Transfer Payment Division
The Company's RCR and CAMS provider offerings compete with systems
integration companies (such as Electronic Data Systems Corporation ["EDS"]),
hospital computer systems vendors (such as HBOC & Company ["HBOC"] and Shared
Medical Systems Corporation ["SMS"]), EDI companies (such as National Data
Corporation ["NDC"], including the former CIS Technologies, Inc.), MedE America
Corporation ("MedE"), and QuadraMed Corporation ["QMDC"]), and national public
accounting firms. The Company competes on the basis of its proprietary systems,
existing relationships, long-standing reputation in the provider market segment,
and pricing.
The payor offerings of the Company's Transfer Payment Division target
federal and state healthcare agencies and large commercial payors, and compete
primarily with national public accounting firms (especially Public Consulting
Group, a frequent business partner of Deloitte & Touche LLP). The Company
competes on the basis of its proprietary systems, historically high recovery
rates, and pricing.
Software Division
The Company's DSS offering competes with products provided by Transition
Systems, Inc. ("TSIX") and HBOC. QMDC, with its recent acquisition of Medicus
Systems, has emerged as a competitor. Companies that offer financial management
products, including Hyperion Software and PeopleSoft, Inc., are also
competitors. The Company competes on the basis of its proprietary software and
management consulting services.
9
<PAGE> 12
The Company's MCIS offerings for the managed care market compete against
many companies, including Health Systems Design Corporation and ERISCO, Inc.
("ERISCO"), a subsidiary of Cognizant Corporation, as well as with in-house
systems development groups. The Company also sells these products to large
provider organizations, and views IDN's as a potential market for its existing
products and services. In the provider market, competition comes from large
hospital computer systems vendors, such as HBOC and SMS, which also offer
managed care information systems as part of their solutions.
In the traditional indemnity market, the Company's MCIS offerings compete
with claims adjudication and provider management products from ERISCO,
Synertech, a subsidiary of Highmark, Inc., Resource Information Management
Systems, Inc., and Rothenberg Health Systems, Inc., which has announced its
intent to be acquired by QMDC. As the Company enters the IDN market, it will
compete with HBOC's Amisys Division and SMS. CSC Healthcare, a subsidiary of
Computer Sciences Corporation, has also been investing in and may emerge as a
strong competitor in the IDN market.
The Company's MCIS offerings compete on the basis of its proprietary
software, healthcare software development expertise, and large-scale project
management capabilities.
Other
The Company's EDI offerings compete with numerous entities, including
MedE, NDC, and QMDC.
Significant Contracts
The Company's largest client is a group of healthcare facilities under the
governance of Los Angeles County, for which the Company provides RCR and CAMS,
including managed care services. During the fiscal years ended October 31, 1997,
1996, and 1995, this group accounted for 12%, 12%, and 15%, respectively, of the
Company's total revenue. The Company's second largest client is C/HCA, for which
the Company provides DSS. This client accounted for 12%, 8%, and 4%,
respectively, of the Company's total revenue in 1997, 1996, and 1995. The
Company provides its services to C/HCA principally pursuant to a series of
12-month work order agreements. There is no assurance that any of these
agreements will be renewed.
The Company's ten largest clients accounted for approximately 53% of the
Company's revenue in fiscal year 1997. Five of the Company's ten largest
contracts with these clients expire in fiscal year 1998. There can be no
assurance that any of these contracts will be renewed.
New Products and Services
The Company's strategy is to continue to strengthen its position as a
leading provider of decision support software and services, managed care
information systems and services, and transfer payment products and services for
both providers and payors. In addition, the Company will continue to leverage
its existing software and services to enhance its outsourcing services
offerings. Key components of the Company's strategy include (i) increasing
levels of investment in product research and development, (ii) enhancing its
outsourcing capabilities, (iii) leveraging existing relationships with large
clients through provision of additional Company products and services, and (iv)
expanding the Company's strategic development partnerships with provider and
payor organizations for all aspects of its business.
Mergers and Acquisitions
The Company may acquire companies that supply healthcare providers and
payors with information management software, systems, or services if the
offerings of such companies would benefit from access to the Company'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,
10
<PAGE> 13
technical, and management resources. The Company also believes that
consolidation will continue to occur within the healthcare information services
industry.
Relationship with Health Information Systems Corporation (HISCo)
The Company and HISCo entered into an agreement, dated as of October 31,
1995 (the "HISCo Agreement"), pursuant to which the Company was to provide HISCo
with certain services ("Basic Services"), including executive, acquisition
support, and corporate support services. For these Basic Services, the Company
was entitled to receive a fee, payable monthly, calculated at the Company's then
current standard hourly rates established for internal allocations plus 20%. The
term of the HISCo Agreement was to continue until the later of (i) June 30, 2000
or (ii) the expiration of any outstanding work order related to additional
services. The Company believed that the terms of the HISCo Agreement were fair
and reasonable and were no less favorable to the Company than those that could
have been obtained with respect to comparable engagements with independent third
parties. In fiscal years 1997 and 1996, the Company received approximately
$331,000 and $161,000 in fees from HISCo for services provided pursuant to the
HISCo Agreement. In fiscal years 1997 and 1996, HISCo received $0 and $569,000
in fees for software development services provided the Company pursuant to the
HISCo agreement. These software development fees were expensed by the Company.
In March 1997, the Company, which owned 43% of HISCo's equity,
acquired the remaining 57% of HISCo's equity for $3,689,000, net of cash
acquired, from WCAS, a limited partnership affiliated with WCAS, certain other
affiliates of WCAS, independent investors, and certain of the Company's
executive officers and directors. In connection with this acquisition, the HISCo
agreement was terminated and HISCo and its sole operating subsidiary, Health
Systems Architects, Inc., were merged and renamed HSA Managed Care Systems, Inc.
("HSA"). HSA provides automated business and information solutions, including
software and services, to the bearers of risk in the healthcare industry. The
acquisition was accounted for using the purchase method and accordingly the
results of operations of HSA from the date of acquisition through October 31,
1997 are included in the accompanying financial statements. The $2,309,000
excess of the purchase price over fair market value of the net assets acquired
was recorded as goodwill and is being amortized over a period not to exceed 20
years. See Note 2(b) of Notes to Consolidated Financial Statements on page F-17
of this Form 10-K.
In connection with the sale of their respective equity interests in HISCo
to the Company, certain officers and directors of the Company derived gross
proceeds as follows: Paul J. Kerz, $101,000; Laurence B. Simon, $62,000; Donald
J. Staffa, $31,000; Russell L. Carson, $79,000; and Richard H. Stowe, $30,000.
Relationship with HHL Financial Services, Inc. (HHL)
HHL Financial Services, Inc. ("HHL") was a client of the Company,
accounting for 2%, 5%, and 10% of the Company's total revenue during the fiscal
years ended October 31, 1997, 1996, and 1995, respectively. During the third
quarter of fiscal year 1996, the Company recorded a one-time charge occasioned
by HHL's default on its obligations under a data processing agreement with the
Company. The one-time charge consisted of (i) a reversal of third quarter
revenue of $2,180,000, (ii) estimated net costs relating to the Company's
continued contractual obligation with HHL of $3,823,000, (iii) a write-off of
prior period accounts receivable of $2,881,000, and (iv) a write-off of its
investment in HHL of $927,000. The after-tax impact of the one-time charge was a
$5,838,000 reduction to net income.
On October 21, 1996, the Company and HHL entered into an agreement which
set forth interim terms for the Company to continue to provide data processing
services to HHL in exchange for payment in advance. On October 29, 1996, the
Company entered into an agreement with HHL and HHL's primary creditor providing
for mutual general releases and the cessation of all claims. In that agreement,
the Company also settled its liabilities due to HHL of $1,950,000 for a payment
of $870,000 resulting in the reversal of $1,080,000 in liabilities as an offset
to other operating expenses. In addition, the Company agreed to provide for a
period of up to 18 months a reduced level of service in exchange for payment in
advance. In January 1997, HHL filed a petition in bankruptcy and on October 30,
1997 HHL canceled all future service requirements with the Company.
11
<PAGE> 14
Prior to their resignations in June 1996, Paul J. Kerz, Chairman,
President, and Chief Executive Officer and a director of the Company, had served
as Chairman and a director of HHL, and Russell L. Carson and Richard H. Stowe,
directors of the Company, had served as directors of HHL. See Note 16(a) to
Notes to Consolidated Financial Statements on page F-26 of this Form 10-K.
Acquisition of Quality Standards in Medicine, Inc. (QSM)
On November 25, 1996, the Company acquired QSM in a merger transaction.
Founded in 1986, QSM furnishes clinical quality management and improvement
systems to hospital providers located primarily in 11 states and the District of
Columbia. The Company issued 260,000 shares of common stock in the QSM merger
transaction, which was treated as a tax-free reorganization for federal income
tax purposes and was accounted for using the pooling of interests method. QSM
has been operationally joined with HCm. Accordingly, the accompanying
consolidated financial statements have been retroactively restated to include
the financial position, results of operations, and cash flows of QSM.
Acquisition of the Assets of Global Health Systems, Inc. and GHS Management
Services, Inc. (Global)
In July 1997, the Company acquired for $2,146,000 in cash substantially
all the assets of Global, which provided systems and services for managed care,
public health, and ambulatory care facilities. The acquisition was accounted for
using the purchase method and accordingly the results of operations for Global
from the date of acquisition through October 31, 1997 are included in the
accompanying consolidated financial statements. The excess of the purchase price
over the fair market value of the net assets acquired was $1,701,000. This
excess was recorded as goodwill and is being amortized over a period not to
exceed 20 years. During 1997, Global was operated as part of the Company's MCIS
offering.
Employees
As of October 31, 1997, the Company had 837 employees: 401 in the Software
Division and 436 in the Transfer Payment Division. No employees are covered by a
collective bargaining agreement or are represented by a labor union. Effective
January 1, 1998, the Company's co-founder, Laurence B. Simon, relinquished his
executive responsibilities to concentrate on new product planning and
development on a part-time basis.
Financial Information about Industry Segments
Specific financial information with respect to the Company's industry
segments is provided in Note 13, Business Segment Information, in the Notes to
Consolidated Financial Statements on page F-25 on this Form 10-K.
Item 2. Properties
The Company's New York City offices consist of 146,000 square feet. In
addition, the Company leases approximately 147,400 square feet of office space
in approximately 25 locations throughout the United States. Information
regarding the Company's leases is included in Note 14 of Notes to Consolidated
Financial Statements on page F-26 of this Form 10-K.
The Company operates IBM CMOS processors, associated peripheral devices
from Hitachi Data Systems and EMC Corporation, communications devices, a large
number of microcomputers, and extensive local and wide area networks. These
technologies facilitate both product development and production processes.
The Company's data processing operations afford both batch processing and
national on-line network capabilities and are controlled by multiple levels of
physical and software security. Each of the Company's critical systems is backed
up on a nightly basis. Copies of the Company's operating systems, key
applications software, and critical client data are maintained offsite to ensure
continuity of business. The Company does not rely on unique
12
<PAGE> 15
hardware or software systems and its purchase and maintenance agreements with
vendors provide for back-up support in case of computer systems failure.
Item 3. 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 arising out of
allegedly false and misleading statements. These lawsuits, which seek damages in
an unspecified amount, have been consolidated into a single proceeding captioned
In re Health Management Systems, Inc. Securities Litigation (97 Civ. 1865 (HB))
and a Consolidated Amended Complaint has been filed. Defendants have made a
motion to dismiss the Consolidated Amended Complaint. The motion was submitted
to the Court on December 18, 1997 following oral argument and is sub judice.
Discovery has been stayed pending a determination of the Company's motion to
dismiss. The Company believes it has meritorious defenses to the claims asserted
against it and intends to vigorously defend this litigation should the pending
motion to dismiss not be granted. It is too early to form any opinion as to the
eventual outcome of this matter.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock is included in the Nasdaq National Market
System (symbol: HMSY). As of the close of business on December 31, 1997 , there
were approximately 14,500 holders of the Company's common stock, including the
individual participants in security position listings. The Company has not paid
any cash dividends on its common stock and does not anticipate paying cash
dividends in the foreseeable future. The Company's present intention is to
retain earnings to support the future growth of its business. The Company's
credit agreement with its bank contains limitations on the Company's ability to
pay cash dividends.
The table below summarizes the high and low closing prices per share for
the Company's common stock for the fiscal year periods indicated, as reported on
the Nasdaq National Market System.
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------
1997:
Market Price:
High $27.75 12.37 7.50 10.00
Low 13.00 4.75 4.50 5.63
1996:
Market Price:
High $26.83 31.75 37.00 31.75
Low 21.33 24.50 25.50 22.25
1995:
Market Price:
High $15.33 17.17 22.83 23.67
Low 11.11 12.55 14.09 17.17
13
<PAGE> 16
Item 6. Selected Financial Data
The information required by Item 6 is found on pages F-7 to F-8 of this
report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by Item 7 is found on pages F-1 to F-6 of this
report.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is found on pages F-10 to F-13 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 will be included in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders, which will be
mailed within 120 days after the close of the Company's fiscal year ended
October 31, 1997, and is hereby incorporated herein by reference to such Proxy
Statement.
Item 11. Executive Compensation
The information required by Item 11 will be included in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders, which will be
mailed within 120 days after the close of the Company's fiscal year ended
October 31, 1997, and is hereby incorporated herein by reference to such Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 will be included in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders, which will be
mailed within 120 days after the close of the Company's fiscal year ended
October 31, 1997, and is hereby incorporated herein by reference to such Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 will be included in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders, which will be
mailed within 120 days after the close of the Company's fiscal year ended
October 31, 1997, and is hereby incorporated herein by reference to such Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
A. Financial Statements - See Index to Consolidated Financial
Information on page 16.
B. Schedule
Schedule II - Valuation and Qualifying Accounts
C. Reports on Form 8-K
None
D. Exhibits
See Exhibit Index
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)
By: /s/ Paul J. Kerz
--------------------------------------
Paul J. Kerz
President and Chief Executive Officer
Date: January 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Paul J. Kerz Chairman, President and January 13, 1998
- --------------------------- Chief Executive Officer,
Paul J. Kerz and Director
/s/ Phillip Siegel Vice President and January 13, 1998
- --------------------------- Chief Financial Officer
Phillip Siegel
/s/ Robert V. Nagelhout Executive Vice President, January 13, 1998
- --------------------------- Chief Operating Officer,
Robert V. Nagelhout and Director
/s/ Donald J. Staffa Senior Vice President and January 13, 1998
- --------------------------- Director
Donald J. Staffa
/s/ Russell L. Carson Director January 13, 1998
- ---------------------------
Russell L. Carson
/s/ William W. Neal Director January 13, 1998
- ---------------------------
William W. Neal
/s/ Galen D. Powers Director January 13, 1998
- ---------------------------
Galen D. Powers
/s/ Ellen A. Rudnick Director January 13, 1998
- ---------------------------
Ellen A Rudnick
/s/ Richard H. Stowe Director January 13, 1998
- ---------------------------
Richard H. Stowe
15
<PAGE> 18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
Page
Contents Number
- -------- ------
Management's Discussion and Analysis of Results of Operations and
Financial Condition F-1
Selected Consolidated Financial Data F-7
Report of Independent Certified Public Accountants F-9
Consolidated Statements of Operations for the Years Ended October 31,
1997, 1996, and 1995 F-10
Consolidated Balance Sheets as of October 31, 1997 and 1996 F-11
Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1997, 1996, and 1995 F-12
Consolidated Statements of Cash Flows for the Years Ended October 31,
1997, 1996, and 1995 F-13
Notes to Consolidated Financial Statements F-14
Schedule:
Schedule II - Valuation and Qualifying Accounts F-30
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page 1 for additional factors
relating to such statements
Overview
The Company's Transfer Payment Division has delivered RCR services since
1974 and began to deliver its TPLR and CAMS offerings in 1985 and 1986,
respectively. The Company augmented its TPLR product line by acquiring CDR in a
merger transaction in April 1996. CDR is a provider of hospital-based claim
audits to payors (principally Blue Cross/Blue Shield organizations) within the
healthcare industry. In fiscal year 1998, hospital business office outsourcing
services, including EDI and Global product offerings, will be one of three units
in the Transfer Payment Division, in addition to the provider and payor units.
The Company's Software Division was referred to as MCS during 1997. The
Company entered the DSS business in February 1995 when the Company merged with
HCm, which provides microcomputer-based decision support software and services
to the healthcare industry. In November 1996, the Company acquired QSM, a
Boston-based company providing clinical information systems to providers, in a
merger transaction. QSM has been combined with HCm. In March 1997, the Company,
which owned 43% of HISCo's equity, acquired from WCAS, a limited partnership
affiliated with WCAS, certain other affiliates of WCAS, independent investors,
and certain of the Company's executive officers and directors, the remaining 57%
of HISCo's equity which, at the end of fiscal year 1997, became the MCIS segment
of the Software Division. At the time of the acquisition, HISCo merged with its
operating subsidiary, Health Systems Architects, Inc. and was renamed HSA
Managed Care Systems, Inc. HSA provides automated business and information
solutions, including software and services, to the bearers of risk in the
healthcare industry. These solutions comprise the MCIS product offering of the
Software Division. In July 1997, the Company acquired substantially all the
assets of Global Health Systems, Inc. and GHS Management Services, Inc.,
subsidiaries of GHS, Inc. These subsidiaries provided computerized record-based
processing systems and services for managed care, public health and ambulatory
care facilities. For the balance of fiscal year 1997, Global's results have been
combined with those of HSA. In fiscal year 1998, Global will be reported as part
of hospital business office outsourcing unit in the Transfer Payment Division.
The remaining portion of the Company's business is currently comprised of
EDI services. The Company entered the EDI market in 1990 when the Company
acquired QMA, which provides electronic billing and automated denial
reprocessing services, principally in the state of California.
The HCm, CDR, and QSM mergers were accounted for using the pooling of
interests method, and the QMA, HISCo, and Global acquisitions were accounted for
using the purchase method.
F-1
<PAGE> 20
Results of Operations
The table below summarizes the Company's results of operations and the
percentage of total revenue of selected line items for the last three fiscal
years.
<TABLE>
<CAPTION>
Years Ended October 31, 1997 1996 (a) 1995 (a)
($ In Thousands)
- --------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
--------------------- -------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Transfer Payment Division
RCR $ 17,108 19% $ 28,212 28% $ 22,961 25%
CAMS 15,431 17% 18,505 18% 23,945 26%
TPLR 16,849 19% 26,407 26% 19,479 22%
------------ -------- ----------- ------- ------------ --------
49,388 55% 73,124 72% 66,385 73%
Software Division
DSS 24,873 28% 19,510 19% 15,888 18%
MCIS (b) 9,422 10% 0 0% 0 0%
------------ -------- ----------- ------- ------------ --------
34,295 38% 19,510 19% 15,888 18%
EDI (c) 5,834 7% 8,692 9% 8,222 9%
- --------------------------------------------------------------------------------------------------------------
89,517 100% 101,326 100% 90,495 100%
Cost of services:
Compensation 52,361 58% 49,370 49% 44,157 49%
Data processing 7,593 9% 10,282 10% 8,167 9%
Occupancy 10,383 12% 8,001 8% 6,669 7%
Other 18,018 20% 20,220 20% 14,042 16%
- --------------------------------------------------------------------------------------------------------------
88,355 99% 87,873 87% 73,035 81%
Operating margin before
amortization of intangibles 1,162 1% 13,453 13% 17,460 19%
Amortization of intangibles 1,331 1% 204 0% 243 0%
- --------------------------------------------------------------------------------------------------------------
Operating (loss) income (169) (0)% 13,249 13% 17,217 19%
Net interest and net other income 2,746 3% 987 1% 942 1%
Loss on investment 0 0% (927) (1)% 0 0%
Merger related costs (537) (1)% (494) (0)% (1,045) (1)%
Equity in (loss) earnings of affiliate (310) (0)% 50 0% 0 0%
- --------------------------------------------------------------------------------------------------------------
Income before income taxes 1,730 2% 12,865 13% 17,114 19%
Income tax benefit (expense) 351 0% (5,574) (6)% (8,152) (9)%
- --------------------------------------------------------------------------------------------------------------
Net income $ 2,081 2% $ 7,291 7% $ 8,962 10%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The fiscal year 1996 and 1995 operating results have been restated to
include the effect of the QSM merger in November 1996, which was accounted for
using the pooling of interests method.
(b) During fiscal year 1997, and since the acquisition of Global on July 15,
1997, the operating results of Global were consolidated with HSA. In fiscal year
1998, the operating results of Global will be reported as part of hospital
business office outsourcing in the Transfer Payment Division.
(c) In fiscal year 1998, EDI will be reported as part of hospital business
office outsourcing in the Transfer Payment Division.
F-2
<PAGE> 21
Years Ended October 31, 1997 and 1996
Revenue for the fiscal year ended October 31, 1997 was $89,517,000, a
decrease of $11,809,000 or 12% from the prior year. Before the HHL revenue
reversal of $2,180,000 in the third quarter of fiscal year 1996, consolidated
revenue decreased $13,989,000 or 14%. Revenue from the Transfer Payment Division
was $49,388,000, a decrease of $23,736,000 or 32% from the prior year. Before
the HHL revenue reversal, Transfer Payment Division revenue decreased
$25,916,000 or 34% from the prior year due to the non-recurrence in 1997 of
one-time projects in 1996, a contract hiatus with a major client, lower billing
volumes and fee rates, and contract expirations.
Revenue from DSS services was $24,873,000, an increase of $5,363,000 or
27% over the prior year due to the continued growth of software consulting fees
and maintenance contract revenue. Revenue from MCIS for fiscal year 1997 was
$9,422,000. There was no comparable prior year revenue for MCIS because HSA and
Global were acquired during fiscal year 1997 in transactions accounted for under
the purchase method.
Revenue from EDI services was $5,834,000, a decrease of $2,858,000 or 33%
from the prior year due primarily to client losses.
Cost of services for the fiscal year ended October 31, 1997 was
$88,355,000, an increase of $482,000 or less than 1% from the prior year. Prior
to the effect of the one-time HHL charge of $6,704,000 in the third quarter of
1996, comprised of $1,362,000 of compensation costs, $2,199,000 of data
processing costs, and $3,143,000 of other operating costs (including $2,881,000
of bad debt expense related to HHL receivables and $262,000 of net other
operating expenses), cost of services increased $7,186,000 or 9% over the prior
year. This increase was due primarily to the added cost of services resulting
from the acquisitions of HSA and Global, which added costs of services by
$9,249,000, and increased operating costs of DSS services of $3,228,000, which
increases were offset by certain cost reductions in the Transfer Payment
Division and EDI businesses.
Compensation expense for the fiscal year ended October 31, 1997 was
$52,361,000 or 59% of total cost of services, an increase of $2,991,000 or 6%
over the prior year. Compensation expense in 1997 compared to 1996 prior to the
HHL one-time charge of $1,362,000 in the third quarter of 1996 increased
$4,353,000 or 9%. The increased compensation expense was primarily attributable
to operating costs resulting from the HSA and Global acquisitions, which
increased compensation expense by $6,395,000, and increased compensation cost
from DSS services of $2,642,000. Included in compensation expense in 1997 was
severance cost of $568,000 in connection with two reductions in force in the
Transfer Payment Division. These increases were partially offset by lower
compensation expenses, including bonus and profit sharing expenses, in the
Transfer Payment Division and EDI businesses.
Data processing expense for the fiscal year ended October 31, 1997 was
$7,593,000, a decrease of $2,689,000 or 26% from the prior year. Prior to the
effect of the HHL one-time charge in the third quarter of 1996 of $2,199,000,
data processing expense decreased $490,000 or 6%. The decrease in cost was due
to certain cost reductions and lower Transfer Payment Division revenue, which
more than offset the $1,087,000 increase in operating costs from the HSA and
Global acquisitions.
Occupancy expense for the fiscal year ended October 31, 1997 was
$10,383,000, an increase of $2,382,000 or 30% over the prior year. This increase
was primarily due to the expansion of the Company's facilities, including
additional floors at the Company's New York City offices, and $813,000 in
additional operating expense from the acquisitions of HSA and Global.
Other operating expense for the fiscal year ended October 31, 1997 was
$18,018,000, a decrease of $2,202,000 or 11% from the prior year. Prior to the
effect of the HHL one-time charge of $3,143,000 in the third quarter of 1996,
other operating expenses increased $941,000 or 6%. The increase was due to an
additional $954,000 in other operating expenses attributable to HSA and Global.
F-3
<PAGE> 22
Operating margin before amortization of intangible assets for the fiscal
year ended October 31, 1997 was $1,162,000, a decrease of $12,291,000 or 91%
from the prior year. The Company's operating margin rate before amortization of
intangible assets was 1.3%, compared to 13.3% in the prior year. Prior to the
effect of the HHL one-time charge and revenue reversal in 1996, operating margin
before amortization decreased $21,175,000 or 95%.
Amortization of intangible assets for the fiscal year ended October 31,
1997 was $1,331,000, an increase of $1,127,000 from the prior year. The increase
resulted primarily from the amortization of goodwill acquired in the HSA and
Global acquisitions.
Net interest and net other income for the fiscal year ended October 31,
1997 was $2,746,000, an increase of $1,759,000. The increase was partially due
to a reversal of $877,000 in accrued interest expense resulting from a favorable
resolution of an Internal Revenue Service ("IRS") audit during fiscal year 1997.
In addition, the Company wrote off its investment in HHL of $927,000 in 1996 as
part of the one-time charge. Merger related costs of $537,000 were incurred in
the fiscal year ended October 31, 1997 related to the Company's merger with QSM
in November 1996. Merger related costs of $494,000 were incurred in fiscal year
end October 31, 1996 related to the Company's merger with CDR in April 1996. The
Company recognized a loss of $310,000 through March 18, 1997 (the date on which
the Company acquired the remaining 57% of HISCo's equity which it did not
already own) from its equity investment in HISCo, compared to earnings of
$50,000 in the prior year.
The Company's income tax benefit for the fiscal year ended October 31,
1997 was $351,000. The tax benefit was primarily due to a reversal of $1,093,000
in accrued taxes arising from the favorable IRS audit resolution in 1997.
Exclusive of the IRS audit resolution, the effective tax rate was 42.9%. This
compares to income tax expense of $5,574,000 and an effective tax rate of 43.3%
for fiscal year 1996.
Net income for the fiscal year ended October 31, 1997 was $2,081,000, a
decrease of $5,210,000 or 71% from the prior year. Earnings per share were $0.12
in 1997 compared to $0.39 in 1996. Earnings per share excluding all one-time
events were $0.06 in 1997 compared to $0.72 in 1996.
Years Ended October 31, 1996 and 1995
Revenue for the fiscal year ended October 31, 1996 was $101,326,000, an
increase of $10,831,000 or 12% over the prior year. Before the HHL revenue
reversal of $2,180,000 in the third quarter of 1996, revenue was $103,506,000,
an increase of $13,011,000 or 14% over the prior year. Revenue from Transfer
Payment Division after the revenue reversal increased $6,739,000 or 10%,
principally due to revenue generated by the Company's RCR and TPLR engagements,
which increased by 23% and 36%, respectively. Revenue from DSS services was
$19,510,000, an increase of $3,622,000 or 23% over the prior year. Revenue from
EDI services was $8,692,000, an increase of $470,000 or 6% over the prior year.
Cost of services for the fiscal year ended October 31, 1996 was
$87,873,000, an increase of $14,838,000 or 20% over the prior year. During the
third quarter of fiscal year ended October 31, 1996, the Company recorded a
one-time charge pertaining to its relationship with HHL, a major CAMS customer,
which defaulted on its obligation under a data processing agreement with the
Company. This charge increased cost of services by $6,704,000 and accounted for
9% of the increase over the prior year. The $6,704,000 charge was comprised of
$1,362,000 of net compensation costs, and $2,199,000 of net data processing
costs, both associated with the continued servicing of the HHL data processing
agreement, plus $3,143,000 of other operating costs, including $2,881,000 of bad
debt expense related to HHL receivables and $262,000 of net other operating
expenses.
Compensation expense for the fiscal year ended October 31, 1996 was
$49,370,000, an increase of $5,213,000 or 12% over the prior year. Before the
one-time charge of $1,362,000 in the third quarter of 1996, compensation expense
was $48,008,000, an increase of $3,851,000 or 9% over the prior year. This
increase reflected a 17% increase in the average number of employees supporting
business growth and expansion, offset by savings related to the non-recurring
fiscal year 1995 CDR S corporation distributions to its former shareholders of
$1,978,000 and salary savings associated with employee turnover.
F-4
<PAGE> 23
Data processing expense for the fiscal year ended October 31, 1996 was
$10,282,000, an increase of $2,115,000 or 26% over the prior year. Before the
one-time HHL charge of $2,199,000 in the third quarter of 1996, data processing
expense was $8,083,000, a decrease of $84,000 or 1% from the prior year. This
decrease was attributable to high levels of expense in fiscal year 1995
associated with the enhancement of the Company's data processing infrastructure
which were non-recurring in nature.
Occupancy expense for the fiscal year ended October 31, 1996 was
$8,001,000, an increase of $1,332,000 or 20% over the prior year. This increase
was primarily due to the expansion of the Company's facilities, including the
Company's headquarters.
Other operating expense for the fiscal year ended October 31, 1996 was
$20,220,000, an increase of $6,178,000 or 44% over prior year. Before the
one-time HHL charge of $3,143,000 in the third quarter of 1996, other operating
expense was $17,077,000, an increase of $3,035,000 or 22% over the prior year.
The increase was due to $1,604,000 in provision for non-HHL bad debts and higher
levels of direct project costs, professional fees and employee related costs.
The Company also settled its liabilities due to HHL of $1,950,000 for a payment
of $870,000, resulting in the reversal of $1,080,000 in liabilities as an offset
to other operating expenses.
Operating margin before amortization of intangible assets for the fiscal
year ended October 31, 1996 was $13,453,000, a decrease of $4,007,000 or 23%
from the $17,460,000 realized in the prior year. The Company's operating margin
rate before amortization of intangible assets was 13%, compared to 19% in fiscal
year 1995. Operating margin before amortization of intangibles and prior to the
one-time charge and revenue reversal for HHL was $22,337,000, an increase of
$4,877,000 or 28%. Exclusive of the effect of the one-time charge and revenue
reversal, the operating margin rate would have been 22%, an increase of three
percentage points over the 19% realized in the prior year.
Amortization of intangible assets for the fiscal year ended October 31,
1996 was $204,000, a decrease of $39,000 or 16% from the prior year. The
decrease resulted from the full amortization of one of the Company's intangible
assets.
Net interest and net other income for the fiscal year ended October 31,
1996 was $987,000, an increase of $45,000 over the prior year. During 1996, the
Company wrote off its investment in HHL of $927,000 as part of the one-time
charge. Merger related costs of $494,000 were incurred in the year ended October
31, 1996 related to the Company's merger with CDR in April 1996. Merger related
costs of $1,045,000 were incurred in 1995 related to the Company's merger with
HCm. See Note 2(e) of Notes to Consolidated Financial Statements on page F-18 of
this Form 10-K. The Company reported equity in earnings of its HISCo affiliate
of $50,000 and $0 in fiscal years 1996 and 1995, respectively.
The Company's income tax expense for the fiscal year ended October 31,
1996 was $5,574,000, resulting in an effective tax rate of approximately 43%.
This compares to income tax expense of $8,152,000 and an effective tax rate of
approximately 48% for fiscal year 1995. The reduction in the effective tax rate
results from the non-taxability of income from CDR for the first six months of
the fiscal year due to its status as an S corporation, and from the decrease of
non-tax deductible merger costs from the comparable prior year period. Had taxes
been computed as if CDR had been a C corporation for the first six months of
1996, the effective tax rate in 1996 would have been 2.4% higher. Income tax
expense without the HHL one-time charge and revenue reversal in the third
quarter of 1996 would have been $9,823,000, an increase of $861,000 or 10% over
fiscal year 1995.
Net income for the fiscal year ended October 31, 1996 was $7,291,000, a
decrease of $1,671,000 or 19% from the prior year. Earnings per share was $0.39
in 1996 compared to $0.51 in 1995. Earnings per share excluding all one-time
events was $0.72 in 1996 compared to $0.57 in 1995.
Liquidity and Capital Resources
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. Pursuant to this authorization, the
F-5
<PAGE> 24
Company began and expects to continue repurchasing shares from time to time on
the open market or in negotiated transactions at prices deemed appropriate by
the Company. Repurchased shares are deposited in the Company's treasury and used
for general corporate purposes. As of October 31, 1997, the Company had
repurchased in the open market 314,500 shares having an aggregate purchase price
of $1,863,000.
On June 30, 1997, the Company amended its unsecured revolving credit
facility with a major money center financial institution in order to remain in
compliance with one of the financial covenants of the credit agreement. The
Company's plans to repurchase up to $10,000,000 in common stock would have
brought the Company below the minimum consolidated tangible net worth test in
fiscal year 1998. The amended credit agreement reduced the credit facility to
$30,000,000 and lowered the minimum consolidated tangible net worth test for
fiscal years 1998 and 1999.
At October 31, 1997, the Company had $53,799,000 in net working capital, a
decrease of $954,000 from the level at October 31, 1996. The Company's principal
sources of liquidity at October 31, 1997 consisted of cash, cash equivalents,
and short-term investments aggregating $39,080,000, net accounts receivable of
$39,519,000, and an available balance of $28,400,000 under its line of credit.
Accounts receivable at October 31, 1997 reflected a decrease of $3,211,000 or 8%
from the October 31, 1996 balance. There has been no significant change in the
nature, age, or composition of the Company's accounts receivable portfolio.
Year 2000
The Company, like all companies in general and information systems
companies in the specific, expects to feel the impact of technological change
and obsolecence. In fiscal year 1997, the Company began engaging with the
implications of the "Year 2000 Problem.," a situation caused by the inability of
many computer systems to distinguish the century associated with a date whose
year is designated by two digits, i.e. January 1 in the year 19XX versus January
1 in the year 20XX. As an information systems and services vendor, the Company
is concerned with ensuring that the Company's systems are reengineered wherever
necessary to handle an expanded date field (which will unambiguously
differentiate between like dates in the 20th and 21st centuries) and with
ensuring that the data received from clients has been properly reformatted to
present the date unambiguously and is properly interpreted when processed by the
Company. The Company's fiscal year 1998 budget includes substantial funding
directed at assuring that the Company's software products and services offerings
are able to deal with the Year 2000 Problem on a timely basis. Notwithstanding
the Company's efforts in this regard, there does exist the risk that the Year
2000 Problem will manifest itself in unanticipated ways, thereby adversely
affecting the Company's performance in the future; such failures of the Company
and/or failures on the part of the computer systems of the Company's clients
could have a material adverse impact on the Company's ability to do business in
the future.
Inflation
The Company's business is labor intensive. Wages and other
employee-related expenses increase during periods of inflation and when
shortages in the skilled labor market occur. Although the moderate inflation
rates of the past several years have not imposed significant problems for the
Company, the Company implemented selective wage increases in fiscal year 1997 to
assure retention of qualified personnel in key areas of its operations.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earning Per
Share". SFAS 128 establishes standards for computing and presenting earnings per
share. In accordance with the effective date of SFAS 128, the Company will adopt
SFAS 128 as of January 31, 1998. SFAS 128 is not expected to have a material
impact on the Company's financial statements.
F-6
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended October 31, 1997 (a) 1996 (b) 1995 (b) 1994 (b) 1993 (b)
(Amounts In Thousands, Except Per Common Share Data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue $ 89,517 101,326 90,495 73,940 59,949
Cost of services 88,355 87,873 73,035 61,094 48,989
- ------------------------------------------------------------------------------------------------------------------------------------
Operating margin before
amortization of intangibles 1,162 13,453 17,460 12,846 10,960
Amortization of intangibles (c) 1,331 204 243 190 303
- ------------------------------------------------------------------------------------------------------------------------------------
Operating (loss) income (169) 13,249 17,217 12,656 10,657
Net interest and net other income (expense) 2,746 987 942 464 (144)
Loss on investment 0 (927) 0 0 0
Merger related costs (537)(d) (494)(e) (1,045)(f) (59)(f) 0
Equity in (loss) earnings of affiliate (g) (310) 50 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary items 1,730 12,865 17,114 13,061 10,513
Income tax benefit (expense) 351 (5,574) (8,152) (6,353) (4,766)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 2,081 7,291 8,962 6,708 5,747
Extraordinary loss, net of tax benefit (h) 0 0 0 0 (306)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 2,081 7,291 8,962 6,708 5,441
- ------------------------------------------------------------------------------------------------------------------------------------
Accretion of preferred stock redemption value 0 0 0 0 (33)
Net income attributable to common shareholders $ 2,081 7,291 8,962 6,708 5,408
- ------------------------------------------------------------------------------------------------------------------------------------
Per Common Share Data:
Income before extraordinary item $ 0.12 0.39 0.51 0.40 0.37
Net income attributable to common shareholders $ 0.12 0.39 0.51 0.40 0.35
Weighted average shares outstanding 17,918 18,461 17,579 16,674 15,508
- ------------------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Operating margin as a percentage of revenue 1% 13% 19% 17% 18%
Operating (loss) income as a percentage of revenue (0)% 13% 19% 17% 18%
- ------------------------------------------------------------------------------------------------------------------------------------
October 31,
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Cash and short-term investments $ 39,080 39,521 30,112 27,827 26,447
Working capital 53,799 54,753 41,413 35,732 28,319
Total assets 109,694 109,643 88,101 70,689 60,802
Common shareholders' equity 79,806 74,612 58,203 46,662 38,181
====================================================================================================================================
</TABLE>
F-7
<PAGE> 26
Notes to Selected Consolidated Financial Data
(a) Includes the revenue and costs associated with the Company's HSA and
Global acquisitions. See Notes 2(a) and 2(b) of Notes to Consolidated
Financial Statements.
(b) Financial data for the years 1994 through 1996 has been restated to
reflect the merger with QSM in 1997. Financial data for 1993 are
immaterial for QSM and amounts for that year have not been restated for
the merger. See Note 2(c) of Notes to Consolidated Financial Statements.
(c) Intangible assets were principally recorded in connection with the
Company's 1989 recapitalization, its acquisition of QMA in 1990, and its
HSA and Global acquisitions in 1997. See Notes 1(e) and 6 of Notes to
Consolidated Financial Statements.
(d) Includes costs associated with the Company's merger with QSM. See Note
2(c) of Notes to Consolidated Financial Statements.
(e) Includes costs associated with the Company's merger with CDR. See Note
2(d) of Notes to Consolidated Financial Statements.
(f) Includes costs associated with the Company's merger with HCm. See Note
2(e) of Notes to Consolidated Financial Statements.
(g) In March 1997, the Company acquired the remaining outstanding shares of
HISCo not already owned by the Company. The acquisition was accounted for
using the purchase method. See Note 2(b) of Notes to Consolidated
Financial Statements.
(h) The extraordinary loss of $306,000, net of income tax benefit of $257,000,
reflects the write-off of the unamortized debt discount attributable to
the prepayment of subordinated debentures issued in connection with the
Company's 1989 recapitalization.
F-8
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Health Management Systems, Inc.:
We have audited the accompanying consolidated financial statements of
Health Management Systems, Inc. and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits. We did not
audit the financial statements of Health Information Systems Corporation
(HISCo), a 43% owned investee company, for the year ended October 31, 1996. The
Company's investment in HISCo at October 31, 1996 was $6,824,000 and its loss in
equity for the year ended October 31, 1996 was $50,000. The financial statements
of HISCo for the aforementioned periods were audited by other auditors whose
reports were furnished to us, and our opinion, insofar as it relates to the
amounts included for HISCo, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Health Management Systems, Inc. and
subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
November 21, 1997
F-9
<PAGE> 28
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended October 31,
------------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Revenue:
Trade $ 89,186 95,719 81,073
Affiliates 331 5,607 9,422
--------- -------- -------
89,517 101,326 90,495
Cost of services:
Compensation 52,361 49,370 44,157
Data processing 7,593 10,282 8,167
Occupancy 10,383 8,001 6,669
Other 18,018 20,220 14,042
--------- -------- -------
88,355 87,873 73,035
--------- -------- -------
Operating margin before amortization of intangibles 1,162 13,453 17,460
Amortization of intangibles 1,331 204 243
--------- -------- -------
Operating (loss) income (169) 13,249 17,217
Other income (expense):
Net interest and net other income 2,746 987 942
Loss on investment 0 (927) 0
Merger related costs (537) (494) (1,045)
Equity in (loss) earnings of affiliate (310) 50 0
--------- -------- -------
1,899 (384) (103)
Income before income taxes 1,730 12,865 17,114
Income tax benefit (expense) 351 (5,574) (8,152)
--------- -------- -------
Net income $ 2,081 7,291 8,962
========= ======== =======
Earnings per share data:
Net income per common share $ 0.12 0.39 0.51
========= ======== =======
Weighted average shares outstanding 17,918 18,461 17,579
========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 29
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
October 31, October 31,
1997 1996
--------- -------
Assets
Current assets:
Cash and cash equivalents $ 20,694 22,340
Short-term investments 18,386 17,181
Accounts receivable, net 39,519 42,730
Other current assets 3,384 4,706
--------- -------
Total current assets 81,983 86,957
Property and equipment, net 7,988 7,823
Goodwill, net 12,316 5,247
Other intangible assets, net 1,059 10
Capitalized software costs, net 3,060 1,472
Investments in affiliates 0 6,824
Deferred income taxes 2,721 0
Other assets 567 1,310
--------- -------
Total assets $ 109,694 109,643
========= =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 16,153 19,676
Amounts payable to affiliates 0 585
Deferred revenue 5,122 4,975
Deferred income taxes 6,909 6,968
--------- -------
Total current liabilities 28,184 32,204
Other liabilities 1,704 2,770
Deferred income taxes 0 57
--------- -------
Total liabilities 29,888 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; 17,773,653 shares issued and 17,459,153
shares outstanding at October 31, 1997; 17,520,991
shares issued and outstanding at October 31, 1996 178 175
Capital in excess of par value 67,304 62,541
Retained earnings 13,506 11,425
Unrealized appreciation on short-term investments 681 471
--------- -------
81,669 74,612
Less treasury stock, at cost (314,500 shares) (1,863) 0
--------- -------
Total shareholders' equity 79,806 74,612
--------- -------
Total liabilities and shareholders' equity $ 109,694 109,643
========= =======
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 30
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ In Thousands)
<TABLE>
<CAPTION>
Unrealized
Common Stock Appreciation
------------------- Capital In Retained (Depreciation) Total
Par Excess Of Earnings on Short-term Treasury Shareholders'
Shares Value Par Value Deficit) Investments Stock Equity
------ ----- --------- -------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994 15,976,423 $160 45,710 1,185 (12) 0 47,043
Adjustments for Quality Standards in
Medicine, Inc. ("QSM") pooling of interest 172,150 1 4,958 (5,340) 0 0 (381)
----------------------------------------------------------------------------------
Balance at October 31, 1994, as restated 16,148,573 161 50,668 (4,155) (12) 0 46,662
Net income 0 0 0 8,962 0 0 8,962
Stock option activity 272,595 3 1,078 0 0 0 1,081
Employee Stock Purchase Plan activity 141,744 1 1,202 0 0 0 1,203
Disqualifying dispositions 0 0 477 0 0 0 477
Unearned compensation 0 0 14 0 0 0 14
Appreciation on short-term investments 0 0 0 0 476 0 476
Adjustment to reflect change in Health
Care microsystems, Inc. fiscal year 0 0 0 (672) 0 0 (672)
----------------------------------------------------------------------------------
Balance at October 31, 1995 16,562,912 165 53,439 4,135 464 0 58,203
Net income 0 0 0 7,290 0 0 7,290
Stock option activity 794,994 8 5,629 0 0 0 5,637
Employee Stock Purchase Plan activity 163,085 2 2,330 0 0 0 2,332
Disqualifying dispositions 0 0 1,143 0 0 0 1,143
Appreciation on short-term investments 0 0 0 0 7 0 7
----------------------------------------------------------------------------------
Balance at October 31, 1996 17,520,991 175 62,541 11,425 471 0 74,612
Net income 0 0 0 2,081 0 0 2,081
Stock option activity 69,480 1 333 0 0 0 334
Employee Stock Purchase Plan activity 95,332 1 708 0 0 0 709
Stock issued to retire QSM debt 87,850 1 1,434 0 0 0 1,435
Stock options issued to non-employees 0 0 98 0 0 0 98
Disqualifying dispositions 0 0 2,190 0 0 0 2,190
Treasury stock acquisition (314,500) 0 0 0 0 (1,863) (1,863)
Appreciation on short-term investments 0 0 0 0 210 0 210
----------------------------------------------------------------------------------
Balance at October 31, 1997 17,459,153 $178 67,304 13,506 681 (1,863) 79,806
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 31
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,081 7,291 8,962
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on investment 0 927 0
Depreciation and amortization 3,811 3,117 2,772
Software capitalization (1,498) (1,151) (840)
Amortization of intangibles 1,331 204 243
Amortization of unearned compensation 0 0 14
Provision for doubtful accounts 538 4,485 183
Loss (gain) on disposal of assets 17 0 (19)
Deferred tax (benefit) expense (1,635) (424) 1,203
Equity in loss (earnings) of affiliate 310 (50) 0
Stock options issued to non-employees 98 0 0
Other 0 0 (3)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 5,008 (15,188) (9,206)
Decrease (increase) in other current assets 4,137 (793) (1,063)
Increase (decrease) in accounts payable and accrued expenses (2,910) 3,196 5,229
Increase (decrease) in amounts payable to affiliates (747) 902 0
Increase (decrease) in deferred revenue (575) 881 (983)
Increase (decrease) in other assets and liabilities, net (1,531) 2,187 717
----------- ----------- ----------
Net cash provided by operating activities 8,435 5,584 7,209
----------- ----------- ----------
Investing activities:
Capital asset expenditures (2,462) (4,456) (1,513)
Investment in affiliates 0 (28) (7,268)
Acquisition of assets of subsidiaries of GHS, Inc. (2,146) 0 0
Acquisition of Health Information Systems Corporation, net of cash acquired (3,689) 0 0
Net (purchases) proceeds from sale of short-term investments (964) 2,106 (5,464)
----------- ----------- ----------
Net cash used in investing activities (9,261) (2,378) (14,245)
----------- ----------- ----------
Financing activities:
Proceeds from issuance of common stock 709 2,332 1,346
Proceeds from exercise of stock options 334 5,637 1,081
Common stock repurchase (1,863) 0 0
Proceeds from notes payable 0 340 494
Repayment of notes payable 0 0 (342)
----------- ----------- ----------
Net cash (used in) provided by financing activities (820) 8,309 2,579
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents (1,646) 11,515 (4,457)
Cash and cash equivalents at beginning of period 22,340 10,825 15,029
Adjustment to cash to reflect change in Health Care
microsystems, Inc. fiscal year 0 0 253
----------- ----------- ----------
Cash and cash equivalents at end of period $ 20,694 22,340 10,825
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 32
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Founded in 1974, Health Management Systems, Inc. (the "Company") provides
information management software, systems and services to healthcare providers
and payors.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
(including money market instruments of $6,283,000 and $5,873,000 at October 31,
1997 and 1996, respectively) to be cash equivalents.
(c) Short-Term Investments
Short-Term investments are recorded at fair value. Included in short-term
investments are investments classified as available for sale and carried at fair
value. Debt securities that the Company does not have the intent and ability to
hold to maturity are classified either as "available for sale" or as "trading"
and are carried at fair value. Unrealized gains and losses on securities
classified as available for sale are carried as a separate component of
shareholders' equity. Unrealized gains and losses on securities classified as
trading are reported in earnings. Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date.
At October 31, 1997 and 1996, the Company recorded cumulative unrealized
appreciation of $681,000 and $471,000, respectively, on these short-term
investments.
(d) Depreciation and Amortization of Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the property and equipment utilizing the
straight-line method. Amortization of leasehold improvements is provided over
the estimated useful lives of the assets or the terms of the leases, whichever
is shorter, utilizing the straight-line method. The estimated useful lives are
as follows:
Equipment 3-5 years
Leasehold improvements 5-8 years
Furniture and fixtures 5-7 years
(e) Intangible Assets
Intangible assets have been recorded primarily as a result of the
recapitalization of the Company in 1989, the acquisition of Quality Medi-Cal
Adjudication, Incorporated ("QMA") in 1990, the acquisition of the remaining
shares of Health Information Systems Corporation. ("HISCo") in March 1997, and
the acquisition of the assets of Global Health Systems, Inc. and GHS Management
Services, Inc. (collectively "Global"), subsidiaries of GHS, Inc., in July 1997.
Intangible assets consist of software, customer lists, and goodwill, which are
being amortized on a straight-line basis over three years, three years and
between ten and forty years, respectively.
F-14
<PAGE> 33
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
(f) Software Development Costs
The Company capitalizes software development costs (related to software
developed for resale) incurred subsequent to the establishment of technological
feasibility of the product, including costs incurred to develop upgrades
subsequent to the commercial release of the product. Amortization of software
development costs is determined on a product-by-product basis to be the greater
of the amount computed on a straight-line basis over the expected economic life
of the product, generally estimated to be 36-60 months, or using the ratio of
current gross revenue to total current and anticipated future gross revenue,
whichever is greater. Software development costs are stated at original cost of
$3,755,000 and $2,257,000 less accumulated amortization of $1,735,000 and
$785,000 at October 31, 1997 and 1996, respectively. Amortization expense for
the years ended October 31, 1997, 1996, and 1995 was $992,000, $543,000, and
$587,000, respectively.
In addition, amounts included in software development costs of $3,686,000
and related accumulated amortization of $2,646,000 are attributable to HISCo's
historical balance sheet. The Company acquired the remaining shares of HISCo's
equity which it did not already own in fiscal year 1997.
(g) Revenue Recognition
The Company generally recognizes revenue for financial reporting purposes
when billings are submitted to third-party payors or their third-party
intermediaries as a consequence of services performed by the Company for a
client. Several client contracts contain periodic fee limitations that the
Company believes will be exceeded in the normal course of business. As a result,
the fees allowable under these contracts are recognized on a straight-line basis
over the fee limitation period as services are performed, and amounts billed in
excess of revenue recognized are deferred. Other contracts have sliding fee
scales for which revenue is fairly predictable. For these, the Company
recognizes revenue, at the estimated effective fee rate, ratably over the
client's contract year. Finally, certain contracts are subject to fixed-fee
arrangements covering specified periods, which the Company realizes on a
straight-line basis over the corresponding periods.
The Company recognizes revenue from consulting services as the services
are provided. Revenue from software products sold to customers under license
agreements is deferred and recognized as revenue upon software installation and
satisfaction of significant Company obligations, if any. Revenue from ongoing
maintenance agreements is deferred and recognized as revenue on a straight-line
basis over the periods of the respective maintenance agreements.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that includes the enactment date.
F-15
<PAGE> 34
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, continued
(i) Net Income Per Common Share
Net income per common share has been computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during each year. Common stock equivalents utilizing the
treasury stock method are included in the computation of weighted average number
of shares outstanding for the years ended October 31, 1997, 1996, and 1995. In
1997, the weighted average number of shares outstanding has been reduced
primarily as a result of the effect a lower average market price for the
Company's common stock had in determining the number of outstanding options
included in the weighted average shares outstanding. See Exhibit 11 -
Computation of Earnings Per Share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share". SFAS 128 establishes standards for computing and presenting earnings per
share. In accordance with the effective date of SFAS 128, the Company will adopt
SFAS 128 as of January 31, 1998. SFAS 128 is not expected to have a material
impact on the Company's consolidated financial statements.
(j) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(k) Reclassifications
Certain reclassifications were made to prior year amounts to conform to
the 1997 presentation.
(l) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
With the exception of short-term investments (see Note 1(c)), the carrying
amounts of the Company's financial instruments included in the accompanying
consolidated balance sheets approximate estimated fair value as of October 31,
1997 and 1996.
(m) Stock-Based Compensation
Effective October 31, 1997, the Company adopted the disclosure-only
provision of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," and applies APB opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no employee
compensation costs have been recognized for its stock purchase plan and stock
option plans. See Note 12-Stock-Based Compensation Plans.
(n) Accounting for the Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," the Company reviewed its long-lived assets
and based on the expected future cash flows, determined that there is no
impairment of such assets. In accordance with the effective date of SFAS 121,
the Company adopted SFAS 121 as of October 31, 1997.
F-16
<PAGE> 35
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combinations
(a) Acquisition of the Assets of Global Health Systems Inc. and GHS
Management Services, Inc.
In July 1997, the Company acquired substantially all the assets of Global
for $2,146,000. Global provides computerized record-based processing systems and
services for managed care, public health and ambulatory care facilities.
The acquisition was accounted for using the purchase method and
accordingly the results of operations for Global from the date of acquisition
through October 31, 1997 are included in the accompanying consolidated financial
statements. The $1,701,000 excess of the purchase price over the fair market
value of the assets acquired was recorded as goodwill and is being amortized
over a period not to exceed 20 years. During fiscal year 1997, Global's
operating results were consolidated with those of HSA.
(b) Acquisition of Health Information Systems Corporation
In March 1997, the Company, which owned 43% of the equity of Health
Information Systems Corporation ("HISCo"), acquired the remaining 57% of HISCo's
equity for $3,689,000, net of cash acquired from Welsh, Carson, Anderson & Stowe
("WCAS"), a limited partnership affiliated with WCAS, other affiliates of WCAS,
independent investors, and certain of the Company's executive officers and
directors. HISCo has been renamed HSA Managed Care Systems, Inc. HSA provides
automated business and information solutions, including software and services,
to the bearers of risk in the healthcare industry. At the end of fiscal year
1997, HSA became the MCIS segment of the Company's Software Systems and Services
Division ("Software Division").
The acquisition was accounted for using the purchase method and
accordingly the results of operations of HSA from the date of acquisition
through October 31, 1997 are included in the accompanying consolidated financial
statements. The $2,309,000 excess of the purchase price over the fair market
value of the net assets acquired was recorded as goodwill and is being amortized
over a period not to exceed 20 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and HSA as if the acquisition had
occurred as of the beginning of fiscal year 1997 and 1996, after giving effect
to certain adjustments. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the Company and
HSA constituted a single entity during such periods.
(Unaudited)
Year ended October 31,
1997 1996
---- ----
Revenue $94,582,000 116,892,000
=========== ===========
Net Income $ 1,671,000 7,358,000
=========== ===========
Earnings per share $ 0.09 0.40
=========== ===========
F-17
<PAGE> 36
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Business Combinations, continued
(c) Merger with Quality Standards in Medicine, Inc.
In November 1996, the Company completed the acquisition of Quality
Standards in Medicine, Inc. ("QSM"), a Boston-based company providing clinical
quality management systems, for 260,000 shares of the Company's common stock.
This transaction was accounted for using the pooling of interests method.
Accordingly, the accompanying consolidated financial statements have been
retroactively restated through 1994 for periods presented to include the
financial position, results of operations, and cash flows of QSM. Prior to 1994,
QSM's financial data is unavailable. Founded in 1986, QSM provides hospitals
with sophisticated systems and consulting services to help define and measure
the quality of care. QSM had 1995 revenue of $768,000 and has clients located
primarily in 13 states and the District of Columbia. Operationally, QSM has been
combined with HCm, providing Decision Support Software ("DSS") as part of the
Company's Software Division.
(d) Merger with CDR Associates, Inc.
In April 1996, the Company acquired all the outstanding capital stock of
CDR Associates, Inc. ("CDR") in exchange for 460,000 shares of the Company's
stock in a merger transaction which was accounted for using the pooling of
interests method. Accordingly, the accompanying consolidated financial
statements have been retroactively restated for all periods presented to include
the financial position, results of operations, and cash flows of CDR. The CDR
product makes up part of the Company's Third Party Liability Recovery ("TPLR")
Services in the Company's Transfer Payment Services Division ("Transfer Payment
Division").
(e) Merger with Health Care microsystems, Inc.
In February 1995, the Company acquired all of the outstanding capital
stock of Health Care microsystems, Inc. ("HCm") in a merger transaction which
was accounted for using the pooling of interests method. Accordingly, the
accompanying consolidated financial statements have been retroactively restated
for all periods presented to include the financial position, results of
operations, and cash flows of HCm. In addition, the accompanying consolidated
financial statements reflect certain adjustments to conform the accounting
policies of the two companies. HCm's DSS offerings are included in the Software
Division.
HCm previously used the fiscal year ended December 31 for its financial
reporting. To conform to the Company's October 31 fiscal year end, HCm's
operating results for the period November 1, 1994 through December 31, 1994 have
been included in the operating results of the Company for the fiscal years ended
October 31, 1995 and 1994. The resulting duplication of revenue and net income
of HCm for the period November 1, 1994 through December 31, 1994 amounted to
$2,842,000 and $672,000, respectively, which has been adjusted by a $672,000
charge to retained earnings during the year ended October 31, 1995.
3. Net Accounts Receivable
Net accounts receivable as of October 31, 1997 and 1996 consisted of the
following:
1997 1996
- --------------------------------------------------------------------------------
Trade $39,519,000 42,330,000
Affiliates -- 400,000
- --------------------------------------------------------------------------------
$39,519,000 42,730,000
================================================================================
Trade accounts receivable are reflected net of an allowance for doubtful
accounts of $1,428,000 and $1,682,000 at October 31, 1997 and 1996,
respectively.
F-18
<PAGE> 37
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Fees Held in Escrow
The Company is obligated to maintain a portion of fees received from two
clients in escrow accounts. The Company's obligation to maintain such fees in
escrow terminates at either: (a) the earlier of six years from the dates of
service associated with fees generated and settlement of the client's Medicaid
and/or Medicare audits for each applicable year, and/or (b) termination of the
contract. Due to the 1994 renewal of one client contract that eliminated future
escrow requirements and the Company's fulfillment of its maximum escrow deposit
for the second client, the Company completed its obligation to make escrow
deposits as of October 31, 1994. For the years ended October 31, 1997 and 1996
fees held in escrow were $772,000 and $1,128,000, respectively.
5. Property and Equipment
Property and equipment as of October 31, 1997 and 1996 consisted of the
following:
1997 1996
- --------------------------------------------------------------------------------
Equipment $ 14,697,000 12,639,000
Leasehold improvements 5,728,000 5,527.000
Furniture and fixtures 4,877,000 3,904,000
- --------------------------------------------------------------------------------
25,302,000 22,070,000
Less accumulated depreciation and amortization (17,314,000) (14,247,000)
- --------------------------------------------------------------------------------
$ 7,988,000 7,823,000
================================================================================
Depreciation and amortization expense related to property and equipment
charged to operations for the years ended October 31, 1997, 1996, and 1995 was
$2,819,000, $2,574,000, and $2,185,000, respectively.
6. Goodwill and Other Intangible Assets
Goodwill and other intangible assets as of October 31, 1997 and 1996
consisted of the following:
1997 1996
- --------------------------------------------------------------------------------
Goodwill $ 14,298,000 6,487,000
Less accumulated amortization (1,982,000) (1,240,000)
- --------------------------------------------------------------------------------
12,316,000 5,247,000
================================================================================
Other intangible assets 3,349,000 1,756,000
Less accumulated amortization (2,290,000) (1,746,000)
- --------------------------------------------------------------------------------
$ 1,059,000 10,000
================================================================================
Amortization expense related to intangible assets charged to operations
for the years ended October 31, 1997, 1996, and 1995, was $1,331,000, $204,000,
and $243,000, respectively.
F-19
<PAGE> 38
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of October 31, 1997 and 1996
consisted of the following:
1997 1996
- --------------------------------------------------------------------------------
Accrued compensation $ 4,633,000 6,185,000
Accrued direct project costs 3,282,000 2,330,000
Accrued HHL one-time charges 719,000 3,658,000
Accounts payable and other accrued expenses 7,519,000 7,503,000
- --------------------------------------------------------------------------------
$16,153,000 19,676,000
================================================================================
8. Credit Facility
On June 30, 1997, the Company amended its unsecured revolving credit
facility with a major money center financial institution in order to remain in
compliance with one of the financial covenants of the credit agreement. The
credit facility has a term of three years, carries an unused commitment fee of
20 basis points, and bears interest at the institution's prime lending rate, or
LIBOR plus 5/8%, at the Company's option. The revolving credit facility
contains, among other things, restrictions on additional borrowings, capital
expenditures, leases, sales of assets, and payments of dividends. The revolving
credit facility also contains covenants that require the Company to maintain
minimum tangible consolidated shareholders' equity and limit debt-to-equity and
debt-to-asset relationships as defined in the agreement. The Company's plans to
repurchase up to $10,000,000 in common stock would have brought the Company
below the minimum consolidated tangible net worth test in fiscal year 1998. The
amended credit agreement reduced the credit facility to $30,000,000 and lowered
the minimum consolidated tangible net worth test for fiscal years 1998 and 1999.
The Company had an available balance under this credit facility of $28,400,000
at October 31, 1997 and $39,950,000 at October 31, 1996. See Note 16(c) -
Related Party Transactions.
Cash interest payments including bank charges attributable to the
aforementioned credit facility for the years ended October 31, 1997, 1996, and
1995 were $0, $68,000, and $60,000, respectively.
9. Income Taxes
Income tax benefit (expense) for the years ended October 31, 1997, 1996,
and 1995 was comprised of the following:
1997 1996 1995
- --------------------------------------------------------------------------------
Current tax expense:
Federal $ (716,000) (4,264,000) (4,677,000)
State and local (568,000) (1,734,000) (2,272,000)
- --------------------------------------------------------------------------------
(1,284,000) (5,998,000) (6,949,000)
- --------------------------------------------------------------------------------
Deferred tax benefit (expense):
Federal 1,136,000 448,000 (1,285,000)
State and local 499,000 (24,000) 82,000
- --------------------------------------------------------------------------------
1,635,000 424,000 (1,203,000)
- --------------------------------------------------------------------------------
Income tax benefit (expense), net $ 351,000 (5,574,000) (8,152,000)
================================================================================
F-20
<PAGE> 39
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes, continued
A reconciliation of the income tax benefit (expense) to the federal
statutory rate of 34% follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax benefit (expense):
Computed at Federal Statutory rate $ (588,000) (34.0)% (4,374,000) (34.0)% (5,819,000) (34.0)%
State and local tax expense, net of
federal benefit (46,000) (2.7)% (1,160,000) (9.0)% (1,445,000) (8.4)%
Amortization of goodwill (70,000) (4.0)% (55,000) (0.4)% (55,000) (0.3)%
Merger related costs (183,000) (10.6)% (157,000) (1.2)% (355,000) (2.1)%
Equity loss in affiliate (88,000) (5.1)% 0 0.0% 0 0.0%
Municipal interest 258,000 14.9% 233,000 1.8% 216,000 1.3%
IRS audit resolution 1,093,000 63.2% 0 0.0% 0 0.0%
CDR S Corporation income 0 0.0% 325,000 2.5% 0 0.0%
QSM's corporate loss 0 0.0% (304,000) (2.4)% (217,000) (1.3)%
Other, net (25,000) (1.4)% (82,000) (0.6)% (477,000) (2.8)%
- ---------------------------------------------------------------------------------------------------------
Total income tax benefit (expense) $ 351,000 20.3% (5,574,000) (43.3)% (8,152,000) (47.6)%
=========================================================================================================
</TABLE>
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement and tax bases of assets
and liabilities. The types of temporary differences that give rise to the
deferred tax liability, and the effect on the deferred income tax benefit
(expense) of changes in those temporary differences, are as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Accounts receivable $ 3,298,000 (3,294,000) (1,609,000)
Fees held in escrow 188,000 108,000 117,000
Depreciable and amortizable assets 12,000 397,000 (400,000)
Allowance for doubtful accounts (206,000) 653,000 0
Unbilled costs 259,000 (156,000) (6,000)
Accounts payable and other accrued expenses (1,273,000) (170,000) 403,000
Deferred revenue (196,000) 275,000 (543,000)
Deferred rent 14,000 237,000 72,000
Contract termination contingency 1,093,000 479,000 0
HHL one-time charges (1,434,000) 2,070,000 0
Other (120,000) (175,000) 763,000
- --------------------------------------------------------------------------------
Deferred income tax benefit (expense) $ 1,635,000 424,000 (1,203,000)
================================================================================
F-21
<PAGE> 40
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes, continued
Temporary differences that give rise to a significant portion of the
deferred tax assets and deferred tax liabilities at October 31, 1997 were as
follows:
Deferred tax assets:
Accounts receivable/deferred items $ 1,061,000
Property and equipment 2,838,000
HHL one-time charges 689,000
Allowance for doubtful accounts 573,000
Accounts payable and accrued expenses 367,000
Net operating loss carryforward 1,396,000
Other 692,000
------------
Total deferred tax assets before valuation 7,616,000
Less: Valuation allowances (1,396,000)
------------
Total deferred tax assets after valuation $ 6,220,000
============
Deferred tax liabilities:
Accounts receivable/deferred items $ 7,436,000
Property and equipment 892,000
Other 2,080,000
------------
Total deferred tax liabilities $ 10,408,000
============
Net current deferred tax liabilities $ (6,909,000)
Net noncurrent deferred tax assets (liabilities) 2,721,000
------------
Total net deferred tax liabilities $ (4,188,000)
============
The valuation allowance for the years ended October 31, 1997 and 1996 were
$1,396,000 and $0, respectively. At October 31, 1997, the Company had a net
operating loss carryforward for federal income tax purposes of $1,396,000 which
is available to offset future federal taxable income of the Company's QSM
subsidiary through 2012. The Company's management believes that the utilization
of such net operating loss carryforward is in doubt.
Cash payments attributable to income taxes for the years ended October 31,
1997, 1996, and 1995 were $1,263,000, $5,896,000, and $6,355,000, respectively.
The Company has had significant disqualifying disposition transactions
during the three years ended October 31, 1997. Disqualifying dispositions are
non-cash transactions and are excluded from the statements of cash flows. The
tax benefit derived from disqualifying dispositions increased shareholder's
equity by $2,190,000, $1,143,000, and $477,000 during the fiscal years ended
October 31, 1997, 1996, and 1995.
10. Treasury Stock
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. Pursuant to this authorization, the
Company began repurchasing and expects to continue repurchasing these shares
from time to time on the open market or in negotiated transactions at prices
deemed appropriate by the Company. Purchased shares are deposited in the
Company's treasury and are to be used for general corporate purposes. As of
October 31, 1997, the Company had repurchased in the open market 314,500 shares
having an aggregate purchase price of $1,863,000.
F-22
<PAGE> 41
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Profit Sharing and 401(k) Plan
The Company has a discretionary defined contribution profit sharing plan
in which a substantial number of its employees participate. For the years ended
October 31, 1997, 1996, and 1995, profit sharing expense was $197,000, $944,000,
and $800,000 respectively.
Effective January 1, 1992, the Company amended its profit sharing plan to
include a 401(k) plan, which permits an employee to contribute a portion of the
employee's compensation, subject to certain limitations. At its discretion, the
Company may make annual contributions to the 401(k) plan for the benefit of
participating employees. For the years ended October 31, 1997, 1996, and 1995,
401(k) plan expense was $804,000, $611,000, and $543,000, respectively. See Note
18-Subsequent Events.
12. Stock-Based Compensation Plans
At October 31, 1997, the Company had three stock-based compensation plans,
which are described below. The Company has adopted the disclosure-only
provisions of SFAS 123 and applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no employee
compensation costs have been recognized for its stock purchase plan and stock
option plans. Had compensation costs for the Company's three stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
income and earnings per share would have been adjusted to the pro forma amounts
indicated below:
1997 1996
- --------------------------------------------------------------------------------
Net income As reported $ 2,081 $ 7,291
Pro forma 837 6,630
Net income per share As reported 0.12 0.39
Pro forma 0.05 0.36
- --------------------------------------------------------------------------------
The effect noted above by applying the disclosure-only provisions of SFAS
123 may not be representative of the effect of reporting net income in future
years.
The fair value of the stock options granted in 1997 and 1996 is estimated
at the grant date using the Black-Scholes option-pricing model with the
following assumptions for 1997 and 1996; dividend yield of 0%; expected
volatility of 51.4%; a risk-free interest rate of 5.9%; and expected lives of 5
years.
Effective May 31, 1989, the Company adopted the Health Management Systems,
Inc. Stock Option and Restricted Stock Purchase Plan (the "Plan") under which:
(a) options can be granted to purchase shares of the Company's common stock at
an exercise price equal to (incentive stock options) or less than (non-qualified
stock options) the estimated fair market value of the Company's common stock, or
(b) rights can be granted in the form of an award to purchase shares of the
Company's common stock at a price equal to, more than, or less than the
estimated fair market value of the Company's common stock. Subsequent amendments
to the Plan, which have been approved by shareholders, have increased the number
of shares available to be issued under the Plan to 6,750,000 shares.
The stock options become exercisable and expire at various dates through
November 2007. As of October 31, 1997, no stock appreciation rights or stock
purchase awards had been granted. Fiscal year 1997 stock option awards totaling
484,004 options were granted in November 1997.
F-23
<PAGE> 42
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stock-Based Compensation Plans, continued
The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP")
was adopted by the Board of Directors on November 30, 1994, which action was
subsequently approved by shareholders at the Annual Meeting of Shareholders held
on March 7, 1995. Under the NEDP, directors of the Company who are not employees
of the Company or its subsidiaries are granted options to purchase 1,500 shares
of common stock of the Company during the fourth fiscal quarter of each year
commencing with fiscal year 1995. Options for the purchase of up to 112,500
shares of common stock may be granted under the NEDP and the Company will
reserve the same number of shares for issuance. The options available for grant
are automatically increased to the extent any granted options expire or
terminate unexercised.
Presented below is a summary of the stock option plans for the years ended
October 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average exercise average exercise average exercise
Shares price Shares price Shares price
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at 1,962,752 $ 12.47 2,778,584 $ 10.51 2,147,787 $ 6.90
beginning of year
Granted 1,570,794 9.09 135,828 27.63 926,479 16.97
Exercised (69,424) 3.90 (794,688) 7.10 (272,663) 3.96
Cancelled (1,540,342) 15.23 (156,972) 17.48 (23,019) 11.92
- ------------------------------------------------------------------------------------------------------------------
Options outstanding at
end of year 1,923,780 $ 7.82 1,962,752 $ 12.47 2,778,584 $ 10.51
==================================================================================================================
Weighted average
grant-date fair value
of options granted $ 9.09 $ 26.31 $ 16.97
==================================================================================================================
</TABLE>
The following table summarizes information for stock options outstanding
at October 31, 1997:
<TABLE>
<CAPTION>
Number Weighted average Weighted Weighted
Range of outstanding remaining average exercise Number average exercise
exercise prices as of 10/31/97 contractual life price exercisable price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.43 - 5.88 1,080,794 8.91 $5.50 341,423 $4.69
6.67 - 10.06 605,068 6.16 8.27 579,443 8.30
15.31 - 70.51 237,918 8.16 17.24 182,376 17.33
- ---------------------------------------------------------------------------------------------------
$0.43 - 70.51 1,923,780 7.95 $7.82 1,103,242 $8.67
===================================================================================================
</TABLE>
On May 28, 1997, the Board of Directors authorized a stock option exchange
program for employee participants in 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.
Approximately 1,600,000 Old Options were eligible to be exchanged for 900,000
New Options. Certain executive officers of the Company were either
F-24
<PAGE> 43
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Stock-Based Compensation Plans, continued
ineligible to participate, or had limitations on their ability to participate in
the stock option exchange. Eligible employees had approximately one month's time
until June 30, 1997, to exchange their Old Options for New Options. At the end
of the exchange program, 1,209,100 Old Options were exchanged for 606,300 New
Options.
On May 28, 1993, the Board of Directors adopted the Health Management
Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently
approved by shareholders at the Annual Meeting of Shareholders held on February
28, 1994. The Company has reserved for issuance up to 1,125,000 shares of common
stock pursuant to the ESPP, which is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code of
1986. The plan provides that all full-time employees of the Company and its
subsidiaries may elect to participate in the ESPP without regard to length of
service if their customary employment is a minimum of 20 hours per week. For the
years ended October 31, 1997 and 1996, the Company had sold 95,332 and 163,426
shares, respectively, of common stock pursuant to the ESPP for aggregate
consideration of $709,000 and $2,332,000, respectively which activity is
reflected in the accompanying consolidated financial statements. The
weighted-average fair value of those purchase rights granted in 1997 and 1996,
respectively, based on the Black-Scholes model were $10.68 and $7.77,
respectively.
13. Business Segment Information
The Company delivers software and services that comprise three business
segments: Transfer Payment Division, Software Division, and Other services
comprised of Electronic Data Interchange ("EDI"). The Transfer Payment Division
includes the Company's RCR, CAMS, and TPLR product offerings. The Software
Division includes the Company's DSS and MCIS product offerings. In fiscal year
1998, EDI will be included as an operating unit in the Transfer Payment
Division.
<TABLE>
<CAPTION>
Transfer Software
Payment Division Division Other Consolidated
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenue $ 49,388,000 34,295,000 5,834,000 89,517,000
Operating (loss) income (3,871,000) 3,657,000 45,000 (169,000)
Total assets 81,258,000 27,565,000 871,000 109,694,000
Depreciation and amortization 2,420,000 2,581,000 141,000 5,142,000
Capital expenditures 902,000 2,990,000 68,000 3,960,000
- ---------------------------------------------------------------------------------------------
1996
Revenue $ 73,124,000 19,510,000 8,692,000 101,326,000
Operating income 9,302,000 2,497,000 1,450,000 13,249,000
Total assets 95,368,000 12,510,000 1,765,000 109,643,000
Depreciation and amortization 2,403,000 736,000 182,000 3,321,000
Capital expenditures 4,067,000 1,535,000 5,000 5,607,000
- ---------------------------------------------------------------------------------------------
1995
Revenue $ 66,385,000 15,888,000 8,222,000 90,495,000
Operating income 14,183,000 1,825,000 1,209,000 17,217,000
Total assets 75,181,000 10,763,000 2,157,000 88,101,000
Depreciation and amortization 2,106,000 775,000 134,000 3,015,000
Capital expenditures 1,240,000 853,000 260,000 2,353,000
- ---------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 44
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments
The Company leases office space and equipment under operating leases which
expire at various dates. The lease agreements provide for rent escalations.
Total rent expense for the years ended October 31, 1997, 1996, and 1995,
including escalations, was $7,634,000, $6,313,000, and $5,275,000, respectively.
Minimum annual lease payments for each of the next five years ending
October 31 and thereafter are as follows:
Year Payments
----------------------------------------------
1998 $ 5,929,000
1999 5,445,000
2000 3,978,000
2001 3,781,000
2002 3,588,000
Thereafter 7,368,000
----------------------------------------------
Total $ 30,089,000
==============================================
15. Significant Contracts
The Company's largest client is a group of healthcare facilities under the
governance of Los Angeles County, for which the Company provides RCR and CAMS,
including managed care services. During the fiscal years ended October 31, 1997,
1996, and 1995, this group accounted for 12%, 12%, and 15%, respectively, of the
Company's total revenues. The Company's second largest client is Columbia//HCA
("C/HCA"), for which the Company provides DSS. This client accounted for 12%,
8%, and 4%, respectively, of the Company's total revenue in 1997, 1996, and
1995. The Company provides its services to C/HCA principally under a series of
12-month work order agreements, each expiring at different times. There is no
assurance that any of these agreements will be renewed.
The Company's ten largest clients accounted for approximately 53% of
the Company's revenue in fiscal year 1997. Five of the Company's ten largest
contracts with these clients expire in fiscal year 1998. There can be no
assurance that any of these contracts will be renewed.
16. Related Party Transactions
(a) HHL Financial Services, Inc.
Effective January 31, 1992, the Company entered into a management and data
processing services agreement ("Management Agreement") with HHL Financial
Services, Inc. ("HHL"). Under the Management Agreement, the Company provided HHL
with executive management, data processing, and technical support services
through June 30, 1996, subject to certain termination and renewal provisions.
Effective July 1, 1993, the Management Agreement was amended ("Outsourcing
Amendment") to include the Company's provision of comprehensive data processing
and information management services to HHL. The five-year term of the
Outsourcing Amendment called for fixed annual fees that range from $6,700,000 to
$9,500,000 subject to upward adjustment in the event of material changes in the
scope of service and/or growth in HHL revenue in excess of 7% annually.
F-26
<PAGE> 45
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Related Party Transactions, continued
On August 21, 1996, the Company announced a one-time charge and revenue
reversal pertaining to its relationship with HHL, which was in default of the
Outsourcing Amendment. The Company's one-time charge related to (i) the full
reservation of prior period accounts receivable of $2,881,000, (ii) accrual of
net costs to be incurred in excess of anticipated revenue relating to the
Company's continued contractual obligation with HHL of $3,823,000, and (iii) the
write-off of its investment in HHL of $927,000, resulting in a total one-time
charge of $7,631,000. Additionally, revenue of $2,180,000 earned and initially
recorded in the third quarter was reversed. The result of the total write-off
and revenue reversal recognized in the third quarter of $9,811,000 translates to
an after-tax impact of $5,563,000, or $0.30 per share.
On October 29, 1996, the Company entered into an agreement with HHL and
HHL's primary financial creditor providing for mutual general releases and the
cessation of all claims. The Company also settled its liabilities due to HHL of
$1,950,000 for a payment of $870,000 resulting in the reversal of $1,080,000 in
liabilities as an offset to other operating expenses. In addition, the Company
agreed to provide, for a period of up to 18 months, a reduced level of service
to HHL in exchange for payment in advance. During this 18 month period, HHL has
the right to lower the level of service requested and therefore lower the amount
paid in advance. Also, HHL has the right to cancel the service completely on 30
days prior written notice.
As of October 31, 1996, the Company had incurred and offset $165,000 in
net expenses for its contractual obligations with HHL. During 1997, the Company
had incurred and offset $2,739,000 in net expenses for its contractual
obligations with HHL. The remaining accrual of $719,000 is scheduled to be
offset over the next five years against a contractual obligation of the Company
to a third party.
During the years ended October 31, 1997, 1996, and 1995, the Company
received approximately $1,849,000, $5,446,000, and $8,877,000 in fees from HHL
related to these agreements and in connection with jointly executed client
projects. During the same periods HHL charged the Company expenses for services
totaling $250,000, $1,557,000, and $1,337,000, respectively, in connection with
work done on jointly executed client projects.
(b) HISCo
The Company and HISCo entered into an agreement, dated as of October 31,
1995 (the "HISCo Agreement"), pursuant to which the Company was to provide HISCo
with certain services ("Basic Services"), including executive, acquisition
support, and corporate support services. For these Basic Services, the Company
was entitled to receive a fee, payable monthly, calculated at the Company's then
current standard hourly rates established for internal allocations plus 20%. The
term of the HISCo Agreement was to continue until the later of (i) June 30, 2000
or (ii) the expiration of any outstanding work order related to additional
services. The Company believes that the terms of the HISCo Agreement were fair
and reasonable and were no less favorable to the Company than those that could
have been obtained with respect to comparable engagements with independent third
parties. In fiscal years 1997 and 1996, the Company received approximately
$331,000 and $161,000 in fees from HISCo for services provided pursuant to the
HISCo Agreement. In fiscal years 1997 and 1996, HISCo received $0 and $569,000
in fees for software development services provided to the Company pursuant to
the HISCo agreement. These software development fees were expensed by the
Company.
F-27
<PAGE> 46
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Related Party Transactions, continued
In March 1997, the Company, which owned 43% of HISCo's equity, acquired
the remaining 57% of HISCo's equity for $3,689,000, net of cash acquired. In
connection with this acquisition, the HISCo agreement was terminated and HISCo
merged with its sole operating subsidiary, Health Systems Architects, Inc. and
was renamed HSA Managed Care Systems, Inc. HSA provides automated business and
information solutions, including software and services, to the bearers of risk
in the healthcare industry. The acquisition was accounted for using the purchase
method and accordingly the results of operations of HSA from the date of
acquisition through October 31, 1997 are included in the accompanying financial
statements. The $2,309,000 excess of the purchase price over fair market value
of the net assets acquired was recorded as goodwill and is being amortized over
a period not to exceed 20 years.
In connection with the sale of their respective equity interests in HISCo
to the Company, certain officers and directors of the Company derived gross
proceeds as follows: Paul J. Kerz, $101,000; Laurence B. Simon, $62,000; Donald
J. Staffa, $31,000; Russell L. Carson, $79,000; and Richard H. Stowe, $30,000.
The Company's total revenue from related parties was $331,000, $5,607,000
and $9,422,000 in 1997, 1996, and 1995, respectively.
(c) Robert V. Nagelhout
Effective April 16, 1997, the Company guaranteed all of the obligations of
Robert V. Nagelhout arising under a $1,600,000 loan made to Mr. Nagelhout by the
financial institution with which the Company has an outstanding credit facility.
Mr. Nagelhout is a director of the Company and its Executive Vice President and
Chief Operating Officer. The loan is payable on a monthly basis as to interest
only, at an interest rate equal to the prime rate announced from time to time by
the financial institution. The loan will mature on April 16, 1999, at which time
the entire unpaid principal balance of the loan, together with accrued and
unpaid interest, will become due and payable. The amount of the loan reduced the
available borrowings under the Company's credit facility.
Mr. Nagelhout has granted the Company a first security interest in 500,000
shares of HMS common stock owned by him to secure the Company's guaranty of his
loan obligations.
F-28
<PAGE> 47
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Quarterly Financial Data (unaudited)
The table below summarizes the Company's unaudited quarterly operating
results for its last three fiscal years.
<TABLE>
<CAPTION>
First Second Third Fourth
($ In Thousands, Except Earnings Per Common Share) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Revenue $22,272 20,108 22,103 25,034
Cost of services 18,945 22,319 23,063 24,028
- ----------------------------------------------------------------------------------------------------
Operating margin (loss) before amortization of intangibles 3,327 (2,211) (960) 1,006
Operating income (loss) 3,281 (2,450) (1,472) 472
Net income (loss) 1,803 281 (603) 600
Net income (loss) per common share $ 0.10 0.02 (0.03) 0.03
- ----------------------------------------------------------------------------------------------------
1996:
Revenue $25,619 25,707 25,935 24,065
Cost of services 19,920 20,238 28,555 19,160
- ----------------------------------------------------------------------------------------------------
Operating margin (loss) before amortization of intangibles 5,699 5,469 (2,620) 4,905
Operating income (loss) 5,644 5,414 (2,671) 4,862
Net income (loss) 3,610 3,102 (2,097) 2,676
Net income (loss) per common share $ 0.20 0.17 (0.12) 0.14
- ----------------------------------------------------------------------------------------------------
1995:
Revenue $21,136 21,174 23,236 24,949
Cost of services 16,789 17,106 19,147 19,993
- ----------------------------------------------------------------------------------------------------
Operating margin (loss) before amortization of intangibles 4,347 4,068 4,089 4,956
Operating income 4,267 4,013 4,035 4,902
Net income 1,640 2,196 2,268 2,858
Net income per common share $ 0.10 0.13 0.13 0.16
- ----------------------------------------------------------------------------------------------------
</TABLE>
18. Subsequent Events
Effective October 31, 1997, the Company terminated its profit sharing
plan, including the 401(k) plan. A replacement, but identical, 401(k) plan was
established as of November 1, 1997. Assets of the terminated profit sharing plan
will be distributed to plan participants subsequent to approval by the IRS..
19. Legal
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 and Exchange Act of 1934 arising out of
allegedly false and misleading statements. These lawsuits, which seek damages in
an unspecified amount, have been consolidated into a single proceeding captioned
In re Health Management Systems, Inc. Securities Litigation (97 Civ. 1865 (HB))
and a Consolidated Amended Complaint has been filed. Defendants have made a
motion to dismiss the Consolidated Amended Complaint. The motion was submitted
to the Court on December 18, 1997 following oral argument and is sub judice.
Discovery has been stayed pending a determination of the Company's motion to
dismiss. The Company believes it has meritorious defenses to the claims asserted
against it and intends to vigorously defend this litigation should the pending
motion to dismiss not be granted. It is too early to form any opinion as to the
eventual outcome of this matter.
F-29
<PAGE> 48
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands, Except Per Share Amounts)
Allowance for doubtful accounts:
Balance, October 31, 1994 $ 269,000
Provision 111,000
Recoveries --
Charge-offs (84,000)
-----------
Balance, October 31, 1995 296,000
Provision 4,485,000
Recoveries --
Charge-offs (3,099,000)
-----------
Balance, October 31, 1996 1,682,000
Provision 538,000
Recoveries --
Charge-offs (792,000)
-----------
Balance, October 31, 1997 $ 1,428,000
===========
F-30
<PAGE> 49
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number
- -------
2.1 Agreement and Plan of Merger dated as of January 18, 1995 among
Health Management Systems, Inc., HCm Acquisition Corp., and all the
shareholders of Health Care microsystems, Inc., as amended
(Incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended October 31, 1994 and to
Exhibit 10.2 to the Company's Registration Statement on Form S-3,
file no. 33-91518)
2.2 Agreement and Plan of Merger, dated as of April 29, 1996 among
Health Management Systems, Inc., CDR Acquisition Corp., CDR
Associates, Inc., and all the shareholders of CDR Associates, Inc.
(Incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated April 29, 1996)
2.2(i) First Amendment to Agreement and Plan of Merger, dated as of April
29, 1996, among Health Management Systems, Inc., CDR Acquisition
Corp., CDR Associates, Inc., and all the shareholders of CDR
Associates, Inc. (Incorporated by reference to Exhibit 2.2(i) to
the Company's Annual Report on Form 10-K for the year ended October
31, 1996 [the 1996 Form 10-K].)
2.3 Agreement and Plan of Merger, dated as of September 3, 1996, by and
among Health Management Systems, Inc., QSM Acquisition Corporation
and Quality Standards in Medicine, Inc. (Incorporated by reference
to Exhibit 2.1 to the Company's Registration Statement on Form S-4,
File No. 333-13513 [the S-4])
2.3(i) Amendment to Agreement and Plan of Merger, dated as of November 20,
1996, by and among Health Management Systems, Inc., QSM Acquisition
Corporation, and Quality Standards in Medicine, Inc. (Incorporated
by reference to Exhibit 10.1 to Post-Effective Amendment No. 1 to
the S-4)
2.4 Form of Escrow Agreement by and among Health Management Systems,
Inc., Quality Standards in Medicine, Inc., Coleman & Rhine LLP,
Rodrigo Rocha, William B. Munier and Peter B. Stovell (Incorporated
by reference to Exhibit 2.2 to the S-4)
2.5 Agreement and Plan of Merger, dated as of March 18, 1997, by and
among Health Management Systems, Inc., HISCo Acquisition Corp.,
Health Information Systems Corporation and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended April
30, 1997 [the April 1997 Form 10-Q].)
2.6 Asset Purchase Agreement, dated as of March 10, 1997, by and among
GHS, Inc., Global Health Systems, Inc. GHS Management Services,
Inc., Health Management Systems, Inc. and Global Health Acquisition
Inc. (Incorporated by reference to Exhibit 2.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997
[the July 1997 Form 10-Q].)
2.6(i) Assignment and Assumption Agreement, dated as of July 15, 1997,
between Global Health Acquisition Corp. and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 2.2 to the July
1997 Form 10-Q.)
17
<PAGE> 50
Exhibit
Number
- -------
3.1 Amended and Restated Certificate of Incorporation of Health
Management Systems, Inc. (Incorporated by reference to Exhibit 3.1
to Amendment No. 1 [Amendment No. 1] to the Company's Registration
Statement on Form S-1, File No. 33-4644 [the Registration
Statement] and Exhibit 3(i) to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1996 [the January 1996
Form 10-Q])
3.2 By-Laws of Health Management Systems, Inc. (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1)
10.1 Financial Management Services Agreement, dated August 1, 1989,
between Health Management Systems, Inc. and the County of Los
Angeles (Incorporated by reference to Exhibit 10.2 to the
Registration Statement)
*10.2(i) Master Software License Agreement, dated June 29, 1992, by and
between Health Care microsystems, Inc. and Healthtrust, Inc. - The
Hospital Company.
*10.2(ii) Amendment, dated as of September 1, 1995, to Master Software
License, dated June 29, 1992, by and between Health Care
microsystems, Inc. and Columbia/HCA.
10.3(i) Health Management Systems, Inc. Stock Option and Restricted Stock
Purchase Plan, as amended (Incorporated by reference to Exhibit
10.3 to the Registration Statement, to Exhibit 10.3 to Amendment
No. 2 [Amendment No. 2] to the Registration Statement, Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1994 [the January 1994 Form 10-Q] and Exhibit to
the January 1996 Form 10-Q.)
*10.3(ii) Amendment No. 6, dated as of December 2, 1997, to the Health
Management Systems, Inc., Stock Option and Restricted Stock
Purchase Plan
10.3(iii) Health Management Systems, Inc. Employee Stock Purchase Plan, as
amended (Incorporated by reference to Exhibit 10.2 to the January
1994 Form 10-Q and to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1995 [the
January 1995 Form 10-Q])
10.3(iv) Health Management Systems, Inc. 1995 Non-Employee Director Stock
Option Plan (Incorporated by reference to Exhibit 10.2 to the
January 1995 Form 10-Q)
10.3(v) Health Management Systems, Inc. Profit Sharing Plan (Incorporated
by reference to Exhibit 10.3(iv) to the Company's Annual Report on
Form 10-K for the year ended October 31, 1995 [the 1995 Form 10-K])
10.3(vi) Health Management Systems, Inc. Profit Sharing Plan, as amended
(Incorporated by reference to Exhibit 10.3(vi) to the 1995 Form
10-K)
10.4(i) Credit Agreement and Guaranty Among Health Management Systems,
Inc., as Borrower, Accelerated Claims Processing, Inc., Quality
Medi-Cal Adjudication, Incorporated, Health Care microsystems,
Inc., and CDR Associates, Inc., as Guarantors, and The Chase
Manhattan Bank, as Bank (Incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1996 [the July 1996 Form 10-Q])
18
<PAGE> 51
Exhibit
Number
- -------
10.4(ii) First Amendment to Credit Agreement and Guaranty and Waiver
(Incorporated by reference to Exhibit 10.1(i) to the July 1996 Form
10-Q)
10.4(iii) Guaranty Agreement, dated as of April 16, 1997, between Health
Management Systems, Inc. and The Chase Manhattan Bank (Incorporated
by reference to Exhibit 10.1 to the April 1997 Form 10-Q)
10.4(iv) Second Amendment to Credit Agreement and Guaranty, dated as of
April 16, 1997, among Health Management Systems, Inc., Accelerated
Claims Processing, Inc., Quality Medical Adjudication,
Incorporated, Health Care microsystems, Inc., CDR Associates, Inc.,
and The Chase Manhattan Bank (Incorporated by reference to Exhibit
10.1 to the July 1997 Form 10-Q)
10.4(v) Third Amendment to Credit Agreement and Guaranty, dated as of June
30, 1997, among Health Management Systems, Inc., Accelerated Claims
Processing, Inc., Quality Medical Adjudication, Incorporated,
Health Care Microsystems, Inc., CDR Associate, Inc., HSA Managed
Care Systems, Inc., Quality Standards in Medicine, Inc. and The
Chase Manhattan Bank (Incorporated by reference to Exhibit 10.1 to
the July 1997 Form 10-Q)
10.5(i) Leases, dated February 1, 1980, September 24, 1981, September 24,
1982, and January 6, 1986, as amended, between 401 Park Avenue
South Associates and Health Management Systems, Inc. (Incorporated
by reference to Exhibit 10.13 to the Registration Statement and to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1994)
10.5(ii) Lease, dated as of March 15, 1996, by and between 387 PAS
Enterprises, as Landlord, and Health Management Systems, Inc., as
Tenant (Incorporated by reference to Exhibit 10.2 to the July 1996
Form 10-Q)
10.6 Lease, dated September 1996, by and between Pacific Corporate
Towers LLC, Health Management Systems, Inc., and Health Care
microsystems, Inc. (Incorporated by reference to Exhibit 10.13 to
the 1996 Form 10-K)
10.7 Master Lease Agreement, effective as of December 1, 1991, between
Hitachi Data Systems Credit Corporation and Health Management
Systems, Inc. (Incorporated by reference to Exhibit 10.15 to the
Registration Statement)
10.8 Services Agreement, dated as of October 31, 1995, between HISCo and
Health Management Systems, Inc. (Incorporated by reference to
Exhibit 10.19(iv) to the 1995 Form 10-K)
10.9 Agreement and Release of Claims dated as of October 29, 1996, by
and among HHL Financial Services, Inc., Health Management Systems,
Inc., and the First National Bank of Chicago (Incorporated by
reference to Exhibit 10.12 to the 1996 Form 10-K)
10.10 Security Agreement, dated as of April 16, 1997, by and between
Robert V. Nagelhout and Health Management Systems, Inc.
(Incorporated by reference to Exhibit 10.3 to the April 1997 Form
10-Q)
10.11 Promissory note, dated as of April 16, 1997, by and between Robert
V. Nagelhout and The Chase Manhattan Bank. (Incorporated by
reference to Exhibit 10.4 to the April 1997 Form 10-Q)
19
<PAGE> 52
Exhibit
Number
- -------
10.12 Consulting Service Agreement, dated as of May 1, 1997, by and
between Improved Funding Techniques, Inc. and Health Management
Systems, Inc. (Incorporated by reference to Exhibit 10.2 to the
July 1997 Form 10-Q)
10.13 Employment Agreement, as of May 1, 1997, by and between Joseph H.
Czajkowski and CDR Associates, Inc., a wholly-owned subsidiary of
Health Management Systems, Inc. (Incorporated by reference to
Exhibit 10.3 to the July 1997 Form 10-Q)
10.14 Employment Agreement, as of May 1, 1997, by and between Jeffrey R.
Donnelly and CDR Associates, Inc., a wholly-owned subsidiary of
Health Management Systems, Inc. (Incorporated by reference to
Exhibit 10.4 to the July 1997 Form 10-Q)
*11.0 Computation of Earnings per Share
*21.1 List of subsidiaries of Health Management Systems, Inc.
*23.1 Consent of KPMG Peat Marwick LLP, independent certified public
accountants
24.2 Consent of Ernst & Young LLP, independent certified public
accountants. (Incorporated by reference to Exhibit 24.2 to the
October 1996 Form 10-K)
24.3 Report of independent certified public accountants on the financial
statements of Health Information Systems Corporation as of and for
the period ended October 31, 1996 (Incorporated by reference to
Exhibit 24.3 to the 1996 Form 10-K)
24.5 Report of independent certified public accountants on the financial
statements of Health Care microsystems, Inc. as of December 31,
1994 and 1993 and for the years then ended (Incorporated by
reference to Exhibit 24.5 to the 1995 Form 10-K
*27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for informational purposes only
* Filed herewith
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EXHIBIT 10.2(i)
MASTER SOFTWARE LICENSE
This Master Software License (the "Agreement") is made and entered
into as of the 29th day of June, 1992 (the "Effective Date"), by and between
Health Care microsystems, Inc. (the "Licensor"), a California corporation having
its principal place of business at 3655 Torrance Boulevard, Suite 350, Torrance,
California 90503, and Healthtrust, Inc. The Hospital Company (the "Licensee"), a
Delaware corporation having its principal place of business at 4525 Harding
Road, Nashville, Tennessee 37205.
WHEREAS, Licensor desires to license to Licensee certain Software
(defined below) and Documentation (defined below);
WHEREAS, Licensee desires to acquire from Licensor a perpetual,
non-exclusive, paid-up, royalty-free, worldwide license for the Software and the
Documentation and to sublicense the Software and the Documentation to health
care providers owned or operated by or affiliated with Licensee; and
WHEREAS, Licensee desires to have Licensor perform software support
and maintenance services in connection with the Software and the Documentation
and Licensor desires to perform such services pursuant to the terms and
conditions contained herein.
NOW, THEREFORE, in consideration of the mutual premises contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Definitions
1.1 "Affiliated User" is defined to include any hospital, clinic or
other health care provider that Licensee operates or in which Licensee holds a
50% or greater equity interest.
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1.2 "Documentation" is defined to include any user manuals, training
materials, specifications and other material related to the Software.
1.3 "Software" is defined as the software furnished by Licensor to
Licensee, including any related interfaces and any custom software, as more
fully described in Schedule A annexed hereto, which is incorporated herein by
reference.
2. Software License
2.1 Licensor hereby grants to Licensee, subject to the terms and
conditions hereinafter set forth, a perpetual, non-exclusive, royalty-free,
worldwide license to use the Software, and to sublicense use of the Software to
Affiliated Users in accordance with the terms and conditions of license
agreements in the form attached hereto as Exhibit 1 (the "User License
Agreements"), solely for the data processing needs of Licensee and Affiliated
Users, including without limitation Licensee's operation of a central data
center. The license granted hereunder includes without limitation the right to
reproduce or copy all or any portion of the Software in machine-readable or
printed form as determined by Licensee to be reasonably required for its own
internal data processing needs and archival and backup purposes, and to copy and
distribute run units of the Software for use by Affiliated Users that sublicense
the Software under User License Agreements. Except as provided in this Section
2.1 and in Section 15, the license granted hereunder shall be nontransferable.
Subject to Section 18, the license granted hereunder shall be terminable in the
event that Licensee fails to make any payment when due of the license fees in
accordance with Schedule A.
2.2 Licensee acknowledges that portions of the Software licensed
under this Agreement are owned by Micro Data Base Systems, Inc. ("MDBS"),
Programmed Intelligence, Inc. ("PI"), or Information Resources, Inc. ("IRI").
Licensee further acknowledges that the MDBS, PI and IRI portions of the Software
may not be used by Licensee as stand-alone software products, but only as
component parts of the Software.
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2.3 The license for the Software and the Documentation granted
hereunder and the terms and conditions of this Agreement shall cover all custom
software and related documentation developed on a time-and-materials or flat-fee
basis by Licensor at Licensee's request.
3. Documentation License
Licensor hereby grants to Licensee a perpetual, non-exclusive,
royalty-free, worldwide license to use the Documentation in conjunction with
Licensee's use of the Software and to sublicense use of the Documentation to
Affiliated Users in conjunction with Affiliated Users' use of the Software.
Licensor will be the primary source for the Documentation, but, as a
convenience, Licensor further grants Licensee the right to reproduce and
distribute copies of the Documentation for its own use and for use by Affiliated
Users. In the event Licensee exercises the right to reproduce and distribute
copies of the Documentation or any portion thereof, such copies shall include
Licensor's copyright notices; provided, however, that this provision shall not
apply to de minimus copying for the personal convenience of employees of
Licensee or Affiliated Users. The Documentation shall be furnished to Licensee
in printed form, and shall consist of all user manuals, training materials and
specifications for the Software. Subject to Section 18, the license granted
hereunder shall be terminable in the event that Licensee fails to make any
payment when due of the license fees in accordance with Schedule A.
4. License Fee, Taxes and Expenses; Delivery
4.1 As consideration for the perpetual license to use and to
sublicense use of the Software and the Documentation granted to Licensee herein,
Licensee shall pay to Licensor a one-time license fee in the amount and payable
in accordance with the payment schedule set forth in Schedule A.
4.2 Licensee shall pay all sales, use and personal property taxes
assessed in connection with this Agreement and each Affiliated User shall be
responsible for any sales, use and
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<PAGE> 4
personal property taxes assessed in connection with its User License Agreement;
provided, however, that Licensor shall pay all taxes based on Licensor's
business operations (including without limitation employment taxes and taxes
levied on Licensor's income).
4.3 Licensee shall reimburse Licensor at Licensor's cost for its
reasonable and necessary direct out-of-pocket expenses incurred in connection
with Licensor's performance hereunder, including without limitation
long-distance toll charges, overnight courier charges and postage. If Licensor
travels to Licensee's site in connection with Licensor's performance under this
Agreement and such travel is approved in advance by an authorized representative
of Licensee, Licensee shall reimburse Licensor for Licensor's reasonable and
necessary expenses at cost. Licensee shall be invoiced monthly in arrears for
all such expenses and payments shall be due within 30 days of Licensee's receipt
of such invoices; provided, however, that Licensee shall have no obligation to
reimburse Licensor for any such expenses not invoiced within 180 days of the
date incurred by Licensor.
4.4 Licensor shall pay all freight, shipping and handling costs for
delivery of the Software and the Documentation and shall bear all risk of loss,
including any insurance costs; provided, however, Licensee shall reimburse
Licensor for freight, shipping and handling costs in accordance with the terms
of Section 4.3 upon delivery and acceptance of the Software and Documentation.
5. Affiliated User License and Fees
5.1 Licensor agrees that Licensee may sublicense the Software and
the Documentation for use by any Affiliated User that executes a User License
Agreement.
5.2 Licensee shall pay Licensor sublicense fees on behalf of each
Affiliated User that executes a User License Agreement for the Software and the
Documentation as determined in accordance with the price schedule set forth in
Schedule A.
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5.3 The Software shall not be used to process the data of an
Affiliated User until a User License Agreement has been entered into with that
Affiliated User.
6. Source Code
6.1 Licensor has not provided Licensee with a copy of, and Licensee
acquires no rights of any kind with respect to, the Software source code except
as provided herein. In the event of Licensor's discontinuance of or failure in
material respects to provide support and maintenance services for the Software
pursuant to the terms and conditions of this Agreement or any other existing
agreement with Licensee, or Licensor has otherwise defaulted under this
Agreement or other agreement related to the Software, Licensor shall deliver to
Licensee a copy of the Software source code for the current version of the
Software and all internal documentation related thereto (including a list of and
information regarding how to license third-party software used to develop or
maintain the Licensed Software).
6.2 In the event Licensee determines that Licensor has failed in
material respects to provide support and maintenance services for the Software
or has otherwise defaulted as described in Section 6.1, Licensee shall provide
Licensor with written notice describing in reasonable detail the reasons for
Licensee's determination and an opportunity for 30 days after Licensor's receipt
of such notice for Licensor to cure the material failure or default as described
by Licensee. The pendency of a dispute regarding such a material failure or
default shall not entitle Licensee to receive a copy of the Software source code
and related documentation.
6.3 Subject to the foregoing, Licensor hereby grants Licensee a
license to use such source code and related documentation in order to maintain
and modify the Software licensed by Licensee and sublicensed by Affiliated
Users. Licensor hereby acknowledges Licensee's and Affiliated Users' right to
participate in a user's support group with other users of all or part of the
Software.
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6.4 Upon delivery of the source code and related documentation to
Licensee, Licensor's support and maintenance obligations hereunder shall
terminate; provided, however, that delivery of the source code and related
documentation to Licensee shall not affect Licensee's obligation to pay Licensor
sublicense fees under Section 5.2. If the source code is delivered to Licensee
as a result of a notice by Licensee under Section 6.2, delivery of the source
code shall constitute Licensee's sole remedy for claims related to support and
maintenance services hereunder.
7. Hardware
Licensee is responsible for providing computer equipment and
operating system software (collectively, the "Hardware") that conforms with
Licensor's specifications as set forth in Schedule B annexed hereto, which is
incorporated herein by reference, as may be modified by mutual consent of the
parties from time to time. Licensee acknowledges that a parallel printer port
must be available for use in connection with security mechanisms that may be
provided by Licensor.
8. Licensor's Warranties
8.1 Ownership and Quiet Enjoyment. Licensor hereby warrants and
represents to Licensee and Affiliated Users that Licensor owns all right, title
and interest in and to the Software and the Documentation or otherwise has the
right to grant to Licensee the license to use and to sublicense same as set
forth in this Agreement without violating or infringing upon any rights of any
third party and without breach of any third-party license to Licensor, and there
is currently no actual or threatened suit by any third party based on an alleged
violation, infringement or breach by Licensor. Use of the Software and the
Documentation in accordance with this Agreement and any User License Agreement
shall not be disturbed or interfered with during the continuation of the license
granted hereunder except as provided in Section 10.2.
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<PAGE> 7
8.2 For any period during which Licensee maintains support and
maintenance of the Software through Licensor as set forth in Section 9, Licensor
further warrants and represents to Licensee and Affiliated Users as follows:
(a) Software Operation. The Software and each module or component
thereof shall operate on the Hardware and shall perform substantially in
accordance with the Documentation and pages 36-59 of Licensor's proposal dated
June 7, 1991, attached hereto as Exhibit 2; provided, however, if Licensee or an
Affiliated User makes an unauthorized modification to the Software, then this
warranty shall terminate with respect to such Licensee or Affiliated User.
(b) Performance Standards. Each of Licensor's employees, agents or
representatives assigned to perform services hereunder shall have the proper
skill, training and background so as to be able to perform in a competent and
professional manner and all work will be so performed in a manner compatible
with Licensee's or each Affiliated User's business operations at its premises.
8.3 EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, LICENSOR DOES NOT
MAKE AND EXPRESSLY DISCLAIMS ALL OTHER WARRANTIES WITH RESPECT TO THE SOFTWARE,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE.
9. Master Software Support and Maintenance
9.1 Licensor shall promptly notify Licensee of any defects or
malfunctions in the Software or the Documentation of which it learns from any
source. Licensor shall use its best efforts reasonable under the circumstances
to correct any material defects or malfunctions in the Software or the
Documentation and provide Licensee and Affiliated Users with corrected copies of
same in accordance with a schedule to be mutually agreed to by the parties.
Licensor's obligation hereunder shall not affect any other liability that it may
have to Licensee or Affiliated Users.
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<PAGE> 8
9.2 Licensor shall provide to Licensee and Affiliated Users copies
of the Software and the Documentation made generally available to its customers
and reflecting any enhancements to the Software and the Documentation made by
Licensor. Such enhancements shall include without limitation all modifications
to the Software that increase the speed, efficiency or ease of operation of the
Software, or add additional capabilities to or otherwise improve the functions
of the Software, but shall not include new products that bring substantial new
functionality to the Software.
9.3 Licensor shall use its best efforts reasonable under the
circumstances to cause the Software to operate as warranted in Section 8.2(a)
and shall provide one copy of any updated release of the Software, or part
thereof, to Licensee and Affiliated Users which Licensee and Affiliated Users
may copy in the appropriate quantity and substitute for a prior release. In
addition, Licensor shall provide published bulletins describing new releases,
maintenance releases, temporary problem resolutions and circumventions, support
level changes and other information with respect to the Software, which updated
releases Licensee and Affiliated Users may obtain at no additional cost, except
for Licensor's then applicable mailing and media charges plus any reasonable
costs as the parties may mutually agree related to installation of such
releases.
9.4 Licensor shall commit the resources of at least one full-time
employee to respond to any request by Licensee to correct any failure of the
Software to perform as warranted in Section 8.2(a), within a period of 48 hours
after Licensee provides reasonably detailed notice of such failure. Licensor
shall use its best efforts promptly to remedy any such failure of the Software,
either by providing a permanent fix or replacement to the Software or by
providing a temporary work around.
9.5 Subject to the provisions of Schedule A, Section V.2.a., whereby
Licensee may earlier terminate the services described in this Section 9,
Licensor shall provide the Software support and maintenance services described
in this Section 9 for the charges set forth in Section 9.6 below for a five-year
period commencing upon the Effective Date of this Agreement (the "Initial
Term"), and, upon expiration of the Initial Term, shall continue
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to provide such services on a year-to-year basis unless, no less than six months
prior to the expiration of the Initial Term or 60 days prior to the expiration
of any one-year renewal term, either party gives the other party written notice
of the notifying party's desire to:
(a) renegotiate the terms and conditions of this Agreement related
to Licensor's Software support and maintenance services, provided that if an
agreement on new terms is not reached prior to the expiration of the applicable
term, Licensor's Software support and maintenance services shall be deemed
terminated in accordance with Section 9.5(b); or
(b) terminate Licensor's Software support and maintenance services,
provided, however, that if either party determines to terminate such services,
termination shall be subject to a two-year wind-down period (the "Wind-down
Period") commencing on the date the expiration of the Initial Term or the
renewal term is effective, which shall be subject to the following additional
terms and conditions:
(i) During the first year of the Wind-down Period, the terms
of this Agreement related to Software support and maintenance
services shall remain in effect and Licensee may elect on behalf of
Affiliated Users to discontinue Licensor's Software support and
maintenance services to up to five Affiliated Users;
(ii) During the second year of the Wind-down Period, the terms
of this Agreement related to Software support and maintenance
services shall remain in effect and Licensee may elect on behalf of
Affiliated Users to discontinue Licensor's Software support and
maintenance services to up to one-half the number of Affiliated
Users that are receiving such services as of the first day of the
second year of the Wind-down Period; and
(iii) Licensee shall have no obligation to pay for and Licensor
shall have no obligation to provide any Software support and
maintenance services after the expiration of the Wind-down Period.
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<PAGE> 10
9.6 During the term of Licensor's software support and maintenance
services, Licensee shall pay to Licensor an annual support and maintenance fee
in accordance with the terms set forth in Schedule A. At any time after the
expiration of the first year of the Initial Term, Licensor's software support
and maintenance fees shall be subject to annual increases, provided that
Licensor provides Licensee with written notice of any such increase at least 90
days prior to the expiration of each one-year period. Annual increases shall in
no event exceed the lesser of: (i) a percentage increase equal to two and
one-half percent (2 1/2%) plus the percentage increase in the Consumer Price
Index for Urban Consumers, All Cities Average, For all Items (1984-1986 = 100),
as published by the Bureau of Labor Statistics of the United States Department
of Labor during the most recent twelve-month period for which such figures are
available; or (ii) ten percent (10%).
9.7 If Licensor travels to Licensee's or an Affiliated User's site
and such travel is approved in advance by an authorized representative of
Licensee, Licensee shall reimburse Licensor for its reasonable and necessary
expenses at cost. Licensee shall be invoiced monthly in arrears for all such
expenses and payments shall be due within 30 days of Licensee's receipt of such
invoice; provided, however, that Licensee shall have no obligation to reimburse
Licensor for any such expenses not invoiced within 180 days of the date incurred
by Licensor.
9.8 (a) Licensee agrees that all enhancements to the Software
furnished by Licensor pursuant to this Agreement shall be installed within six
months of Licensee's receipt of any such enhancements, provided that if Licensor
is responsible for installation, Licensor shall cooperate with Licensee to
install the Software within such time period. As mutually agreed by the parties
at such time as enhancements are provided, either Licensee shall install the
enhancements or Licensee shall engage Licensor to install the enhancements at
its standard hourly rate for software installation services.
(b) Licensee agrees to provide Licensor with sufficient support and
test time on Licensee's or an Affiliated User's computer system to duplicate a
reported problem, certify that the problem is with the Software, and certify
that the
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problem has been corrected, and to otherwise reasonably cooperate with Licensor
in connection with Licensor's support and maintenance services.
(c) As long as Licensor is providing support and maintenance
services to Licensee, Licensee shall install and maintain a 1200 or 2400 baud
modem and associated dial-up telephone line. Licensee shall pay for
installation, maintenance and use of such equipment and associated telephone
line-use charges. Licensor, at its option, shall use this modem and telephone
line in connection with error correction, installation of enhancements and
assistance to Licensee in connection with its use of the Software. Such access
by Licensor shall be subject to prior approval by Licensee in each instance. As
long as Licensor is providing support and maintenance services to Licensee,
Licensee shall also install and maintain a tape backup system that conforms to
the specifications set forth in Schedule B to be used for regular tape backups
by Licensee and transfer of data and Software updates between Licensee and
Licensor.
(d) Except as authorized by Section 6, Licensee shall not modify or
attempt to modify the Software without the prior written consent of Licensor.
(e) Licensee agrees that any copies of the Software or the
Documentation that it makes pursuant to this Agreement shall bear all copyright,
trademark and other proprietary notices included therein by Licensor and, except
as expressly authorized herein, Licensee shall not distribute same to any third
party without Licensor's prior written consent.
9.9 The Software support and maintenance fees, stated in Schedule A,
Section V., are subject to mutually acceptable adjustment to be negotiated by
the parties in the event:
(a) Licensee assumes support obligations for the Affiliated Users
but in so doing fails to: (i) provide a level of staffing for the assumed
obligations consistent with the level of staffing previously provided by
Licensor or (ii) staff its Affiliated User support function with persons trained
by Licensor or otherwise determined by Licensor to be qualified and Licensor's
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cost in providing the Software support described in this Section 9, as measured
by the average number of calls made by the Licensee and Affiliated Users to
Licensor's corporate support center for such support versus the volume of calls
to such center prior to Licensee's assumption of support obligations for the
Affiliated Users, does not increase significantly due to Licensee's assumption
of such obligations; or,
(b) the parties mutually agree to add more application software
programs or interfaces to the Software described in Schedule A.
10. Limitations of Liability
10.1 Except as provided in Section 16, Licensor shall have no
liability for consequential, exemplary, indirect, special or incidental damages,
whether based on contract, tort or any other legal theory, arising out of or
related to this Agreement or the transactions contemplated herein, nor shall
Licensor be liable for any loss of data or lost profits of Licensee, or for any
amount in excess of the license fees paid to Licensor by Licensee under this
Agreement, even if Licensor is apprised of the likelihood of such damages
occurring.
10.2 Subject to Licensor's obligations under Section 16.2, in the
event that the use of the Software or any portion thereof is held by a court of
competent jurisdiction to infringe or constitute the wrongful use of any third
party's proprietary rights and Licensee's right to use the Software is enjoined,
or if Licensor in the reasonable exercise of its discretion instructs Licensee
to cease using the Software in order to mitigate potential damages arising from
a third party's claim that use of the Software infringes on its rights, Licensee
shall cease using the Software. In either event (other than by reason of a
temporary restraining order not exceeding 30 days), Licensor shall (i) replace
the Software with equally suitable non-infringing software, (ii) modify the
Software so that its use by Licensee as permitted hereunder ceases to be
infringing or wrongful, (iii) procure for Licensee the right to continue using
the Software as permitted hereunder, or (iv) after reasonable efforts under
clauses (i), (ii) and (iii) of this sentence, refund to Licensee a
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pro rata portion of the license fee as follows: (I) within one year of the
Effective Date, 100%; (II) for the second one-year period following the
Effective Date, 80%; (III) for the third one-year period following the Effective
Date, 60%; (IV) for the fourth one-year period following the Effective Date,
40%; or (V) during the period running from the fourth anniversary through the
tenth anniversary of the Effective Date, if Licensee continues to receive
Software support and maintenance services from Licensor pursuant to Section 9,
20%.
10.3 Other than as expressly contained in Sections 16.2 and 10.2,
Licensor shall have no liability whatsoever to indemnify Licensee for any loss
or damage arising out of or related to any allegation or determination that
Licensee's use of the Software as permitted hereunder infringes or constitutes
wrongful use of any proprietary right.
11. Title to Software and Documentation
The Software and the Documentation provided hereunder and all copies
thereof are proprietary to Licensor and title thereto remains in Licensor (or in
third parties who have licensed any part of the Software to Licensor). Other
than the rights in and to the Software and the Documentation granted to Licensee
hereunder, Licensee acquires no rights in the Software or the Documentation,
including patents, copyrights, trademarks, and trade secrets, if any, embodied
therein. Licensee acknowledges that Licensor claims that the Software contains
valuable proprietary information and trade secrets developed or acquired by
Licensor. Licensee agrees to secure and protect the Software and the
Documentation and copies thereof in a manner consistent with the maintenance of
Licensor's rights therein and to take reasonable action by instruction or
agreement with its employees or independent contractors who are permitted access
to the Software and the Documentation to satisfy its obligations hereunder.
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12. Confidentiality
12.1 "Confidential Information" is defined to include the identity
of patients, the content of any medical records, financial and tax information,
information regarding Medicare and Medicaid claims submission and
reimbursements, the object and source codes for the Software, the Documentation,
and such other information so designated in writing prior to disclosure by the
party claiming that the information to be disclosed is confidential or
proprietary business information.
12.2 The party receiving the Confidential Information (the
"Receiving Party") from the party who owns or holds in confidence such
Confidential Information (the "Owning Party") may use the Confidential
Information solely for the purpose of performing its obligations or enforcing
its rights under this Agreement.
12.3 The Receiving Party shall not disclose the Confidential
Information except to those persons having a need to know for purposes
authorized in Section 12.2. Each party shall take appropriate action, by
instruction to or agreement with its employees, agents and subcontractors, to
maintain the confidentiality of the Confidential Information. Except as provided
in Section 12.4 below, Licensee shall not disclose the Documentation or the
Software to any independent contractor or subcontractor engaged primarily in the
business of developing health care applications software or to any of the
companies identified as competitors of Licensor on Schedule C annexed hereto
(which schedule may be modified from time to time by mutual consent of the
parties, which consent shall not be unreasonably withheld) without the prior
consent of Licensor, which consent shall not be unreasonably withheld. Licensee
may disclose any Confidential Information on an as-needed basis to its
non-employee fiduciaries, including without limitation Licensee's or Affiliated
Users' attorneys, accountants, auditors, controlling persons, officers,
directors or trustees, without Licensor's prior consent. The Receiving Party
shall promptly notify the Owning Party in the event that the Receiving Party
learns of an unauthorized release of Confidential Information.
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12.4 The Receiving Party shall have no obligation with respect to:
(a) Confidential Information made available to the general public
without restriction by the Owning Party or by an authorized third party;
(b) Confidential Information known to the Receiving Party
independently of disclosures by the Owning Party under this Agreement;
(c) Confidential Information independently developed by the
Receiving Party; or
(d) Confidential Information that the Receiving Party may be
required to disclose pursuant to subpoena or other lawful process; provided,
however, that the Receiving Party notifies the Owning Party in a timely manner
to allow the Owning Party to appear and protect its interests.
12.5 Upon the termination or expiration of the license, each party
shall (i) immediately cease to use the other party's Confidential Information,
(ii) return to the other party such Confidential Information and all copies
thereof within ten (10) days of the termination, unless otherwise provided in
this Agreement, and (iii) upon request, certify in writing to the other party
that it has complied with its obligations set forth in this Section 12, unless
otherwise provided in this Agreement.
12.6 The parties acknowledge that monetary remedies may be
inadequate to protect rights in Confidential Information and that, in addition
to legal remedies otherwise available, injunctive relief is an appropriate
judicial remedy to protect such rights.
12.7 Licensor shall not use Confidential Information received from
Licensee or Affiliated Users for the purpose of developing information or
statistical compilations for use by third parties or for any other commercial
exploitation.
12.8 Each party agrees to provide reasonable assistance and
cooperation upon the reasonable request of the
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other party in connection with any litigation against third parties to protect
the requesting party's Confidential Information, provided that the party seeking
such assistance and cooperation shall reimburse the other party for its
reasonable out-of-pocket expenses.
13. Publicity
Neither party shall refer to the existence of this Agreement or
disclose its terms or use the name of the other party in any press release,
advertising or materials distributed to prospective customers, without the prior
written consent of the other party. Licensor shall not represent, directly or
indirectly, that any product or service of Licensor has been approved or
endorsed by Licensee or any Affiliated User. Notwithstanding the foregoing,
Licensor shall have the right to identify as clients Licensee and Affiliated
Users that have executed User License Agreements on Licensor's list of clients,
such list to be used by Licensor solely on a one-for-one basis with individual
prospects for marketing purposes but not to be used in any mass marketing or
general advertising materials or media.
14. Books and Records
14.1 If required by applicable law, the parties agree that until the
expiration of four (4) years after the furnishing of services under this
Agreement, Licensor will make available to the Secretary of the United States
Department of Health and Human Services (the "Secretary") and the United States
Comptroller General, and their duly authorized representatives, this Agreement,
each User License Agreement executed hereunder and all books, documents and
records necessary to certify the nature and extent of the costs of the goods and
services provided under this Agreement and the User License Agreements. No
attorney-client, accountant-client or other legal privilege shall be deemed to
have been waived by the parties by virtue of this provision.
14.2 Licensee shall have the right, at its expense, during normal
business hours and with reasonable advance notice,
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to review and photocopy Licensor's books and records that pertain directly to
the accounts of the Licensee and the Affiliated Users, the fees payable to
Licensor under this Agreement and the User License Agreements, or the goods and
services provided by Licensor hereunder or under the User License Agreements.
14.3 If Licensor carries out the duties of this Agreement or any
User License Agreement through a subcontract worth $10,000 or more over a
twelve-month period with a related organization, the subcontract will also
contain a clause substantially identical to Sections 14.1 and 14.2 to permit
access by Licensee, the Secretary, the United States Comptroller General and
their representatives to the related organization's books and records.
14.4 Licensee's rights under this Section 14 shall survive for a
period of four (4) years after termination or expiration of this Agreement.
15. Assignment
Neither Licensee nor Licensor shall assign or transfer this
Agreement or any of its rights or obligations hereunder without the prior
written consent of the other, which consent shall not be unreasonably withheld;
provided, however, that (i) either party may assign its rights or obligations
hereunder to a subsidiary in which the assigning party holds a 50% or greater
equity interest without the consent of the other party and (ii) either party may
assign its rights and obligations hereunder in connection with any transaction
involving the sale of all or substantially all of its assets without the consent
of the other party. This Agreement shall inure to the benefit of and bind
successors and permitted assigns of Licensor and Licensee. In no event shall
consent to assignment be conditioned upon the payment of any fee.
16. Indemnity
16.1 Each party shall indemnify and hold harmless the other party
and its affiliates, directors, officers, employees and
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<PAGE> 18
agents (collectively, the "indemnitee") against any and all losses, liabilities,
judgments, awards and costs (including legal fees and expenses) arising out of
or related to any third-party claim for personal injury or property damage
(other than intellectual property infringement claims), including any damages
finally awarded attributable to such claim and any reasonable expense incurred
by indemnitee in assisting indemnitor in defending against such claim, that
arises out of any action or inaction by the indemnitor or its employees or
agents; provided, however, that indemnitee gives indemnitor: (i) written notice
within a reasonable time after indemnitee is served with legal process in an
action asserting such claims, provided that the failure or delay to notify
indemnitor shall not relieve indemnitor from any liability that it may have to
indemnitee hereunder so long as the failure or delay shall not have prejudiced
the defense of such claim; (ii) reasonable assistance in defending the claim;
and (iii) sole authority to defend or settle such claim. In the event indemnitor
elects not to defend any such claim, indemnitee shall have the option but not
the duty to reasonably settle or defend the claim at its cost and indemnitor
shall indemnify indemnitee for such settlement or any damages finally awarded
against indemnitee attributable to such claim, reasonable costs and expenses
(including attorneys' fees), and interest on such recoverable funds advanced.
16.2 Licensor agrees to indemnify and hold harmless Licensee and its
affiliates, directors, officers, employees and agents (collectively,
"indemnitee") against any and all losses, liabilities, judgments, awards and
costs (including legal fees and expenses) arising out of or related to any
third-party claim that Licensee's use or possession of the Software or the
Documentation or the license granted hereunder infringes or violates the
copyright, patent, trade secret or other proprietary rights of any third party,
including any damages finally awarded attributable to such claim and any
reasonable expense incurred by indemnitee in assisting Licensor in defending
against such claim; provided, however, that indemnitee gives Licensor: (i)
written notice within a reasonable time after indemnitee is served with legal
process in an action asserting such claims, provided that the failure or delay
to notify Licensor shall not relieve Licensor from any liability that it may
have to indemnitee hereunder so long as the failure or delay shall not have
prejudiced the defense of such
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<PAGE> 19
claim; (ii) reasonable assistance in defending the claim; and (iii) sole
authority to defend or settle such claim. In the event Licensor elects not to
defend any such claim, indemnitee shall have the option, but not the duty, to
reasonably settle or defend the claim at its cost and Licensor shall indemnify
indemnitee for such settlement or any damages finally awarded against indemnitee
attributable to such claim, reasonable costs and expenses (including attorneys'
fees) and interest on such recoverable funds advanced. Notwithstanding the
foregoing, Licensor's obligations to indemnify Licensee under this Section 16.2
shall not extend to claims arising more than five years after discontinuation of
Software support and maintenance services under Section 9. The indemnity
provided by this Section 16.2 extends only to damages and costs awarded against
Licensee (or payable by Licensee pursuant to a settlement agreement) and costs
and expenses associated with the defense of such third-party claims; any
assertion by Licensee that it is damaged by virtue of any inability to use the
Software as a result of a third party claim shall be governed by Section 10.2
hereof, which provides the sole and exclusive remedies therefor.
17. Work Environment
When Licensor's employees are physically assigned to work on the
premises of Licensee's corporate headquarters site, Licensee shall provide to
Licensor's employees a reasonable work environment, including reasonable office
space, furniture, supplies and equipment, within or in proximity to the
buildings housing Licensee's corporate headquarters, to enable Licensor to
perform its obligations under this Agreement and any work order executed
hereunder.
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<PAGE> 20
18. Termination and Survival
18.1 The license granted hereunder is perpetual and may not be
terminated by Licensor except upon Licensee's failure to cure a material breach
of this Agreement, including nonpayment of any Software license fee when due,
within 60 days of receipt of Licensor's written notice describing the nature of
the alleged material breach. In the event of a termination of the license,
Licensee shall within 60 days, at Licensee's option, either deliver to Licensor
or destroy the Software and the Documentation in Licensee's possession. Within
60 days following termination, Licensee shall certify in writing to Licensor
that all copies of the Software and the Documentation in Licensee's possession
have been returned or destroyed.
18.2 Subject to Section 18.4, the sublicense granted to each
Affiliated User is perpetual and may not be terminated by Licensor except upon
that Affiliated User's failure to cure a material breach of its User License
Agreement within 60 days of receipt of Licensor's written notice describing the
nature of the alleged material breach. In the event of a termination of an
Affiliated User's sublicense, that Affiliated User shall within 10 days, at
Affiliated User's option, either deliver to Licensor or destroy the Software and
the Documentation in such Affiliated User's possession. Within 10 days following
termination such Affiliated User shall certify in writing to Licensor that all
copies of the Software and the Documentation in such Affiliated User's
possession have been returned or destroyed.
18.3 Expiration or termination of Licensor's support and maintenance
obligations shall not constitute a termination of the license granted hereunder
or of the respective rights and obligations of the parties created by this
Agreement.
18.4 Termination of the license to use and to sublicense use of the
Software granted to Licensee pursuant to Section 18.1 shall not automatically
cause the termination or otherwise interfere with validly existing sublicenses
previously granted by Licensee to Affiliated Users as authorized herein;
provided, however, that in the event the license granted to Licensee hereunder
is terminated pursuant to Section 18.1, the sublicenses may be terminated by
Licensor.
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<PAGE> 21
18.5 Any provision of this Agreement related to confidentiality,
publicity and indemnification or which by its terms provides for survival shall
survive the termination of this Agreement.
19. Notices
All notices required or permitted under this Agreement shall be in
writing and sent to the other party at the address specified below or to such
other address as either party may substitute from time to time by written notice
to the other and
shall be deemed validly given upon receipt of such notice given by certified
mail, postage prepaid, or personal or courier delivery to:
Healthtrust, Inc. - Health Care microsystems,
The Hospital Company Inc.
4525 Harding Road Suite 350
Nashville, Tennessee 37205 3655 Torrance Boulevard
Attention: Director of Torrance, California 90503
Information Services Attention: Thomas J. Kazamek
with a copy to: with a copy to:
Healthtrust, Inc. - Health Care microsystems,
The Hospital Company Inc.
4525 Harding Road Suite 350
Nashville, Tennessee 37205 3655 Torrance Boulevard
Attention: Philip D. Torrance, California 90503
Wheeler, Esq. Attention: Robert V. Nagelhout
20. Governing Law
This Agreement shall be governed by and construed in all respects in
accordance with the substantive laws of the State of Tennessee.
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<PAGE> 22
21. Severability
All agreements, clauses and covenants contained herein are
severable, and in the event any of them shall be held to be unconstitutional,
invalid, illegal, or unenforceable, the remainder of this Agreement shall be
interpreted as if such unconstitutional, invalid, illegal or unenforceable
agreements, clauses or covenants were not contained herein. IT IS EXPRESSLY
UNDERSTOOD AND AGREED THAT EACH AND EVERY PROVISION OF THIS AGREEMENT THAT
PROVIDES FOR A LIMITATION OF LIABILITY, DISCLAIMER OF WARRANTIES OR EXCLUSION OF
DAMAGES IS INTENDED BY THE PARTIES TO BE SEVERABLE AND INDEPENDENT OF ANY OTHER
PROVISION AND TO BE ENFORCED AS SUCH. FURTHER, IT IS EXPRESSLY UNDERSTOOD AND
AGREED THAT IN THE EVENT THAT ANY REMEDY HEREUNDER IS DETERMINED TO HAVE FAILED
OF ITS ESSENTIAL PURPOSE, ALL LIMITATIONS OF LIABILITY AND EXCLUSIONS OF DAMAGES
SET FORTH HEREIN SHALL REMAIN IN EFFECT.
22. Waiver; Modification
The failure by either party to exercise any right provided hereunder
shall not be deemed a waiver of such right. This Agreement may be amended,
modified or supplemented only by a writing signed by the parties to this
Agreement. Such amendments, modifications or supplements shall be deemed as much
a part of this Agreement as if so incorporated herein.
23. Integration
The parties hereto acknowledge that they have read this Agreement in
its entirety and understand and agree to be bound by all of its terms and
conditions, and further agree that this Agreement, any User License Agreement
executed hereunder and any exhibits or schedules hereto or thereto constitute a
complete and exclusive statement of the understanding between the parties with
respect to the subject matter hereof which supersede any and all other
communications between the parties, whether written or oral. Any prior
agreements, promises, negotiations or representations related to the subject
matter hereof not expressly set forth in this Agreement, any User License
Agreement executed hereunder or any exhibits or schedules hereto or thereto are
of no force and effect.
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<PAGE> 23
24. Independent Contractor
Licensor, in performance of this Agreement, is acting as an
independent contractor and shall have the exclusive control of the manner and
means of performing the work contracted for hereunder. Personnel supplied by
Licensor hereunder, whether or not located on Licensee's premises, are not
Licensee's employees or agents and shall not hold themselves out as such, and
Licensor assumes full responsibility for their acts and for compliance with any
applicable employment and tax laws with respect to such employees. Nothing
contained in this Agreement shall be construed to create a joint venture or
partnership between the parties.
25. Force Majeure
Neither party hereto shall be liable for any failure or delay in
performance of its obligations hereunder by reason of any event or circumstance
beyond its reasonable control, including without limitation acts of God, war,
riot, strike, labor disturbance, fire, explosion, flood, or shortage or failure
of suppliers.
26. Export Control Regulations
Licensee shall be responsible for complying with all export
regulations required to provide the Software to any Affiliated User located
outside of the United States.
27. Hiring of Employees
During the term of this Agreement and for one (1) year thereafter,
neither Licensor nor Licensee will, without the prior written consent of other
party, which may be withheld in that party's sole discretion, offer employment
to, employ or subcontract
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<PAGE> 24
work to any person employed then or within the preceding twelve (12) months by
the other party. This provision shall also be binding upon affiliates of both
parties.
28. Counterparts
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same document. In making proof of this Agreement, it shall not be
necessary to produce or account for more than one such counterpart executed by
the party against whom enforcement of this Agreement is sought.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their authorized representatives as of the date first set forth
above.
LICENSEE: LICENSOR:
By: By:
------------------------------ -------------------------------
Hilary E. Adams, III, Thomas J. Kazamek,
Senior Vice-President Chief Operating Officer
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<PAGE> 25
Schedule A
Software and Fees
I. Licensed Software
The Software is described on Attachments 1 and 2 to this Schedule A.
II. Corporate License Fee
The fees payable to Licensor by Licensee for the license granted to
Licensee to use the Software and the Documentation and to sublicense the use of
the Software and the Documentation to Affiliated Users shall be as follows:
1. $350,000 due and payable on execution of the Master
Software License and Professional Services Agreement by Licensor and
Licensee; and
2. $600,000 due and payable within ten (10) days following
acceptance of the Product Management program in the first three
pilot hospitals as further described in Work Order 001 executed
hereunder; and
3. In the event Licensee elects to (i) sublicense the use of
the Software and the Documentation to more than 15 Affiliated Users
or (ii) sublicense programs
A-1
<PAGE> 26
comprising the Software other than the Product Management, Payment
Verification, Budgeting and Desktop Delivery System programs, then,
upon the first exercise of either election, a single payment of
$150,000 to be due and payable with payment of the applicable
sublicense fee.
III. Affiliated User Sublicense Fees
(a) The sublicense fees to be paid to Licensor by Licensee for or on
behalf of Affiliated Users per program actually sublicensed are set forth on
Schedule A, Attachment 1; provided, however, the sublicense fees payable to
Licensor for up to 90 sublicenses are subject to the caps described in Section
IV below. Sublicense fees are due and payable as follows:
1. For the first three sublicenses of a particular licensed
program comprising the Software:
A. 75% of the sublicense fees for each licensed program
within thirty (30) days following installation of such
licensed program; and
B. 25% of the sublicense fees for each licensed program
within thirty (30) days following acceptance of such
licensed program.
2. After the first three sublicenses of a particular licensed
program, 100% within thirty (30) days following grant of the
applicable sublicense.
(b) Notwithstanding paragraph (a) above, if Licensee acquires or is
acquired by any entity, person or group that holds a 50% or greater equity
interest in 20 or more hospitals, clinics or healthcare providers (such
healthcare providers shall be deemed to be Affiliated Users but are hereinafter
referred to as the "Designated Providers" for the purpose of computing
sublicense
A-2
<PAGE> 27
fees), Licensee may sublicense use of the Software and the Documentation to such
Designated Provider by executing a User License Agreement in the form of Exhibit
1; provided, however, that the license fees payable in accordance with Section
3.1 of the User License Agreement and Schedule A, Attachment 1 to this Agreement
may be adjusted at Licensor's request (i) first, by applying the formula rate of
increase set forth in Section 9.6 of this Agreement to the license fees set
forth in Schedule A, Attachment 1 for the period commencing on the Effective
Date through the effective date of such acquisition to establish the minimum
license fee per Software program (the "Base Fees"), and (ii) second, by Licensor
and Licensee, who shall negotiate in good faith to arrive at the license fees to
be charged; provided, however such sublicense fees shall not be greater than an
amount equal to twice the Base Fees. In the event any User License Agreements
are executed by Designated Providers, Schedule A to this Agreement shall be
amended to include a new Attachment 3 setting forth the agreed-upon license fees
applicable to such Designated Providers.
A-3
<PAGE> 28
IV. License/Sublicense Fee Cap
Notwithstanding Sections II and III above, the total fees payable by
Licensee for its license and up to 90 sublicenses shall not exceed $4,000,000;
provided, however, that in the event Licensee (i) notifies Licensor in writing
on or before September 1, 1993 of Licensee's election to pay a lump sum for all
such fees equal to the difference between the total license and sublicense fees
paid by Licensee to date and (a) $3,200,000 if Licensee elects to continue to
use as a corporate multi-facility application and to sublicense use of the
Desktop Delivery System program to Affiliated Users or (b) $3,000,000 if
Licensee elects to surrender its right to use as a corporate multi-facility
application and to further sublicense use of the Desktop Delivery System
program, and (ii) remits payment to Licensor for such fees within thirty (30)
days of such notice, then the total fees payable by Licensee for its license and
up to 90 sublicenses shall not exceed $3,200,000 inclusive of the right to
continue using as a corporate multi-facility application and sublicensing use of
the Desktop Delivery System program or $3,000,000 with surrender of the right to
use as a corporate multi-facility application and to further sublicense use of
the Desktop Delivery System program; provided, however, the fee caps set forth
in this Section IV apply for the first ninety (90) sublicenses granted by
Licensee and the license fees per program comprising the Software as set forth
in Attachment 1 to this Schedule A shall apply beginning with the ninety-first
(91st) sublicense granted by License. The fee caps provided in this Section IV
shall not apply to sublicenses issued to Designated Providers.
V. Software Support and Maintenance Fees
1. Subject to the caps provided in this Section, software support
and maintenance fees for Licensee, Affiliated Users and Designated Providers
shall be based on a percentage of the sum of: (a) total corporate license fees
(described in Section II, but excluding any lump sum payment described in
Section IV) paid by Licensee to Licensor for the license to use the Software and
the Documentation and to sublicense such use pursuant to Section II above, plus
(b) the aggregate sublicense fees as determined pursuant
A-4
<PAGE> 29
to the price schedule attached to this Schedule A for such Software programs
sublicensed and actually installed. Such percentage to be calculated on a
sliding scale as follows:
Percentage of
Amount of License/Sublicense Fees Paid License Fees
- -------------------------------------- ------------
Up to $750,000 20%
$750,001 to $1,500,000 15%
Over $1,500,000 (up to applicable cap
of $3,200,000 or $4,000,000) 10%
2. a. Notwithstanding the foregoing, Software support and
maintenance fees for the first year of this Agreement, commencing on the
Effective Date, shall be $240,000 and shall be due and payable (i) $140,000 upon
execution of this Agreement and (ii) $100,000 on September 1, 1992. If the
Product Management program is not accepted by Licensee pursuant to Work Order
No. 001, Licensor shall refund $90,000 to Licensee and Licensor shall negotiate
with each Pilot Hospital (as defined in Work Order No. 001) for Software support
and maintenance services to commence one year after the Effective Date.
b. For all years of this Agreement subsequent to the first
year, the total fees payable by Licensee for annual Software support and
maintenance for its license and 90 sublicenses shall be calculated using the
formula set forth in paragraph 1 of this Section V, but in no event shall such
annual fees exceed $512,500 irrespective of the Software programs sublicensed
and actually installed; provided, however, that in the event Licensee elects to
limit its total license fees to either $3,200,000 or $3,000,000 (as described in
Section IV for its license and 90 sublicenses, then the total fees payable by
Licensee for annual Software support and maintenance for its license and 90
sublicenses shall in no event exceed $432,500 irrespective of the Software
programs sublicensed and actually installed. These fees shall be due and payable
within thirty (30) days after each anniversary date of the Effective Date of
this Agreement.
A-5
<PAGE> 30
c. In the event Licensee enters into more than 90 sublicenses,
the fee caps contained in Section V.2.b shall be increased by an amount equal to
10% of the sublicense fees due and payable to Licensor within thirty (30) days
after the grant of such additional sublicenses.
d. After the first year's payment of annual Software support
and maintenance fees, such fees will be calculated as of and due and payable
after each anniversary date of the Effective Date of the Master Software License
and Professional Services Agreement; provided, however, Software support and
maintenance fees payable in connection with any programs sublicensed after an
anniversary date of the Effective Date shall be prorated over the period
commencing on the date of grant of the sublicense for such programs and ending
on the next succeeding anniversary date.
A-6
<PAGE> 31
VI. Pass-through Fees
A. MDBS/IQ (per computer) MDBS/PI $750
MDBS/IQ (per file server MDBS/PI $1,500
used as a database
server in any network)
B. Express/EIS II (per end user) IRI $400
C. Distributed Budgeting MDBS/IQ $1,500
(per site)
Pass-through fees shall be due and payable within thirty (30) days following
grant of the applicable sublicense. Total pass-through fees payable by Licensee
for Express/EIS II shall be capped and shall not exceed $40,000. Each $400
payment shall be credited against this $40,000 cap.
A-7
<PAGE> 32
Schedule A
Attachment 1
Affiliated User Price Schedule
License
Ownership Fee
--------- -------
A. TEAMWORK(TM) Programs
Product Management HCm $16,250
Payment Verification HCm 8,750
Budgeting and
Budgeting Interface HCm 8,000
Labor Planning and Control
and Labor Planning and
Control Interface HCm 4,675
Distributed Budgeting HCm 2,500
Capital Budgeting (CapTrac) HCm 3,000
Standard Costing and
Standard Costing Interface HCm 11,875
Labor Productivity HCm 18,750
Rate Setting (RTrac) HCm 2,000
B. Desktop Delivery System HCm 25,000
- Departmental Analysis
- Patient Care Management
(which includes Physician
Analysis, Product Analysis
and Payor Analysis)
- Key Indicators
A-8
<PAGE> 33
Schedule A
Attachment 2
TEAMWORK(TM) MODULES
TEAMWORK(TM) Product Management is a comprehensive product line management
system which turns case mix into a true decision support system. It contains
sophisticated forecasting and modeling features to support payor contract
evaluation and modeling, clinical treatment profile development, user-defined
product, outlier, and acuity classifications, and detailed reporting by payor,
physician, product, etc. Intelligent Query Ad-hoc Reporting, included within the
TEAMWORK(TM) Product Management module, provides complete ad-hoc query and
custom reporting capabilities to the entire TEAMWORK(TM) product line. Its
menu-driven design facilitates the development of user-defined reports and
on-line data base queries. Output can be displayed on the screen, printed,
written to a file, or transferred directly into LOTUS worksheet format.
TEAMWORK(TM) Payment Verification is an integrated module of the TEAMWORKTM
Product Management application designed to track and monitor detailed contract
information and to produce "Explanations of Reimbursement" detailing the net
amount due the hospital from the payor with the payment due date, as well as a
step-by-step explanation of the reimbursement calculation.
TEAMWORK(TM) Desktop Delivery System is a unique new management tool which
instantly delivers strategic and operational information to your desktop. By
integrating data from multiple systems and different vendors, the system
provides a standard and efficient way to share information throughout your
organization. This powerful system uses the latest technology combined with an
easy to use graphical interface to turn your information into knowledge
throughout your entire staff. There are three "modules" included with this
system:
- Departmental Analysis
A-9
<PAGE> 34
- Patient Care Management (which includes Physician Analysis, Product
Analysis and Payor Analysis)
- Key Indicators
TEAMWORK(TM) Budgeting is a sophisticated yet easy to use tool which facilitates
the development of the hospital's entire operating budget. It contains features
for statistical forecasting from historical data, fixed, flexible or product
based budget development, automated budget worksheets, financial modeling and
comprehensive performance and productivity reports.
TEAMWORK(TM) Labor Planning and Control is used to plan and control the
hospital's labor expenses, using detailed information by employee to develop the
budget and monitor performance. It contains features for flexible budget
development using standards by job code and performance reports by pay period
and by month.
TEAMWORK(TM) Standard Costing is used to develop procedure-level standard costs.
It supports 80/20 selection of the procedures for which a detailed bill of
materials will be developed, and will calculate a standard cost for all
procedures. It contains comprehensive overhead allocation calculations and
standards verification reports.
CapTrac(TM) Capital Budgeting is a comprehensive capital planning and tracking
system for health care facilities which can function independently, or in
conjunction with established TEAMWORK(TM) applications, in a single or
multi-user environment. The system includes capital budgeting and performance
tracking.
TEAMWORK(TM) Labor Productivity Management is a comprehensive productivity
management system that assists all management team members to track productivity
by employee and department, allowing for the most efficient use of labor
resources while maintaining high standards for patient care.
RTrac(TM) Rate Optimization System helps the hospital to maximize their net
revenues by properly assessing the impact of rate changes by procedure.
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Distributed Budgeting works in conjunction with the TEAMWORK(TM) Budgeting
system to provide department heads with a tool to facilitate budget development.
Distributed Budgeting is an automated system used to review historical data,
enter budget requests, and print detail and summary reports to evaluate the
budget as it is being developed. The completed budget is then submitted to the
budget department in an automated manner via diskette.
A-11
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SCHEDULE B
The Hardware
Licensor acknowledges that the Software will operate on a 386 or faster
IBM, Compaq or Gateway personal computer system, using the DOS Operating System
Version 4.0 or 5.0 or Novell Netware 386 Version 3.11A or subsequent versions,
together with Licensor's security sentinel and Tecmar QT or Datavault tape
backup system.
Licensor shall provide its security sentinel as an accessory item to be
billed separately to Licensee at a cost of $75.
B-1
<PAGE> 37
SCHEDULE C
HCm Competitor List
American Express Information Systems
Dilts, Kappeler, Durham & Company
Dun & Bradstreet Software
Ernst & Young (excluding the Audit Group)
Gerber Alley
Global Software, Inc.
HBO and Company
Hospital Cost Consultants
IBAX
Innovative Software Solutions, Inc.
Maximus, Inc.
Medicus Systems Corporation
Meditech
Phamis, Incorporated
Shared Medical Systems, Inc.
Sun Health Systems
Transition Systems, Inc.
C-1
<PAGE> 38
EXHIBIT 1
FORM USER LICENSE AGREEMENT
-----------------------------------------
This USER LICENSE AGREEMENT (the "Agreement") is made and entered into as
of the ____ day of ________________, 199_, by and between Healthtrust, Inc. The
Hospital Company ("Sublicensor") and ________________________________, a
____________ corporation, whose principal place of business is in
__________________________ ("Affiliated User").
WHEREAS, Sublicensor has licensed from Health Care microsystems, Inc., a
California corporation ("Licensor") the Software (defined below), and certain
documentation related to the Software (the "Documentation"), and has been
authorized to sublicense the Software and the Documentation in accordance with
the terms and conditions of the Master Software License (the "Master
Agreement"), and Sublicensor desires to sublicense the Software and the
Documentation to Affiliated User; and
WHEREAS, Affiliated User is a hospital, clinic or other health care
provider that Sublicensor operates or in which Sublicensor holds a 50% or
greater equity interest and desires to acquire from Sublicensor a perpetual,
non-exclusive, paid-up, royalty-free, worldwide license for the Software and the
Documentation of Licensor; and
WHEREAS, Affiliated User desires to obtain software support and
maintenance services for the Software and the Documentation pursuant to the
terms and conditions contained in the Master Agreement.
NOW THEREFORE, in consideration of the premises, the mutual obligations
contained herein and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties covenant and agree as
follows:
SECTION I - DEFINITIONS
<PAGE> 39
1.1 "Documentation" is defined to include any user manuals, training
materials, specifications and other material related to the Software.
1.2 "Software" is defined as the software, furnished by Licensor to
Affiliated User, including any related interfaces, as more fully described in
Schedule AA, which is incorporated herein by reference.
SECTION II - LICENSE
2.1 Upon full payment of the Software license fee to Licensor by
Sublicensor on behalf of Affiliated User for the Software listed in Schedule AA,
Sublicensor hereby grants to Affiliated User a fully-paid, perpetual,
non-exclusive, royalty-free license to use the Software and the Documentation at
Affiliated User's premises or at Sublicensor's offices solely for the data
processing needs of Affiliated User, subject to the terms and conditions set
forth in the Master Agreement. The license granted hereunder includes without
limitation the right to reproduce or copy all or any portion of the Software in
machine-readable or printed form as determined by Affiliated User to be
reasonably required for its own internal data processing needs and archival and
backup purposes, the right to share data with Sublicensor and other Affiliated
Users that have executed User License Agreements and the right to reproduce
copies of the Documentation for its own use.
2.2 Affiliated User acknowledges that portions of the Software licensed
under this Agreement are owned by Micro Data Base Systems, Inc. ("MDBS"),
Programmed Intelligence, Inc. ("PI"), or Information Resources, Inc. ("IRI").
Affiliated User further acknowledges that the MDBS, PI and IRI portions of the
Software may not be used by Affiliated User as stand-alone software products,
but only as component parts of the Software. Affiliate User agrees to execute
separate agreements with each of MDBS, PI and IRI in the forms attached as
Schedule CC.
2
<PAGE> 40
SECTION III - LICENSE FEE, TAXES AND EXPENSES
3.1 As consideration for the perpetual license to use the Software and the
Documentation granted to Affiliated User herein, Affiliated User agrees to pay
to Sublicensor a one-time license fee in the amount and payable in accordance
with the payment schedule set forth in Schedule A to the Master Agreement.
3.2 Affiliated User shall pay all sales, use and personal property taxes
assessed in connection with this Agreement; provided, however, that Licensor and
Sublicensor shall pay all taxes based on Licensor and Sublicensor's business
operations (including without limitation employment taxes and taxes levied on
their respective income).
3.3 Affiliated User shall reimburse Sublicensor for the reasonable and
necessary out-of-pocket expenses incurred by Licensor or Sublicensor and paid by
Sublicensor on behalf of Affiliated User in connection with this Agreement,
including any hardware and security device(s) described in Schedule BB.
SECTION IV - SOFTWARE SUPPORT AND MAINTENANCE
Software support and maintenance services shall be provided by Licensor to
Affiliated User in accordance with the terms and conditions of the Master
Agreement pursuant to the fee schedule adopted by Sublicensor from time to time.
SECTION V - ADDITIONAL TERMS
The provisions of the Master Agreement relative to Licensor's Warranties,
Limitations of Liability, Title to Software and Documentation, Confidentiality,
Publicity, Books and Records, Indemnity and Termination and Survival and
Severability are hereby incorporated by reference and adopted herein.
3
<PAGE> 41
SECTION VI - MISCELLANEOUS
6.1 Affiliated User may, without the consent of Licensor, assign this
Agreement and its rights and obligations hereunder to (i) an entity that
Licensee operates or in which Licensee holds a 50% or greater interest that
succeeds to the business of Affiliated User or (ii) a third party that is not
affiliated with Affiliated User or Sublicensor and that purchases all or
substantially all of the assets of or ownership interest in Affiliated User,
provided that such third-party assignee's continued use of the Software and the
Documentation shall be conditioned upon the execution of a license agreement
with Licensor and such assignee shall take the Software and the Documentation
subject to Licensor's then current rates for Software support and maintenance.
This Agreement shall inure to the benefit of and bind successors and permitted
assigns of Licensor, Sublicensor and Affiliated User.
6.2 This Agreement shall be governed by and construed in all respects in
accordance with the substantive laws of the State of Tennessee.
6.3 All remedies available to either party for one or more breaches by the
other party are and shall be deemed cumulative and may be exercised separately
or concurrently without waiver of any other remedies. The failure of either
party to act on a breach of this Agreement by the other shall not be deemed a
waiver of such breach or a waiver of future breaches, unless such waiver shall
be in writing and signed by the party against whom enforcement is sought.
4
<PAGE> 42
6.4 All notices required or permitted under this Agreement shall be in
writing and shall be sent to the other party at the address specified above or
to such other address as either party may substitute from time to time by
written notice to the other and shall be deemed validly given upon receipt of
such notice given by certified mail, postage prepaid, or personal or courier
delivery to:
If to Sublicensor:
Healthtrust, Inc. - The Hospital Company
P. O. Box 4350
Nashville, Tennessee 37202-4350
Attention: Director of Information Services,
with a copy to:
Healthtrust, Inc. - The Hospital Company
P. O. Box 4350
Nashville, Tennessee 37202-4350
Attention: Philip D. Wheeler, Esq.
If to Affiliated User:
_____________________________
_____________________________
_____________________________
_____________________________
6.5 This Agreement and the Master Agreement, and any schedules and
exhibits attached hereto and thereto, constitute the entire agreement of the
parties hereto with respect to the subject matter hereof and supersede all prior
representations, proposals, discussions, and communications, whether oral or in
writing. This Agreement may be modified only in writing and shall be enforceable
in accordance with its terms when signed by the parties sought to be bound.
6.6 Affiliated User acknowledges that Licensor reserves the right to
enforce the terms and conditions of this Agreement, including without limitation
the right to terminate the license
5
<PAGE> 43
granted hereunder for breach by the Affiliated User of the terms hereof.
6.7 This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together constitute one and
the same document. In making proof of this Agreement, it shall not be necessary
to produce or account for more than one such counterpart executed by the party
against whom enforcement by this Agreement is sought.
6
<PAGE> 44
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives, as of the date first above written.
Healthtrust, Inc. - The Hospital -------------------------------
Company [Hospital's name]
By: By:
------------------------------- -------------------------------
Title: Title:
---------------------------- ----------------------------
7
<PAGE> 45
SCHEDULE AA
Schedule of Licensed Programs
Licensed
TEAMWORK(TM) Programs Ownership Programs
- --------------------- --------- --------
Product Management, including HCm [ ]
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Payment Verification, including HCm [ ]
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Budgeting and
Budgeting Interface, including HCm [ ]
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Labor Planning and Control
and Labor Planning and
Control Interface, including HCm [ ]
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Distributed Budgeting, including HCm [ ]
Distributed Budgeting MDBS/IQ
and
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Capital Budgeting (CapTrac) HCm [ ]
AA-1
<PAGE> 46
SCHEDULE AA (continued)
Standard Costing and
Standard Costing Interface, HCm [ ]
including
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Labor Productivity, including HCm [ ]
MDBS/IQ (per computer) MDBS/PI [ ]
or
MDBS/IQ (per network) MDBS/PI [ ]
Rate Setting (RTrac) HCm [ ]
Desktop Delivery System, HCm [ ]
including
Express/EIS II (per end user) IRI
AA-2
<PAGE> 47
SCHEDULE BB
The Hardware
Affiliated User shall use the Software on a 386 or faster IBM, Compaq or
Gateway personal computer system, using the DOS Operating System Version 4.0 or
5.0 or Novell Netware 386 Version 3.11A or subsequent versions, together with
Licensor's security sentinel and Tecmar QT or Datavault tape backup system.
BB-1
<PAGE> 48
SCHEDULE CC
USER ACKNOWLEDGEMENT OF SOFTWARE LICENSE -- MDBS
User's Name:
Address:
1) User has entered into a license for certain software supplied by Health
Care microsystems, Inc. ("HCm"). Such software includes programs supplied
to HCm by Micro Data Base Systems, Inc. ("MDBS"), P.O. Box 248, Lafayette,
Indiana 47902, U.S.A.
2) User disclaims any ownership rights and other intellectual property rights
in such software, and any accompanying copyrights therein, and
acknowledges that its right to use such software is defined in its
license.
3) User's license does not authorize the use of the MDBS portion of the
Software as a stand-alone software product, but only as part of the
Software.
4) User may make the minimum necessary number of copies reasonably needed for
use, backup and archival purposes only and may use, copy or modify the
Software only in accordance with its license.
5) User has covenanted, through its license, that it will not delete any
identifying marks or copyright notices in or on the Software.
6) This document is not intended to serve as an addendum, supplement or
modification to or of User's license. In the event of any conflict between
this document and User's license, the license shall control.
USER:
By:
--------------------------------
CC-1
<PAGE> 49
Name:
-------------------------------
Title:
------------------------------
Date:
-------------------------------
CC-2
<PAGE> 50
SCHEDULE CC (continued)
USER ACKNOWLEDGEMENT OF SOFTWARE
LICENSE -- INTELLIGENT QUERY
User's Name:
Address:
1) User has entered into a license for certain software supplied by Health
Care microsystems, Inc. ("HCm"). Such software includes programs supplied
to HCm by Programming Intelligence, Inc. ("PI"), 3069 Amwiler Road,
Atlanta, Georgia 30360.
2) User disclaims any ownership rights and other intellectual property rights
in such software, and any accompanying copyrights therein, and
acknowledges that its right to use such software is defined in its
license.
3) User's license does not authorize the use of the PI portion of the
Software as a stand-alone software product, but only as part of the
Software.
4) User may make the minimum necessary number of copies reasonably needed for
use, backup and archival purposes only and may use, copy or modify the
Software only in accordance with its license.
5) User has covenanted, through its license, that it will not delete any
identifying marks or copyright notices in or on the Software.
6) This document is not intended to serve as an addendum, supplement or
modification to or of User's license. In the event of any conflict between
this document and User's license, the license shall control.
CC-3
<PAGE> 51
USER:
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
Date:
-------------------------------
CC-4
<PAGE> 52
SCHEDULE CC (continued)
USER ACKNOWLEDGEMENT OF SOFTWARE
LICENSE -- INFORMATION RESOURCES, INC.
User's Name:
Address:
1) User has entered into a license for certain software supplied by Health
Care microsystems, Inc. ("HCm"). Such software includes programs supplied
by Information Resources, Inc. ("IRI").
2) User disclaims any ownership rights and other intellectual property rights
in such software, and any accompanying copyrights therein, and
acknowledges that its right to use such software is defined in its
license.
3) User's license does not authorize the use of the IRI portion of the
Software as a stand-alone software product, but only as part of the
Software.
4) User may make the minimum necessary number of copies reasonably needed for
use, backup and archival purposes only and may use, copy or modify the
Software only in accordance with its license.
5) User has covenanted, through its license, that it will not delete any
identifying marks or copyright notices in or on the Software.
6) This document is not intended to serve as an addendum, supplement or
modification to or of User's license. In the event of any conflict between
this document and User's license, the license shall control.
USER:
CC-5
<PAGE> 53
By:
--------------------------------
Name:
-------------------------------
Title:
------------------------------
Date:
-------------------------------
CC-6
<PAGE> 54
EXHIBIT 2
LICENSOR'S PROPOSAL
DATED JUNE 7, 1991
Pages 36-59 of the Licensor's Proposal dated June 7, 1991, attached
hereto, are incorporated by reference herein.
<PAGE> 1
EXHIBIT 10.2(ii)
CONFIDENTIAL
This Amendment to the Master Software License, dated the 29th day of June,
1992, (the "Agreement") is made and entered into as of the 1st day of September,
1995 (the "Effective Date"), by and between Health Care microsystems, Inc. (the
"Licensor"), a California corporation having its principal place of business at
3655 Torrance Boulevard, Suite 350, Torrance, California 90503, and Columbia/HCA
(the "Licensee"), a Delaware corporation having its principal place of business
at One Park Plaza, Nashville, Tennessee 37203.
In the event of any conflict between the terms and conditions of this Amendment
and those contained in the Agreement, the terms and conditions of this Amendment
shall govern.
Master Software License - Section 9.5
Section 9.5 of the Agreement shall be replaced by the following paragraph:
9.5 Subject to the provisions of Schedule A, Section V.2a., whereby
Licensee may earlier terminate the services described in this Section 9,
Licensor shall provide the Software support and maintenance services described
in this Section 9 for the charges set forth in Section 9.6 below for a period
commencing upon the Effective Date of this Agreement and running through
December 31, 2000 (the "Initial Term"), and, upon expiration of the Initial
Term, shall continue to provide such services on a year-to-year basis unless, no
less than six months prior to the expiration of the Initial Term or 60 days
prior to the expiration of any one-year renewal term, either party gives the
other party written notice of the notifying party's desire to:
Master Software License - Section 19
Section 19 of the Agreement shall be replaced by the following paragraph:
All notices required or permitted under this Agreement shall be in writing
and sent to the other party at the address specified below or to such other
address as either party may substitute from time to time by written notice to
the other and shall be deemed validly given upon receipt of such notice given by
certified mail, postage prepaid, or personal or courier delivery to:
<PAGE> 2
CONFIDENTIAL
Columbia/HCA, Inc. Health Care microsystems, Inc.
One Park Plaza Suite 350
Nashville, Tennessee 37203 3655 Torrance Boulevard
Attention: Torrance, California 90503
Richard Chapman, CIO Attention: Thomas J. Kazamek
with a copy to: with a copy to:
Columbia/HCA, Inc. Health Care microsystems, Inc.
One Park Plaza Suite 350
Nashville, Tennessee 37203 3655 Torrance Boulevard
Attention: Samuel A. Greco Torrance, California 90503
Attention: Robert V. Nagelhout
Schedule A - Section III (a) Paragraph 1
Schedule A - Section III (a) Paragraph 1 of the Agreement shall be replaced by
the following paragraph:
(a) The sublicense fees to be paid to Licensor by Licensee for or on behalf of
Affiliated Users per program actually sublicensed are set forth on Schedule A,
Attachment 1; provided, however, the sublicense fees payable to Licensor for up
to 190 sublicenses are subject to the caps described in Section IV below.
Sublicense fees shall be due and payable as follows:
Schedule A - Section IV
The following Paragraph 2 shall be added to Schedule A - Section IV:
2. All License/Sublicense Fee Caps are based on the Corporate License and first
90 Sublicenses of all software described in Section A Attachment 2. The License
Fee for the next 100 Product Management systems is $1,250,000 in total and 10
additional PCM Licenses for $200,000 in total. The License Fee for the next 100
Product Management systems and 10 additional PCM Licenses shall be due and
payable within thirty (30) days from the execution of this Amendment.
Schedule A - Section V - Paragraph 2b.
<PAGE> 3
CONFIDENTIAL
Schedule A - Section V - Paragraph 2b of the Agreement shall be replaced by the
following paragraph:
b. The total fees payable by Licensee for annual Software support and
maintenance for its license and 190 sublicensee shall in no event exceed
$601,720 irrespective of the Software programs sublicensed and actually
installed.
Schedule A - Section VI
Schedule A - Section VI of the Agreement shall be replaced by the following:
A. MDBS/IQ (per computer) MDBS/PI $ 750
MDBS/IQ (per file server MDBS/PI $1,500
used as a database
server in any network)
B. Express/IRI Workstation Royalty
(per end user workstation) $ 400
C. Express/IRI Royalty - Financial Modeling
(per license to Financial Modeling) $1,500
Pass-through fees shall be due and payable within thirty (30) days following
grant of the applicable sublicense. Total workstation pass-through fees payable
by Licensee for Express/EIS II shall be capped and shall not exceed $40,000.
Each $400 Workstation payment shall be credited against this $40,000 cap.
Express royalties for Financial Modeling shall be excluded from this cap.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THE MASTER SOFTWARE LICENSE TOGETHER
WITH THIS AMENDMENT AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS.
FURTHER, THE PARTIES AGREE THAT THE AGREEMENT AND THIS AND ANY PRIOR AMENDMENTS
ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES,
WHICH SUPERSEDES ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN,
<PAGE> 4
CONFIDENTIAL
AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER
OF THIS AGREEMENT AND THIS AND PRIOR AMENDMENTS.
LICENSEE: LICENSOR:
By: By:
--------------------------- --------------------------
Samuel A. Greco Thomas J. Kazamek,
Senior Vice-President Chief Operating Officer
<PAGE> 5
CONFIDENTIAL
Schedule A - Attachment 1
Schedule A - Attachment 1 of the Agreement shall be replaced by the following:
Schedule A
Attachment 1
Affiliated User Price Schedule
License
Ownership Fee
--------- -------
A. TEAMWORK(tm)
Product Management HCm $16,250
(Licenses 1-90)
Product Management HCm $12,500
(Licenses 91-190)
Payment Verification HCm 8,750
Capital Budgeting HCm 3,000
(CapTrac)
Standard Costing and
Standard Costing HCm 11,875
Interface
Labor Productivity HCm 18,750
Rate Setting (RTrac) HCm 2,000
B. Patient Care Management HCm 25,000
Financial Modeling
(Budgeting and
Departmental reporting)
(Licenses 1-90)
Patient Care Management HCm 20,000
(Licenses 91-100)
<PAGE> 1
EXHIBIT 10.3(ii)
HEALTH MANAGEMENT SYSTEMS, INC.
Amendment No. 6 to
Stock Option and Restricted Stock Purchase Plan
Amendment, dated as of December 2, 1997 (the "Effective Date"), to
the Stock Option and Restricted Stock Purchase Plan (the "Plan") of Health
Management Systems, Inc., a New York corporation (the "Company"), subject to the
approval of shareholders.
1. All terms not otherwise defined in the Amendment shall have
meanings ascribed to them in the Plan.
2. The Plan, as amended, provides that the Board of Directors (or
the Committee) shall have the sole authority and discretion to determine the
number of shares of Common Stock that may be issued under each Award or Option.
3. In order to ensure that compensation with respect to Awards
and/or Options granted under the Plan will continue to be deductible for income
tax purposes under Section 162(m) of the Code, this amendment ("Amendment No.
6") to the Plan, adopted by the Board of Directors on December 2, 1997, subject
to approval by the shareholders of the Company, limits the number of shares of
Common Stock that may be subject to an Award and/or Option awarded to any single
Employee in any fiscal year of the Company to 150,000 shares, and requires that
grants be made by a committee of the Board of Directors consisting solely of at
least two "outside directors."
4. Pursuant to the foregoing, the following is hereby inserted as
Section 2.10 of the Plan:
2.10 "Outside Director" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
5. Pursuant to the foregoing, current Sections 2.10, 2.11, 2.12 and
2.13 of the Plan are hereby renumbered to be Sections 2.11, 2.12, 2.13 and 2.14,
respectively.
6. Pursuant to the foregoing, Section 3 of the Plan
<PAGE> 2
is hereby eliminated in its entirety, and the following is inserted in its place
and stead:
Section 3. Eligibility. Awards and/or Options may be granted
to any Employee. The Board of Directors (or the Committee) shall have the sole
authority to select the persons to whom Awards and/or Options are to be granted
hereunder, and to determine whether a person is to be granted a Non-Qualified
Option, an ISO or an Award or any combination thereof. No person shall have any
right to participate in the Plan. Any person selected by the Board of Directors
or the Committee for participation during any one period will not by virtue of
such participation have the right to be selected as a Participant for any other
period. No person may be granted, in any fiscal year of the Company, Awards
and/or Options to purchase more than 150,000 shares of Common Stock.
7. Pursuant to the foregoing, Section 5.1 of the Plan is hereby
eliminated in its entirety, and the following is inserted in its place and
stead:
5.1 The Plan shall be administered by the Board of Directors
or, if established at any time by the Board of Directors, by a committee thereof
(the "Committee"). The Committee shall be appointed from time to time by, and
shall serve at the pleasure of, the Board of Directors. To the extent that the
Board of Directors determines it to be desirable to qualify Awards and/or
Options granted hereunder as "performance-based compensation" within the meaning
of Section 162(m) of the Code, the Plan shall be administered by a Committee
consisting solely of two or more Outside Directors.
8. Other than as amended hereby, the Plan shall remain in full force
and effect.
9. This Amendment No 6. shall be effective as of the Effective Date.
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
Years Ended October 31,
-----------------------
1997 1996 1995
------- ------ ------
Primary Earnings per Share:
Earnings data:
Net income $ 2,081 7,291 8,962
======= ====== ======
Weighted average shares outstanding
Average shares of common stock outstanding 17,613 17,166 16,435
Net effect of dilutive stock options - based on the
treasury stock method using average market price 305 1,295 1,144
------- ------ ------
Weighted average shares outstanding 17,918 18,461 17,579
======= ====== ======
Earnings per common share:
Net income $ 0.12 0.39 0.51
======= ====== ======
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 21.1 - LIST OF SUBSIDIARIES OF HEALTH MANAGEMENT SYSTEMS, INC.
STATE OF
SUBSIDIARY INCORPORATION
---------- -------------
Accelerated Claims Processing, Inc. Delaware
401 Park Avenue South
New York, NY 10016
Quality Medi-Cal Adjudication, Incorporated California
2897 Kilgore Road
Rancho Cordova, CA 95670
Health Care microsystems, Inc. California
200 North Sepulveda Boulevard
El Segundo, CA 90245
CDR Associates, Inc. Maryland
9642 Deereco Road
Timonium, MD 21093
Quality Standards in Medicine, Inc. Delaware
581 Boylston Street
Boston, MA 02116
HSA Managed Care Systems, Inc. Delaware
234 Spring Lake Drive
Itasca, IL 60143
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Health Management Systems, Inc.:
We consent to incorporation by reference in the registration forms S-3 (File
Nos. 33-91518 and 333-06769), and forms S-8 (File Nos. 33-65560, 33-76770,
33-95326, 33-76638 and 33-33706) of Health Management Systems, Inc. of our
report dated November 21, 1997 relating to the consolidated balance sheets of
Health Management Systems, Inc. and subsidiaries as of October 31, 1996 and
1997, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
October 31, 1997, and related schedule, which report appears herein.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 21, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial statement information extracted from
Consolidated Balance Sheets at October 31, 1997 and 1996 and the Statement of
Operations for the years ended October 31, 1997, 1996, and 1995 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> Year Year Year
<FISCAL-YEAR-END> Oct-31-1997 Oct-31-1996 Oct-31-1995
<PERIOD-START> Nov-01-1996 Nov-01-1995 Nov-01-1994
<PERIOD-END> Oct-31-1997 Oct-31-1996 Oct-31-1995
<CASH> 20,694 22,340 0
<SECURITIES> 18,386 17,181 0
<RECEIVABLES> 40,947 44,412 0
<ALLOWANCES> (1,428) (1,682) 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 81,983 86,955 0
<PP&E> 25,302 22,070 0
<DEPRECIATION> (17,314) (14,247) 0
<TOTAL-ASSETS> 109,694 109,643 0
<CURRENT-LIABILITIES> 28,184 32,204 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 178 175 0
<OTHER-SE> 79,628 74,437 0
<TOTAL-LIABILITY-AND-EQUITY> 109,694 109,643 0
<SALES> 89,517 101,326 90,495
<TOTAL-REVENUES> 89,517 101,326 90,495
<CGS> 0 0 0
<TOTAL-COSTS> 88,355 87,873 73,035
<OTHER-EXPENSES> 1,899 (384) (103)
<LOSS-PROVISION> 538 4,485 183
<INTEREST-EXPENSE> 0 (987) (942)
<INCOME-PRETAX> 1,730 12,865 17,114
<INCOME-TAX> (351) 5,574 8,152
<INCOME-CONTINUING> (169) 13,249 17,217
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 2,081 7,291 8,962
<EPS-PRIMARY> 0.12 0.39 0.51
<EPS-DILUTED> 0.12 0.39 0.51
</TABLE>
