<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 February 26, 1999
Common Stock, $.01 Par Value 17,353,446 Shares
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JANUARY 31, 1999
PART I FINANCIAL INFORMATION Page No.
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of 1
January 31, 1999 (unaudited) and October 31, 1998
Condensed Consolidated Statements of Operations 2
(unaudited) for the three month periods ended
January 31, 1999 and January 31, 1998
Consolidated Statement of Comprehensive Income 3
(unaudited) for the three month periods ended
January 31, 1999 and January 31, 1998
Consolidated Statement of Shareholders' Equity 4
(unaudited) for the three month period ended
January 31, 1999
Condensed Consolidated Statements of Cash Flows 5
(unaudited) for the three month periods ended
January 31, 1999 and January 31, 1998
Notes to Interim Consolidated Financial 6
Statements (unaudited)
Item 2 Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
PART II OTHER INFORMATION 13
SIGNATURES 14
EXHIBIT INDEX 15
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31, October 31,
1999 1998
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 9,030 $ 13,883
Short-term investments 14,864 14,519
Accounts receivable, billed, net 30,109 28,792
Accounts receivable, unbilled, net 29,353 26,201
Other current assets 4,940 6,361
--------- ---------
Total current assets 88,296 89,756
Property and equipment, net 6,283 6,687
Capitalized software costs, net 4,863 4,203
Goodwill, net 11,601 11,742
Other assets 5,319 5,414
--------- ---------
Total assets $ 116,362 $ 117,802
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,337 $ 15,864
Deferred revenue 5,826 5,876
Deferred income taxes 11,500 11,307
--------- ---------
Total current liabilities 29,663 33,047
Other liabilities 1,430 1,486
--------- ---------
Total liabilities 31,093 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;
18,402,446 shares issued and 17,353,446 shares outstanding at January 31, 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 21,201 19,595
Unrealized appreciation on short-term investments 106 107
--------- ---------
93,019 91,019
Less treasury stock, at cost (1,049,000 shares at January 31, 1999 and October 31, 1998) (7,750) (7,750)
--------- ---------
Total shareholders' equity 85,269 83,269
--------- ---------
Total liabilities and shareholders' equity $ 116,362 $ 117,802
========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Revenue $27,369 $25,037
------- -------
Cost of services:
Compensation 15,331 14,412
Data processing 1,835 2,506
Occupancy 2,188 2,254
Other 5,400 4,332
------- -------
24,754 23,504
------- -------
Operating margin before amortization of intangibles 2,615 1,533
Amortization of intangibles 200 523
------- -------
Operating income 2,415 1,010
Net interest and net other income 308 460
------- -------
Income before income taxes 2,723 1,470
Income tax expense 1,117 591
------- -------
Net income $ 1,606 $ 879
======= =======
Earnings per share data:
Basic:
Basic earnings per share $ 0.09 $ 0.05
======= =======
Weighted average common shares outstanding 17,310 17,347
======= =======
Diluted:
Diluted earnings per share $ 0.09 $ 0.05
======= =======
Weighted average common shares and common share equivalents 17,848 17,519
======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
-------------------
1999 1998
------- -------
<S> <C> <C>
Net income $ 1,606 $ 879
Other comprehensive income:
Unrealized appreciation (loss) on short-term investments (1) 77
------- -------
Comprehensive income $ 1,605 $ 956
======= =======
</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 Unrealized
------------------- Capital In Appreciation (Loss) Total
# of Shares Par Excess Of Retained on Short-term Treasury Shareholders'
Issued Value Par Value Earnings Investments 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 1,606 0 0 1,606
Stock option activity 38,663 1 205 0 0 0 206
Employee stock purchase plan activity 31,416 0 160 0 0 0 160
Disqualifying dispositions 0 0 29 0 0 0 29
Depreciation on short-term investments 0 0 0 0 (1) 0 (1)
---------- ------- ---------- -------- ---------- -------- ----------
Balance at January 31, 1999 18,402,446 $ 184 $ 71,528 $ 21,201 $ 106 $ (7,750) $ 85,269
========== ======= ========== ======== ========== ======== ==========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash used in operating activities $ (3,707) $ (1,769)
-------- --------
Investing activities:
Capital asset expenditures (222) (238)
Software capitalization (945) (593)
Net purchases of short-term investments (345) (883)
-------- --------
Net cash used in investing activities (1,512) (1,714)
-------- --------
Financing activities:
Proceeds from issuance of common stock 160 3
Proceeds from exercise of stock options 206 76
Common stock repurchases 0 (1,500)
-------- --------
Net cash provided by (used in) financing activities 366 (1,421)
-------- --------
Net decrease in cash and cash equivalents (4,853) (4,904)
Cash and cash equivalents at beginning of period 13,883 20,694
-------- --------
Cash and cash equivalents at end of period $ 9,030 $ 15,790
======== ========
</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 as
filed with the Securities and Exchange Commission (the "Commission").
2. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the quarters ended January 31, 1999 and
1998 was $113,000 and $774,000, respectively.
The Company recorded $29,000 and $0 for the three months ended January 31,
1999 and 1998, respectively, as disqualified dispositions related to the
sale of stock acquired through the exercise of certain compensatory stock
options, thereby reducing the Company's tax liability and increasing
shareholders' equity in a like amount.
3. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share is
calculated as net income divided by the weighted average common shares
outstanding including the dilutive effects of potential common shares,
which include the Company's stock options. A reconciliation of the
numerator and denominator of the calculations for the three month periods
ended January 31, 1999 and 1998, respectively, is presented below.
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3. Earnings Per Share, cont'd
<TABLE>
<CAPTION>
($ in thousands, except per share data) Three months ended
January 31,
--------------------
1999 1998
------- -------
<S> <C> <C>
Numerator:
Net Income $ 1,606 $ 879
======= =======
Denominator:
Weighted average common shares 17,310 17,347
Potential common shares: stock options 538 172
------- -------
Weighted average common shares and
common share equivalents 17,848 17,519
======= =======
Basic earnings per share $ 0.09 $ 0.05
======= =======
Diluted earnings per share $ 0.09 $ 0.05
======= =======
</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 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.
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
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attempt to assist in settling the matter or narrowing the issues between
the parties. 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. The motions are scheduled to be heard
by the Court in April 1999. The Company intends to continue its vigorous
defense of this lawsuit.
The Company is a party to several other legal proceedings. In the opinion
of the Company's management, none of these other proceedings is expected
to have a material adverse effect on the Company's financial position,
results of operations or liquidity.
8
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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 January 31, 1999 Compared to Three Months Ended January 31,
1998
Consolidated revenue for the first quarter of fiscal year 1999 of $27,369,000
represents an increase of $2,332,000 or 9% from the comparable period in 1998.
The Company's Transfer Payment Services ("TPS") division, which includes the
Provider Transfer Payment and Payor Transfer Payment business units, accounted
for $14,476,000 or 53% of the Company's consolidated revenue for the first
fiscal quarter of 1999, an increase of $1,606,000 or 12% from the comparable
period in 1998. Of these amounts, the Provider Transfer Payment unit revenue
totaled $8,620,000, an increase of $62,000 or 1% from the comparable period in
1998 and the Payor Transfer Payment unit revenue totaled $5,856,000, an increase
of $1,544,000 or 36% from the comparable period in 1998. The Payor Transfer
Payment unit revenue increase resulted primarily from clients generating revenue
in this quarter but not in last year's corresponding period and from scope
enhancements for existing clients.
Revenue from the Software Systems and Services ("Software") division, comprised
of the Decision Support Software ("DSS") and Managed Care Information Systems
("MCIS") business units, totaled $12,893,000 or 47% of the Company's
consolidated revenue for the first fiscal quarter of 1999, an increase of
$726,000 or 6% from the comparable period in 1998. Revenue from the DSS business
unit was $6,540,000, a decrease of $363,000 or 5% from the robust comparable
period in 1998, while revenue from the MCIS business unit increased $1,089,000
to $6,353,000, an increase of 21% from the comparable period in 1998, largely as
a result of the implementation of an outsourcing engagement priced on the basis
of monthly membership and for which the continuing implementation schedule is
currently the subject of active discussion, the outcome of which is not certain.
Cost of services for the first fiscal quarter of 1999 of $24,754,000, increased
$1,250,000 or 5% 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 $15,331,000 for the first
fiscal quarter of 1999, an increase of $919,000 or 6% over the comparable period
in 1998. This increase was principally attributable to increases in headcount
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associated with the generation of new revenue and increases in average salaries
to reflect prevailing market conditions. Data processing expense was $1,835,000,
a decrease of $671,000 or 27% 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 first fiscal quarter of 1999 was $5,400,000, an increase of $1,068,000
or 25% 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 and
activities.
As a result of the above factors, operating margin for the first fiscal quarter
of 1999, before amortization of intangible assets, increased to $2,615,000, an
increase of $1,082,000 or 71% from the comparable period in 1998.
Amortization of intangible assets for the first fiscal quarter of 1999 was
$200,000, a decrease of $323,000 or 62% 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 MCIS business unit) in 1997.
Net interest and net other income in the first fiscal quarter of 1999 was
$308,000, a decrease of $152,000 or 33% over the comparable period in 1998,
based upon both lower cash balances and interest rates.
Income tax expense for the first fiscal quarter of 1999 was $1,117,000, an
increase of $526,000 or 89% 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 first fiscal quarter of 1999.
As a result of the above factors, net income for the first fiscal quarter of
1999 increased to $1,606,000, an increase of $727,000 or 83% from the comparable
period in 1998. Diluted earnings per share for the first quarter of 1999 was
$0.09, an increase of $0.04 or 80% from the comparable period in 1998.
Liquidity and Capital Resources
At January 31, 1999, the Company had $58,633,000 in net working capital, an
increase of $1,924,000 over the level at October 31, 1998. The Company's
principal sources of liquidity at January 31, 1999 consisted of cash, cash
equivalents, and short-term investments aggregating $23,894,000, net accounts
receivable of $59,462,000, and $30,000,000 available under a line of credit with
a major bank. Accounts receivable at January 31, 1999 reflected an increase of
$4,469,000 or 8% from the October 31, 1998 balance. The increase in accounts
receivables resulted primarily from a combination of a backlog in converting
unbilled accounts receivable to billed accounts receivable and from revenue
increases in the Payor Transfer Payment unit.
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
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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 current fiscal quarter ended January 31, 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.
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 Transfer
Payment business unit 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
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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 less than $1,000,000. The Company currently expects that
the total cost of these programs, including both incremental spending and
redeployed resources, will not exceed $2,000,000. The total cost estimate does
not include potential costs related to any customer claims, or 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 Transfer Payment
business units of their respective product versions into a consolidated version
for each business unit. 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
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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 -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K -- None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 17, 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
14
<PAGE> 17
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description of Exhibit to Interim Consolidated Financial
Statements
27 Financial Data Schedule (Submitted for informational purposes
only and not deemed to be filed)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AT JANUARY 31, 1999 (UNAUDITED) AND 1998
(UNAUDITED) AND THE INTERIM CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE THREE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) AND 1998 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-1998
<PERIOD-START> NOV-01-1998 NOV-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 9,030 15,790
<SECURITIES> 14,864 19,347
<RECEIVABLES> 61,360 43,493
<ALLOWANCES> 1,898 1,270
<INVENTORY> 0 0
<CURRENT-ASSETS> 88,296 80,625
<PP&E> 26,831 25,542
<DEPRECIATION> 20,548 17,969
<TOTAL-ASSETS> 116,362 107,472
<CURRENT-LIABILITIES> 29,663 26,509
<BONDS> 0 0
0 0
0 0
<COMMON> 184 178
<OTHER-SE> 85,085 79,163
<TOTAL-LIABILITY-AND-EQUITY> 116,362 107,472
<SALES> 27,369 25,037
<TOTAL-REVENUES> 27,369 25,037
<CGS> 0 0
<TOTAL-COSTS> 24,754 23,504
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 248 (2)
<INTEREST-EXPENSE> 29 43
<INCOME-PRETAX> 2,415 1,010
<INCOME-TAX> 1,117 591
<INCOME-CONTINUING> 2,415 1,010
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,606 879
<EPS-PRIMARY> 0.09 0.05
<EPS-DILUTED> 0.09 0.05
</TABLE>
