<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>
HEALTH MANAGEMENT SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 3, 1998
The Annual Meeting of Shareholders of Health Management Systems, Inc. (the
"Company") will be held at the offices of the Company, 401 Park Avenue South,
New York, New York, on March 3, 1998 at 11:00 a.m., Eastern Standard Time, for
the following purposes:
1. To elect four directors to serve for two-year terms expiring at the
annual meeting in 2000 and until their successors are elected and
qualified;
2. To consider and take action on a proposal to approve an amendment
to the Company's Stock Option and Restricted Stock Purchase Plan to limit
the maximum number of shares of the Company's Common Stock that may be
subject to a stock option or stock purchase right awarded to any single
employee in any fiscal year;
3. To consider and take action on the ratification of the selection of
KPMG Peat Marwick LLP as the Company's independent certified public
accountants for 1998; and
4. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Only shareholders of record at the close of business on January 13, 1998
will be entitled to receive notice of and to vote at the meeting.
Shareholders are cordially invited to attend the meeting in person. Whether
or not you expect to attend, WE URGE YOU TO READ THE ACCOMPANYING PROXY
STATEMENT AND THEN COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED PROXY CARD IN
THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE. It is important that your shares be
represented at the meeting by virtue of your executed proxies should you be
unable to attend the meeting in person. Your promptness in responding will
assist us to prepare for the meeting and to avoid the cost of a follow-up
mailing. If you receive more than one proxy card because you own shares
registered in different names or at different addresses, each proxy card should
be completed and returned.
Sincerely,
/s/ Felice Blanco
Felice Blanco
Secretary
January 30, 1998
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
PROXY STATEMENT
------------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 3, 1998
GENERAL INFORMATION
This Proxy Statement is furnished to shareholders of Health Management
Systems, Inc., a New York corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies for use at its
Annual Meeting of Shareholders (the "Meeting"). The Meeting is scheduled to be
held on Tuesday, March 3, 1998, at 11:00 a.m., Eastern Standard Time, at the
offices of the Company, 401 Park Avenue South, New York, New York, and at any
adjournments thereof. It is anticipated that the mailing to shareholders of this
Proxy Statement and the enclosed form of proxy will commence on or about January
30, 1998.
At the Meeting, shareholders will be asked to vote upon: (1) the election
of four directors; (2) a proposal to amend the Company's Stock Option and
Restricted Stock Purchase Plan; (3) ratification of the selection of independent
certified public accountants for 1998; and (4) such other business as may
properly come before the Meeting and at any adjournments thereof.
VOTING RIGHTS AND VOTES REQUIRED
The close of business on January 13, 1998 has been fixed as the record date
(the "Record Date") for the determination of shareholders entitled to receive
notice of and to vote at the Meeting. As of the close of business on such date,
the Company had outstanding and entitled to vote 17,220,069 shares of common
stock, par value $0.01 per share (the "Common Stock").
A majority of the outstanding shares of Common Stock must be represented in
person or by proxy at the Meeting in order to constitute a quorum for the
transaction of business. The record holder of each share of Common Stock
entitled to vote at the Meeting will have one vote for each share so held.
Directors are elected by a plurality of the votes cast. Shareholders may
not cumulate their votes. The four candidates receiving the highest number of
votes will be elected. In tabulating the votes, votes withheld in connection
with the election of one or more nominees and broker nonvotes will be
disregarded and will have no effect on the outcome of the vote.
The affirmative vote of the holders of a majority of the shares of Common
Stock outstanding on the Record Date will be required to approve the amendment
to the Company's Stock Option and Restricted Stock Purchase Plan. In determining
whether this proposal has received the requisite number of affirmative votes,
abstentions and broker nonvotes will have the same effect as votes against the
proposals.
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the Meeting in person or by proxy and entitled to vote
thereat will be required to ratify the selection of the Company's independent
certified public accountants and to adopt any shareholder proposal duly
presented at the Meeting. In determining whether these proposals have received
the requisite number of affirmative votes, abstentions and broker nonvotes will
be disregarded and will have no effect on the outcome of the vote.
<PAGE> 4
VOTING OF PROXIES
If the accompanying proxy is properly executed and returned, the shares
represented by the proxy will be voted at the Meeting as specified in the proxy.
If no instructions are specified, the shares represented by any properly
executed proxy will be voted FOR the election of the nominees listed below under
"Election of Directors", FOR the amendment of the Company's Stock Option and
Restricted Stock Purchase Plan, and FOR the ratification of the selection of
independent certified public accountants.
REVOCATION OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by a
shareholder at any time before it is exercised by written notice to the
Secretary of the Company, by timely notice of a properly executed proxy bearing
a later date delivered to the Company, or by voting in person at the Meeting.
SOLICITATION OF PROXIES
The Company will bear the cost of this solicitation, including amounts paid
to banks, brokers, and other record owners to reimburse them for their expenses
in forwarding solicitation material regarding the Meeting to beneficial owners
of Common Stock. The solicitation will be by mail, with the material being
forwarded to the shareholders of record and certain other beneficial owners of
Common Stock by the Company's officers and other regular employees (at no
additional compensation). Such officers and employees may also solicit proxies
from shareholders by personal contact, by telephone, or by other means if
necessary in order to assure sufficient representation at the Meeting.
ChaseMellon Shareholder Services, L.L.C. has been retained to receive and
tabulate proxies and to provide representatives to act as inspectors of election
for the Meeting.
2
<PAGE> 5
MATTERS SUBJECT TO SHAREHOLDER VOTE
1. ELECTION OF DIRECTORS
Pursuant to the Company's by-laws, the Board of Directors of the Company is
currently divided into two classes, with one class standing for election each
year for two-year terms. The terms of four directors will expire at the Meeting.
The terms of the other current directors listed below will expire at the 1999
annual meeting.
The four persons designated by the Board of Directors as nominees for
election as directors with terms expiring at the 2000 annual meeting are Russell
L. Carson, Robert V. Nagelhout, Galen D. Powers, and Donald J. Staffa.
Unless a contrary direction is indicated, it is intended that proxies
received will be voted for the election as directors of the four nominees to
serve for two-year terms expiring at the 2000 annual meeting, and in each case
until their successors are elected and qualified. In the event any nominee for
director declines or is unable to serve, the proxies may be voted for a
substitute nominee selected by the Board of Directors. The Board of Directors
expects that each nominee named in the following table will be available for
election.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.
<TABLE>
<CAPTION>
SERVED AS
POSITION WITH THE COMPANY DIRECTOR
NAME OR PRINCIPAL OCCUPATION FROM
- --------------------------------- -------------------------------------------------- ---------
<S> <C> <C>
Nominees for director for two-year terms ending in 2000:
Russell L. Carson................ General Partner of Welsh, Carson, Anderson & Stowe 1992
("WCAS"), an investment firm
Robert V. Nagelhout.............. Executive Vice President and Chief Operating 1996
Officer of the Company
Galen D. Powers.................. Senior Founder and President of Powers, Pyles, 1992
Sutter & Verville, P.C., a law firm
Donald J. Staffa................. Senior Vice President of the Company 1996
Directors continuing in office until 1999:
Paul J. Kerz..................... Chairman, President and Chief Executive Officer of 1974
the Company
William W. Neal.................. Managing Principal of Piedmont Venture Partners, 1989
an investment firm
Ellen A. Rudnick................. Chairman of Pacific Biometrics, Inc., a 1997
biotechnology company
Richard H. Stowe................. General Partner of WCAS 1989
</TABLE>
3
<PAGE> 6
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company, as of January 13, 1998:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------------------- ----------------------------------------------------------
<S> <C>
Paul J. Kerz..................... Chairman, President and Chief Executive Officer, and
Director
Robert V. Nagelhout.............. Executive Vice President and Chief Operating Officer, and
Director
Donald J. Staffa................. Senior Vice President and Director
Thomas J. Kazamek................ Senior Vice President
Phillip Siegel................... Vice President and Chief Financial Officer
Lewis D. Levetown................ Vice President
Russell L. Carson................ Director
William W. Neal.................. Director
Galen D. Powers.................. Director
Ellen A. Rudnick................. Director
Richard H. Stowe................. Director
</TABLE>
PAUL J. KERZ, 56, a founder of the Company, has been its Chairman,
President and Chief Executive Officer, and a director since the Company's
inception in 1974. From 1970 until 1973, he served as Senior Vice President of
Finance and Chairman of the Management Review Committee of the New York City
Health and Hospitals Corporation. Prior to 1970, Mr. Kerz served in various
capacities in state and federal Bureaus of the Budget. Mr. Kerz was also a
director of Health Information Systems Corporation ("HISCo") and acted as its
Chairman until its acquisition by the Company in March 1997.
ROBERT V. NAGELHOUT, 43, serves as President of Health Care microsystems,
Inc. ("HCm"), a position he held since HCm's acquisition by the Company in
February 1995, and became the Company's Executive Vice President and Chief
Operating Officer effective November 1997. Prior to co-founding HCm in 1983, he
served as a consultant at Ernst & Whinney (now Ernst & Young).
DONALD J. STAFFA, 52, has served as Senior Vice President in charge of the
Transfer Payment Services Division of the Company since November 1997. Prior to
that time, Mr. Staffa had served as Senior Vice President of Operations since
October 1994; he continues to serve as President of Quality Medi-Cal
Adjudication, Incorporated ("QMA"), a position he has held since QMA's
acquisition by the Company in 1990. From 1989 until September 1994, he served as
Vice President in charge of the Company's California operations, and from 1981
through 1988 served as Vice President of Operations of the Company. From 1979 to
1981, Mr. Staffa was the President of Western Bradford Trust Company, a division
of Bradford National Corporation, which he joined in 1975.
THOMAS J. KAZAMEK, 39, joined HCm in 1984 and currently holds the position
of Senior Vice President in charge of the Company's Software Systems and
Services Division. Prior to joining HCm, Mr. Kazamek was a Supervisor for the
National Systems Group of Ernst & Whinney (now Ernst & Young).
PHILLIP SIEGEL, 55, joined the Company in May 1996 as the Company's Vice
President and Chief Financial Officer. Mr. Siegel had been an independent
business consultant since March 1993. He served in various executive positions
at Presidential Life Insurance Company from December 1989 until February 1993,
including Senior Vice President. During 1988, Mr. Siegel served as Chief
Operating Officer and Chief Financial Officer of Sherwood Group and Sherwood
Securities. From 1972 through 1987, Mr. Siegel served in various senior
executive capacities for the American Subsidiary of Reuters LTD., including Vice
President for
4
<PAGE> 7
Acquisitions, Vice President and General Counsel and as a senior financial
officer. Mr. Siegel is a director of WestPoint Stevens, Inc. (and chairman of
its audit committee), and a General Partner of Fiduciary Capital Partners, L.P.
and Fiduciary Capital Pension Partners, L.P.
LEWIS D. LEVETOWN, 55, has been Vice President of Human Resources of the
Company since 1988. From 1982 until he joined the Company, he was Senior Vice
President, Human Resources for Automated Data Processing, Inc. ("ADP").
RUSSELL L. CARSON, 54, has been a general partner of WCAS since 1979. Prior
to 1979, he was Chairman of Citicorp Venture Capital, Ltd. Mr. Carson is a
director of American Oncology Resources, Inc., a company that manages oncology
practices, National Surgery Centers, Inc., a company that owns and operates
outpatient surgery centers, Quorum Health Group, Inc., a company that owns
hospitals and provides management and consulting services to third party
hospital owners, and several other private companies. Mr. Carson also was a
director of HISCo until its acquisition by the Company in March 1997.
WILLIAM W. NEAL, 65, has been Managing Principal of Piedmont Venture
Partners since its inception in July 1996. From 1989 to April 1996, he served as
Chief Executive Officer of Broadway and Seymour, a company that provides
software and computer systems to the banking industry. From 1985 through July
1989, he was a partner of WCAS. Mr. Neal was Senior Vice President -- Marketing
of ADP from 1984 to 1985 and a Group President of ADP from 1982 to 1984. He
served as a director of ADP from 1982 until 1985.
GALEN D. POWERS, 61, is the senior founder and has served as President of
Powers, Pyles, Sutter & Verville P.C., a Washington, D.C. law firm specializing
in healthcare and hospital law, since he founded the firm in 1983. Mr. Powers
was the first chief counsel of the federal Health Care Financing Administration
and has served as a director and the President of the National Health Lawyers
Association. He is the President of the National Association of Medicare
Dependent Hospitals.
ELLEN A. RUDNICK, 47, since 1992 has served as Chairman of two
corporations: Pacific Biometrics, Inc., a publicly-held healthcare
biodiagnostics company, and CEO Advisors, Inc., a privately-held consulting
firm. From 1990 to 1992, she was President and Chief Executive Officer of
Healthcare Knowledge Resources ("HKR"), a privately held healthcare information
technology corporation, and subsequently served as President of HCIA, Inc.
("HCIA") following the acquisition of HKR by HCIA. From 1975 to 1990, Ms.
Rudnick served in various positions at Baxter Health Care Corporation, including
Corporate Vice President and President of its Management Services Division.
RICHARD H. STOWE, 54, has been a general partner of WCAS since 1979. Prior
to 1979, he was a Vice President in the venture capital and corporate finance
groups of New Court Securities Corporation (now Rothschild Inc.). Mr. Stowe is a
director of Aurora Electronics, Inc., a company that distributes spare parts and
computer recycling services, and several other private companies. Mr. Stowe also
was a director of HISCo until its acquisition by the Company in March 1997.
DIRECTORS' FEES
Directors do not receive any cash compensation for their services, but are
reimbursed for expenses incurred in attending meetings. In addition, each
non-employee director is granted options annually to purchase 1,500 shares of
Common Stock under the Company's 1995 Non-Employee Director Stock Option Plan.
5
<PAGE> 8
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held eleven meetings during Fiscal Year 1997. In
addition, there were three actions taken by unanimous written consent. Each
director attended at least 75% of the aggregate of (a) the total number of
meetings of the Board of Directors, and (b) the committees on which the director
served, except for Mr. Carson who attended 55%.
The committees of the Board of Directors consist of an Audit Committee and
a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the annual appointment of independent certified public accountants with whom the
committee reviews the audit fees, scope, and timing of the audit, the adequacy
of internal controls, and any other services rendered. The Audit Committee is
comprised of Messrs. Powers and Stowe and held three meetings during fiscal year
1997.
COMPENSATION COMMITTEE. The Compensation Committee reviews and recommends
the compensation and bonuses of the executives of the Company. The Compensation
Committee also administers the Company's Stock Option and Restricted Stock
Purchase Plan, the Company's Employee Stock Purchase Plan, and the Company's
1995 Non-Employee Director Stock Option Plan. The Compensation Committee is
comprised of Messrs. Neal and Stowe and held two meetings during fiscal year
1997. In addition, there was one action taken by unanimous written consent.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules issued thereunder, the Company's executive
officers and directors are required to file with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. reports of
ownership and changes in ownership of Common Stock. Copies of such reports are
required to be furnished to the Company. Based solely on review of the copies of
such reports furnished to the Company, or written representations that no other
reports were required, the Company believes that, during 1997, all of its
executive officers and directors complied with the requirements of Section
16(a), except that Robert V. Nagelhout, an officer and director of the Company,
did not timely file a Form 4 for the month of June 1997 with respect of the sale
of 10,000 shares of Common Stock.
ADDITIONAL INFORMATION REGARDING COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS IS PROVIDED ON PAGES 10 THROUGH 16 OF THIS PROXY STATEMENT.
2. APPROVAL OF PROPOSAL TO AMEND THE COMPANY'S STOCK OPTION AND RESTRICTED
STOCK PURCHASE PLAN
DESCRIPTION OF THE STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The Company's Stock Option and Restricted Stock Purchase Plan (the "Plan")
was established in 1989 to provide the Company an effective means to attract,
retain, and motivate employees. The Plan, which is designed to comply with the
requirements of Section 16(b) of the Exchange Act, was approved by the Company's
shareholders in December 1992. The Plan, as amended, provides for the issuance
of a maximum of 6,750,000 shares of Common Stock. As of January 13, 1998,
approximately 2,853,377 shares remained available for issuance under the Plan.
The shares remaining available for issuance under the Plan will be increased to
the extent any granted stock options expire or terminate unexercised. No options
may be granted under the Plan after May 23, 1999.
6
<PAGE> 9
The Plan is administered by the Compensation Committee which must consist
solely of at least two non-employee directors within the meaning of the Exchange
Act. The Compensation Committee has the authority to interpret the provisions of
the Plan and to make all determinations deemed necessary or advisable for its
administration. The Compensation Committee may amend or terminate the Plan,
except that shareholder approval is required to increase the number of shares of
Common Stock subject to the Plan, to change the class of persons eligible to
participate in the Plan, or to increase materially the benefits accruing to
participants under the Plan.
The Plan provides for the issuance of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code") and
non-qualified stock options not intended to meet the requirements of Section 422
of the Code. The Plan also provides for the granting of rights to purchase
Common Stock on a "restricted stock" basis. No such rights have ever been
granted by the Company. Incentive stock options may be granted to employees of
the Company and its subsidiaries, and non-qualified options may be granted to
employees, directors, and other persons employed by, or performing services for,
the Company and its subsidiaries. Subject to the Plan, the Compensation
Committee determines the employees to whom grants are made and the vesting,
timing, amounts, and other terms of such grants. An employee may not receive
incentive stock options first exercisable in any one calendar year for shares
with a fair market value on the date of grant in excess of $100,000. No quantity
limitations currently apply to the grant of non-qualified stock options.
The exercise price of incentive stock options may not be less than the fair
market value of the Common Stock on the date of grant, except that the exercise
price of any incentive stock option granted to the holder of more than 10% of
the outstanding Common Stock may not be less than 110% of the fair market value
of the Common Stock on the date of grant. The exercise price of non-qualified
stock options may be equal to, more than, or less than the fair market value of
the Common Stock on the date of grant. The term of each option may not exceed
ten years, except the term of any incentive stock option granted to the holder
of more than 10% of the outstanding Common Stock may not exceed five years. The
option price may be paid in cash, shares of Common Stock, or any other
consideration acceptable to the Compensation Committee. The Plan and the option
agreements issued thereunder set forth additional provisions with respect to the
exercise of options by optionees upon the termination of their employment and
upon their death.
The number of shares of Common Stock covered by outstanding options, the
number of shares of Common Stock available for issuance under the Plan, and the
exercise price per share of outstanding options are to be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or stock dividend. In the event of a merger
or sale of all or substantially all of the assets of the Company, the
Compensation Committee or the Board of Directors will make such adjustment as it
deems equitable in respect of outstanding options, including, without
limitation, the revision or cancellation of any such options.
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 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. Mr. Kerz and Laurence B. Simon, who resigned as an officer of the
Company on November 30, 1997, were ineligible to participate, and Mr. Staffa had
limitations on his ability to participate in the stock option exchange. Eligible
employees had approximately one month's time until
7
<PAGE> 10
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.
FEDERAL INCOME TAX CONSEQUENCES
INCENTIVE STOCK OPTIONS. The grant of an incentive stock option has no
immediate tax consequences to the optionee or to the Company. The exercise of an
incentive stock option generally has no immediate tax consequences to the
optionee (except to the extent it is an adjustment in computing alternative
minimum taxable income) or to the Company. If an optionee holds the shares
acquired pursuant to the exercise of an incentive stock option for the required
holding period, the optionee generally recognizes mid-term or long-term capital
gain or loss (depending on the holding period of the shares) upon a subsequent
sale of the shares in the amount of the difference between the amount realized
upon the sale and the exercise price of the shares. In such a case, the Company
is not entitled to a deduction in connection with the grant or exercise of the
incentive stock option or the sale of shares acquired pursuant to such exercise.
If, however, an optionee disposes of the shares prior to the expiration of the
required holding period, the optionee recognizes ordinary income equal to the
excess of the fair market value of the shares on the date of exercise (or the
amount realized on the disposition, if less) over the exercise price, and the
Company is entitled to a corresponding deduction if applicable reporting
requirements are satisfied. The required holding period is two years from the
date of grant and one year after the date of issuance of the shares, whichever
ends later.
NON-QUALIFIED STOCK OPTIONS. The grant of a non-qualified stock option has
no immediate tax consequences to the optionee or to the Company. Upon the
exercise of a non-qualified stock option, the optionee recognizes ordinary
income in an amount equal to the excess of the fair market value of the shares
on the date of exercise over the exercise price, and the Company is entitled to
a corresponding deduction if applicable reporting requirements are satisfied and
the shares acquired on exercise are not subject to a substantial risk of
forfeiture. The optionee's tax basis in the shares is the exercise price plus
the amount of ordinary income recognized by the optionee, and the optionee's
holding period will commence on the day after the day of exercise. Upon a
subsequent sale of the shares, any difference between the optionee's tax basis
in the shares and the amount realized on the sale is treated as long-term,
mid-term or short-term capital gain or loss, depending on the holding period of
the shares.
PROPOSED AMENDMENT TO PLAN
On December 2, 1997, the Board of Directors unanimously approved, subject
to approval by the Company's shareholders, an amendment to the Plan to limit to
150,000 shares the maximum number of shares of Common Stock that may be subject
to a stock option or stock purchase right awarded to any single employee in any
fiscal year. The purpose of this amendment is to assure that any options or
rights granted under the Plan after the December 2, 1997 meeting of the Board of
Directors will qualify as "other performance-based compensation" under Section
162(m) of the Code.
Under Section 162(m) of the Code, no deduction is allowed in any taxable
year of the Company for compensation in excess of $1,000,000 paid to each of its
chief executive officer and its four most highly paid other executive officers
(the "Covered Executives") who are serving in such capacities as of the last day
of such taxable year. An exception to this rule applies to certain
performance-based compensation that is paid pursuant to a plan or program
approved by the Company's shareholders and that specifies the performance
objectives to be obtained, the class of employees eligible to receive awards,
and the maximum amount that can be paid to eligible employees under such plan or
program. Stock options with exercise prices at least equal to
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<PAGE> 11
the fair market value of the underlying Common Stock on the date of grant are
inherently performance based, since they provide value to employees only if the
stock price appreciates.
If the shareholders do not approve the amendment to the Plan, the
Compensation Committee has made no determination as to what action it might take
with respect to the Covered Executives. The Compensation Committee's general
approach to executive compensation is described in its report included in this
Proxy Statement. The current terms of the Plan would remain in effect for all
other employees who are eligible participants in the Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO AMEND THE
COMPANY'S STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN TO LIMIT THE MAXIMUM
NUMBER OF SHARES OF COMMON STOCK THAT MAY BE SUBJECT TO A STOCK OPTION OR STOCK
PURCHASE RIGHT AWARDED TO ANY SINGLE EMPLOYEE IN ANY FISCAL YEAR.
3. RATIFICATION OF THE SELECTION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors, in accordance with the recommendation of the Audit
Committee, has selected, subject to ratification by the shareholders, KPMG Peat
Marwick LLP, independent certified public accountants, to audit the consolidated
financial statements of the Company and its subsidiaries for 1998. KPMG Peat
Marwick LLP has audited the Company's financial statements since 1981.
The Company expects representatives of KPMG Peat Marwick LLP to attend the
Meeting, to be available to respond to appropriate questions from shareholders,
and to have the opportunity to make a statement if so desired.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
SELECTION OF KPMG PEAT MARWICK LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FOR 1998.
9
<PAGE> 12
ADDITIONAL INFORMATION
STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of January 13, 1998, by (a) each person known by
the Company to be the beneficial owner of more than 5% of the outstanding shares
of Common Stock, (b) each executive officer identified in the Summary
Compensation Table below, (c) each director and nominee for director, and (d)
all executive officers and directors as a group. Except as otherwise noted, the
named shareholder had sole voting and investment power with respect to such
securities.
<TABLE>
<CAPTION>
NAME AMOUNT PERCENTAGE
- -------------------------------------------------------------------- --------- ----------
<S> <C> <C>
The Kaufman Fund
140 East 45 Street
New York, NY 10017................................................ 1,000,000 5.81%
Paul J. Kerz(a)..................................................... 1,132,755 6.58%
Laurence B. Simon(b)................................................ 610,103 3.54%
Robert V. Nagelhout(c).............................................. 609,782 3.54%
Donald J. Staffa(d)................................................. 227,533 1.32%
Thomas J. Kazamek(e)................................................ 226,395 1.32%
Phillip Siegel(f)................................................... 13,988 *
Lewis D. Levetown(g)................................................ 36,083 *
Russell L. Carson(h)................................................ 206,105 1.2%
William W. Neal(i).................................................. 35,233 *
Galen D. Powers(j).................................................. 12,747 *
Ellen A. Rudnick(k)................................................. 375 *
Richard H. Stowe(l)................................................. 59,176 *
All executive officers and directors as a group (twelve
persons)(m)....................................................... 3,170,275 18.41%
</TABLE>
- ---------------
* denotes percentage of ownership is less than 1%
(a) Includes (i) 89,828 shares of Common Stock owned by members of the family of
Mr. Kerz or trusts for the benefit of such family members, as to which Mr.
Kerz disclaims beneficial ownership, (ii) 50,353 shares of Common Stock
owned by the Company's Employees' Profit Sharing Trust Plan (the "Profit
Sharing Plan"), of which Mr. Kerz serves as trustee and as to which Mr. Kerz
disclaims beneficial ownership, and (iii) outstanding options to purchase
283,804 shares of Common Stock that are currently exercisable or will become
exercisable before March 31, 1998.
(b) Includes outstanding options to purchase 155,307 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
Mr. Simon resigned as an officer of the Company on November 30, 1997, and
from full-time employment effective December 31, 1997.
(c) Includes 21,599 shares of Common Stock owned by members of the family of Mr.
Nagelhout or trusts for the benefit of such family members, as to which Mr.
Nagelhout disclaims beneficial ownership. Also includes outstanding options
to purchase 25,001 shares of Common Stock that are currently exercisable or
will become exercisable before March 31, 1998. See "Certain
Transactions -- Guarantee of Loan to Robert V. Nagelhout" for additional
information regarding the Company's security interest in certain of these
securities.
10
<PAGE> 13
(d) Includes outstanding options to purchase 114,816 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(e) Includes outstanding options to purchase 32,804 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(f) Includes outstanding options to purchase 7,251 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(g) Includes outstanding options to purchase 6,347 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(h) Includes 2,700 shares of Common Stock owned by members of the family of Mr.
Carson, as to which Mr. Carson disclaims beneficial ownership. Also includes
outstanding options to purchase 2,812 shares of Common Stock that are
currently exercisable or will become exercisable before March 31, 1998.
(i) Includes 20,000 shares of Common Stock owned by members of the family of
Mr. Neal, as to which Mr. Neal disclaims beneficial ownership. Also
includes outstanding options to purchase 10,791 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(j) Includes 237 shares of Common Stock owned by members of the family of Mr.
Powers, as to which Mr. Powers disclaims beneficial ownership. Also
includes outstanding options to purchase 12,510 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(k) Includes outstanding options to purchase 375 shares of Common Stock that are
currently exercisable or will become exercisable before March 31, 1998.
(l) Includes outstanding options to purchase 2,812 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
(m) Includes outstanding options to purchase 654,630 shares of Common Stock that
are currently exercisable or will become exercisable before March 31, 1998.
11
<PAGE> 14
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for each
of the last three fiscal years ended October 31, 1997 awarded to or earned by
the Chief Executive Officer and by each of the other four most highly
compensated executive officers of the Company, as well as two other individuals
who became executive officers in December 1997.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
FISCAL --------------------------------- STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEARS SALARY BONUS OTHER(a) AWARDED
- --------------------------------------- ------ -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Paul J. Kerz........................... 1997 $380,667 $ 0 $ 11,029 0
Chairman, President and 1996 414,000 65,500 14,943 0
Chief Executive Officer 1995 414,000 85,600 17,317 75,001
Laurence B. Simon...................... 1997 322,167 0 12,211 0
Senior Vice President and 1996 350,500 58,000 14,685 0
Secretary 1995 350,500 50,000 17,317 60,001
Robert V. Nagelhout.................... 1997 185,000 75,000 1,997 32,580
Executive Vice President and 1996 185,000 50,000 2,538 0
Chief Operating Officer 1995 148,250 35,000 1,597 9,900
Donald J. Staffa....................... 1997 241,333 0 12,211 32,250
Senior Vice President 1996 268,000 56,500 14,852 0
1995 268,000 50,000 17,317 45,001
Thomas J. Kazamek...................... 1997 180,000 60,000 4,367 126,213
Senior Vice President 1996 165,000 45,000 2,268 0
1995 135,000 30,000 1,597 8,250
Phillip Siegel......................... 1997 230,000 0 1,692 42,001
Vice President and Chief 1996 150,000 25,000 0 25,000
Financial Officer 1995 -- -- -- --
Lewis D. Levetown...................... 1997 175,000 0 11,799 15,386
Vice President 1996 195,000 25,000 14,344 0
1995 195,000 32,500 15,955 6,375
</TABLE>
- ---------------
(a) Includes matching contributions under the Company's (i) 401(k), (ii) Profit
Sharing, and (iii) Executive Deferred Compensation Plans.
12
<PAGE> 15
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The following table sets forth selected option grant information for the
fiscal year ended October 31, 1997 with respect to options awarded to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company, as well as two other individuals who became executive
officers in December 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
NUMBER % OF TOTAL OF STOCK PRICE APPRECIATION
TYPE OF OF OPTIONS EXERCISE FOR OPTION TERM
OPTION OPTIONS GRANTED TO PRICE PER EXPIRATION ----------------------------
NAME GRANTED GRANTED EMPLOYEES(A) SHARE DATE 0% 5%(B) 10%(B)
- ----------------------- ------- ------ ------------- --------- ----------- --- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul J. Kerz........... -- 0 n/a $ n/a n/a $ 0 $ 0 $ 0
Laurence B. Simon...... -- 0 n/a n/a n/a 0 0 0
Robert V. Nagelhout.... ISO 17,636(c) 1% 15.31 11/19/06 0 0(c) 0(c)
NQ 1,114(c) * 15.31 11/19/06 0 0(c) 0(c)
ISO 13,830 1% 5.88 06/02/07 0 51,142 129,604
Donald J. Staffa....... ISO 6,530 * 15.31 11/19/06 0 62,873 159,333
NQ 12,220 1% 15.31 11/19/06 0 117,659 298,170
NQ 13,500 1% 5.88 06/02/07 0 49,922 126,511
Thomas J. Kazamek...... ISO 15,000(c) 1% 15.31 11/19/06 0 0(c) 0(c)
ISO 68,024(d) 4% 5.88 06/02/07 0 251,546 637,467
NQ 43,189(d) 3% 5.88 06/02/07 0 159,709 404,733
Phillip Siegel......... ISO 27,093(c) 2% 15.31 11/19/06 0 0(c) 0(c)
NQ 907(c) * 15.31 11/19/06 0 0(c) 0(c)
ISO 14,001 1% 5.88 06/02/07 0 51,774 131,206
Lewis D. Levetown...... ISO 5,105(c) * 15.31 11/19/06 0 0(c) 0(c)
NQ 145(c) * 15.31 11/19/06 0 0(c) 0(c)
ISO 10,136 1% 5.88 06/02/07 0 37,482 94,987
</TABLE>
- ---------------
* denotes percentage of options granted is less than 1%
(a) Represents individual option grant as a percentage of total options issued
in fiscal year 1997.
(b) The hypothetical potential appreciation shown in these columns reflects the
required calculations at compounded annual rates of 5% and 10% set by the
Securities and Exchange Commission, and therefore is not intended to
represent either historical appreciation or anticipated future price
appreciation of the Common Stock.
(c) Options were exchanged on June 2, 1997, for a lesser number of options at an
exercise price of $5.88 per share.
(d) Of the 111,213 options awarded on June 2, 1997, 11,213 options were received
as part of the option exchange program; the other 100,000 options represent
an additional grant awarded to Mr. Kazamek during fiscal year 1997.
13
<PAGE> 16
The following table sets forth selected stock option exercise information
as of October 31, 1997 and for the year then ended relating to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company, as well as two other individuals who became executive
officers in December 1997.
STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END STOCK OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS
OPTIONS AT
SHARES AT FISCAL YEAR-END FISCAL YEAR-END(a)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ----------- -------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Kerz................. 0 0 283,804 5,715 $ 30,750 $ 0
Laurence B. Simon............ 0 0 155,307 5,715 121,829 0
Robert V. Nagelhout.......... 0 0 3,458 10,372 3,769 11,305
Donald J. Staffa............. 0 0 114,816 22,369 3,679 11,036
Thomas J. Kazamek............ 0 0 27,804 83,409 30,306 90,916
Phillip Siegel............... 0 0 3,501 10,500 3,816 11,445
Lewis D. Levetown............ 0 0 5,347 7,602 2,762 8,286
</TABLE>
- ---------------
(a) Value of unexercised "in-the-money" options is determined by multiplying the
number of shares subject to such options by the difference between the
exercise price per share and $6.97, the average of the high and low price
per share of the Common Stock on the Nasdaq National Market System on
October 31, 1997.
The following table sets forth selected information regarding the Company's
Employee Stock Purchase Plan as of January 13, 1998.
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN
------------------------------------
NUMBER OF SHARES VALUE OF SHARES
NAME OF INDIVIDUAL OR GROUP PURCHASED(a) PURCHASED(b)
- -------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Paul J. Kerz(c)............................................... 0 $ 0
Laurence B. Simon............................................. 7,682 (12,104)
Robert V. Nagelhout........................................... 2,691 (21,615)
Donald J. Staffa.............................................. 7,682 (12,104)
Thomas J. Kazamek............................................. 1,718 (10,282)
Phillip Siegel................................................ 2,737 (4,887)
Lewis D. Levetown............................................. 7,682 (12,104)
All current executive officers as a group..................... 30,192 (73,096)
All employees, other than executive officers as a group....... 486,576 $(1,504,126)
</TABLE>
- ---------------
(a) Represents the cumulative number of shares of the Common Stock purchased by
employee.
(b) Calculated as the difference between the purchase price per share paid by
employees and $6.72, the closing price of the Common Stock on Nasdaq
National Market System on January 13, 1998, multiplied by the cumulative
number of shares purchased by the employees. Amounts in parentheses indicate
the amount by which the purchase price exceeded market value at January 13,
1998.
(c) Mr. Kerz is not eligible to participate in this Plan because his beneficial
ownership of the outstanding Common Stock exceeds 5%.
14
<PAGE> 17
PROFIT SHARING PLAN
Since 1974, the Company has maintained a discretionary Profit Sharing Plan
in which all its employees are eligible to participate after one year of
service. Contributions by the Company to the Plan are discretionary in the
judgment of the Board of Directors. The interest of each employee under the Plan
vests ratably over a seven-year period with vesting commencing in the third year
of participation under the Plan. Contributions to the Plan are allocated among
participants based on their relative compensation levels. For the years ended
October 31, 1997, 1996, and 1995, Profit Sharing Plan expense for all employees
was $197,000, $944,000, and $800,000, respectively. The 1997 contribution has
not yet been allocated to the individual accounts of participants by the
independent participant recordkeeper. For the year ended October 31, 1996,
$9,629 was contributed on behalf of each of Messrs. Kerz, Simon, Staffa, and
Levetown.
Effective October 31, 1997, the Company terminated its profit sharing plan,
including the 401(k) plan discussed below. 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 Internal Revenue Service.
401(k) PLAN
As of January 1, 1992, the Company adopted an Employee Savings Plan under
Section 401(k) of the Code which permits an employee to contribute a portion of
such employee's compensation, subject to certain limitations. In its discretion,
the Company may make an annual contribution to the 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. For the
year ended October 31, 1997, $1,400 was contributed on behalf of Mr. Kerz,
$2,542 was contributed on behalf of Mr. Simon, $2,382 was contributed on behalf
of Mr. Staffa, $1,692 was contributed on behalf of Mr. Siegel, and $2,170 was
contributed on behalf of Mr. Levetown.
Mr. Nagelhout and Mr. Kazamek participate under the 401(k) plan of the
Company's HCm subsidiary, which is valued at the end of each calendar year. For
the calendar year ending December 31, 1997, $1,997 and $4,367 was contributed on
behalf of Mr. Nagelhout and Mr. Kazamek, respectively.
EMPLOYEE STOCK PURCHASE PLAN
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 the shareholders at the Annual Meeting of Shareholders held on
February 28, 1994. The Company has reserved for issuance 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 Code. 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 fiscal years ended October 31, 1997, 1996 and 1995, the Company
sold 95,332, 163,426, and 141,867 shares of Common Stock pursuant to the ESPP,
respectively, for aggregate consideration of $708,000, $2,337,000, and
$1,203,000.
15
<PAGE> 18
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
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. The purpose of the NEDP is to provide compensation in the form
of equity participation in the Company, in consideration of the services
provided by directors not employed by the Company. Under the NEDP, a grant of
options to purchase 1,500 shares of Common Stock is made to each non-employee
director during the fourth fiscal quarter of each fiscal year. The exercise
price of options issued under the NEDP is the fair market value of the Common
Stock on the date of grant. The 1997 option grants were issued on October 31,
1997 with an exercise price of $6.97 per share. Options granted under the NEDP
have a term of ten years, with 25% of the options exercisable immediately upon
grant and an additional 25% exercisable at the end of each of the three
subsequent fiscal years. The NEDP is administered by the Compensation Committee
of the Company's Board of Directors.
EXECUTIVE DEFERRED COMPENSATION PLAN
As of November 1, 1994, the Company adopted an unfunded Executive Deferred
Compensation Plan ("Executive Plan") for a select group of management or other
highly compensated employees, defined as employees who receive at least $150,000
in total compensation in a fiscal year. The purpose of the Executive Plan is (i)
to provide certain key executive employees of the Company with benefits to
replace the benefits to which they would be entitled under the Health Management
Systems, Inc. Profit Sharing Plan but for the application of various limitations
on contributions including the limitation under Section 401(a)(17) of the Code,
and (ii) to provide the ability to replace the benefits previously available
under the Company's Profit Sharing and 401(k) Plans that may have been limited
because of any other future changes in the Code or other applicable laws. For
the fiscal years ended October 31, 1997, 1996 and 1995, the Executive Plan
expense was $0, $12,000, and $15,000, respectively. For the fiscal year ended
October 31, 1997, no contributions were made on behalf of any of the executive
officers, including two other individuals who became executive officers in
December 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Richard H. Stowe and William W.
Neal, both of whom are non-employee directors of the Company. Mr. Stowe is a
general partner of WCAS. Both Mr. Stowe and WCAS and its affiliates were
stockholders of HISCo, a corporation which was 43% owned by the Company. In
March 1997, Mr. Stowe and WCAS and its affiliates received $30,000 and
$8,234,000, respectively, in connection with the Company's purchase of the
remaining 57% of HISCo's equity. See "Certain Transactions -- Relationship with
Health Information Systems Corporation" for additional information regarding
this transaction.
16
<PAGE> 19
Notwithstanding contrary statements set forth in any of the Company's
previous filings under the Securities Act of 1933 or the Exchange Act that might
incorporate future filings, including this proxy statement, the Compensation
Committee report and the performance graph set forth below shall not be
incorporated by reference into such future filings.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report provides an explanation of the philosophy underlying the
Company's executive compensation program and details on how decisions were
implemented during 1997 regarding the compensation paid to the Company's
executive officers.
The Company's mission is to be a significant provider of quality products
and services in the markets it serves. To support this and other strategic
objectives as approved by the Board of Directors and to provide adequate returns
to the shareholders, the Company must compete for, attract, develop, motivate,
and retain top quality executive talent at the corporate office and operating
business units of the Company during periods of both favorable and unfavorable
business conditions.
The Company's executive compensation program is a critical management tool
in achieving this goal. "Pay for performance" is the underlying philosophy for
the Company's executive compensation program. Consistent with this philosophy,
the program has been carefully conceived and is independently administered by
the Compensation Committee (the "Committee") of the Board of Directors, which is
comprised entirely of non-employee directors. The program is designed to link
executive pay to corporate performance, including share price, recognizing that
there is not always a direct correlation in the short-term between executive
performance and share price.
The program is designed and administered to:
- reward individual and team achievements that contribute to the attainment
of the Company's business goals; and
- provide a balance of total compensation opportunities, including salary,
bonus, and longer term cash and equity incentives, that are competitive
with similarly situated companies and reflective of the Company's
performance.
In seeking to link executive pay to corporate performance, the Committee
believes that the most appropriate measure of corporate performance is the
increase in long-term shareholder value, which involves improving such
quantitative performance measures as revenue, net income, cash flow, operating
margins, earnings per share, and return on shareholders' equity. The Committee
may also consider qualitative corporate and individual factors which it believes
bear on increasing the long-term value of the Company to its shareholders. These
include: (i) the development of competitive advantages; (ii) the ability to deal
effectively with the growing complexity of the Company's businesses; (iii)
success in developing business strategies, managing costs, and improving the
quality of the Company's products and services as well as customer satisfaction;
and (iv) the general performance of individual job responsibilities.
The Company's executive compensation program consists of: (i) a base
salary; (ii) an annual bonus; and (iii) a long-term incentive represented by
stock options.
17
<PAGE> 20
COMPENSATION OF EXECUTIVE OFFICERS
Salary. In determining the amount of compensation to be paid to the
executive officers of the Company, the Committee adheres to long established
compensation policies of the Company pursuant to which executive compensation is
determined. Base salary determinants include the prevailing rate of compensation
for positions of like responsibility in the particular geographic area, the
level of the executive's compensation in relation to other executives of the
Company with the same, more, or less responsibilities, and the tenure of the
individual. To ensure both competitiveness and appropriateness of base salaries,
the Company retains professional consultants on a periodic basis to update the
job classification and pay scale structure pursuant to which individual
executives (and the remainder of the Company's employees) are classified and the
pay ranges with which their jobs are associated.
In view of the Company's performance during 1997 and the resulting decline
in the price of the Common Stock, annualized salaries of the Company's executive
officers who were executive officers in 1997 were reduced in 1997 from 1996
levels.
Bonus. Bonuses are intended to reward both overall corporate performance
and an individual's participation in attaining such performance. From time to
time, bonuses are also awarded to augment base salary when a determination has
been made that an executive's salary is not competitive in light of the factors
discussed above. During 1997, no bonuses were paid to the five individuals who
were executive officers in 1997.
Stock Options. The longer-term component of the Company's executive
compensation program consists of stock options. The options generally permit the
option holder to buy the number of shares of the underlying Common Stock at a
price equal to or greater than the market price of the stock at the time of
grant. Thus, the options generally gain value only to the extent the stock price
exceeds the option exercise price during the life of the option. Generally a
portion of the options vest over a period of several years and expire no later
than ten years after grant. Stock options are granted upon the recommendation of
management and approval of the Committee based upon their subjective evaluation
of the appropriate amount for the level and amount of responsibility of each
executive officer. During 1997, no stock options were awarded to the Company's
Chief Executive Officer and two of the other four individuals who were executive
officers during 1997.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Determination of the Company's compensation of Paul J. Kerz, the Company's
Chief Executive Officer and founder, takes into account the factors described
above as pertinent to the remainder of the Company's executives and employees,
while also taking into consideration the proprietary nature of the Company's
business and efforts expended in connection with development of the Company's
strategy and product development activities. The Committee also took into
account Mr. Kerz's participation in the Company's ongoing efforts to realign the
Company's operations to adjust for the recent decline in its existing businesses
and the difficult economic conditions in the markets served by the Company.
During 1997, Paul J. Kerz received salary at a reduced rate, no bonus, and no
stock options.
OTHER
Section 162(m) of the Code prohibits the Company from deducting any
compensation in excess of $1,000,000 paid to certain of its executive officers,
except to the extent that such compensation is paid pursuant to a shareholder
approved plan upon the attainment of specified performance objectives. The
Committee believes that tax deductibility is an important factor, but not the
sole factor, to be considered in
18
<PAGE> 21
setting executive compensation policy. Accordingly, the Committee generally
intends to take such reasonable steps as are required to avoid the loss of a tax
deduction due to Section 162(m), but reserves the right, in appropriate
circumstances, to pay amounts which are not deductible. The Company is proposing
to shareholders an amendment to the Stock Option and Restricted Stock Purchase
Plan (the "Plan") to limit to 150,000 shares the maximum number of shares of
Common Stock that may be subject to a stock option awarded to any single
employee in any fiscal year. If approved by shareholders, this amendment will
assure that options granted under the Plan after the Meeting will qualify as
"other performance-based compensation" under Section 162(m) and, as such, will
continue to be excluded from the compensation paid in determining whether the
$1,000,000 threshold has been exceeded. See "Approval of Proposal to Amend the
Company's Stock Option and Restricted Stock Purchase Plan."
COMPENSATION COMMITTEE
Richard H. Stowe
William W. Neal
SHAREHOLDER RETURN PERFORMANCE GRAPH
The graph presented below provides a comparison between the cumulative
total shareholder return (assuming the reinvestment of dividends) on the Common
Stock since the initial public offering on December 17, 1992 and the Nasdaq U.S.
companies index, the Nasdaq computer and data processing service companies
index, and the Nasdaq health service companies index, over the same period. The
graph assumes the investment of $100 in the Common Stock and each of the
indices.
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) HMSY Nasdaq Comp Nasdaq HC Nasdaq Info
<S> <C> <C> <C> <C>
Dec-92 100 100 100 100
Oct-93 141.53 115.11 102.13 107.13
Oct-94 189.06 115.74 129.75 128.96
Oct-95 319.79 155.89 133.56 196.83
Oct-96 352.32 185.99 153.84 228.19
Oct-97 97.45 242.14 166.75 307.89
</TABLE>
CERTAIN TRANSACTIONS
Relationship with Health Information Systems Corporation
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
19
<PAGE> 22
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 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 merged with its sole operating subsidiary, Health Systems
Architects, Inc., and was 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 Company's financial statements contained in the Company's Annual
Report on Form 10K for the fiscal year ended October 31, 1997. 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 to the Company of their respective equity
interests in HISCo, 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 HISCo was $331,000, $161,000 and $545,000
in 1997, 1996, and 1995, respectively. The 1997 revenue is for the period
November 1, 1996 through the Company's acquisition of the balance of HISCo's
equity in March 1997, at which time the HISCo Agreement was terminated. In
fiscal years 1997, 1996, and 1995, HISCo received $0, $569,000, and $0 in fees
for software development services provided to the Company pursuant to the HISCo
Agreement. These software development fees were expensed by the Company.
Guarantee of Loan to 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 the Executive Vice President and Chief Operating Officer and a
director of the Company. 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 Common Stock owned by him to secure the Company's guaranty of his loan
obligations.
OTHER RELATIONSHIPS
The Company occasionally transacts business with companies for which
members of its Board of Directors serve as executive officers and/or directors.
In 1997, none of these transactions was individually significant or reportable.
20
<PAGE> 23
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.
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors knows of no
business to be presented at the Meeting other than as set forth herein. If other
matters properly come before the Meeting, the persons named as proxies will vote
on such matters in their discretion.
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any shareholder proposals intended to be presented at the Company's 1999
annual meeting of shareholders must be received by the Secretary, Health
Management Systems, Inc., 401 Park Avenue South, New York, New York 10016, no
later than October 3, 1998, in order to be considered for inclusion in the
Company's Proxy Statement and form of proxy relating to such meeting.
ANNUAL REPORT
The Company's 1997 Annual Report is concurrently being mailed to
shareholders. The Annual Report contains consolidated financial statements of
the Company and its subsidiaries and the report thereon of KPMG Peat Marwick
LLP, independent certified public accountants.
BY ORDER OF THE BOARD OF DIRECTORS
Felice Blanco
Secretary
Dated: January 30, 1998
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, SHAREHOLDERS ARE
URGED TO COMPLETE, SIGN, DATE, AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE
ENCLOSED ENVELOPE.
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<PAGE> 24
HEALTH MANAGEMENT SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Paul J. Kerz and Felice Blanco, and any one of
them, as proxies, to vote all shares of Common Stock of Health Management
Systems, Inc. (the "Company") held of record by the undersigned as of January
13, 1998, the record date with respect to this solicitation, at the Annual
Meeting of Shareholders of the Company to be held at 401 Park Avenue South, New
York, New York 10016 on Tuesday, March 3, 1998, at 11:00 A.M. and any
adjournments thereof, upon the following matters:
(OVER)
<PAGE> 25
<TABLE>
<S> <C>
PLEASE MARK
YOUR VOTES AS
INDICATED IN X
THIS EXAMPLE
1. ELECTION OF DIRECTORS: NOMINEES: Russell L. Carson, Robert V. Nagelhout,
Galen D. Powers, Donald J. Staffa
FOR all nominees WITHHOLD
listed to the right AUTHORITY -------------------------------------------------,
(except as marked to the to vote for all nominees FOR, except for the following nominee(s)
contrary) listed to the right
2. Approval of an amendment to the Company's Stock Option and
Restricted Stock Purchase Plan to limit the maximum number of
shares of Common Stock awarded to any single employee in any
fiscal year to 150,000 shares.
FOR AGAINST ABSTAIN
3. Ratification of the selection of KPMG Peat Marwick LLP as
the Company's independent accountants for the fiscal year
ending October 31, 1998.
FOR AGAINST ABSTAIN
4. To transact such other business as may properly come before
the meeting or any adjournment thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS GIVEN,
THIS PROXY WILL BE VOTED FOR PROPOSALS (1), (2) AND (3) ABOVE.
IF ANY NOMINEE DECLINES OR IS UNABLE TO SERVE AS A DIRECTOR,
THEN THE PERSONS NAMED AS PROXIES SHALL HAVE FULL DISCRETION
TO VOTE FOR ANY OTHER PERSON DESIGNATED BY THE BOARD OF
DIRECTORS.
Signature Signature Date
---------------------------------------- --------------------------------------------- ----------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
</TABLE>
