<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-20946
Health Management Systems, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2770433
State of Incorporation (I.R.S. Employer Identification Number)
401 Park Avenue South, New York, New York 10016
(Address of principal executive offices, zip code)
(212) 685-4545
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 28, 1999
Common Stock, $.01 Par Value 17,371,452 Shares
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED APRIL 30, 1999
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 1999 (unaudited) 1
and October 31, 1998
Condensed Consolidated Statements of Operations (unaudited) for the 2
three month and six month periods ended April 30, 1999 and April 30,
1998
Consolidated Statement of Comprehensive Income (unaudited) for the 3
three month and six month periods ended April 30, 1999 and April 30,
1998
Consolidated Statement of Shareholders' Equity (unaudited) for the six 4
month period ended April 30, 1999
Condensed Consolidated Statements of Cash Flows (unaudited) for the 5
three month and six month periods ended April 30, 1999 and April 30,
1998
Notes to Interim Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
PART II OTHER INFORMATION 14
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,695 $ 13,883
Short-term investments 19,484 14,519
Accounts receivable, billed, net 27,090 28,792
Accounts receivable, unbilled, net 30,187 26,201
Other current assets 4,657 6,361
--------- ---------
Total current assets 91,113 89,756
Property and equipment, net 6,559 6,687
Capitalized software costs, net 5,666 4,203
Goodwill, net 11,461 11,742
Other assets 5,039 5,414
--------- ---------
Total assets $ 119,838 $ 117,802
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,236 $ 15,864
Deferred revenue 5,039 5,876
Deferred income taxes 12,108 11,307
--------- ---------
Total current liabilities 31,383 33,047
Other liabilities 1,410 1,486
--------- ---------
Total liabilities 32,793 34,533
--------- ---------
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued
and outstanding 0 0
Common stock - $.01 par value; 45,000,000 shares authorized;
18,420,452 shares issued and 17,371,452 shares outstanding at April 30, 1999;
18,332,367 shares issued and 17,283,367 shares outstanding at October 31, 1998 184 183
Capital in excess of par value 71,528 71,134
Retained earnings 23,004 19,595
Accumulated other comprehensive income 79 107
--------- ---------
94,795 91,019
Less treasury stock, at cost (1,049,000 shares at April 30, 1999 and October 31, 1998) (7,750) (7,750)
--------- ---------
Total shareholders' equity 87,045 83,269
--------- ---------
Total liabilities and shareholders' equity $ 119,838 $ 117,802
========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE> 4
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $28,857 $25,636 $56,226 $50,673
------- ------- ------- -------
Cost of services:
Compensation 16,414 14,754 31,745 29,166
Data processing 1,704 2,232 3,539 4,741
Occupancy 2,209 2,414 4,397 4,668
Other 5,499 4,123 10,899 8,460
------- ------- ------- -------
25,826 23,523 50,580 47,035
------- ------- ------- -------
Operating margin before amortization of intangibles 3,031 2,113 5,646 3,638
Amortization of intangibles 200 504 400 1,027
------- ------- ------- -------
Operating income 2,831 1,609 5,246 2,611
Net interest and net other income 289 460 597 920
------- ------- ------- -------
Income before income taxes 3,120 2,069 5,843 3,531
Income tax expense 1,317 884 2,434 1,474
------- ------- ------- -------
Net income $ 1,803 $ 1,185 $ 3,409 $ 2,057
======= ======= ======= =======
Earnings per share data:
Basic:
Basic earnings per share $ 0.10 $ 0.07 $ 0.20 $ 0.12
======= ======= ======= =======
Weighted average common shares outstanding 17,360 17,361 17,334 17,354
======= ======= ======= =======
Diluted:
Diluted earnings per share $ 0.10 $ 0.07 $ 0.19 $ 0.12
======= ======= ======= =======
Weighted average common shares and common share equivalents 17,402 18,094 17,485 17,807
======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 1,803 $ 1,185 $ 3,409 $ 2,057
Other comprehensive income, net of tax:
Unrealized appreciation (loss) on short-term investments (27) (27) (28) 50
------- ------- ------- -------
Comprehensive income $ 1,776 $ 1,158 $ 3,381 $ 2,107
======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------------ Capital In Other Total
# of Shares Par Excess Of Retained Comprehensive Treasury Shareholders'
Issued Value Par Value Earnings Income Stock Equity
----------- ----- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1998 18,332,367 $ 183 $ 71,134 $ 19,595 $ 107 $ (7,750) $ 83,269
Net income 0 0 0 3,409 0 0 3,409
Stock option activity 39,163 1 205 0 0 0 206
Employee stock purchase
plan activity 48,922 0 160 0 0 0 160
Disqualifying dispositions 0 0 29 0 0 0 29
Unrealized loss on
short-term investments 0 0 0 0 (28) 0 (28)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at April 30, 1999 18,420,452 $ 184 $ 71,528 $ 23,004 $ 79 $ (7,750) $ 87,045
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
April 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 3,641 $ (356)
-------- --------
Investing activities:
Capital asset expenditures (1,194) (567)
Software capitalization (2,008) (1,355)
Net purchases of short-term investments (4,993) (1,131)
-------- --------
Net cash used in investing activities (8,195) (3,053)
-------- --------
Financing activities:
Proceeds from issuance of common stock 160 47
Proceeds from exercise of stock options 206 1,982
Common stock repurchases 0 (1,602)
-------- --------
Net cash provided by financing activities 366 427
-------- --------
Net decrease in cash and cash equivalents (4,188) (2,982)
Cash and cash equivalents at beginning of period 13,883 20,694
-------- --------
Cash and cash equivalents at end of period $ 9,695 $ 17,712
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 8
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of Health Management Systems, Inc. ("HMS" or the "Company")
is responsible for the accompanying unaudited interim consolidated
financial statements and the related information included in these notes to
the unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements reflect
all adjustments, consisting of normal recurring adjustments necessary for
the fair presentation of the Company's financial position and results of
operations and cash flows for the periods presented. Results of operations
of interim periods are not necessarily indicative of the results to be
expected for the entire year.
These unaudited interim consolidated financial statements should be read in
conjunction with: the audited consolidated financial statements of the
Company as of and for the fiscal year ended October 31, 1998 included in
the Company's Annual Report on Form 10-K for such year; and the unaudited
interim consolidated financial statements of the Company as of and for the
quarterly period ended January 31, 1999 included in the Company's Quarterly
Report on Form 10-Q, both as filed with the Securities and Exchange
Commission (the "Commission").
2. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the six months ended April 30, 1999 and
1998 was $316,000 and $2,417,000 respectively.
The Company recorded $29,000 and $383,000 for the six months ended April
30, 1999 and 1998, respectively, as disqualified dispositions related to
the sale of stock acquired through the exercise of certain compensatory
stock options, thereby reducing the Company's tax liability and increasing
shareholders' equity in like amounts.
3. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share is
calculated as net income divided by the weighted average common shares
outstanding including the dilutive effects of potential common shares,
which include the Company's stock options. A reconciliation of the
numerator and denominator of the calculations for the three month periods
and six month periods ended April 30, 1999 and 1998, respectively, is
presented below.
6
<PAGE> 9
3. Earnings Per Share, cont'd
<TABLE>
<CAPTION>
($ in thousands, except per share data) Three months ended Six months ended
April 30, April 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 1,803 $ 1,185 $ 3,409 $ 2,057
======= ======= ======= =======
Denominator:
Weighted average common shares 17,360 17,361 17,334 17,354
Potential common shares: stock options 42 733 151 453
------- ------- ------- -------
Weighted average common shares and
common share equivalents 17,402 18,094 17,485 17,807
======= ======= ======= =======
Basic earnings per share $ 0.10 $ 0.07 $ 0.20 $ 0.12
======= ======= ======= =======
Diluted earnings per share $ 0.10 $ 0.07 $ 0.19 $ 0.12
======= ======= ======= =======
</TABLE>
4. Legal Proceedings
In April and May 1997, five purported class action lawsuits were commenced
in the United States District Court for the Southern District of New York
against the Company and certain of its present and former officers and
directors alleging violations of the Securities Exchange Act of 1934 in
connection with certain allegedly false and misleading statements. These
lawsuits, which sought damages in an unspecified amount, were consolidated
into a single proceeding captioned In re Health Management Systems, Inc.,
Securities Litigation (97 CIV-1965 (HB) and a Consolidated Amended
Complaint was filed. Defendants made a motion to dismiss the Consolidated
Amended Complaint, which was submitted to the Court on December 18, 1997
following oral argument. On May 27, 1998, the Consolidated Amended
Complaint was dismissed by the Court for failure to state a claim under the
federal securities laws, with leave for the plaintiffs to replead. On July
17, 1998, a Second Consolidated Amended Complaint was filed in the United
States District Court of the Southern District of New York, which
reiterates plaintiffs' allegations in their prior Complaint. On September
11, 1998, the Company and the other defendants filed a motion to dismiss
the second Complaint. The motion was fully briefed in late November 1998,
at which time the motion was submitted to the Court. The consolidated
proceeding has been reassigned to another judge and oral argument has been
scheduled for June 11, 1999. The Company intends to continue its vigorous
defense of this lawsuit.
On June 1, 1998, MedE America Corp. commenced a lawsuit against the Company
and others in the United States District Court for the Southern District of
New York. In its complaint, plaintiff alleges copyright infringement and
other violations of its rights relating to the Company's development and
sale of certain computer software, known as the Universal Billing Platform,
which was recently developed for the Company by certain former employees of
plaintiff, who are also defendants in the action, acting as independent
contractors. Plaintiff, among other relief, seeks (i) to restrain the
Company from continuing to market and sell the alleged infringing software,
and (ii) monetary damages in excess of $10,000,000. Over a period of in
excess of nine months prior to the filing of the complaint, the parties
engaged in an extensive exchange of communications, as a result of which
the Company concluded, after investigation, that plaintiff's claims were
without merit. On July 22, 1998, the Company answered the complaint,
denying the material allegations of the complaint.
7
<PAGE> 10
Discovery has commenced and the Company intends to vigorously contest
plaintiff's claims. Pursuant to the Rules of the Court, this matter has
been referred to a court-appointed mediator, who in the context of
non-binding mediation and independent of the Court proceeding, will attempt
to assist in settling the matter or narrowing the issues between the
parties. A number of sessions with counsel and the experts retained by both
parties have been held and another session has been scheduled for late
June. Absent a settlement of this matter through mediation, the Company
intends to continue its vigorous defense of this lawsuit.
On June 28, 1998, eight holders of promissory notes (the "Notes") of HHL
Financial Services, Inc. ("HHL") commenced a lawsuit against the Company
and others in the Supreme Court of the State of New York, County of Nassau,
alleging various breaches of fiduciary duty on the part of the defendants
against HHL. The complaint alleges that, as a result of these breaches of
duty, HHL was caused to make substantial unjustified payments to the
Company which, ultimately, led to defaults on the Notes and to HHL's filing
for Chapter 11 bankruptcy protection. On June 30, 1998, the same Note
holders commenced a virtually identical action (the "Adversary Proceeding")
in the United States Bankruptcy Court for the District of Delaware, where
HHL's Chapter 11 proceeding is pending. The Adversary Proceeding alleges
the same wrongdoing as the New York State Court proceeding and seeks the
same damages, i.e., $2,300,000 (the unpaid amount of the Notes) plus
interest. Plaintiffs have moved in the Bankruptcy Court to have the Court
abstain from hearing the Adversary Proceeding in deference to the New York
State Court action. The Company has opposed plaintiffs' motion for
abstention and on September 15, 1998, filed a motion in the Bankruptcy
Court to dismiss the Adversary Proceeding. This motion was briefed in
December 1998. Oral argument on the motions was heard by the Court on April
22, 1999 and the motions are now sub judice. The Company intends to
continue its vigorous defense of this lawsuit.
Other legal proceedings to which the Company is a party, in the opinion of
the Company's management, are not expected to have a material adverse
effect on the Company's financial position, results of operations or
liquidity.
8
<PAGE> 11
Certain statements in this document 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 HMS, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMS to contain costs in view of its revised revenue outlook to
grow internally or by acquisition and to integrate acquired businesses into the
HMS group of companies; (iii) the uncertainties of litigation; (iv) HMS's
dependence on significant customers; (v) changing conditions in the healthcare
industry which could simplify the reimbursement process and adversely affect
HMS's business; (vi) government regulatory and political pressures which could
reduce 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 HMS to deal with the Year 2000 Problem on a timely basis; (ix) all
the risks inherent in the development, introduction, and implementation of new
products and services; and other factors both referenced and not referenced in
this document. When used in this document, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements, and the above described risks
inherent therein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
Consolidated revenue for the second fiscal quarter of fiscal year 1999 of
$28,857,000 represents an increase of $3,221,000 or 13% from the comparable
period in 1998. The Company's Revenue Services division (previously known as the
Transfer Payment Services division), which includes the Provider revenue
services group and Payor revenue services group, accounted for $15,993,000 or
55% of the Company's consolidated revenue for the second fiscal quarter of 1999,
an increase of $1,644,000 or 11% from the comparable period in 1998. Of these
amounts, the Provider revenue services group revenue totaled $9,567,000, an
increase of $1,064,000 or 13% from the comparable period in 1998 and the Payor
revenue services group revenue totaled $6,426,000, an increase of $580,000 or
10% from the comparable period in 1998. The revenue increases realized by each
of these two groups comprising the Revenue Services division were a result of
both (1) "new clients," defined as clients generating revenue in the second
quarter of fiscal year 1999 who were not revenue generating clients in the
second quarter of fiscal year 1998, and (2) delivery of services of expanded
scope to "existing clients," defined as clients who generated revenue in the
prior year comparable period.
Revenue from the Software Systems and Services ("Software") division, comprised
of the Decision Support group and the Payor Systems group (formerly known as the
Managed Care Information Systems business unit, or MCIS), totaled $12,864,000 or
45% of the Company's consolidated revenue for the second fiscal quarter of 1999,
an increase of $1,577,000 or 14% from the comparable period in 1998. Revenue
from the Decision Support group was $5,111,000, a decrease of $624,000 or 11%
from the comparable period in 1998, while revenue from the Payor Systems group
increased $2,201,000 to $7,753,000, an increase of 40% from the comparable
period in 1998. The decrease in the Decision Support group revenue is thought to
be largely the result of an elongated sales cycle occasioned by client concern
over "Y2K" risk, thereby leading to deferrals in anticipated contract closings.
The decrease in Decision Support group revenue was more than offset by the
increased revenue realized in the Payor Systems group, with approximately one
half of the increased revenue in the Payor Systems group attributable to the
group's earning a non-recurring revenue incentive bonus from one client.
9
<PAGE> 12
Cost of services for the second fiscal quarter of 1999 of $25,826,000, increased
$2,303,000 or 10% from the comparable period in 1998. The increase in cost of
services reflects increases in Compensation and Other expenses, partially offset
by decreases in Data Processing and Occupancy expenses. Compensation expense,
the Company's largest expense component, totaled $16,414,000 for the second
fiscal quarter of 1999, an increase of $1,660,000 or 11% over the comparable
period in 1998. This increase was principally attributable to increases in
headcount associated with the 13% increase in revenue and to increases in
average salaries to reflect prevailing market conditions. Data processing
expense was $1,704,000, a decrease of $528,000 or 24% over the comparable period
in 1998. This decrease was primarily attributable to: the continued
consolidation by the Company of its data processing platforms and reduced
support of older versions of the Company's systems, products and services; the
capitalization of additional software development costs; and the timing
differences associated with amortization of multiple-period maintenance and
software license fees. Other operating expense for the second fiscal quarter of
1999 was $5,499,000, an increase of $1,376,000 or 33% over the comparable period
in 1998. The increase was primarily attributable to direct project costs for
subcontractor expense incurred in connection with the Company's realization of
increased revenue, while an increase in the allowance for doubtful accounts was
in line with increases in revenue and accounts receivable and was more than
offset by the savings in professional fees and employee related costs, including
recruiting fees.
As a result of the above factors, operating margin for the second fiscal quarter
of 1999, before amortization of intangible assets, increased to $3,031,000, an
increase of $918,000 or 43% from the comparable period in 1998.
Amortization of intangible assets for the second fiscal quarter of 1999 was
$200,000, a decrease of $304,000 or 60% from the comparable period in 1998. The
decrease was due primarily to completion, in fiscal year 1998, of the
amortization of software related to the Company's acquisition of HSA Managed
Care Systems, Inc. (now the Payor Systems group) in 1997.
Net interest and net other income in the second fiscal quarter of 1999 was
$289,000, a decrease of $171,000 or 37% over the comparable period in 1998,
based upon both lower cash balances and interest rates.
Income tax expense for the second fiscal quarter of 1999 was $1,317,000, an
increase of $433,000 or 49% from the comparable period in 1998. The increase in
income tax expense was due primarily to the Company's higher pre-tax profit for
the second fiscal quarter of 1999.
As a result of the above factors, net income for the second fiscal quarter of
1999 increased to $1,803,000, an increase of $618,000 or 52% from the comparable
period in 1998. Thus, diluted earnings per share for the second fiscal quarter
of 1999 was $0.10, an increase of $0.03 or 43% from the comparable period in
1998.
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998
Consolidated revenue for the six months ended April 30, 1999 of $56,226,000
represents an increase of $5,553,000 or 11% from the comparable period in 1998.
The Revenue Services division accounted for $30,469,000 or 54% of the
consolidated revenue for the six months ended April 30, 1999, an increase of
$3,250,000 or 12% from the comparable period in 1998. Of these amounts, the
Provider revenue services group revenue totaled $18,187,000, an increase of
$1,126,000 or 7% from the comparable period in 1998 and the Payor revenue
services group revenue totaled $12,282,000, an increase of $2,124,000 or 21%
from the comparable period in 1998. The revenue increases realized by each of
these two groups comprising the Revenue Services division were a result of both
(1) new clients, and (2) delivery of services of expanded scope to existing
clients.
10
<PAGE> 13
Revenue from the Software Systems and Services division totaled $25,757,000 or
46% of the Company's consolidated revenue for the six months ended April 30,
1999, an increase of $2,303,000 or 10% from the comparable period in 1998.
Revenue from the Decision Support group was $11,651,000, a decrease of $987,000
or 8% from the comparable period in 1998, while revenue from the Payor Systems
group increased $3,290,000 to $14,106,000, an increase of 30% from the
comparable period in 1998. The decrease in the Decision Support group is
attributable to both what is perceived as client reluctance to make decisions
regarding the implementation of new software in the year immediately preceding
the "Y2K" conversion combined with a robust first quarter of the prior year. The
decrease in Decision Support group revenue was more than offset by the increased
revenue realized in the Payor Systems group, with approximately one third of the
increased revenue in the Payor Systems group attributable to the group's earning
a non-recurring revenue incentive bonus from one client.
Cost of services for the six months ended April 30, 1999 of $50,580,000,
increased $3,545,000 or 8% from the comparable period in 1998. The increase in
cost of services reflects increases in Compensation and Other expenses,
partially offset by decreases in Data Processing and Occupancy expenses.
Compensation expense totaled $31,745,000 for the six months ended April 30,
1999, an increase of $2,579,000 or 9% over the comparable period in 1998,
principally attributable to increases in headcount associated with the
generation of new revenue and increases in average salaries to reflect
prevailing market conditions. Data processing expense was $3,539,000, a decrease
of $1,202,000 or 25% over the comparable period in 1998. As noted previously,
this favorable decrease was primarily attributable to: the continued
consolidation by the Company of its data processing platforms and reduced
support of older versions of the Company's systems, products and services; the
capitalization of additional software development costs; and the timing
differences associated with amortization of multiple-period maintenance and
software license fees. Other operating expense for the six months ended April
30, 1999 was $10,899,000, an increase of $2,439,000 or 29% over the comparable
period in 1998. As also noted previously, this increase was primarily
attributable to direct project costs for subcontractor expense incurred in
connection with the Company's realization of increased revenue, while an
increase in the allowance for doubtful accounts was in line with increases in
revenue and accounts receivable and was more than offset by the savings in
professional fees and employee related costs, including recruiting fees and
activities.
As a result of the above factors, operating margin for the six months ended
April 30, 1999, before amortization of intangible assets, increased to
$5,646,000, an increase of $2,008,000 or 55% from the comparable period in 1998.
Amortization of intangible assets for the six months ended April 30, 1999 was
$400,000, a decrease of $627,000 or 61% from the comparable period in 1998. As
previously noted, the decrease was due primarily to completion, in fiscal year
1998, of the amortization of software related to the Company's acquisition of
HSA Managed Care Systems, Inc. (now the Payor Systems group) in 1997.
Net interest and net other income in the six months ended April 30, 1999 was
$597,000, a decrease of $323,000 or 35% over the comparable period in 1998,
based upon both lower cash balances and interest rates.
Income tax expense for the six months ended April 30, 1999 was $2,434,000, an
increase of $960,000 or 65% from the comparable period in 1998. The increased
income tax expense was due primarily to the Company's higher pre-tax profit for
the period.
As a result of the above factors, net income for the six months ended April 30,
1999 increased to $3,409,000, an increase of $1,352,000 or 66% from the
comparable period in 1998. Diluted earnings per share for the six months ended
April 30, 1999 was thus $0.19, an increase of $0.07 or 58% from the comparable
period in 1998.
11
<PAGE> 14
Liquidity and Capital Resources
At April 30, 1999, the Company had $59.7 million in net working capital, an
increase of $3.0 million over the level at October 31, 1998. The Company's
principal sources of liquidity at April 30, 1999 consisted of cash, cash
equivalents, and short-term investments aggregating $29.2 million, net accounts
receivable of $57.3 million and $30 million available under a line of credit
with a major bank. Accounts receivable at April 30, 1999 increased $2.3 million
or 4% from the October 31, 1998 balance, increasing at a lesser rate than the
revenue increased during the period as a result of improved collection results.
The Company's bank line of credit expires on July 15, 1999. Although the Company
intends to secure a new line of credit at that time, there can be no assurance
that the Company will be able to do so on acceptable terms.
On May 28, 1997, the Board of Directors authorized the Company to repurchase
such number of shares of its Common Stock that have an aggregate purchase price
not in excess of $10,000,000. The Company repurchases these shares from time to
time on the open market or in negotiated transactions at prices deemed
appropriate by the Company. Repurchased shares are deposited in the Company's
treasury and used for general corporate purposes. Since the inception of the
repurchase program in June 1997, the Company has repurchased in the open market
1,049,000 shares having an aggregate purchase price of $7,750,000. No shares
were repurchased during the six months ended April 30, 1999, as the Company
seeks to secure a new or renewed credit facility before reconsidering the
further purchase of shares pursuant to the original authorization by the Board.
Year 2000
In common with many other organizations, the "Year 2000 ("Y2K") computer issue"
creates risks for the Company. To address these Y2K issues, the Company
formulated a plan and began work at the end of 1997. The Company put in place a
working committee to track implementation of the plan. Activities included in
this plan are intended to encompass all major categories of systems in use by
the Company, including those entailed in the performance of product development,
operations, sales, finance, and human resources. Interactions with major
suppliers of products and services have been identified and the Company is
working to ensure uninterrupted delivery to the Company of the requisite
products and services. The Company has purchased and installed Y2K compliant
security, elevator and fire alarm systems in its New York City office and is
currently implementing new financial and human resource information systems
throughout the enterprise. These management information systems were purchased
in 1998 and were already Y2K compliant.
The Company is working with its clients to ensure a smooth transition to the
next millennium. As well, the Company responded to the enactment of the Y2K
Information and Disclosure Act ("Y2K Act") on October 19, 1998. The purpose of
the Y2K Act is to encourage and promote disclosure regarding Y2K issues and to
provide limitations for claims on tort liability.
Contingency plans for all potential single points of disruption have been or are
being developed and implemented. It is expected that assessment and redemption
will be completed in sufficient time to ensure the Company's provision of
service without interruption due to the onset of the year 2000. The Company is
seeking to complete its Y2K remediation work in accordance with a schedule which
is responsive to the time sensitivity of the clients, seeking first to complete
work on engagements where the Company's interactions with the clients are on a
concurrent (in contrast to a retrospective) basis. To the extent that the
Company has not developed an adequate plan for any particular contingency, the
Company believes its capacity to stage, resequence and reschedule much of its
operational processing work should enable mitigation, in whole or part, of the
potential long-term negative impact on its clients and the Company.
12
<PAGE> 15
The Company has designed and tested the most current versions of its products
for Y2K compliance. The Company is now migrating to its most current versions
those of the Company's products running on versions not Y2K compliant. The
Company is utilizing the migration to Y2K compliant systems as the catalyst for
a consolidation of various of the Company's disparate systems -- thereby
reducing the number of product versions which require updating for the Y2K
problem. A substantial amount of conversion work for the Provider revenue
services group remains to be completed, though not all of it must be concluded
by the end of 1999. As well, a number of the Company's customers are running
product versions that are not Y2K compliant. While the Company has provided its
clients with viable plans for migration to Y2K compliant versions and has been
encouraging such customers to adopt such plans, it is possible that various of
the Company's clients will not adopt the recommended plan of migration,
potentially entailing either increased costs to the Company or loss of revenue
by the Company. Moreover, the revenue stream and financial stability of existing
customers may be adversely impacted by Y2K problems, which could cause
fluctuations or diminution in the Company's revenue. In addition, there can be
no assurances that the Company's current products do not contain undetected
errors or defects associated with Y2K date functions that could result in
material, additional future costs to the Company. Moreover, assessment of
whether a complete system will operate correctly depends on the capabilities and
interoperability of the hardware and software components comprising the system;
for most end-users, this will include hardware and software provided by
companies other than the Company. Except as specifically provided for in the
limited warranty accompanying the current versions of its products, the Company
does not believe it is legally responsible for costs incurred by customers
related to ensuring their Y2K capability. Nevertheless, the Company is incurring
various costs to provide customer support and customer satisfaction services
regarding Y2K issues and it is anticipated that these expenditures will continue
through 1999 and thereafter.
The costs incurred to date related to these programs are difficult to isolate
but are estimated at approximately $1,300,000. The Company currently expects
that the total cost of these programs, including both incremental spending and
redeployed resources, will not exceed $2,500,000. The total cost estimate does
not include potential costs related to any customer claims, other claims or the
cost of internal software and hardware replaced in the normal course of
business, nor does this estimate include the costs associated with the
consolidation (to the maximum practicable extent) by the two Revenue Services
groups of their respective product versions into a consolidated version for each
group. In some instances, the installation schedule of new software and hardware
in the normal course of business is being accelerated to afford a timely
solution to Y2K capability issues. Because the factors involved are complex and
frequently not readily separable, it is difficult to determine which of the
Company's multiple development activities are properly allocable to the solution
of Y2K problems. The Company's cost estimates are based on an assessment of the
current situation and are subject to future revision.
The expenses incurred by the Company to identify and address the Y2K matters
discussed above, or the expenses or liabilities to which the Company may become
subject as a result of such matters, could have a material adverse effect on the
Company's business, financial condition and results of operation. In addition,
there can be no assurance that failure to ensure Y2K capability by a supplier,
client or another third party would not have a material adverse effect on the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk -- None
13
<PAGE> 16
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- See Note 4 of the Notes to Interim Consolidated
Financial Statements for discussion of certain pending legal
proceedings
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- The Annual
Meeting ("Meeting") of Shareholders of the Company was held on March
9, 1999. The 16,135,901 shares of common stock ("Common Stock")
present at the Meeting out of a then total 17,305,321 shares
outstanding and entitled to vote, acted as follows with respect to
the following proposals:
Approved, by a vote of : 15,716,482 shares of Common Stock for
and 419,419 shares against the election of Randolph G. Brown
as a director of the Company; 15,746,392 shares of Common
Stock for and 389,509 shares against the election of Paul Kerz
as a director of the Company; 15,728,222 shares of Common
Stock for and 407,679 shares against the election of William
W, Neal as a director of the Company; 15,719,472 shares of
Common Stock for and 416,429 shares against the election of
Ellen A. Rudnick as a director of the Company; and 15,731,322
shares of Common Stock for and 404,579 shares against Richard
H. Stowe as a director of the Company. In addition, 386,175
shares of Common Stock were voted against the election of all
of the nominees.
Approved, by a vote of 7,418,123 shares of Common Stock for
and 3,258,822 shares against the adoption of the Company's
1999 Long-Term Incentive Stock Plan.
Ratified, by a vote of 16,078,475 shares of Common Stock for
and 25,487 against the selection of KPMG LLP as the Company's
independent certified public accountants for the fiscal year
ending October 31, 1999.
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K -- None
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 10, 1999 HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------------
(Registrant)
By: /s/ Paul J. Kerz
-------------------------------------
Paul J. Kerz
President and Chief Executive Officer
By: /s/ Alan L. Bendes
-------------------------------------
Alan L. Bendes
Senior Vice President and
Chief Financial Officer
15
<PAGE> 18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit to Interim Consolidated Financial Statements
-------------- -------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule (Submitted for informational purposes only and not
deemed to be filed)
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT APRIL 30, 1999 (UNAUDITED) AND THE
INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
APRIL 30, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 9,695
<SECURITIES> 19,484
<RECEIVABLES> 59,281
<ALLOWANCES> 2,004
<INVENTORY> 0
<CURRENT-ASSETS> 91,113
<PP&E> 27,759
<DEPRECIATION> 21,200
<TOTAL-ASSETS> 119,838
<CURRENT-LIABILITIES> 31,183
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 86,861
<TOTAL-LIABILITY-AND-EQUITY> 119,838
<SALES> 56,226
<TOTAL-REVENUES> 56,226
<CGS> 50,580
<TOTAL-COSTS> 50,580
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 485
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 5,843
<INCOME-TAX> 2,434
<INCOME-CONTINUING> 5,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,409
<EPS-BASIC> .20
<EPS-DILUTED> .19
</TABLE>
