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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20946
HEALTH MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-2770433
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 PARK AVENUE SOUTH 10016
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 685-4545
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
The aggregate market value of the registrant's common stock held by
non-affiliates as of January 7, 2000 was $114,203,376 based on the closing price
on the Nasdaq National Market System on that day.
Number of shares outstanding of the registrant's common stock, $.01 par value,
on January 7, 2000 was 17,435,522.
DOCUMENTS INCORPORATED BY REFERENCE:
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DOCUMENT WHERE INCORPORATED
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PROXY STATEMENT FOR THE ANNUAL MEETING PART III
TO BE HELD ON MARCH 14, 2000
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TABLE OF CONTENTS
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Contents Number
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Cover Page ........................................................................ i
PART I
Item 1. Business ............................................................ 1
Item 2. Properties .......................................................... 11
Item 3. Legal Proceedings ................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ................. 13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 13
Item 6. Selected Financial Data ............................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risks ......... 24
Item 8. Financial Statements and Supplementary Data ......................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 24
PART III
Item 10. Directors and Executive Officers of the Registrant .................. 25
Item 11. Executive Compensation .............................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management ...... 25
Item 13. Certain Relationships and Related Transactions ...................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .... 25
Signatures ................................................................... 26
Exhibit Index ................................................................ 54
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES AND THAT
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE THOSE RISKS IDENTIFIED IN "ITEM 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CERTAIN FACTORS
THAT MIGHT AFFECT FUTURE OPERATING RESULTS" AND OTHER RISKS IDENTIFIED IN THIS
FORM 10-K AND FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION
STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
OVERVIEW
Health Management Systems, Inc. (the "Company" or "HMSY") furnishes
proprietary information management, data processing, and software (including
consulting) services to healthcare providers and payors, including government
health service agencies. These services address the various types of data
generated by the interaction of the participants in the healthcare delivery
process: the providers of care, the third-party payors, and the patients.
Through its product and service offerings, the Company acts as an outsourcer of
information management functions addressing the operational, administrative,
financial, and clinical data that result from the rendering of healthcare
services to patients. The Company's product and service offerings benefit its
clients by enhancing revenue (achieved through improved reimbursability,
profitability, and/or collectability), accelerating cash flow, reducing
operating and administrative costs (by supplying advanced information
analytics), and improving decision-making capabilities (via the provision of
useful information regarding cost and quality of care).
Healthcare providers receive payment for services from patients,
third-party payors, or a combination thereof. Third-party payors include
commercial insurance companies, governments or their fiscal agents and
intermediaries, health maintenance organizations, preferred provider
organizations, third-party administrators for self-insured companies, and
managed care companies. Although patients generally retain primary
responsibility for payment for all healthcare services, third-party payors bear
the preponderance of the responsibility for many charges for care. Obtaining
reimbursement from third-party payors has become increasingly difficult for
providers because of frequent changes in reimbursement formulae and contractual
requirements for pre-admission certification and utilization review, and
administrative procedures instituted by third-party payors in an effort to
control costs. To be successful in obtaining payment from third-party payors,
hospitals and other healthcare providers require regulatory knowledge and
technical skills to manage complex data collection, integration, analysis, and
accounts receivable management functions. To ensure that program costs are not
greater than necessary, third party payors require knowledge and skills
analogous to those required by providers.
Using the operational, financial, administrative, and clinical data
generated as part of the healthcare delivery process, HMSY applies proprietary
software and other analytical tools to transform data into valuable information
that clients use to (i) minimize operating and administrative costs while
improving profitability, (ii) measure the quality of care, and (iii) increase
revenue by optimizing the outcome of the transfer payment processes linking
payors, providers, and patients. The Company believes its customers benefit from
the Company's unique understanding of the healthcare delivery and associated
transfer payment processes, from the perspective of both providers and payors.
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COMPANY HISTORY
In fiscal year 1999, each of the Company's subsidiaries adopted use of
the corporate name, Health Management Systems, as part of an initiative to
strengthen the corporate identity. As well, the Company changed the designation
of its business segments in order to more appropriately describe the functions
being performed. The table below cross-references the current nomenclature to
that used in prior years.
A healthcare information systems and services enterprise, the Company
is organized into two divisions: the Revenue Services Division ("Revenue
Services Division") and the Software Systems and Services Division ("Software
Division"). The Revenue Services Division comprises two business units: the
Provider Revenue Services Group and the Payor Revenue Services Group. The
Company's Software Division also comprises two business units: the Decision
Support Group and the Payor Systems Group.
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CURRENT NOMENCLATURE PRIOR NOMENCLATURE
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Revenue Services Division Transfer Payment Division
- Provider Revenue Services Group - Provider Transfer Payment Unit
- Payor Revenue Services Group - Payor Transfer Payment Unit
Software Systems and Services Division Software Systems and Services Division
- Decision Support Group - Decision Support Systems or DSS Unit
- Payor Systems Group - Managed Care Information Systems or MCIS
Unit
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Within the Revenue Services Division, the Provider Revenue Services
Group has delivered Retroactive Claims Reprocessing ("RCR")(SM) services since
1974 and began to deliver Comprehensive Account Management Services ("CAMS")(SM)
in 1986 and Electronic Data Interchange ("EDI") services with the acquisition in
1990 of Quality Medi-Cal Adjudication, Incorporated ("QMA"). QMA provides
electronic billing and automated denial reprocessing services. In 1997, the
Company acquired a computerized medical record-based processing system for
managed care public health and ambulatory care facilities as part of its
purchase of substantially all the assets of Global Health Systems, Inc. and GHS
Management Services, Inc. (collectively "Global"). In 1997 the Company formed a
Business Office Outsourcing unit and in 1998 consolidated this unit with the
remainder of what is currently entitled the Provider Revenue Services Group. In
1999, the Company's Quality Standards in Medicine, Inc. ("QSM") subsidiary
acquired substantially all of the assets and specified liabilities of Health
Receivables Management, LLC ("Old HRM"), an Illinois based company that
furnishes Medicaid applications service, electronic billing, eligibility
verification, accounts receivable management, and collections services to
providers. In connection with the transaction, QSM changed its name to Health
Receivables Management, Inc. ("HRM"). The Company offers pre-collection and
collections services through HRM. HRM's results are included in the Provider
Revenue Services Group. The Revenue Services Division's Payor Revenue Services
Group began delivery of Third Party Liability Recovery ("TPLR")(SM) services in
1985 and augmented its product line in 1996 with the acquisition of CDR
Associates, Inc. ("CDR"). CDR is a provider of hospital-based claim audits to
payors, principally Blue Cross and Blue Shield organizations.
The Company entered the software business in 1995, merging with Health
Care microsystems, Inc. ("HCm"), a company furnishing microcomputer-based
distributed decision support software systems and services (including
consulting) to healthcare providers and payors. HCm now constitutes the Decision
Support Group. In 1996, the Decision Support Group acquired QSM and integrated
QSM's clinical information systems with HCm's decision support offerings. In
1997 the Company, which had owned a 43% equity interest in Health Information
Systems Corporation ("HISCo"), acquired from Welsh, Carson, Anderson & Stowe
("WCAS") and various of its affiliates, independent investors, and from certain
of the Company's executive officers and directors, the remaining 57% of HISCo's
equity. At the time of acquisition, HISCo merged with its sole operating
subsidiary, Health Systems Architects, Inc., and was renamed HSA Managed Care
Systems, Inc. ("HSA"). This entity now constitutes the Payor Systems Group
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and furnishes automated business and information solutions, including software
systems and services, to healthcare providers and payors.
The HCm, CDR, and QSM mergers were accounted for using the pooling of
interest method, while the QMA, HISCo, Global, and HRM acquisitions were
accounted for using the purchase method.
HEALTHCARE REFORM AND REGULATORY MATTERS
The healthcare reimbursement landscape continues to change. Federal,
state, and local governments, as well as other third-party payors, have
initiated policies to reduce the rate of increase in healthcare expenditures.
Many of these policy initiatives have contributed to the complex and
time-consuming nature of obtaining healthcare reimbursement for medical
services.
Changes occurring in the healthcare industry, most notably the
evolution of healthcare towards the present managed care model characterized by
the formation of large integrated delivery systems and capitated reimbursement,
have created an increasingly complex reimbursement environment that impacts both
providers and payors. This environment is made even more complex as the
historical distinction between providers and payors becomes less clear. The
consolidation of healthcare into integrated delivery systems has broken down
traditional organizational barriers that once supported a clear delineation
between the manner in which providers and payors utilized operational,
financial, administrative, and clinical information. Today, emphasis is placed
on improving the level of provider and payor accountability for both the
delivery and the utilization of healthcare services. Providers must ensure that
they are properly reimbursed by third-party payors for healthcare services
rendered in accordance with pre-established contracts. Likewise, payors must
ensure that they are making payments for only those services for which they are
responsible and in the dollar amounts specified by these pre-established
contracts.
Although the Company cannot predict the nature of future healthcare
reforms that will be adopted by federal, state, and local governments, the
Company believes that the shifting of traditional insurance risk to providers of
care, the consolidation of providers, and the resulting additional information
management requirements placed on providers and payors should increase the
demand for the Company's offerings. Moreover, the Company believes that
providers, payors, and patients -- both separately and together -- will benefit
from the Company's integration of cost and other financial and clinical data,
enabling identification and management by all participants (providers, payors,
and patients) of the outcomes (benefits and costs) achieved.
The Company observes the continuing intensification of interest in
ensuring compliance by providers and payors with the statutory, regulatory, and
contractual requirements of managed care. The Company believes that the
intensifying concern regarding compliance has increased its costs, as the
Company seeks to ensure its own compliance and that of its customers. At the
same time, the Company believes that the increased focus on compliance creates a
potential market for its products and services.
The Company's services also are subject to regulations pertaining to
billing services, which primarily involve recordkeeping requirements and other
provisions designed to prevent fraud. The Company believes that it operates in a
manner consistent with such regulations, the enforcement of which is
increasingly more stringent.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA"), an agency of the United States Department of Health and
Human Services. HCFA currently contracts with numerous intermediaries and fiscal
agents to process regional claims for reimbursement. Although HCFA has
established the regulatory framework for Medicare claims administration,
Medicare intermediaries have the authority to develop independent procedures for
administering the claims reimbursement process. The Medicaid program is subject
to regulation by HCFA, but is administered by state governments. State
governments provide for Medicaid claims reimbursement either through the
establishment of state-owned and operated processing centers or through
contractual arrangements with third-party fiscal agents who own and operate
their own processing centers. The requirements and procedures for reimbursement
implemented by Medicaid differ from state to state. Similar to the claims
administration processes of Medicare and Medicaid, many national health
insurance companies and self-insured employers administer reimbursement of
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claims through local or regional offices. Consequently, because guidelines for
the reimbursement of claims are generally established by third-party payors at
local or regional levels, hospital and other provider reimbursement managers
must remain current with the local procedures and requirements of third-party
payors.
The ownership and operation of hospitals is subject to comprehensive
federal and state regulation, which affects hospital reimbursement. Since
adoption, the Medicare and Medicaid programs have undergone significant and
frequent changes, and it is realistic to expect additional changes in the
future. Specifically, Congress recently passed the Balanced Budget Refinement
Act of 1999. This legislation provides relief of approximately $17 billion to
the healthcare industry over the next five years. The bill was enacted to
partially restore funds that were reduced as a result of the Balanced Budget Act
of 1997. The Balanced Budget Act of 1997 was originally estimated to reduce
Medicare spending by approximately $106 billion over five years. Today,
estimates of the reduction in Medicare outlays due to the Balanced Budget Act of
1997 exceed $200 billion, more than double the original government projections.
The recent legislation may indicate an acknowledgment that the reductions were
too pervasive and that hardship has been placed on many healthcare providers as
a result of Medicare cuts associated with the Balanced Budget Act of 1997. While
the Balanced Budget Act of 1997, as modified by the Balanced Budget Refinement
Act of 1999, could still have an adverse effect on the operations of hospitals
and other providers of healthcare, and consequently reduce the amount of the
Company's revenue, the Company believes that healthcare organizations can use
the Company's products and services to reduce costs while maintaining or
improving the quality of care (thereby compensating, in part or whole, for
losses in revenue due to the Balanced Budget Act of 1997).
In addition, the Social Security Act imposes certain requirements on
the Company with regard to confidentiality and disclosure of Medicare and
Medicaid provider and beneficiary data. Specifically, the Company is prohibited
from disclosing information that is obtained by or from the Department of Health
and Human Services except as otherwise provided by regulations or other federal
law. Generally, the Company is required to maintain standards of confidentiality
that are comparable to those of an agency administering the Medicare or Medicaid
program when the Company uses data obtained from such programs.
Finally, the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") requires the Secretary of Health and Human Services to adopt
national standards for certain types of electronic health information
transactions and the data elements used in such transactions and to adopt
standards to ensure the integrity and confidentiality of health information. All
providers, payors, and clearinghouses will be mandated to use HIPAA standards
when electronically exchanging health data covered by HIPAA. Any material
restriction on the ability of healthcare providers and payors to obtain or
disseminate health information could adversely affect the Company's business,
financial condition, and results of operations. While HIPAA could also have an
adverse affect on the operations of providers and payors and consequently reduce
the amount of the Company's revenue, the Company believes it possesses technical
and managerial knowledge and skills that could benefit healthcare organizations
seeking to establish compliance with HIPAA requirements.
The Company believes that the rapidity of consolidation within the
healthcare industry will continue to create opportunities for the Company in its
role as a data consolidator. Yet the rapidity of change suggests that some of
the consolidation may have been overdone and may be undone over the next several
years, as providers downsize and integrated delivery networks ("IDN's") begin to
unbundle. The Company believes these dynamics constitute both a risk to its
existing business relationship with Columbia/HCA Healthcare Corporation
("Columbia"), the Company's largest client, and an opportunity for new business
in the future.
PRINCIPAL PRODUCTS AND SERVICES
PROVIDER REVENUE SERVICES GROUP
The Company's Provider Revenue Services Group offers information
management solutions across the accounts receivable spectrum, with offerings
performed on retroactive, concurrent, and prospective bases. Fees are tailored
to the particular configuration of service furnished to the client, with the
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preponderance of the Company's remuneration based upon contingent fee
arrangements. The Company recognizes revenue at the time the work on a
particular bill submission, claim, recovery, or cost report has been completed
and accepted by the client for purposes of initiating the revenue recovery
process.
PROVIDER REVENUE SERVICES GROUP: SAFETY-NET SERVICES
The Company's first product, RCR, entails the retroactive recovery of
third-party payments due provider healthcare organizations, including large
public and voluntary hospitals and schools. RCR services are used by a hospital
(most commonly for its emergency room and outpatient clinics) to realize
third-party revenue from patient accounts after the hospital has expended its
own best efforts at billing and collection, but before the accounts are referred
to a collection agency. The Company's specialized data aggregation, data
purification, data editing, and electronic claim preparation and transmission
routines are designed to facilitate the reimbursement of accounts that remain
unpaid because necessary billing information was missing or because third-party
coverage was not known. RCR services require the hospital to provide the Company
with copies of existing data files, demand minimal hospital staff support, and
generally involve no patient contact. Through the application of the Company's
proprietary technology, the Company's RCR services produce, for its hospital
clients, incremental revenue which otherwise would remain uncollected. RCR
services have evolved from a strictly background process to a process frequently
concurrent and integrated with clients' internal processes, entailing onsite
support, designed to generate the maximum results through targeted review,
analysis, and opportunity identification.
Using database-driven methodologies developed in connection with RCR,
the Provider Revenue Services Group offers a range of additional safety-net
retroactive recovery services to healthcare providers. In conjunction with the
Decision Support Group, the Provider Revenue Services Group provides Managed
Care Recovery Services (formerly referred to as "underpayment recovery
services") to assist healthcare providers in the recovery of underpayments due
from managed care payors. The Company is paid on a contingent fee basis for
these services, and recognizes revenue at the time the work has been completed
and is accepted by the client.
This Group also offers Cost Report reimbursement services, including
Medicare Bad Debt Recovery, in which the Company assists providers in isolating
coinsurance and deductible amounts that qualify for Bad Debt reimbursement, and
Disproportionate Share services, as part of which the Company identifies and
recalculates improperly classified claims that are eligible for Federal
Financial Participation. The Group also supports clients' substantiation of
future claims for Medicare Bad Debt by establishing appropriate concurrent
operating processes. In addition, the Company performs Supplemental Security
Income ("SSI") identification and recovery services in order to secure
reimbursement from Medicaid for services rendered to recipients approved for SSI
upon conclusion of the lengthy SSI application review process.
PROVIDER REVENUE SERVICES GROUP: BUSINESS OFFICE SERVICES
As a result of the technology and expertise developed in providing RCR
services, the Company is able to provide customized institutional data
processing, computer software, and operations support services to hospitals,
public health clinics, outpatient treatment facilities, and companies that serve
the healthcare industry. In contrast to RCR services, which retrospectively
reprocess patient accounts receivable data, CAMS, delivered to healthcare
providers, provides concurrent third-party claim identification, editing, claim
preparation, electronic claims submission, bill follow-up, denial reprocessing,
and remittance management services. The Company integrates data derived from the
hospital's disparate data collection systems and manages the electronic
interfaces between the hospital and the transfer payment agencies upon which the
hospital is dependent for reimbursement. CAMS is designed to provide an
integrated and comprehensive solution to a hospital's accounts receivable
liquidation requirements by combining (i) an intimate familiarity with the
principal in-house data collection and patient accounting systems found in large
urban hospitals with (ii) expertise in the management and liquidation of
accounts receivable, thereby offering a hospital a unique opportunity to improve
the effectiveness (enhanced revenue and accelerated cash flow) of its accounts
receivable management program while decreasing its administrative costs.
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Through its RCR and CAMS offerings, the Company has developed the
capability to submit healthcare claims data and to receive remittance data
electronically from a diverse array of third-party payors. In addition, the
Company provides electronic billing and follow-up services for claims submitted
by providers to Medi-Cal (the California Medicaid program) and the Illinois
Medicaid program. The Company also provides stand-alone EDI services to clients
in Illinois, New York, and Pennsylvania. The Company's strategy includes the
continued development of EDI services as an integral component of its business
office services.
Using its EDI capability and medical record-based processing system
acquired from Global, the Provider Revenue Services Group is also able to
provide products and services on a concurrent basis as part of its Business
Office Outsourcing offering. The Company created this offering in 1997 to
provide a lower-cost alternative to its CAMS offering for hospitals, physician
groups, faculty practices, public and private clinic systems, and other
healthcare organizations. As part of its Business Office Outsourcing offering,
the Company integrates its software, staff, and processes to enable providers,
including those bearing financial risk, to manage their data and transfer
payment processes. Components of the Company's Business Office Outsourcing
offering include pre-treatment patient registration and admission; treatment
authorization; claim preparation and billing; account follow-up; and reporting.
For providers at financial risk, the Company's Business Office Outsourcing
offering includes membership services, claims administration, provider services,
risk administration, and management information.
The Provider Revenue Services Group also furnishes Comprehensive
Accounts Receivable Services ("CARS"), through which the Company liquidates aged
accounts from a client's outgoing patient accounting system before a new patient
accounting system is installed. CARS also assists providers in liquidating aged
accounts before they are transferred to a collection agency.
With the acquisition of the assets and specified liabilities of Old HRM
in 1999, the Company offers Medicaid Application Services, which assist eligible
patients in properly enrolling in public aid, ensuring that providers receive
reimbursement for care rendered to indigent patients. The Company also provides
pre-collection and collections services to providers through HRM.
PAYOR REVENUE SERVICES GROUP
In 1985, the Company began to offer TPLR services principally to state
Medicaid agencies, as a means of identifying third parties with prior liability
for Medicaid claims. As part of its TPLR offering via its 1996 acquisition of
CDR, the Company provides hospital-based claims audits on behalf of payors, for
the purpose of recovering credit balances and duplicate payments. The Company
provides services to state Medicaid agencies as well as to Medicaid HMO's and to
Blue Cross/Blue Shield organizations and commercial insurers (including managed
care payors).
The Payor Revenue Services Group applies its proprietary information
management and coordination of benefits methodologies used in TPLR to examine
paid claims datasets in order to identify duplicate payments, overpayments,
compliance-related erroneous payments, and other inappropriate payments on
behalf of payor organizations.
TPLR contracts generally have one to three year terms and provide for
contingent fees calculated as a percentage of the amounts recovered for the
client. The Company recognizes revenue at the time the work on a particular
recovery or disallowance has been submitted to the client or its third-party
payors or intermediaries and accepted by the client for purposes of initiating
the recovery process. The Group's fiscal fourth quarter is traditionally its
strongest quarter, within which it executes a number of once a year recovery
projects.
DECISION SUPPORT GROUP
The growth of managed care and the consolidation of healthcare
institutions is significantly increasing the complexity of the industry and the
associated demand for decision support systems. In the managed care environment,
the Company believes decision support to be the linchpin for integrating,
analyzing, and understanding key operational, financial, administrative, and
clinical data obtained from institutions' transaction-based healthcare
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information systems. As such, decision support systems and services are
increasingly being relied upon to guide the management practices of providers
(in areas ranging from managed care contracting and clinical pathways
development to physician profiling) to ensure the success and financial and
operational viability of their organizations. The current clients for the
Decision Support Group include more than 500 hospitals and IDN's located
primarily in the United States. These hospitals range in size from 50 to more
than 1,000 beds, and include many of the most progressive and complex health
systems in the country, as well as some of the largest multi-site hospital
chains, managed care organizations, and long-term care institutions.
Developed in collaboration with several major healthcare organizations,
the Company's suite of decision support software and related consulting
services, called Alliance for Decision Support(TM) ("Alliance"), was released to
the market in June 1998. Alliance enables healthcare providers to perform
contract modeling and net revenue management, costing and clinical financial
analytics, and physician profiling and quality management from the perspective
of the provider, payor, and/or third-party administrator. Employing advanced
systems integration, data validation, and distribution methods, Alliance
supports evolving data warehousing and information systems initiatives. Alliance
was built with an open system architecture, running on a variety of platforms
that support client server processing and World Wide Web applications. In
addition to purchasing the Company's software, customers have the option of
partnering with the Company or outsourcing part or all of the operation of the
Alliance system to the Company. The Company continues to integrate clinical
quality measures within Alliance.
In partnering relationships, the Company dedicates considerable
resources to providing a wide variety of related consulting applications,
including decision support planning and implementation services, decision
support outsourcing and management, and data warehouse planning and
implementation.
The Decision Support Group provides clients with prospective,
concurrent, and retroactive decision support applications and services,
including a concurrent managed care contract profiler and payment calculator
system and data warehouse services for a substantial number of Columbia
facilities. As a result, proper calculation of anticipated contractual
allowances are now provided as an integrated component of the managed care
reimbursement process for a substantial number of Columbia facilities. In
addition, the Decision Support Group provides a substantial number of Columbia
facilities with prospective decision support applications for reimbursement
management.
Through Alliance for Financial Management(TM) ("FM"), the Decision
Support Group offers healthcare organizations an enterprise-wide financial
analysis and modeling application, with capabilities including employee-level
budget and productivity support, operating and capital budget support, and
long-range strategic planning. FM version 6.2 was released during fiscal year
1999, and incorporates web publishing and a Microsoft(R) Excel spreadsheet
add-in for ease of use and quicker access to data. The application also
incorporates multi-dimensional, on-line analytical processing technology,
integrated with electronic mail applications and standard spreadsheet tools to
support communications and analysis. The Decision Support Group provides related
application consulting services, focusing on analysis and development of cost
accounting, contract management, budgeting, business lines, and treatment
patterns.
PAYOR SYSTEMS GROUP
The Payor Systems Group provides large-scale transaction processing
systems and services to large and medium-sized commercial payors and managed
care plans, including some large Blue Cross/Blue Shield organizations.
Both public and private entities have been embracing managed care
health plans as a means of providing and managing the delivery and cost of
healthcare services. With this increased demand, the number of existing payors,
the number of start-up entities, and the number of IDN's seeking to offer
managed care products has greatly increased. To support their businesses, these
payors require systems to: manage patient membership, provider contracts, and
networks; process and adjudicate claims; manage risk; and perform medical
management.
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The four principal offerings of the Payor Systems Group are
ProAlliance(TM); CapAlliance(TM); Alliance for Managed Care(TM) (formerly called
"HES"), and Alliance for Claims Outsourcing(TM) ("ACO") formerly called
("Service Bureau"). ProAlliance is a data repository of integrated information,
enabling proactive management of complex processes such as credentialing,
accreditation, and pricing arrangements. In the past two years, in conjunction
with development partners and on its own, the Company has migrated various of
its Payor Systems Group offerings to an open system architecture, running on
platforms that support client server and world wide web applications.
CapAlliance, the Company's stand-alone capitation offering, manages the payment
to providers of pre-negotiated per capita amounts. Alliance for Managed Care is
a risk management solution for payors seeking a strategy to manage their own
health plans and market their own products, providing data processing for plans
offering a full spectrum of products, from traditional indemnity coverage
through complete managed care programs. Comprised of modular systems, Alliance
for Managed Care automates four major areas of healthcare administration:
membership and billing, provider administration, capitation, and benefits and
claims. In fiscal year 1999, the Payor Systems Group consummated a multi-year
strategic partnership with Medical Mutual of Ohio for the design and development
of Alliance for Managed Care, which will expand the current functionality of the
Company's existing managed care systems to incorporate graphical and web
interfaces, a component-based architecture, and the use of relational database
technology. Through its ACO offering, the Company provides its managed care
functionality, including hardware and software, in an outsourcing or
applications service provider mode. In fiscal year 1999, ACO was upgraded for
the "Year 2000 ("Y2K") computer issue" to afford home host information
technology services processing to clients, and to afford enhanced electronic
claims and referral authorization control. Membership was approximately 44,000
members at October 31, 1999.
The Company's Payor Systems Group offerings are sold on a stand-alone
basis, or can be integrated into existing systems, the latter option enabling
payors to preserve their investments in information technology. The Company
believes that these offerings dramatically reduce the cost of processing claims
through auto-adjudication.
CUSTOMERS
The Company's client base includes hospitals, IDN's, multi-hospital
systems, the country's largest public health systems, long-term care facilities,
large commercial payors, Blue Cross/Blue Shield organizations, and state
Medicaid agencies. The Company also has a limited number of overseas clients.
Among the Company's domestic clients are the nation's three largest public
health systems and the largest proprietary hospital corporation.
No single client of the Company accounted for 10% or more of the
Company's total revenue in fiscal year 1999. The Company's largest client is
Columbia, a customer of the Decision Support Group. This client accounted for
9%, 10%, and 12% of the Company's total revenue in fiscal years 1999, 1998, and
1997, respectively. The Company provides its services to Columbia primarily
pursuant to annual work order agreements. There is no assurance that any of
these agreements will be renewed.
The clients constituting the Company's ten largest clients change
periodically. The concentration of revenue in such accounts has decreased;
accounting for approximately 48%, 50%, and 53% of the Company's revenue in
fiscal years 1999, 1998, and 1997, respectively. In many instances, including
governmental clients, the Company provides its services pursuant to agreements
subject to competitive re-procurement. All of these agreements periodically
expire, and will have reached their terms by the end of fiscal year 2004. There
is no assurance that any of these agreements will be renewed and, if renewed,
that the fee rates will be equal to those currently in effect.
The Company works with selected customers and other development
partners in the research, development, and testing of its software products and
services.
8
<PAGE> 11
MARKET TRENDS/OPPORTUNITIES
The healthcare industry continues to face unrelenting financial
pressure, as provider reimbursement is constrained and payor costs are under
pressure. Thus, information relating to reimbursement, costs, and quality of
care is of increasing importance. Administrative costs within the healthcare
industry remain high and constitute a continuing target of opportunity for the
Company.
The demands of managing the delivery of patient care with ever
increasing qualitative and quantitative rigor will continue to drive the need
for increased amounts of operational, financial, administrative, and clinical
information. The Company believes that it possesses the data content, analytic
tools, technology, communications, and process management skills required to
respond to the current and anticipated needs of provider and payor clients for
tools and services to manage this evolving complexity.
Cost pressures continue to drive horizontal and vertical integration of
providers and payors alike. Consolidation among healthcare organizations is
creating larger healthcare delivery systems, with greater regional market power.
This phenomenon is creating a new market for the Company's products, with fewer
but larger client prospects. Despite some recent analyses suggesting that the
rapidity of this change may be undone over the next several years, as providers
are downsized and IDN's begin to unbundle, the Company believes that it has the
opportunity to leverage its products and services across larger enterprises,
making the Company's products and services more cost effective for clients. As
well, the shifting of financial risk from payors to providers creates the
opportunity for the Company to provide its payor software offerings to
providers.
A certain portion of the accounts receivable against which the
Company's traditional receivables management services were focused has been
capitated and is no longer subject to recovery through the primary RCR offering.
Capitation and other forms of managed care reimbursement, however, have created
an opportunity for the Company to augment its RCR offering with managed care
recovery services, enabling providers to ensure proper reimbursement under
capitated and other managed care contracts. In addition, providers' commercial
insurance portfolios are becoming more problematic. Providers are increasingly
seeking assistance from vendors to optimize recovery of commercial insurance
claims, which are frequently rejected erroneously as managed care claims. In
addition, the Company expects that there will be a growing trend toward
outsourcing by healthcare provider organizations in the future.
The World Wide Web is a readily available means of enhancing
communications among the various participants in the healthcare delivery
process. Previously disenfranchised consumers, or patients, may now connect
readily with their providers of healthcare and the payors for care. Previously
isolated individual and small practitioners may now connect readily with larger
providers and with their payors. In the short term, the enhanced connectivity
should render various types of data more readily available, while in the longer
term the enhanced connectivity has the potential to facilitate partial or full
amelioration of existing inefficiencies in the clinical, operational, financial,
and administrative aspects of healthcare. The Company views the Internet as a
conduit for additional data, thereby enabling the Company to increase its
value-added impact on the marketplace.
COMPETITION
Although the Company's products and services involve various
proprietary aspects, its business is highly competitive and competition has been
consolidating rapidly. While the Company believes that no one company competes
with all aspects of its business, several companies, some of which may be larger
and have greater financial resources than the Company, compete with the Company
in providing one or more of the Company's offerings. The Company also encounters
competition from companies attempting to expand the scope of their products and
services within or into the healthcare information management services industry.
9
<PAGE> 12
PROVIDER REVENUE SERVICES GROUP
The Company's Provider Revenue Services Group competes with systems
integration companies (such as Electronic Data Systems Corporation ("EDS")),
hospital computer systems vendors (such as McKesson HBOC, Inc. ("MCK") and
Shared Medical Systems Corporation ("SMS")), EDI companies (such as National
Data Corporation ("NDC"), Healtheon/WebMD ("HLTH"), and QuadraMed Corporation
("QMDC")), and national public accounting firms. The Company competes on the
basis of its proprietary systems, existing relationships, long-standing
reputation in the provider market segment, and pricing.
PAYOR REVENUE SERVICES GROUP
The Company's Payor Revenue Services Group targets federal and state
healthcare agencies and large commercial payors, and competes primarily with
national public accounting firms (especially Deloitte & Touche LLP and Public
Consulting Group). The Company competes on the basis of its proprietary systems,
historically high recovery rates, and pricing.
DECISION SUPPORT GROUP
The Company's Decision Support Group competes with products provided by
Eclypsis Corporation ("ECLP"), MCK, QMDC, Kreg Information Systems, and SRC
Software. Companies that offer general-purpose financial management products,
including Hyperion Software and PeopleSoft, Inc., are also competitors. The
Company competes on the basis of its proprietary software and quality,
value-added management consulting services.
PAYOR SYSTEMS GROUP
The Company's Payor Systems Group competes against multiple companies,
including Health Systems Design Corporation and ERISCO, Inc. ("ERISCO"), as well
as with in-house systems development groups. The Company sells its products to
large provider organizations, and also views IDN's as a potential market for its
existing products and services. In the provider market, competition comes from
large hospital computer systems vendors, such as MCK and SMS, which offer
managed care information systems as part of their solutions.
In the traditional indemnity health insurance market, the Company's
payor systems offerings compete with claims adjudication and provider management
products from ERISCO, Synertech, a subsidiary of Highmark, Inc., Resource
Information Management Systems, Inc. and QMDC. As the Company enters the IDN
market, it will compete with MCK's Amisys Division and SMS. CSC Healthcare, a
subsidiary of Computer Sciences Corporation, has also been investing in and may
emerge as a strong competitor in the IDN information systems market.
The Company's Payor Systems Group competes on the basis of its
proprietary software, healthcare software development expertise, and large-scale
project management capabilities.
RESEARCH AND DEVELOPMENT
The Company's performance in the healthcare information technology and
services arenas requires it to devote resources to research and development to
continue the acceptance of the Company's products in the marketplace. See Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors - New Product Development and System Enhancement.
BUSINESS STRATEGY
Given the severity of the budgetary constraints impinging upon
providers and payors of healthcare alike, and the high procurement and
conversion costs associated with the implementation of new systems, there is a
great deal of attractiveness to a paradigm that enables a client to access the
requisite applications software and data by means of communications technology
via the World Wide Web, with the vendor providing associated software and data
maintenance functions as an applications services provider, and associated
business functionality as a business services provider.
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<PAGE> 13
The Company's business strategy is to accelerate growth in the second
half of fiscal year 2000 and thereafter, once client reluctance to make
decisions regarding implementation of new software during their internal Y2K
concerns abates. Management believes the Company is well positioned as a leading
source of analytic and operational software and services to providers and payors
within the healthcare industry. The Company expects to continue to leverage its
existing software and service offerings to enhance its outsourcing offerings and
to provide, as a single package World Wide Web connectivity, software
applications, and related applications and business services for a monthly
service fee. Key components of the Company's strategy include: (i) continuing
its investment in product research and development, (ii) enhancing its
capabilities as an outsourcer or business services provider, (iii) continuing
its investment in its data warehousing infrastructure, (iv) leveraging its
existing relationships with large clients through the provision of augmentative
products and services, and (v) expanding its strategic development partnerships
with provider and payor organizations for all aspects of the Company's business.
Additionally, the Company seeks to acquire companies that supply
healthcare providers and/or payors with information management software,
systems, or services if the offerings of the Company or such companies would
benefit from access to the other's technology, software applications, or client
base. The Company believes that such acquisition opportunities exist due, in
part, to competitive pressures on local service businesses that lack adequate
capital, technical, and management resources.
EMPLOYEES
As of October 31, 1999, the Company employed approximately 900
employees. No employees are covered by a collective bargaining agreement or are
represented by a labor union.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Specific financial information with respect to the Company's industry
segments is provided in Note 13, Segment and Geographical Information, of Notes
to Consolidated Financial Statements, on page 46 on this Form 10-K.
ITEM 2. PROPERTIES
The Company's New York City offices consist of approximately 149,000
square feet. In addition, the Company leases approximately 169,000 square feet
of office space in approximately 23 locations throughout the United States.
Information regarding the Company's leases is included in Note 14, Commitments,
of Notes to Consolidated Financial Statements, on page 48 of this Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
In April and May 1997, five purported class action lawsuits were
commenced in the United States District Court for the Southern District of New
York against the Company and certain of its present and former officers and
directors alleging violations of the Securities Exchange Act of 1934 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 for the Southern District of New
York, which reiterated plaintiffs' allegations in their prior Complaint. On
September 11, 1998, the Company and the other defendants filed a motion to
dismiss the Second Consolidated Amended Complaint. The motion was fully briefed
in late November 1998, at which time the motion was submitted to the Court.
11
<PAGE> 14
The consolidated proceeding was reassigned to another Judge. The Court heard
oral argument on the motion to dismiss on June 11, 1999. Prior to rendering its
decision on the motion to dismiss, the Court ordered the parties to attempt to
settle the case, and meetings toward that end were conducted. On December 20,
1999, the parties reached a tentative agreement on the principal terms of
settlement of the litigation against all defendants. Pursuant to this
understanding, without admitting any wrongdoing, certain of the defendants have
agreed to pay, in complete settlement of this lawsuit, the sum of $4,500,000,
not less than 75 percent of which will be paid by the Company's insurance
carriers. For the fiscal year ended October 31, 1999, the Company has recorded a
charge of $845,000 related to this proposed settlement which is included as a
component of other cost of services. The proposed settlement is subject to
execution of a final settlement agreement and Court approval. On December 22,
1999, the Judge issued an Order dismissing, without prejudice, the pending
motion to dismiss, as moot. In the event a final settlement is not consummated,
the Company intends to resubmit a motion to dismiss the Second Consolidated
Amended Complaint and to continue its vigorous defense of the lawsuit. See Note
17 of Notes to Consolidated Financial Statements and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 alleged copyright infringement and
other violations of its rights relating to the Company's development and sale of
certain computer software, known as the Universal Billing Platform, which was
developed for the Company by certain former employees of plaintiff, who are also
defendants in the action, acting as independent contractors. Plaintiff, among
other relief, sought (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. After the
commencement of discovery and pursuant to the Rules of the Court, this matter
was referred to a Court-appointed Mediator, who, in the context of non-binding
mediation and independent of the Court proceeding, met with the parties over a
period of months. The Mediator assisted in negotiating a settlement of this
case, which entails no payment by the Company, dismissal of the Complaint with
prejudice, and an acknowledgement by MedE that, after review and access to
additional information, the copyright and trademark infringement claims were
without merit.
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. Management believes the risk of
loss is not probable and accordingly has not recognized any accrued liability
for this matter. Although the outcome of this matter cannot be predicted with
certainty, the Company believes that any liability that may result will not, in
the aggregate, have a material adverse effect on the Company's financial
position or cash flows, although it could be material to the Company's operating
results in any one accounting period.
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<PAGE> 15
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is included in the NASDAQ-AMEX National
Market System (symbol: HMSY). As of the close of business on December 30, 1999,
there were approximately 9,500 holders of the Company's common stock, including
the individual participants in security position listings. The Company has not
paid any cash dividends on its common stock and does not anticipate paying cash
dividends in the foreseeable future. The Company's current intention is to
retain earnings to support the future growth of its business. The Company's
credit agreement with its bank contains limitations on the Company's ability to
pay cash dividends.
The table below summarizes the high and low sales prices per share for
the Company's common stock for the fiscal year periods indicated, as reported on
the NASDAQ-AMEX National Market System.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1999:
High $ 10.13 8.00 6.63 6.09
Low 6.13 4.13 4.44 3.81
1998:
High $ 7.63 13.38 13.12 9.25
Low 5.25 7.25 7.75 3.94
</TABLE>
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<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (a)
($ In Thousands, Except Per Common Share Data)
<TABLE>
<CAPTION>
Years Ended October 31, 1999 1998 1997 1996 1995
- ----------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Revenue Services Division
Provider Revenue Services Group $ 41,536 $ 34,987 $ 39,007 $ 55,410 $ 55,128
Payor Revenue Services Group 26,414 22,251 16,849 26,406 19,479
--------- --------- --------- --------- ---------
67,950 57,238 55,856 81,816 74,607
Software Division
Decision Support Group 22,542 25,499 24,873 19,510 15,888
Payor Systems Group 23,563 22,515 8,788 0 0
--------- --------- --------- --------- ---------
46,105 48,014 33,661 19,510 15,888
--------- --------- --------- --------- ---------
114,055 105,252 89,517 101,326 90,495
Cost of services 102,918 95,628 88,355 87,873 73,035
--------- --------- --------- --------- ---------
Operating margin before amortization of intangibles 11,137 9,624 1,162 13,453 17,460
Amortization of intangibles (b) 840 1,964 1,331 204 243
--------- --------- --------- --------- ---------
Operating income (loss) 10,297 7,660 (169) 13,249 17,217
Net interest income 1,277 1,700 2,755 987 942
Other income (loss) 0 597 (856)(c) (1,371)(d) (1,045)(e)
--------- --------- --------- --------- ---------
Income before income taxes 11,574 9,957 1,730 12,865 17,114
Income tax expense (benefit) 4,091 3,869 (351) 5,574 8,152
--------- --------- --------- --------- ---------
Net income 7,483 6,088 2,081 7,291 8,962
--------- --------- --------- --------- ---------
PER COMMON SHARE DATA:
Diluted earnings per share $ 0.43 $ 0.34 $ 0.12 $ 0.39 $ 0.51
Weighted average common shares and
common share equivalents 17,419 17,833 17,979 18,494 17,579
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
As of October 31, 1999 1998 1997 1996 1995
- ----------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments $33,817 28,402 39,080 39,521 30,112
Working capital 58,437 56,703 53,799 54,753 41,413
Total assets 130,921 117,802 109,694 109,643 88,101
Common shareholders' equity 91,232 83,269 79,806 74,612 58,203
</TABLE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(a) Included in each respective year's amounts are the revenue and costs
associated with the following acquisitions, accounted for using the
purchase method of accounting (see Note 2 of Notes to Consolidated
Financial Statements): HRM, since June 1999 acquisition; Global, since
July 1997 acquisition; and HISCo, since March 1997 acquisition. In
accordance with the pooling method of accounting, financial data for the
fiscal years 1996 and 1995 has been restated to reflect the merger with
QSM in fiscal year 1997; financial data for the fiscal year 1995 has
been restated to reflect the merger with HCm in fiscal year 1996.
(b) Intangible assets were principally recorded in connection with the
Company's fiscal year 1989 recapitalization, its acquisition of QMA in
fiscal year 1990, its HISCo and Global acquisitions in fiscal year 1997,
and its HRM acquisition in fiscal year 1999. The amortization of
software related to the HISCo acquisition was completed during fiscal
year 1999. See Notes 1(e) and 6 of Notes to Consolidated Financial
Statements.
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<PAGE> 17
(c) Includes costs associated with the Company's merger with QSM, and
acquisition of the remaining outstanding shares of HISCo not already
owned by the Company. See Notes 2(c) and 2(d) of Notes to Consolidated
Financial Statements.
(d) Includes costs associated with the Company's merger with CDR.
(e) Includes costs associated with the Company's merger with HCm.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 31, 1999 AND 1998
Consolidated revenue for the fiscal year ended October 31, 1999 was
$114,055,000, an increase of $8,803,000 or 8.4% over prior year revenue of
$105,252,000.
The Revenue Services Division, comprised of the Provider Revenue
Services Group and the Payor Revenue Services Group, achieved revenue of
$67,950,000, an increase of $10,712,000 or 19% from the prior year. Of these
amounts, the Provider Revenue Services Group produced revenue of $41,536,000,
including the $1,800,000 in revenue growth attributable to the HRM acquisition
in July 1999, an increase of $6,549,000 or 19% from the prior year. The Payor
Revenue Services Group produced revenue of $26,414,000, an increase in revenue
of $4,163,000 or 19% from the prior year. Other than the revenue growth
attributable to the HRM acquisition, the balance of the revenue growth realized
by each of the two groups comprising the Revenue Services Division was
internally generated from both (1) "new clients," defined as clients generating
revenue in the fiscal year 1999 who did not generate revenue in fiscal year
1998, and (2) delivery of services of expanded scope to "existing clients,"
defined as clients who generated revenue in the comparable prior period.
Revenue from the Software Division was $46,105,000, a decrease of
$1,909,000 or 4% compared with the prior year. Revenue from the Decision Support
Group was $22,542,000, a decrease of $2,957,000 or 11.6% from the prior year,
while revenue from the Payor Systems Group increased $1,048,000 to $23,563,000,
an increase of 5% from the prior period. Overall, the increased revenue realized
in the Payor Systems Group was offset by the decrease in revenue from the
Decision Support Group. The decrease in this Division's revenue was the result
of an elongated sales cycle, attributable to clients' reluctance to make
decisions regarding the implementation of new software while facing their own
internal Y2K conversion, partially offset by the revenue earned from the
Company's recurring base of clients and implementation of its sales backlog.
Cost of services for the fiscal year ended October 31, 1999 was
$102,918,000, an increase of $7,290,000 or 8% from the prior year. The increase
was attributable to higher compensation costs, and direct project
subcontractors, partially offset by lower data processing, occupancy, and other
employee related operating expenses. Compensation expense, the largest component
of cost of services, was $64,253,000 for the fiscal year ended October 31, 1999,
reflecting an increase of $4,965,000 or 8% over the prior year. As a percentage
of total revenue, compensation expense remained constant at 56% of total revenue
in the fiscal years ended October 31, 1999 and 1998, respectively. Increased
compensation expense was principally attributable to increases in average
salaries to reflect prevailing market conditions, and an increase in personnel
associated with the acquisition of HRM. Data processing expense for the fiscal
year ended October 31, 1999 was $7,061,000, a decrease of $1,710,000 from the
prior year. The decrease was primarily attributable to the Company's continued
consolidation of its data processing platforms, reduced support of older
versions of the Company's systems, products and services, the capitalization of
additional software development costs incurred to enhance existing products, and
the timing differences associated with amortization of multiple-period
maintenance and software license fees. Direct project costs were $11,240,000 for
the fiscal year ended October 31, 1999, reflecting an increase of $6,172,000
over the prior year, primarily attributable to the Company's increased use of
revenue-generating subcontractor services to support the growth in the Revenue
Services Division. Other operating expenses were $10,987,000 for the fiscal year
ended October 31, 1999 including $845,000 reserved for settlement of the
Company's class action litigation, reflecting a decrease of $1,851,000 over the
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<PAGE> 18
prior year. The change was primarily attributable to lower professional fees and
employee related costs, including recruiting costs.
Principally as a result of the above factors, operating margin before
amortization of intangible assets for the fiscal year ended October 31, 1999 was
$11,137,000, an increase of $1,513,000 or 16% from the $9,624,000 realized in
fiscal year 1998. The Company's operating margin rate before amortization of
intangible assets was 10%, compared to 9% in the years ended October 31, 1999
and 1998, respectively.
Amortization of intangible assets for the fiscal year ended October 31,
1999 was $840,000, a decrease of $1,124,000 from the prior year. This decrease
was due primarily to completion, in fiscal year 1999, of the amortization of the
excess purchase price related to the HISCo acquisition in fiscal year 1997
allocated to certain revenue contracts.
Net interest and other income for the fiscal year ended October 31,
1999 was $1,277,000, a decrease of $1,020,000 over the prior year, based upon
the combination of lower cash balances and interest rates, the HRM acquisition
transaction, and a $600,000 capital gain on investment recorded in the prior
fiscal year.
The Company's income tax expense for the fiscal year ended October 31,
1999 was $4,091,000, resulting in an effective tax rate of approximately 35.3%.
This compared to an income tax expense of $3,869,000 and an effective tax rate
of approximately 38.9% for fiscal year 1998. The increased income tax expense
was due primarily to the Company's higher pre-tax profit, offset by a more
favorable effective tax rate realized from the Company's ability to file
consolidated state tax returns in specific jurisdictions and from the newly
enacted provision of the tax code pertaining to utilization of existing prior
year net operating tax loss carryforwards, for which the Company had previously
provided a valuation allowance. The Company reduced its valuation allowance by
$372,000 related to this matter.
Principally as a result of the above factors, net income for the fiscal
year ended October 31, 1999 increased to $7,483,000, an increase of $1,395,000
or 23% from the prior year. Resultant diluted earnings per share was $0.43 in
fiscal year 1999, compared to $0.34 in fiscal year 1998.
FISCAL YEARS ENDED OCTOBER 31, 1998 AND 1997
The results of operations discussed below include certain editorial
changes to conform the years ended October 31, 1998 and 1997 to current business
unit naming and segment conventions.
Consolidated revenue for the fiscal year ended October 31, 1998 was
$105,252,000, an increase of $15,735,000 or 18% from prior year revenue of
$89,517,000.
The Revenue Services Division, comprised of the Provider Revenue
Services Group and the Payor Revenue Services Group, achieved revenue of
$57,238,000, an increase of $1,382,000 or 2% from the prior year. Of these
amounts, the Provider Revenue Services Group had revenue of $34,987,000, a
decrease of $4,020,000 or 10% from the prior year, while the Payor Revenue
Services Group had revenue of $22,251,000, an increase in revenue of $5,402,000
or 32% over the prior period.
Revenue from the Software Division was $48,014,000, an increase of
$14,353,000 or 43% over the prior year. Revenue from the Decision Support Group
was $25,499,000, an increase of $626,000 or 3% from the prior year, while the
Payor Systems Group had revenue of $22,515,000 reflecting an increase of
$13,727,000 or 156% from the prior year. This increase was primarily
attributable to the inclusion of the Payor Systems results for the entirety of
the fiscal year in 1998 but for only two-thirds of the fiscal year (March 18
through October 31) in 1997.
Cost of services for the fiscal year ended October 31, 1998 was
$95,628,000, an increase of $7,273,000 or 8% from the prior year, which included
only partial year costs for the Payor Systems Group in fiscal year 1997 and
partial year costs for the Global acquisition consummated by the Company in July
1997 and reported as part of the Provider Revenue Services Group in fiscal
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<PAGE> 19
year 1998. In summary, increased costs in the Software Division of $11,045,000
(of which $8,962,000 were attributable to the Payor Systems Group) were offset
by diminished costs of approximately $3,772,000 in the Revenue Services
Division. As a percentage of total revenue, cost of services declined to 91%
from 99% of total revenue for the fiscal years ended October 31, 1998 and 1997,
respectively.
Compensation expense, the largest component of cost of services, was
$59,288,000 or 56% of total revenue for the fiscal year ended October 31, 1998,
an increase of $6,927,000 or 13% over the prior year, when compensation cost was
58% of total revenue. Increased compensation expense was attributable in large
part to the addition of full year compensation costs for the Payor Systems Group
and the full year effect of the Global acquisition, offset by lower compensation
expense in the remainder of Revenue Services Division due to reduction in
average headcount and decreased deferred compensation benefits. Data processing
expense for the fiscal year ended October 31, 1998 was $8,771,000, an increase
of $1,178,000 or 16% from the prior year. The increase was due primarily to full
year costs of operations in fiscal year 1998 associated with the acquisitions
completed during the course of fiscal year 1997. Occupancy expense for the
fiscal year ended October 31, 1998 was $9,663,000, a decrease of $720,000 or 7%
from the prior year. The decrease was attributable to the subletting of two
floors at the Company's New York City offices, offset by increases associated
with the acquisitions completed during the course of fiscal year 1997. Other
operating expense for the fiscal year ended October 31, 1998 was $17,906,000, a
decrease of $112,000 or 1% from the prior year. This decrease was attributable
to cost reductions in the Revenue Services Division, offset in part by full year
costs in fiscal year 1998 for the acquisitions completed during the course of
fiscal year 1997.
Operating margin before amortization of intangible assets for the
fiscal year ended October 31, 1998 was $9,624,000, an increase of $8,462,000 or
728% from the $1,162,000 realized in fiscal year 1997. The Company's operating
margin rate before amortization of intangible assets was 9.1%, compared to 1.3%
in the prior year.
Amortization of intangible assets for the fiscal year ended October 31,
1998 was $1,964,000, an increase of $633,000 from the prior year. This increase
was attributable to a full year of amortization of intangibles for both the
Global and HSA acquisitions.
Net interest and other income for the fiscal year ended October 31,
1998 was $2,297,000, an increase of $398,000 over the prior year. Fiscal year
1998 other income included $597,000 in capital gains compared to a loss of
$9,000 in the prior year. The prior year also included $877,000 in interest
expense reversal resulting from a favorable Internal Revenue Service audit
resolution, merger expense of $537,000 and equity losses in HISCo of $310,000,
none of which events occurred in fiscal year 1998. Finally, fiscal year 1998
interest income declined by $178,000 from the prior year due to lower interest
rates and lower cash balances.
The Company's income tax expense for the fiscal year ended October 31,
1998 was $3,869,000, resulting in an effective tax rate of approximately 38.9%.
This compared to an income tax benefit of $351,000 for fiscal year 1997. The
fiscal year 1998 tax rate of 38.9% was lower than the Company's normal rate of
slightly under 42%. This decrease was attributable to available "capital loss
carry forwards" which sheltered the entirety of a $593,000 long term capital
gain, both for tax and financial statement purposes. The effective tax rate for
fiscal year 1998 exclusive of the benefit of the tax-sheltered capital gain was
41.3%, compared to an equivalent effective tax rate of 42.9% in fiscal year
1997. The tax benefit in fiscal year 1997 was primarily due to a reversal of
$1,093,000 in accrued taxes arising from the favorable resolution of an Internal
Revenue Service audit.
Net income for the fiscal year ended October 31, 1998 was $6,088,000,
an increase of $4,007,000 or 193% from the prior year. Resultant diluted
earnings per share were $0.34 in fiscal year 1998, compared to $0.12 in fiscal
year 1997. Included in the fiscal year 1998 earnings per share were $0.03
resulting from $593,000 in fully sheltered long-term capital gains; included in
fiscal year 1997 earnings per share were $0.06 attributable to non-recurring
events, which consisted of a $310,000 loss in earnings due to the Company's
(then) equity interest in HISCo, $537,000 in merger related costs, offset by a
one-time benefit from the reversal of a $877,000 reserve for interest expense
and $1,093,000 in accrued taxes resulting from a favorable resolution of an
Internal Revenue Service audit concluded fiscal year 1997. Earnings per share
without the one-time and unusual events increased from $0.06 in fiscal year 1997
to $0.31 in fiscal year 1998, an increase of $0.25 per share.
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<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, the Company had $58,437,000 in net working
capital, an increase of $1,734,000 or 3% from the level at October 31, 1998. The
Company's principal sources of liquidity at October 31, 1999 consisted of cash,
cash equivalents, and short-term investments aggregating $33,817,000, and net
accounts receivable of $58,662,000. Accounts receivable at October 31, 1999
reflected an increase of $3,669,000 or 7% from the balance at October 31, 1998,
of which approximately $2,561,000 was attributable to the HRM acquisition
transaction.
As of December 30, 1999, the Company amended its unsecured revolving
credit facility to extend the existing term through February 15, 2000. No other
terms of the existing credit facility have changed. Although the Company is in
the process of securing a new credit facility with its financial institution,
there can be no assurance that the Company will be able to do so on terms that
are consistent with the current credit facility or terms that are acceptable to
the Company.
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 may repurchase 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 in fiscal year 1999.
In fiscal year 1999, the Company utilized a portion of its excess
capital to again become an opportunistic acquirer, completing the HRM
acquisition transaction. The Company continues to seek to acquire companies that
supply healthcare providers and/or payors with information management software,
systems, or services if the offerings of the Company or such companies would
benefit from access to the other's technology, software applications, or client
base. The Company believes that such acquisition opportunities exist due, in
part, to competitive pressures on local service businesses that lack adequate
capital, technical, and management resources.
INFLATION
Historically, inflation has not been a material factor affecting the
Company's revenue, and general operating expenses have been subject to normal
inflationary pressure. Notwithstanding, the Company's business is labor
intensive. Wages and other employee-related expenses increase during periods of
inflation and when shortages in the skilled labor market occur. Although the
moderate inflation rates of the past several years have not imposed significant
problems for the Company, in light of current shortages in the skilled labor
market, the Company has implemented selective wage increases in fiscal year 1999
to assure retention of qualified personnel in key areas of its operations.
RISK FACTORS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. The Company intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
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<PAGE> 21
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, prospective investors are urged not to place undue
reliance on written or oral forward-looking statements of the Company. The
Company undertakes no obligation to update or revise this safe harbor compliance
statement for forward-looking statements to reflect future developments. In
addition, the Company undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the following:
VARIABILITY OF OPERATING RESULTS; LENGTH OF SALES CYCLES; TERMINABILITY OF
CUSTOMER CONTRACTS.
The Company's revenue and operating results may vary significantly from
quarter to quarter as a result of a number of factors, including the number and
timing of systems sales; the termination of, or a reduction in, offerings of the
Company's products and services; the loss of customers due to consolidation in
the healthcare industry; the length of the sales cycles and delays in the
implementation process; the timing of periodic revenue enhancement projects; and
general economic conditions. The Company experiences sales cycles of three to
eighteen months. As a result, the Company's results of operations are subject to
significant fluctuations and its results of operations for any particular
quarter or fiscal year may not be indicative of results of operations for future
periods. A significant portion of the Company's operating expenses are fixed,
and planned expenditures are based primarily on sales forecasts. Any inability
of the Company to reduce spending or to compensate for any failure to meet sales
forecasts or receive anticipated revenues could magnify the adverse impact of
such events on the Company's operating results. Further, the commencement of one
or more major implementations could generate a large increase in revenue and net
income for any given quarter or fiscal year, which increase may prove anomalous
when compared to changes in revenue and net income in other periods, and which
may not provide a valid basis for future projections. The Company's ability to
complete implementation of its systems and recognize revenue is dependent on
certain factors outside the control of the Company, including its customers'
ability to allocate internal resources to the implementation process and, with
respect to certain customers, the need to obtain necessary approvals upon
completion of work but prior to customer acceptance. In addition, many of the
Company's agreements with its customers may be terminated under certain
circumstances upon 30 to 90 days notice. The termination of customer agreements,
if not replaced, could have a material adverse effect on the Company's business,
financial condition and results of operations.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
The Company's future performance will depend in large part upon the
Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted increasingly more resources to product enhancements and
research and development and believes that significant continuing development
efforts will be necessary to adapt to changing marketplace requirements, to
sustain its operations, and to integrate the products and technologies of
acquired businesses. There can be no assurance that the Company will
successfully or in a timely manner develop, acquire, integrate, introduce, and
market new product enhancements or products, or that product enhancements or new
products developed by the Company will meet the requirements of hospitals or
other healthcare providers and payors and achieve or sustain market acceptance.
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<PAGE> 22
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company's success is dependent to a significant extent on its
ability to maintain the proprietary and confidential aspects of its data
processing and computer software technology. The Company relies on a combination
of trade secrets, copyright and trademark laws, nondisclosure and other
contractual provisions to protect its proprietary rights. There can be no
assurance that the measures taken by the Company to protect its intellectual
property will be adequate or that the Company's competitors will not
independently develop products and services that are substantially equivalent or
superior to those of the Company.
Substantial litigation regarding intellectual property rights exists in
the software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
products overlaps. Although the Company believes that its products do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that a license or similar agreement will be available on
reasonable terms in the event of an unfavorable ruling on any such claim. In
addition, any claim may require the Company to incur substantial litigation
expenses or subject the Company to significant liabilities and could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be
successful in its defense of any such claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products and services such as those offered by the Company at times
contain errors or failures, especially when initially introduced or when new
versions are released or processes implemented. Although the Company conducts
extensive testing, software errors are sometimes discovered in certain
enhancements and products and services after their introduction. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors or performance failures will not occur in products and
services under development or in other enhancements or products after
commencement of commercial shipments or implementations, resulting in loss of
revenue and customers, delay in market acceptance, diversion of development
resources, damage to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
ACQUISITIONS AND EXPANSION
The Company's strategy includes the expansion of its business through
selective acquisitions. In pursuing such acquisitions, the Company competes with
other prospective acquirors, some of which may have greater financial resources
than the Company. There can be no assurance that suitable acquisition
opportunities will be identified or that acquisitions can be consummated or
integrated successfully into the Company's operations. In addition, future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other tangible assets, any of
which could materially adversely affect the Company's operating results and
financial position.
Growth through acquisition entails certain risks in that acquired
operations could be subject to unanticipated business uncertainties or legal
liabilities. The Company seeks to minimize these risks through investigation and
evaluation of the operations proposed to be acquired and through transaction
structure and indemnification. The various risks associated with the
acquisitions and operational integration of future acquisitions and the
subsequent performance of such acquired operations may adversely affect the
Company's results of operations. The ability of the Company to acquire
additional operations may depend upon its ability to obtain appropriate
financing and personnel.
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<PAGE> 23
COMPETITION
The business of providing information management and data processing
products and services to hospitals and other healthcare providers and to
government health service agencies and other healthcare payors is highly
competitive. The Company's competitors vary in the size, scope and breadth of
the products and services they offer. There can be no assurance that competitors
will not develop or offer products with superior functionality, or that other
features of competitive products will not be preferred by the Company's
customers. Several of the Company's competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. In the future, additional competitors could enter the market, including
providers of information systems to other segments of the healthcare industry,
and compete with the Company. A substantial amount of the Company's sales are
derived from competitive procurement processes managed directly by sophisticated
clients or consultants that require specific, highly detailed presentations from
several qualified vendors. There can be no assurance that future competition
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
HEALTHCARE PAYMENT COMPLEXITY
The complexity of the healthcare transfer payment process, and the
experience of the Company in offering services that improve the ability of its
customers to recover incremental revenue through that process, have been
contributing factors to the success of the Company's service offerings.
Complexities of the healthcare transfer payment process include multiple payors,
the coordination and utilization of clinical, operational, financial and/or
administrative review instituted by third-party payors in an effort to control
costs and manage care. If the payment processes associated with the healthcare
industry are simplified, the need for services such as those offered by the
Company could be reduced, and there could be a resulting adverse effect on the
Company's business, results of operations or financial condition.
HEALTHCARE REGULATION AND REFORM
The healthcare industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of healthcare organizations. The Company's products are
designed to function within the structure of the healthcare financing and
reimbursement system currently being used in the United States. During the past
several years, the healthcare industry has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates, certain
capital expenditures, and data confidentiality and privacy. From time to time,
certain proposals to reform the healthcare system have been considered by
Congress. These proposals, if enacted, may increase government involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for the Company's clients. Healthcare organizations may react to
these proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's products and services.
The Company cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on its results of operations,
financial condition or business.
DEPENDENCE UPON KEY PERSONNEL
As the Company's success depends upon the continued contributions of
its senior management, the loss of services of certain of the Company's
executive officers could have an adverse effect on the Company's business.
Accordingly, although the Company does not have long term service agreements
with most of its executive officers, the Company does have confidentiality,
non-compete and non-solicitation agreements with most of its management and
certain other key employees. In general, such agreements (i) require the
employee to protect the confidential and proprietary information of the Company
and (ii) preclude the employee from soliciting other employees of the Company or
competing with the Company for periods of up to three years following
termination of employment. In addition, the Company believes that its continued
success also will depend in large part on its ability to attract and retain
highly-skilled management, technology, marketing, and sales personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel as
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<PAGE> 24
necessary. Furthermore, the Company's ability to manage change and growth
successfully will require the Company to continue to improve its management
expertise as well as its financial systems and controls. Additions of new
personnel, and departures of existing skilled employees, can be disruptive and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
POSSIBLE VOLATILITY OF STOCK PRICES
The market price of the Company's common stock has been subject in the
past and could be subject in the future to significant fluctuations in response
to variations in the Company's quarterly operating results and other factors,
such as announcements of technological innovations or new products by the
Company or by the Company's competitors, adoption of new or amended government
regulations, challenges to or changes in patent or other proprietary rights, and
developments in the Company's relationships with its customers. In addition, the
stock market has in recent years experienced and continues to experience
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded. Broad
market fluctuations, as well as fluctuating economic conditions generally, may
adversely affect the market price of the Company's common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined by the Company's Board
of Directors. Accordingly, the Company's Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which could adversely affect
the voting power or, other rights of holders of the Company's common stock. In
the event of issuance, preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. In addition, the Company's by-laws provide for a
classified Board of Directors, which provision could also have the effect of
discouraging a change of control of the Company.
LITIGATION
The Company is a party to various proceedings as described under Item
3, "Legal Proceedings," of this Report, which description is incorporated herein
by reference. Although the Company believes that it has meritorious defenses to
the claims of liability or for damages in the actions against the Company, there
can be no assurance that an outcome favorable to the Company will be reached in
any of these litigations or that additional lawsuits will not be filed against
the Company. Further, there can be no assurance that these lawsuits will not
have a disruptive effect upon the operations of the business, that the defense
of the lawsuits will not consume the time and attention of the senior management
of the Company, or that the resolution of the lawsuits will not have a material
adverse effect upon the Company, including without limitation, the Company's
results of operations, financial position and cash flow.
YEAR 2000
In common with many other organizations, the 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
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 were identified and continue to be monitored to ensure
uninterrupted delivery to the Company of the requisite products and services.
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<PAGE> 25
The Company is also continuing to work with its clients to ensure a
smooth Y2K transition. 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 were
developed and implemented. It is expected that assessment and remediation will
be completed in sufficient time to ensure the Company's provision of service
without interruption due to the onset of the year 2000. No event has surfaced
through the time of filing of this Form 10-K to materially impact the Company's
results of operations. The Company has completed 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 has finished 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. Each business group has had its Y2K remediation tested, with
the exception of the Provider Revenue Services Group. Progress continues to be
made in the substantial conversion work for the Provider Revenue Services Group,
though not all of it was 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 would continue through 2000.
The costs incurred to date related to these programs are difficult to
isolate but are estimated at approximately $2,100,000. 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 Groups comprising
the Revenue Services Division 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.
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<PAGE> 26
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criteria for hedge accounting is that the derivative must be
highly effective in achieving offsetting changes in fair value or cash flows of
the hedged items during the term of the hedge. The effective date of SFAS No.
133 was delayed to fiscal 2001 by the issuance of SFAS No. 137. The Company has
not yet determined the effect, if any, of adopting this new standard.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's holdings of financial instruments are comprised of
federal, state and local government debt, and corporate debt. All such
instruments are classified as securities available for sale. The Company does
not invest in portfolio equity securities or commodities or use financial
derivatives for trading purposes. The Company's debt security portfolio
represents funds held temporarily, pending use in the Company's business and
operations. The Company manages these funds accordingly. The Company seeks
reasonable assuredness of the safety of principal and market liquidity by
investing in rated fixed income securities while, at the same time, seeking to
achieve a favorable rate of return. The Company's market risk exposure consists
principally of exposure to changes in interest rates. The Company's holdings are
also exposed to the risks of changes in the credit quality of issuers. The
Company typically invests in the shorter-end of the maturity spectrum or highly
liquid investments.
The table below presents the historic cost basis, and the fair value
for the Company's investment portfolio as of October 31, 1999, and the related
weighted average interest rates by year of maturity:
<TABLE>
<CAPTION>
Fiscal year
Fiscal year Fiscal year 2005 and
2000 2001 thereafter Total Fair value
---------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed income assets
Governmental Securities $ 5,137,000 $ 5,756,000 $ 6,383,000 $ 17,276,000 $ 17,005,000
Average interest rate 5.06% 5.01% 5.52%
Corporate debt 500,000 502,000
Average interest rate 4.55%
----------- ----------- ----------- ------------ ------------
$ 5,137,000 $ 5,756,000 $ 6,383,000 $ 17,776,000 $ 17,507,000
----------- ----------- ----------- ------------ ------------
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is found on pages 29 to 53 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders (the "Proxy
Statement"), which will be mailed within 120 days after the close of the
Company's fiscal year ended October 31, 1999, and is hereby incorporated herein
by reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 1999, and is hereby incorporated herein by
reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 1999, and is hereby incorporated herein by
reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 1999, and is hereby incorporated herein by
reference to such Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements:
See Index to Consolidated Financial Statements on page 27
B. Schedule:
Schedule II - Valuation and Qualifying Accounts on page 53
C. Reports on Form 8-K:
None
D. Exhibits:
See Exhibit Index on page 54
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------
(REGISTRANT)
BY: /s/ PAUL J. KERZ
-------------------------------
Paul J. Kerz
President and Chief Executive Officer
DATE: January 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures TITLE Date
- ---------- ----
<S> <C> <C>
/s/ PAUL J. KERZ Chairman, President, January 24, 2000
- ------------------------- Chief Executive Officer,
Paul J. Kerz and Director
/s/ ALAN L. BENDES Senior Vice President and January 24, 2000
- ------------------------- Chief Financial Officer
Alan L. Bendes
/s/ ERNEST W. D'AMBROSE Corporate Controller January 24, 2000
- -------------------------
Ernest W. D'Ambrose
/s/ RANDOLPH G. BROWN Director January 24, 2000
- -------------------------
Randolph G. Brown
/s/ ROBERT V. NAGELHOUT Director, and President of Software January 24, 2000
- ------------------------- Systems and Services Division
Robert V. Nagelhout
/s/ WILLIAM W. NEAL Director January 24, 2000
- -------------------------
William W. Neal
/s/ GALEN D. POWERS Director January 24, 2000
- -------------------------
Galen D. Powers
/s/ ELLEN A. RUDNICK Director January 24, 2000
- -------------------------
Ellen A. Rudnick
/s/ DONALD J. STAFFA Director January 24, 2000
- --------------------------
Donald J. Staffa
/s/ RICHARD H. STOWE Director January 24, 2000
- -------------------------
Richard H. Stowe
</TABLE>
26
<PAGE> 29
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
CONSOLIDATED FINANCIAL STATEMENTS: NUMBER
- ----------------------------------- ------
<S> <C>
Independent Auditors' Report 28
Consolidated Balance Sheets as of October 31, 1999 and 1998 29
Consolidated Statements of Operations for the Years Ended October 31, 1999, 1998, and 1997 30
Consolidated Statements of Comprehensive Income for the Years Ended October 31, 1999,
1998, and 1997 31
Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 1999,
1998, and 1997 32
Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998, and 1997 33
Notes to Consolidated Financial Statements 34
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts 53
</TABLE>
27
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Health Management Systems, Inc.:
We have audited the accompanying consolidated financial statements of
Health Management Systems, Inc. and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Management Systems, Inc. and subsidiaries as of October 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 31, 1999 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
December 1, 1999, except for
paragraph 1 of footnote 17
which is as of December 20, 1999
28
<PAGE> 31
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
October 31,
------------------------------
1999 1998
----------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 16,310 $ 13,883
Short-term investments 17,507 14,519
Accounts receivable, billed, net 17,001 28,792
Accounts receivable, unbilled, net 41,661 26,201
Income tax receivable 588 2,340
Prepaid expenses and other current assets 3,928 4,021
----------- ------------
Total current assets 96,995 89,756
Property and equipment, net 7,766 6,687
Capitalized software costs, net 7,286 4,203
Goodwill, net 12,762 11,742
Deferred income taxes 3,797 3,303
Notes receivable from officer 900 750
Other assets 1,415 1,361
----------- ------------
Total assets $ 130,921 $ 117,802
=========== ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 18,050 $ 15,420
Deferred revenue 4,541 6,326
Deferred income taxes 15,967 11,307
----------- -----------
Total current liabilities 38,558 33,053
Other liabilities 1,131 1,480
----------- -----------
Total liabilities 39,689 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;
18,450,737 shares issued and 17,401,737 shares outstanding at October 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 71,714 71,134
Retained earnings 27,078 19,595
Accumulated other comprehensive income 6 107
----------- -----------
98,982 91,019
Less treasury stock, at cost (1,049,000 shares at October 31, 1999 and October 31, 1998) (7,750) (7,750)
----------- -----------
Total shareholders' equity 91,232 83,269
----------- -----------
Total liabilities and shareholders' equity $ 130,921 $ 117,802
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
($ In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years ended October 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue: $ 114,055 $ 105,252 $ 89,517
------------ ------------ ------------
Cost of services:
Compensation 64,253 59,288 52,361
Data processing 7,061 8,771 7,593
Occupancy 9,377 9,663 10,383
Direct project costs 11,240 5,068 6,034
Other 10,987 12,838 11,984
------------ ------------ ------------
102,918 95,628 88,355
------------ ------------ ------------
Operating margin before amortization of intangibles 11,137 9,624 1,162
Amortization of intangibles 840 1,964 1,331
------------ ------------ ------------
Operating income (loss) 10,297 7,660 (169)
------------ ------------ ------------
Other income:
Interest income, net 1,277 1,700 2,755
Other income (loss), net 0 597 (856)
------------ ------------ ------------
1,277 2,297 1,899
------------ ------------ ------------
Income before income taxes 11,574 9,957 1,730
Income tax expense (benefit) 4,091 3,869 (351)
------------ ------------ ------------
Net income $ 7,483 $ 6,088 $ 2,081
============ ============ ============
Earnings per share data:
Basic:
Basic earnings per share $ 0.43 $ 0.35 $ 0.12
============ ============ ============
Weighted average common shares outstanding 17,357 17,366 17,611
============ ============ ============
Diluted:
Diluted earnings per share $ 0.43 $ 0.34 $ 0.12
============ ============ ============
Weighted average common shares and common share equivalents 17,419 17,833 17,979
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended October 31,
------------------------------------------------
1999 1998 1997
------------ --------------- -------------
<S> <C> <C> <C>
Net income $ 7,483 $ 6,088 $ 2,081
Other comprehensive income, net of tax:
Change in net unrealized appreciation (depreciation)
on short-term investments (101) (574) 210
------------ --------------- -------------
Comprehensive income $ 7,382 $ 5,514 $ 2,291
============ =============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 34
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
------------------- Accumulated Total
Number of Capital In Other Share-
Shares Par Excess Of Retained Comprehensive Treasury holders'
Outstanding Value Par Value Earnings Income Stock Equity
---------- ------ --------- --------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996 17,520,991 $ 175 $ 62,541 $ 11,426 $ 471 $ 0 $ 74,613
Net income 0 0 0 2,081 0 0 2,081
Stock option activity 69,480 1 333 0 0 0 334
Employee stock purchase plan activity 95,332 1 708 0 0 0 709
Stock issued to retire QSM debt 87,850 1 1,434 0 0 0 1,435
Stock issued to non-employees 0 0 98 0 0 0 98
Disqualifying dispositions 0 0 2,190 0 0 0 2,190
Treasury stock acquisition (314,500) 0 0 0 0 (1,863) (1,863)
Change in net unrealized appreciation
on short-term investments 0 0 0 0 210 0 210
---------- ------ --------- --------- ------ -------- -------
Balance at October 31, 1997 17,459,153 178 67,304 13,507 681 (1,863) 79,807
Net income 0 0 0 6,088 0 0 6,088
Stock option activity 440,316 4 2,713 0 0 0 2,717
Employee stock purchase plan activity 118,398 0 515 0 0 0 515
Treasury stock acquisition (734,500) 1 0 0 0 (5,887) (5,886)
Disqualifying dispositions 0 0 602 0 0 0 602
Change in net unrealized depreciation
on short-term investments 0 0 0 0 (574) 0 (574)
---------- ------ --------- --------- ------ -------- --------
Balance at October 31, 1998 17,283,367 183 71,134 19,595 107 (7,750) 83,269
Net income 0 0 0 7,483 0 0 7,483
Stock option activity 41,247 0 210 0 0 0 210
Employee stock purchase plan activity 77,123 1 337 0 0 0 338
Disqualifying dispositions 0 0 33 0 0 0 33
Change in net unrealized depreciation
on short-term investments 0 0 0 0 (101) 0 (101)
---------- ------ --------- --------- ------ -------- --------
Balance at October 31, 1999 17,401,737 $ 184 $ 71,714 $ 27,078 $ 6 $ (7,750) $ 91,232
========== ====== ========= ========= ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE> 35
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended October 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income $ 7,483 $ 6,088 $ 2,081
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of capitalized software 3,755 3,520 3,811
Amortization of intangibles 840 1,964 1,331
Provision for doubtful accounts 690 838 538
Loss on disposal of assets 0 0 17
Deferred tax expense (benefit) 4,166 4,022 (1,635)
Equity in loss of affiliate 0 0 310
Stock options issued to non-employees 33 0 98
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (2,496) (15,474) 5,008
(Increase) decrease in income tax receivable 1,752 (1,830) 200
(Increase) decrease in prepaid expenses and other current assets 133 (1,147) 3,937
Increase (decrease) in accounts payable and accrued expenses 491 (289) (2,910)
Decrease in amounts payable to affiliates 0 0 (747)
Increase (decrease) in deferred revenue (401) 754 (575)
Decrease in other assets (477) (747) (1,531)
-------- -------- --------
Net cash provided by (used in) operating activities 15,969 (2,301) 9,933
-------- -------- --------
Investing activities:
Software capitalization (4,107) (3,138) (1,498)
Capital asset expenditures (2,720) (1,263) (2,462)
Net proceeds from (purchases of) short-term investments (3,089) 3,295 (964)
Acquisition of net assets of Health Receivables Management, LLC, net of cash acquired (4,024) 0 0
Acquisition of remainder of Health Information Systems Corporation, net of cash acquired 0 0 (3,689)
Acquisition of assets of subsidiaries of GHS, Inc. 0 0 (2,146)
Increase in notes receivable from officer (150) (750) 0
-------- -------- --------
Net cash used in investing activities (14,090) (1,856) (10,759)
-------- -------- --------
Financing activities:
Proceeds from issuance of common stock 210 515 709
Proceeds from exercise of stock options 338 2,717 334
Common stock repurchases 0 (5,886) (1,863)
-------- -------- --------
Net cash provided by (used in) financing activities 548 (2,654) (820)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,427 (6,811) (1,646)
Cash and cash equivalents at beginning of period 13,883 20,694 22,340
-------- -------- --------
Cash and cash equivalents at end of period $ 16,310 $ 13,883 $ 20,694
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 36
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Management Systems, Inc. (the "Company") furnishes proprietary
information management, data processing, and software (including consulting)
services to healthcare providers and payors, including government health service
agencies. The Company is organized into two divisions: the Revenue Services
Division ("Revenue Services Division") and the Software Systems and Services
Division ("Software Division"). The Revenue Services Division comprises two
business units: the Provider Revenue Services Group and the Payor Revenue
Services Group. The Company's Software Division also comprises two business
units: the Decision Support Group and the Payor Systems Group.
In fiscal year 1999, each of the Company's subsidiaries adopted use of
the corporate name, Health Management Systems ("HMS"), as part of an initiative
to strengthen the corporate identity. As well, the Company changed the
designation of its business segments in order to more appropriately describe the
functions being performed. The table below cross-references fiscal year 1999
nomenclature to that used in prior years.
<TABLE>
<CAPTION>
CURRENT NOMENCLATURE PRIOR NOMENCLATURE
-------------------- ------------------
<S> <C>
Revenue Services Division Transfer Payment Division
- Provider Revenue Services Group - Provider Transfer Payment Unit
- Payor Revenue Services Group - Payor Transfer Payment Unit
Software Systems and Services Division Software Systems and Services Division
- Decision Support Group - Decision Support Systems or DSS Unit
- Payor Systems Group - Managed Care Information Systems or MCIS
Unit
</TABLE>
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
(including money market instruments of $3,871,000 and $6,231,000 at October 31,
1999 and 1998, respectively) to be cash equivalents.
(c) Short-Term Investments
Short-term investments are recorded at fair value. Included in
short-term investments are investments classified as available for sale and
carried at fair value. Debt securities that the Company does not have the intent
and ability to hold to maturity are classified either as "available for sale" or
as "trading" and are carried at fair value. Unrealized gains and losses on
securities classified as available for sale are carried as a separate component
of shareholders' equity. Unrealized gains and losses on securities classified as
trading are reported in earnings. Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date.
At October 31, 1999 and 1998, the Company recorded cumulative
unrealized appreciation of $6,000 and $107,000, respectively, on short-term
investments classified as available for sale.
34
<PAGE> 37
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Depreciation and Amortization of Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the property and equipment utilizing the
straight-line method. Amortization of leasehold improvements is provided over
the estimated useful lives of the assets or the terms of the leases, whichever
is shorter, utilizing the straight-line method. The estimated useful lives are
as follows:
<TABLE>
<S> <C>
Equipment 3-5 years
Leasehold improvements 5-8 years
Furniture and fixtures 5-7 years
</TABLE>
(e) Intangible Assets
Intangible assets have been recorded primarily as a result of the
recapitalization of the Company in 1989, the acquisition of Quality Medi-Cal
Adjudication, Incorporated ("QMA") in 1990, the acquisition of the remaining
shares of Health Information Systems Corporation ("HISCo") in March 1997, the
acquisition of the assets of Global Health Systems, Inc. and GHS Management
Services, Inc. (collectively "Global") in July 1997, and the acquisition of the
assets of Health Receivables Management, LLC ("Old HRM") in July 1999.
Intangible assets consist of software and goodwill, which are being amortized on
a straight-line basis over three years, three years and between ten and forty
years, respectively.
(f) Software Development Costs
The Company capitalizes software development costs (related to software
developed for resale) incurred subsequent to the establishment of technological
feasibility of the product, including costs incurred to develop upgrades
subsequent to the commercial release of the product. Amortization of software
development costs is calculated on a straight-line basis over the expected
economic life of the product, generally estimated to be 36-48 months. Software
development costs are stated at original cost of $11,000,000 and $6,893,000 less
accumulated amortization of $3,714,000 and $2,690,000 at October 31, 1999 and
1998, respectively. Amortization expense for the years ended October 31, 1999,
1998, and 1997 was $1,024,000, $956,000, and $992,000, respectively.
(g) Revenue Recognition
The Company generally recognizes revenue for financial reporting
purposes when billings are submitted to clients or their third-party payors or
intermediaries as a consequence of completion and acceptance of services
performed by the Company for a client. Accounts receivable, unbilled, net,
represents amounts recognized for services rendered but not yet invoiced and is
based on the Company's estimate of the fees that will be invoiced upon receipt
of remittance data. Accounts receivable, billed, net, represents amounts
invoiced to clients. Several client contracts contain periodic fee limitations
that the Company believes will be exceeded in the normal course of business. As
a result, the fees allowable under these contracts are recognized on a
straight-line basis over the fee limitation period as services are performed,
and amounts billed in excess of revenue recognized are deferred. Other contracts
have sliding fee scales for which revenue is fairly predictable. For these, the
Company recognizes revenue, at the estimated effective fee rate, ratably over
the client's contract year. Finally, certain contracts are subject to fixed-fee
arrangements covering specified periods, which the Company realizes on a
straight-line basis over the corresponding periods.
The Company recognizes revenue from consulting services as the services
are provided. Revenue from software products sold to customers under license
agreements is deferred and recognized as revenue upon software installation and
satisfaction of significant Company obligations, if any, and when collection of
the resulting receivable is reasonably assured. Revenue from ongoing maintenance
agreements is deferred and recognized as revenue on a straight-line basis over
the periods of the respective maintenance agreements.
35
<PAGE> 38
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Income Taxes
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that includes the enactment date.
(i) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criteria for hedge accounting is that the derivative must be
highly effective in achieving offsetting changes in fair value or cash flows of
the hedged items during the term of the hedge. The effective date of SFAS No.
133 was delayed to fiscal 2001 by the issuance of SFAS No. 137. The Company has
not yet determined the effect, if any, of adopting this new standard.
(j) Net Income Per Common Share
Basic earnings per share is based on the net income for the relevant
period divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based on the net income for the
relevant period divided by the weighted average number of common shares and
common stock equivalents outstanding during the period. The Company had weighted
average common shares and common stock equivalents outstanding during fiscal
years 1999, 1998, and 1997 of 17,357,000, 17,366,000, and 17,611,000 and of
62,000, 467,000, and 368,000, respectively. The Company's common stock
equivalents consist of stock options. As of October 31, 1999, the Company had
3,335,928 potentially dilutive common shares outstanding that could have an
effect on future calculations of diluted earnings per share.
(k) Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reported period. The actual results could differ from those
estimates.
(l) Reclassifications
Certain reclassifications were made to prior year amounts to conform to
the current presentation.
(m) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets approximate estimated fair value as of
October 31, 1999 and 1998.
(n) Stock-Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On October 31,
1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
36
<PAGE> 39
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro-forma net income and pro-forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS No.
123. See Note 12 - Stock Based Compensation Plans.
(o) Accounting for the Impairment of Long-Lived Assets
The Company reviews its long-lived assets, certain identifiable
intangibles, and goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets.
2. BUSINESS COMBINATIONS
(a) Acquisition of the Assets of Health Receivables Management, LLC.
In June 1999, the Company's Quality Standards in Medicine, Inc. ("QSM")
subsidiary acquired substantially all of the assets and assumed specified
liabilities of Old HRM for $4,024,000, net of cash acquired and subject to
certain purchase price adjustments. In connection with the transaction, QSM
changed its name to Health Receivables Management, Inc. ("HRM"). HRM currently
furnishes Medicaid application services, electronic billing, eligibility
verification, accounts receivable management and collection services to
healthcare providers, principally in the State of Illinois.
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of HRM from the date of
acquisition through October 31, 1999 are included in the accompanying
consolidated financial statements. Its results are included in the Provider
Revenue Services Group. The $1,618,000 excess of the purchase price over the
fair market value of the identifiable assets acquired was recorded as goodwill
and is being amortized over a period not to exceed 15 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and HRM as if the acquisition had
occurred as of the beginning of fiscal years 1999 and 1998, after giving effect
to certain adjustments. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the Company and
HRM constituted a single entity during such periods.
<TABLE>
<CAPTION>
(Unaudited)
Year ended October 31,
1999 1998
---- ----
<S> <C> <C>
Revenue $ 119,209,000 $ 113,066,000
Net income 7,556,000 5,571,000
------------- -------------
Basic earnings per share 0.41 0.32
------------- -------------
Diluted earnings per share $ 0.40 $ 0.31
------------- -------------
</TABLE>
(b) Acquisition of the Assets of Global Health Systems Inc. and GHS
Management Services, Inc.
In July 1997, the Company acquired substantially all the assets of
Global for $2,146,000. Global provides computerized record-based processing
systems and services for managed care, public health and ambulatory care
facilities.
The acquisition was accounted for using the purchase method and
accordingly the results of operations for Global from the date of acquisition
through October 31, 1998 are included in the accompanying consolidated
37
<PAGE> 40
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements. Its results are included in the Provider Revenue Services
Group. The $1,701,000 excess of the purchase price over the fair market value of
the identifiable assets acquired was recorded as goodwill and is being amortized
over a period not to exceed 20 years.
(c) Acquisition of Health Information Systems Corporation
In March 1997, the Company, which owned 43% of the equity of HISCo,
acquired the remaining 57% of HISCo's equity for $3,689,000, net of cash
acquired from Welsh, Carson, Anderson & Stowe ("WCAS"), a limited partnership
affiliated with WCAS, other affiliates of WCAS, independent investors, and
certain of the Company's executive officers and directors. HISCo was
subsequently renamed HSA Managed Care Systems, Inc. ("HSA"). HSA provides
automated business and information solutions, including software systems and
services, to healthcare providers and payors.
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, 1998 are included in the accompanying consolidated financial
statements. Its results comprise the results of the Payor Systems Group. The
$2,309,000 excess of the purchase price over the fair market value of the
identifiable net assets acquired was recorded as goodwill and is being amortized
over a period not to exceed 20 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and HSA as if the acquisition had
occurred as of the beginning of fiscal year 1997, after giving effect to certain
adjustments. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had the Company and HSA
constituted a single entity during such period.
<TABLE>
<CAPTION>
(Unaudited)
Year ended October 31,
1997
----------------------
<S> <C>
Revenue $ 94,582,000
Net income 1,671,000
------------
Basic earnings per share 0.09
------------
Diluted earnings per share $ 0.09
------------
</TABLE>
(d) Merger with Quality Standards in Medicine, Inc.
In November 1996, the Company completed the acquisition of QSM, a
Boston-based company providing clinical quality management systems, for 260,000
shares of the Company's common stock. This transaction was accounted for using
the pooling of interests method. Accordingly, the accompanying consolidated
financial statements have been retroactively restated through 1995 for periods
presented to include the financial position, results of operations, and cash
flows of QSM. Founded in 1986, QSM provides hospitals with sophisticated systems
and consulting services to help define and measure the quality of care. QSM has
clients located primarily in 13 states and the District of Columbia.
3. MARKETABLE SECURITIES
The Company's holdings of financial instruments are comprised of
federal, state and local government debt, and corporate debt. All such
instruments are classified as securities available for sale. The Company does
not invest in portfolio equity securities or commodities or use financial
derivatives for trading purposes. The Company's debt security portfolio
represents funds held temporarily, pending use in the Company's business and
operations. The Company manages these funds accordingly. The Company seeks
reasonable assuredness of the safety of principal and market liquidity by
investing in rated fixed income securities while, at the same time, seeking to
achieve a favorable rate of return. The Company's market risk exposure consists
principally of exposure to changes in interest rates. The Company's holdings are
also exposed to the risks of changes in the credit quality of issuers. The
Company typically invests in the shorter-end of the maturity spectrum or highly
38
<PAGE> 41
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liquid investments.
The table below presents the historic cost basis, and the fair value
for the Company's investment portfolio as of October 31, 1999:
<TABLE>
<CAPTION>
Fiscal year
Fiscal year Fiscal year 2005 and
2000 2001 thereafter Total Fair value
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Fixed income assets
Governmental Securities $ 5,137,000 $ 5,756,000 $ 6,383,000 $ 17,276,000 $ 17,005,000
Corporate debt 500,000 502,000
----------- ----------- ----------- ------------ ------------
$ 5,137,000 $ 5,756,000 $ 6,383,000 $ 17,776,000 $ 17,507,000
=========== =========== =========== ============ ============
</TABLE>
4. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of an allowance for doubtful
accounts of $1,823,000 and $1,853,000 at October 31, 1999 and 1998,
respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment as of October 31, 1999 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Equipment $ 19,022,000 $ 15,411,000
Leasehold improvements 6,161,000 6,035,000
Furniture and fixtures 5,192,000 5,119,000
------------ ------------
30,375,000 26,565,000
Less accumulated depreciation and amortization (22,609,000) (19,878,000)
------------ ------------
Property and equipment, net $ 7,766,000 $ 6,687,000
============ ============
</TABLE>
Depreciation and amortization expense related to property and equipment
charged to operations for the years ended October 31, 1999, 1998, and 1997 was
$2,731,000, $2,564,000, and $2,819,000, respectively.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets as of October 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Goodwill $ 15,916,000 $ 14,298,000
Less accumulated amortization (3,154,000) (2,556,000)
------------ ------------
Goodwill, net 12,762,000 11,742,000
------------ ------------
Other intangible assets 1,443,000 7,036,000
Less accumulated amortization (973,000) (6,325,000)
------------ ------------
Other intangible assets, net $ 470,000 $ 711,000
------------ ------------
</TABLE>
Amortization expense related to intangible assets charged to operations
for the years ended October 31, 1999, 1998, and 1997, was $840,000, $1,964,000,
and $1,331,000, respectively. During 1999, software in the amount of $5,593,000
became fully amortized.
39
<PAGE> 42
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of October 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Accounts payable $ 5,922,000 $ 4,485,000
Accrued compensation 5,113,000 6,390,000
Accrued direct project costs 3,112,000 1,763,000
Accrued other expenses 3,903,000 2,782,000
----------- -----------
$18,050,000 $15,420,000
=========== ===========
</TABLE>
8. CREDIT FACILITY
The Company's unsecured $30,000,000 revolving credit facility with a
major money center financial institution carries an unused commitment fee of 20
basis points, and bears interest at the institution's prime lending rate, or
LIBOR plus 5/8%, at the Company's option. The revolving credit facility
contains, among other things, restrictions on additional borrowings, capital
expenditures, leases, sales of assets, and payments of dividends. The revolving
credit facility also contains covenants that require the Company to maintain
minimum tangible consolidated shareholders' equity and limit debt-to-equity and
debt-to-asset relationships as defined in the agreement. The Company had an
available balance under this credit facility of $30,000,000 at both October 31,
1999 and October 31, 1998. See Note 16(c) Related Party Transactions. Subsequent
to the fiscal year ended October 31, 1999, the Company amended the credit
facility to extend the existing term through February 15, 2000. No other terms
of the existing credit facility have changed. Although the Company is in the
process of securing a new credit facility with its financial institution, there
can be no assurance that the Company will be able to do so on terms that are
consistent with the current credit facility or terms that are acceptable to the
Company.
Cash interest payments including bank charges attributable to the
aforementioned credit facility for the years ended October 31, 1999, 1998, and
1997 were $105,000, $102,000, and $80,000, respectively.
9. INCOME TAXES
Income tax expense (benefit) for the years ended October 31, 1999,
1998, and 1997 was comprised of the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ (145,000) $ (577,000) $ 716,000
State and local 70,000 423,000 568,000
----------- ----------- -----------
(75,000) (154,000) 1,284,000
----------- ----------- -----------
Deferred tax expense (benefit):
Federal 3,254,000 3,505,000 (1,136,000)
State and local 912,000 518,000 (499,000)
----------- ----------- -----------
4,166,000 4,023,000 (1,635,000)
----------- ----------- -----------
Income tax expense (benefit), net $ 4,091,000 $ 3,869,000 $ (351,000)
----------- ----------- -----------
</TABLE>
40
<PAGE> 43
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the income tax expense (benefit) to the applicable
federal statutory rates follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense (benefit):
Computed at federal statutory rate $ 3,951,000 34.1% $ 3,386,000 34.0% $ 588,000 34.0%
State and local tax expense, net of 647,000 5.6 621,000 6.2 46,000 2.7
federal benefit
Amortization of goodwill 56,000 0.5 83,000 0.8 70,000 4.0
Municipal interest (199,000) (1.7) (181,000) (1.8) (258,000) (14.9)
Decrease in valuation allowance (372,000) (3.2) 0 0.0 0 0.0
Merger related costs 0 0.0 0 0.0 183,000 10.6
Equity loss in affiliate 0 0.0 0 0.0 88,000 5.1
IRS audit resolution 0 0.0 0 0.0 (1,093,000) (63.2)
Amortization of software 0 0.0 104,000 1.0 24,000 1.4
Tax contingency 0 0.0 (261,000) (2.6) 0 0.0
Other, net 8,000 0.0 117,000 1.3 1,000 0.0
----------- ---- ----------- ---- ----------- -----
Total income tax expense (benefit) $ 4,091,000 35.3% $ 3,869,000 38.9% $ (351,000) (20.3)%
=========== ==== =========== ==== =========== =====
</TABLE>
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement and tax bases of assets
and liabilities. The types of temporary differences that give rise to the
deferred tax liability, and the effect on the deferred income tax expense
(benefit) of changes in those temporary differences, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Accounts receivable $ 5,900,000 $ 5,351,000 $(2,131,000)
Allowance for doubtful accounts 61,000 (265,000) 104,000
Fees held in escrow (130,000) (105,000) (128,000)
Depreciable and amortizable assets 272,000 (1,112,000) (674,000)
Capitalized research and development costs 1,229,000 1,119,000 316,000
Unbilled costs 58,000 32,000 (242,000)
Accounts payable and other accrued expenses (78,000) 122,000 1,248,000
Deferred revenue 214,000 92,000 106,000
Deferred rent 355,000 (65,000) (138,000)
Contract termination contingency 0 0 (1,093,000)
HHL one-time charges 0 0 1,310,000
Federal and state net operating loss (3,780,000) (1,251,000) (434,000)
Other 65,000 105,000 121,000
----------- ----------- -----------
Deferred income tax expense (benefit) $ 4,166,000 $ 4,023,000 $(1,635,000)
=========== =========== ===========
</TABLE>
The tax effect of temporary differences that give rise to a significant
portion of the deferred tax assets and deferred tax liabilities at October 31,
1999 and 1998 were as follows:
41
<PAGE> 44
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable/deferred items $ 193,000 $ 408,000
Allowance for doubtful accounts 777,000 838,000
Property and equipment 3,732,000 3,904,000
HHL one-time charges 325,000 399,000
Accounts payable and accrued expenses 203,000 202,000
Federal and state net operating loss carryforward 7,261,000 3,321,000
Minimum tax credit 572,000 0
Other 684,000 756,000
------------ ------------
Total deferred tax assets before valuation allowance 13,747,000 9,828,000
Less: Valuation allowances (1,024,000) (1,396,000)
------------ ------------
Total deferred tax assets after valuation allowance $ 12,723,000 $ 8,432,000
============ ============
Deferred tax liabilities:
Accounts receivable/deferred items $ 18,446,000 $ 12,121,000
Capitalized research and development cost 3,194,000 1,965,000
Federal impact of states net operating losses 1,207,000 674,000
Other 2,046,000 1,676,000
------------ ------------
Total deferred tax liabilities $ 24,893,000 $ 16,436,000
============ ============
Total net deferred tax liabilities $(12,170,000) $ (8,004,000)
============ ============
Net current deferred tax liabilities $(15,967,000) $(11,307,000)
Net noncurrent deferred tax assets 3,797,000 3,303,000
------------ ------------
Total net deferred tax liabilities $(12,170,000) $ (8,004,000)
============ ============
</TABLE>
The valuation allowances for the fiscal years ended October 31, 1999,
1998, and 1997 were $1,024,000, $1,396,000 and $1,396,000, respectively. At
October 31, 1999, the Company had a net operating loss carryforward of
$10,000,000 and $16,000,000, which is available to offset future federal and
state/city taxable income, respectively. Of the federal amount, $3,998,000 is
subject to annual limitation of $266,000 under Internal Revenue Code Section
382. The federal and state/city net operating loss carryforwards expire between
fiscal years 2012 through 2019, and fiscal years 2012 through 2014,
respectively. The federal minimum tax credit has no expiration period. The
Company's management believes that the utilization of certain net operating loss
carryforward is not more likely than not to be realized, and therefore has
maintained a valuation allowance of $1,024,000.
Cash payments attributable to income taxes for the years ended October
31, 1999, 1998, and 1997 were $522,000, $2,412,000, and $1,263,000,
respectively.
The Company has had disqualifying disposition transactions during the
three years ended October 31, 1999. Disqualifying dispositions are non-cash
transactions and are excluded from the statements of cash flows. The tax benefit
derived from disqualifying dispositions increased shareholders' equity by
$33,000, $602,000, and $2,190,000 during the fiscal years ended October 31,
1999, 1998, and 1997, respectively.
10. EQUITY
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 is authorized
42
<PAGE> 45
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to repurchase 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. In
fiscal year 1998, the Company repurchased a total of 734,500 shares of common
stock at an average price of $8.01 per share, for an aggregate purchase price of
$5,887,000. Since the inception of the repurchase program in June 1997, the
Company has repurchased in the open market 1,049,000 shares of common stock at
an average price of $7.39 per share having an aggregate purchase price of
$7,750,000.
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined by the Company's Board
of Directors.
11. PROFIT SHARING AND 401(K) PLAN
The Company had a discretionary defined contribution profit sharing
plan in which a substantial number of its employees participated. For the years
ended October 31, 1999, 1998, and 1997, profit sharing expense was $0, $0, and
$197,000 respectively.
Effective January 1, 1992, the Company amended its profit sharing plan
to include a 401(k) plan, which permits an employee to contribute a portion of
the employee's compensation, subject to certain limitations. At its discretion,
the Company may make annual contributions to the 401(k) plan for the benefit of
participating employees. For the years ended October 31, 1999, 1998, and 1997,
401(k) plan expense was $1,102,000, $959,000, and $804,000, respectively.
Effective October 31, 1997, the Company terminated its profit sharing
plan, including the 401(k) plan. A replacement, but identical, 401(k) plan was
established as of November 1, 1997. Having obtained approval by the Internal
Revenue Service, an initial distribution of the assets of the terminated profit
sharing plan was completed on December 18, 1998, the majority of the individual
accounts were distributed in March 1999, and the Company expects to distribute
the remainder in fiscal year 2000.
12. STOCK-BASED COMPENSATION PLANS
At October 31, 1999, the Company had three stock-based compensation
plans, which are described below. The Company has adopted the disclosure-only
provisions of SFAS 123 and applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no employee
compensation costs have been recognized for its stock purchase plan and stock
option plans. Had compensation costs for the Company's three stock-based
compensation plans been determined consistent with fair value method prescribed
by SFAS 123, the Company's net income and earnings per share would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C> <C>
Net income As reported $7,483 $6,088 $2,081
Pro forma 6,325 2,189 837
Net income per basic share As reported 0.43 0.35 0.12
Pro forma 0.36 0.13 0.05
Net income per diluted share As reported 0.43 0.34 0.12
Pro forma $0.36 $0.12 $0.05
</TABLE>
43
<PAGE> 46
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect noted above by applying the disclosure-only provisions of
SFAS 123 may not be representative of the pro forma effect in future years.
The fair value of the stock options granted in 1999, 1998, and 1997 is
estimated at the grant date using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0% (the Company does not pay
dividends); expected volatility of 58.3%, 48.9%, and 51.4%; a risk-free interest
rate of 4.7%, 5.7%, and 5.8%; and expected lives of 4.76, 4.91, and 4.90 years,
respectively.
Effective March 9, 1999, the shareholders of the Company approved the
Health Management Systems, Inc. 1999 Long-Term Incentive Stock Plan (the
"Plan"), which replaced the Health Management Systems, Inc. Stock Option and
Restricted Stock Purchase Plan terminated in May 1999. The primary purposes of
the Plan are (i) to promote the interests of the Company and its shareholders by
strengthening the Company's ability to attract and retain highly competent
individuals to serve as officers and other key employees and (ii) to provide a
means to encourage stock ownership and proprietary interest by such persons in
the Company. The Plan provides for the grant of (a) options to purchase shares
of the Company's common stock at an exercise price no less than 100% of the
estimated fair market value of the Company's common stock; (b) stock
appreciation rights ("SAR") representing the right to receive a payment, in
cash, shares of common stock, or a combination thereof, equal to the excess of
the fair market value of a specified number of shares of the Company's common
stock on the date the SAR is exercised over the fair market value of such shares
on the date the SAR was granted; or (c) stock awards made or valued, in whole or
in part, by reference to shares of common stock. The Plan authorizes the
issuance of up to 4,751,356 shares of common stock. The Plan expires in January
2009.
The stock options become exercisable and expire at various dates
through November 2009. As of October 31, 1999, no SAR's or stock purchase awards
had been granted. Effective November 30, 1999 (the "Grant Date"), the Company
awarded 367,500 stock options. Of the total options, 234,000 options are subject
to a performance based accelerated vesting schedule. These options vested 25
percent on the Grant Date and the remaining 75 percent will vest on October 31,
2003, subject to accelerated vesting of all or a portion of the total options
upon realization of certain annual performance measures. All options whose
vesting has not otherwise been accelerated pursuant to the foregoing will vest
on October 31, 2003, subject only to the continued employment by the Company of
the optionee.
The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP")
was adopted by the Board of Directors on November 30, 1994, which action was
subsequently approved by shareholders at the Annual Meeting of Shareholders held
on March 7, 1995. Under the NEDP, directors of the Company who are not employees
of the Company or its subsidiaries are granted options to purchase 1,500 shares
of common stock of the Company during the fourth fiscal quarter of each year
commencing with fiscal year 1995. Options for the purchase of up to 112,500
shares of common stock may be granted under the NEDP and the Company will
reserve the same number of shares for issuance. The options available for grant
are automatically increased to the extent any granted options expire or
terminate unexercised.
44
<PAGE> 47
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Presented below is a summary of the stock option plans for the years
ended October 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ----------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares Price Shares price Shares price
--------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at 1,801,098 $ 7.50 1,925,856 $ 7.82 1,962,752 $ 12.47
Beginning of year
Granted 1,965,250 6.16 541,504 6.57 1,573,294 9.09
Exercised (41,247) 5.09 (440,316) 6.17 (69,424) 3.90
Cancelled (389,173) 6.58 (225,946) 10.63 (1,540,766) 15.22
--------- -------- --------- --------- --------- ---------
Options outstanding at
end of year 3,335,928 $ 6.85 1,801,098 $ 7.50 1,925,856 $ 7.82
========= ======== ========= ========= ========= =========
Weighted average
Grant-date fair value
of options granted
(Black-Scholes) $ 2.30 $ 3.17 $ 4.63
======== ========= =========
</TABLE>
The following table summarizes information for stock options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
Total Outstanding Options Outstanding Exercisable Options
--------------------------------------------- -------------------------------
Weighted
average Weighted Weighted
Range Number remaining average average
of exercise outstanding contractual exercise Number exercise
prices as of 10/31/99 life price exercisable price
- ----------------- -------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.58 - 5.69 360,869 8.43 $ 4.28 71,744 $ 2.84
5.88 - 6.03 482,994 7.60 5.88 359,994 5.88
6.32 - 7.00 2,044,028 8.56 6.43 529,280 6.45
8.16 - 10.06 306,652 4.97 9.30 271,652 9.26
15.31 - 23.00 141,101 6.21 17.20 131,590 17.34
70.51 - 70.51 284 6.18 70.51 172 70.51
- ----------------- -------------- ----------- ----------- ----------- ---------
$ 0.58 - 70.51 3,335,928 7.98 $ 6.85 1,364,432 $ 7.73
- ----------------- -------------- ----------- ----------- ----------- ---------
</TABLE>
On May 28, 1997, the Board of Directors authorized a stock option
exchange program for employee participants in the Plan. Eligible employees who
held stock options ("Old Options") with exercise prices in excess of $10.00 per
share were able to exchange them for stock options ("New Options") exercisable
for a lesser number of shares with an exercise price of $5.88 per share, the
average price of the Company's common stock on the NASDAQ-Amex National Market
System on June 2, 1997 ("Grant Date"). Approximately 1,600,000 Old Options were
eligible to be exchanged for 900,000 New Options. At the end of the exchange
program, 1,288,000 Old Options were exchanged for 609,000 New Options. The New
Options received in the exchange entailed a new vesting schedule where one
quarter vested immediately on the Grant Date, with an additional quarter vesting
on each of November 1, 1998, 1999, and 2000, respectively. To the extent that
the fair market value of the Company's common stock exceeded $12.50 on each day
for ten consecutive trading days, the vesting of all New Options not otherwise
vested would become accelerated and 100% fully vested. On March 30, 1998, these
New Options became fully vested as a consequence of the fair market value of the
Company's common stock having exceeded $12.50 for the requisite ten consecutive
trading day period.
45
<PAGE> 48
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 28, 1993, the Board of Directors adopted the Health Management
Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently
approved by shareholders at the Annual Meeting of Shareholders held on February
28, 1994. The Company has reserved for issuance up to 1,125,000 shares of common
stock pursuant to the ESPP, which is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code of
1986. The ESPP provides that all full-time employees of the Company and its
subsidiaries may elect to participate in the ESPP without regard to length of
service if their customary employment is a minimum of 20 hours per week. For the
years ended October 31, 1999, 1998, and 1997, the Company had sold 77,123,
118,531, and 95,332 shares, respectively, of common stock pursuant to the ESPP
for aggregate consideration of $337,000, $516,000, and $709,000, respectively,
which activity is reflected in the accompanying consolidated financial
statements. The weighted-average fair value of those purchase rights granted in
1999, 1998, and 1997, respectively, based on the Black-Scholes model was $2.35,
$3.52, and $10.68 respectively.
13. SEGMENT AND GEOGRAPHICAL INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of An Enterprise and Related Information." SFAS No. 131 established standards
for reporting information about operating segments in annual financial
statements and in interim financial reports issued to stockholders.
(a) Segment Information
The Company measures the performance of its operating segments through
"Operating Income" as defined on the accompanying consolidated statements of
operations.
46
<PAGE> 49
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TOTAL Provider Payor
REVENUE Revenue Revenue TOTAL Decision Payor
TOTAL SERVICES Services Services SOFTWARE Support Systems
($ in Thousands) HMS DIVISION Group Group DIVISION Group Group
- ---------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Revenue $ 114,055 $ 67,950 $ 41,536 $ 26,414 $ 46,105 $ 22,542 $ 23,563
Operating income (loss) 10,297 2,150 (2,988) 5,138 8,147 4,328 3,819
Total assets 130,921 84,186 51,155 32,631 46,735 21,536 25,199
Depreciation and
amortization 4,595 1,865 1,368 497 2,730 1,584 1,146
Capital expenditures and
software capitalization 6,827 2,177 1,562 615 4,650 3,165 1,485
--------- --------- --------- --------- --------- --------- ---------
1998
Revenue 105,252 57,238 34,987 22,251 48,014 25,499 22,515
Operating income (loss) 7,660 1,481 (1,620) 3,101 6,179 4,645 1,534
Total assets 117,802 73,857 46,106 27,751 43,945 19,939 24,006
Depreciation and
amortization 5,484 2,343 1,559 786 3,141 1,285 1,856
Capital expenditures and
software capitalization 4,401 687 420 267 3,714 2,941 773
--------- --------- --------- --------- --------- --------- ---------
1997
Revenue 89,517 55,856 39,007 16,849 33,661 24,873 8,788
Operating income (loss) (169 (3,824) (704) (3,120) 3,655 4,628 (973)
Total assets 109,694 73,304 46,630 26,674 36,390 17,359 19,031
Depreciation and
amortization 5,142 2,531 1,814 717 2,611 1,059 1,552
Capital expenditures and
software capitalization $ 3,960 $ 1,519 $ 1,055 $ 464 $ 2,441 $ 2,182 $ 259
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
(b) Geographic Information
The Company operates within the continental United States. The Company
also has a limited number of overseas clients. Substantially, all identifiable
assets of the Company are located and safeguarded throughout the continental
United States.
(c) Major Customers
No single client of the Company accounted for 10% or more of the
Company's total revenue in fiscal year 1999. The Company's largest client is
Columbia/HCA Healthcare Corporation ("Columbia"), a customer of the Decision
Support Group. This client accounted for 9%, 10%, and 12% of the Company's total
revenue in fiscal years 1999, 1998, and 1997, respectively. The Company provides
its services to Columbia primarily pursuant to annual work order agreements.
There is no assurance that any of these agreements will be renewed.
(d) Concentration of Revenue
The clients constituting the Company's ten largest clients change each
year. The concentration of revenue in such accounts has decreased; accounting
for approximately 48%, 50%, and 53% of the Company's revenue in fiscal years
1999, 1998, and 1997, respectively. In many instances, including governmental
clients, the Company provides its services pursuant to agreements subject to
competitive re-procurement. All of these agreements periodically expire,
47
<PAGE> 50
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and will have reached their terms by the end of fiscal year 2004. There is no
assurance that any of these agreements will be renewed and, if renewed, that the
fee rates will be equal to those currently in effect.
14. COMMITMENTS
The Company leases office space and data processing equipment under
operating leases which expire at various dates through 2006. The lease
agreements provide for rent escalations. Rent expense, net of sublease income,
for the years ended October 31, 1999, 1998, and 1997, including escalations, was
$6,806,000, $6,801,000, and $7,634,000, respectively. Sublease income was
$1,401,000, $751,000 and $0, for the years ended October 31, 1999, 1998, and
1997, respectively.
Minimum annual lease payments for each of the next five years ending
October 31 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Payments
---- --------------
<S> <C>
2000 $ 4,795,838
2001 4,427,404
2002 4,350,503
2003 3,417,561
2004 2,519,253
Thereafter 4,138,669
--------------
Total $ 23,649,228
==============
</TABLE>
15. RELATED PARTY TRANSACTIONS
(a) HHL Financial Services, Inc.
Effective January 31, 1992, the Company entered into a management and
data processing services agreement ("Management Agreement") with HHL Financial
Services, Inc. ("HHL"). Under the Management Agreement, the Company provided HHL
with executive management, data processing, and technical support services
through June 30, 1996, subject to certain termination and renewal provisions.
Effective July 1, 1993, the Management Agreement was amended
("Outsourcing Amendment") to include the Company's provision of comprehensive
data processing and information management services to HHL. The five-year term
of the Outsourcing Amendment called for fixed annual fees that range from
$6,700,000 to $9,500,000, subject to upward adjustment in the event of material
changes in the scope of service and/or growth in HHL revenue in excess of 7%
annually.
On August 21, 1996, the Company announced a one-time charge and revenue
reversal pertaining to its relationship with HHL, which was in default of the
Outsourcing Amendment. The Company's one-time charge related to (i) the full
reservation of prior period accounts receivable of $2,881,000, (ii) accrual of
net costs to be incurred in excess of anticipated revenue relating to the
Company's continued contractual obligation with HHL of $3,823,000, and (iii) the
write-off of its investment in HHL of $927,000, resulting in a total one-time
charge of $7,631,000. Additionally, revenue of $2,180,000 earned and initially
recorded in the third quarter of 1996 was reversed. The result of the total
write-off and revenue reversal recognized in the third quarter of 1996 of
$9,811,000 translated to an after-tax impact of $5,563,000, or $0.30 per share.
On October 29, 1996, the Company entered into an agreement with HHL and
HHL's primary financial creditor providing for mutual general releases and the
cessation of all claims. The Company also settled its liabilities due to HHL of
$1,950,000 for a payment of $870,000 resulting in the reversal of $1,080,000 in
liabilities as an offset to other operating expenses. In addition, the Company
agreed to provide, for a period of up to 18 months, a reduced level of service
48
<PAGE> 51
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to HHL in exchange for payment in advance. During this 18-month period, HHL had
the right and elected to lower the level of service requested and therefore
lower the amount paid in advance. Also, HHL had the right and in certain
instances cancelled the service on 30 days prior written notice.
During 1997, the Company had incurred and offset $2,739,000 in net
expenses for its contractual obligations with HHL. During 1998 and 1999, the
Company had offset $200,000 and $130,000, respectively, of a contractual
obligation to a third party. The remaining accrual liability of $389,000 at
October 31, 1999, is scheduled to be offset over the next three years against a
contractual obligation of the Company to a third party.
During the years ended October 31, 1999, 1998, and 1997, the Company
received approximately $0, $0, and $1,849,000 in fees from HHL related to these
agreements and in connection with jointly executed client projects. During the
same periods, HHL charged the Company expenses for services totaling $0, $0, and
$250,000, respectively, in connection with work done on jointly executed client
projects.
(b) HISCo
The Company and HISCo entered into an agreement, dated as of October
31, 1995 (the "HISCo Agreement"), pursuant to which the Company was to provide
HISCo with certain services ("Basic Services"), including executive, acquisition
support, and corporate support services. For these Basic Services, the Company
was entitled to receive a fee, payable monthly, calculated at the Company's then
current standard hourly rates established for internal allocations plus 20%. The
term of the HISCo Agreement was to continue until the later of (i) June 30, 2000
or (ii) the expiration of any outstanding work order related to additional
services. The Company believes that the terms of the HISCo Agreement were fair
and reasonable and were no less favorable to the Company than those that could
have been obtained with respect to comparable engagements with independent third
parties. In fiscal year 1997, the Company received approximately $331,000 in
fees from HISCo for services provided pursuant to the HISCo Agreement.
In March 1997, the Company, which owned 43% of HISCo's equity, acquired
the remaining 57% of HISCo's equity for $3,689,000, net of cash acquired. In
connection with this acquisition, the HISCo agreement was terminated and HISCo
merged with its sole operating subsidiary, Health Systems Architects, Inc. and
was renamed HSA Managed Care Systems, Inc. This entity is currently known as the
Company's Payor Systems Group, and provides automated business and information
solutions, including software and services, to healthcare providers and payors.
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,
1999 are included in the accompanying financial statements. The $2,309,000
excess of the purchase price over fair market value of the identifiable net
assets acquired was recorded as goodwill and is being amortized over a period of
20 years.
In connection with the sale of their respective equity interests in
HISCo to the Company, certain of the Company's current and former officers and
directors derived gross proceeds as follows: Paul J. Kerz, $101,000; Laurence B.
Simon, $62,000; Donald J. Staffa, $31,000; Russell L. Carson, $79,000; and
Richard H. Stowe, $30,000.
The Company's total revenue from related parties was $0, $0, and
$331,000 in fiscal years 1999, 1998, and 1997, respectively.
(c) Robert V. Nagelhout
In April 1997, the Company guaranteed a loan by The Chase Manhattan
Bank (the "Bank") in the original principal amount of $1,600,000 to Robert V.
Nagelhout, the then Chief Operating Officer and a director of the Company. Mr.
Nagelhout granted the Company a security interest in 500,000 shares of the
Company's common stock as collateral for its guarantee. On June 11, 1998, Mr.
Nagelhout repaid the loan in its entirety, the Bank released the Company's
49
<PAGE> 52
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
guaranty, and the available balance under the Company's line of credit with the
Bank was restored by $1,600,000 to $30,000,000.
(d) Paul J. Kerz
During October 1998, the Company's HSA subsidiary, a Delaware
corporation, made two loans to Paul J. Kerz, an officer and director of HSA, who
is also the Company's Chairman and Chief Executive Officer. One loan, in the
principal amount of $500,000, was secured by a pledge of 162,666 shares of the
Company's common stock owned by Mr. Kerz, while the other loan, in the principal
amount of $250,000, was unsecured. Both loans bore interest at the rate of
5.3125% per annum, payable semi-annually commencing April 30, 1999, and were due
as to principal and all then accrued but unpaid interest on October 31, 2000.
During October 1999, HSA (i) extended the due date of both loans to December 31,
2001 and (ii) increased the total principal amount of the unsecured loan to
$1,000,000 of which a total of $400,000 was outstanding as of October 31, 1999.
During November 1999, Mr. Kerz drew down the remaining $600,000 of the unsecured
loan. In addition, the interest rate on the amended loans was increased to
5.9686% per annum. The amendments to the loans were unanimously approved by the
Board of Directors of HSA and the Company as the sole stockholder of HSA,
following the recommendation of the Compensation Committee of the Company's
Board of Directors that the amendment to the loans were in the best interest of
HSA and the Company, and the unanimous approval of the amendment to the loans by
the independent members of the Company's Board of Directors.
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the Company's unaudited quarterly operating
results for its last two fiscal years.
<TABLE>
<CAPTION>
First Second Third Fourth
($ In Thousands, Except Earnings Per Common Share) Quarter Quarter Quarter Quarter
- -------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999:
Revenue $ 27,369 $ 28,857 $ 27,655 $ 30,174
Operating income 2,415 2,831 2,844 2,207
Net income 1,606 1,803 2,068 2,006
Basic earnings per share 0.09 0.10 0.12 0.12
Diluted earnings per share 0.09 0.10 0.12 0.12
-------- -------- -------- --------
1998:
Revenue 25,037 25,636 26,736 27,843
Operating income 1,010 1,609 1,960 3,081
Net income 879 1,185 1,388 2,636
Basic earnings per share 0.05 0.07 0.08 0.15
Diluted earnings per share $ 0.05 $ 0.07 $ 0.08 $ 0.15
-------- -------- -------- --------
</TABLE>
17. 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 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 for the Southern District of New
York, which reiterated plaintiffs' allegations in their prior Complaint. On
September 11, 1998, the Company and the other defendants filed a motion
50
<PAGE> 53
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to dismiss the Second Consolidated Amended Complaint. The motion was fully
briefed in late November 1998, at which time the motion was submitted to the
Court. The consolidated proceeding was reassigned to another Judge. The Court
heard oral argument on the motion to dismiss on June 11, 1999. Prior to
rendering its decision on the motion to dismiss, the Court ordered the parties
to attempt to settle the case, and meetings toward that end were conducted. On
December 20, 1999, the parties reached a tentative agreement on the principal
terms of settlement of the litigation against all defendants. Pursuant to this
understanding, without admitting any wrongdoing, certain of the defendants have
agreed to pay, in complete settlement of this lawsuit, the sum of $4,500,000,
not less than 75 percent of which will be paid by the Company's insurance
carriers. For the fiscal year ended October 31, 1999, the Company has recorded a
charge of $845,000 related to this proposed settlement which is included as a
component of other cost of services. The proposed settlement is subject to
execution of a final settlement agreement and Court approval. On December 22,
1999, the Judge issued an Order dismissing, without prejudice, the pending
motion to dismiss, as moot. In the event a final settlement is not consummated,
the Company intends to resubmit a motion to dismiss the Second Consolidated
Amended Complaint and to continue its vigorous defense of the 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 alleged 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, sought (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. After the
commencement of Discovery and pursuant to the Rules of the Court, this matter
was referred to a Court-appointed Mediator, who, in the context of non-binding
mediation and independent of the Court proceeding, met with the parties over a
period of months. The Mediator assisted in negotiating a settlement of this
case, which entails no payment by the Company, dismissal of the Complaint with
prejudice, and an acknowledgement by MedE that, after review and access to
additional information, the copyright and trademark infringement claims were
without merit.
On June 28, 1998, eight holders of promissory notes (the "Notes") of
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. Management believes
the risk of loss is not probable and accordingly has not recognized any accrued
liability for this matter. Although the outcome of this matter cannot be
predicted with certainty, the Company believes that any liability that may
result will not, in the aggregate, have a material adverse effect on the
Company's financial position or cash flows, although it could be material to the
Company's operating results in any one accounting period.
51
<PAGE> 54
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
52
<PAGE> 55
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Allowance for doubtful accounts:
<S> <C>
Balance, October 31, 1996 $ 1,682,000
Provision 538,000
Recoveries -
Charge-offs (792,000)
---------------
Balance, October 31, 1997 1,428,000
Provision 838,000
Recoveries -
Charge-offs (413,000)
---------------
Balance, October 31, 1998 1,853,000
Provision 690,000
Recoveries -
Charge-offs (720,000)
---------------
BALANCE, OCTOBER 31, 1999 $ 1,823,000
===============
</TABLE>
53
<PAGE> 56
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
2.1 Agreement and Plan of Merger dated as of January 18, 1995 among
Health Management Systems, Inc., HCm Acquisition Corp., and all
the shareholders of Health Care microsystems, Inc., as amended
(Incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the year ended October 31, 1994
and to Exhibit 10.2 to the Company's Registration Statement on
Form S-3, file no. 33-91518)
2.2 Agreement and Plan of Merger, dated as of April 29, 1996 among
Health Management Systems, Inc., CDR Acquisition Corp., CDR
Associates, Inc., and all the shareholders of CDR Associates,
Inc. (Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated April 29, 1996)
2.2(i) First Amendment to Agreement and Plan of Merger, dated as of
April 29, 1996, among Health Management Systems, Inc., CDR
Acquisition Corp., CDR Associates, Inc., and all the shareholders
of CDR Associates, Inc. (Incorporated by reference to Exhibit
2.2(i) to the Company's Annual Report on Form 10-K for the year
ended October 31, 1996 (the 1996 Form 10-K)
2.3 Agreement and Plan of Merger, dated as of September 3, 1996, by
and among Health Management Systems, Inc., QSM Acquisition
Corporation and Quality Standards in Medicine, Inc. (Incorporated
by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-4, File No. 333-13513 (the S-4))
2.3(i) Amendment to Agreement and Plan of Merger, dated as of November
20, 1996, by and among Health Management Systems, Inc., QSM
Acquisition Corporation, and Quality Standards in Medicine, Inc.
(Incorporated by reference to Exhibit 10.1 to Post-Effective
Amendment No. 1 to the S-4)
2.4 Agreement and Plan of Merger, dated as of March 18, 1997, by and
among Health Management Systems, Inc., HISCo Acquisition Corp.,
Health Information Systems Corporation and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
April 30, 1997 (the April 1997 Form 10-Q))
2.5 Asset Purchase Agreement, dated as of March 10, 1997, by and
among GHS, Inc., Global Health Systems, Inc. GHS Management
Services, Inc., Health Management Systems, Inc. and Global Health
Acquisition Inc. (Incorporated by reference to Exhibit 2.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1997 (the July 1997 Form 10-Q))
2.5(i) Assignment and Assumption Agreement, dated as of July 15, 1997,
between Global Health Acquisition Corp. and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 2.2 to the
July 1997 Form 10-Q)
2.6 Asset Purchase Agreement, dated as of June 30, 1999, by and among
ARC Ventures, LLC, and Health Receivables Management, LLC and
Health Management Systems, Inc., and Quality Standards In
Medicine, Inc. (Incorporated by reference to Exhibit 2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1999 (the "July 1999 Form 10-Q"))
</TABLE>
54
<PAGE> 57
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Health
Management Systems, Inc. (Incorporated by reference to Exhibit
3.1 to Amendment No. 1 (Amendment No. 1) to the Company's
Registration Statement on Form S-1, File No. 33-4644 (the
Registration Statement) and Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1996 (the January 1996 Form 10-Q))
3.2 By-Laws of Health Management Systems, Inc. (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1)
10.2(ii) Amendment, dated as of September 1, 1995, to Master Software
License, dated June 29, 1992, by and between Health Care
microsystems, Inc. and Columbia/HCA. (Incorporated by reference
to Exhibit 10.2(ii) to the 1997 Form 10-K)
10.3(i) Health Management Systems, Inc. Stock Option and Restricted Stock
Purchase Plan, as amended (Incorporated by reference to Exhibit
10.3 to the Registration Statement, to Exhibit 10.3 to Amendment
No. 2 (Amendment No. 2) to the Registration Statement, Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1994 (the January 1994 Form 10-Q) and
Exhibit 10 to the January 1996 Form 10-Q)
10.3(ii) Amendment No. 6, dated as of December 2, 1997, to the Health
Management Systems, Inc., Stock Option and Restricted Stock
Purchase Plan. (Incorporated by reference to Exhibit 10.3(iii) to
the 1997 Form 10K)
10.3(iii) Health Management Systems, Inc. Employee Stock Purchase Plan, as
amended (Incorporated by reference to Exhibit 10.2 to the January
1994 Form 10-Q and to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended January 31, 1995 (the
January 1995 Form 10-Q))
10.3(iv) Health Management Systems, Inc. 1995 Non-Employee Director Stock
Option Plan (Incorporated by reference to Exhibit 10.2 to the
January 1995 Form 10-Q)
10.3(v) Health Management Systems, Inc. Profit Sharing Plan (Incorporated
by reference to Exhibit 10.3(iv) to the Company's Annual Report
on Form 10-K for the year ended October 31, 1995 (the 1995 Form
10-K))
10.3(vi) Health Management Systems, Inc. Profit Sharing Plan, as amended
(Incorporated by reference to Exhibit 10.3(vi) to the 1995 Form
10-K)
10.3(vii) Health Management Systems, Inc. 1999 Long-Term Incentive Stock
Plan (Incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-77121)
</TABLE>
55
<PAGE> 58
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.4(i) Credit Agreement and Guaranty Among Health Management Systems,
Inc., as Borrower, Accelerated Claims Processing, Inc., Quality
Medi-Cal Adjudication, Incorporated, Health Care microsystems,
Inc., and CDR Associates, Inc., as Guarantors, and The Chase
Manhattan Bank, as Bank (Incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1996 (the July 1996 Form 10-Q))
10.4(ii) First Amendment to Credit Agreement and Waiver (Incorporated by
reference to Exhibit 10.1(i) to the July 1996 Form 10-Q)
10.4(iii) Guaranty Agreement, dated as of April 16, 1997, between Health
Management Systems, Inc. and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10.1 to the April 1997 Form
10-Q)
10.4(iv) Second Amendment to Credit Agreement and Guaranty, dated as of
April 16, 1997, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medical
Adjudication, Incorporated, Health Care microsystems, Inc., CDR
Associates, Inc., and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 10.1 to the July 1997 Form 10-Q)
10.4(v) Third Amendment to Credit Agreement and Guaranty, dated as of
June 30, 1997, among Health Management Systems, Inc., Accelerated
Claims Processing, Inc., Quality Medical Adjudication,
Incorporated, Health Care Microsystems, Inc., CDR Associate,
Inc., HSA Managed Care Systems, Inc., Quality Standards in
Medicine, Inc. and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 10.1 to the July 1997 Form 10-Q)
10.4(vi) Fourth Amendment To Credit Agreement And Guaranty, dated as of
July 15, 1999 among Health Management Systems, Inc., Accelerated
Claims Processing, Inc., Quality Medi-Cal Adjudication,
Incorporated, Health Care Microsystems, Inc., CDR Associates
Inc., HSA Managed Care Systems, Inc., Quality Standards In
Medicine, Inc. and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 2 to the July 1999 Form 10-Q)
*10.4(vii) Fifth Amendment To Credit Agreement And Guaranty, dated as of
September 30, 1999, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc., CDR
Associates Inc., HSA Managed Care Systems, Inc., Health
Receivables Management, Inc. and The Chase Manhattan Bank
*10.4(viii) Sixth Amendment to Credit Agreement and Guaranty, dated as of
December 30, 1999, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc., CDR
Associates Inc., HSA Managed Care Systems, Inc., Health
Receivables Management, Inc. and The Chase Manhattan Bank
10.5(i) Leases, dated February 1, 1980, September 24, 1981, September 24,
1982, and January 6, 1986, as amended, between 401 Park Avenue
South Associates and Health Management Systems, Inc.
(Incorporated by reference to Exhibit 10.13 to the Registration
Statement and to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the quarter ended January 31, 1994)
</TABLE>
56
<PAGE> 59
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.5(ii) Lease, dated as of March 15, 1996, by and between 387 PAS
Enterprises, as Landlord, and Health Management Systems, Inc., as
Tenant (Incorporated by reference to Exhibit 10.2 to the July
1996 Form 10-Q)
10.6 Lease, dated September 1996, by and between Pacific Corporate
Towers LLC, Health Management Systems, Inc., and Health Care
microsystems, Inc. (Incorporated by reference to Exhibit 10.13 to
the 1996 Form 10-K)
10.7 Services Agreement, dated as of October 31, 1995, between Health
Information Systems Corporation and Health Management Systems,
Inc. (Incorporated by reference to Exhibit 10.19(iv) to the 1995
Form 10-K)
10.8 Agreement and Release of Claims dated as of October 29, 1996, by
and among HHL Financial Services, Inc., Health Management
Systems, Inc., and the First National Bank of Chicago
(Incorporated by reference to Exhibit 10.12 to the 1996 Form
10-K)
10.9 Security Agreement, dated as of April 16, 1997, by and between
Robert V. Nagelhout and Health Management Systems, Inc.
(Incorporated by reference to Exhibit 10.3 to the April 1997 Form
10-Q)
10.10 Promissory note, dated as of April 16, 1997, by and between
Robert V. Nagelhout and The Chase Manhattan Bank. (Incorporated
by reference to Exhibit 10.4 to the April 1997 Form 10-Q)
10.11 Sublease Agreement, dated December 23, 1997, between Health
Management Systems, Inc. and Shandwick USA, Inc. (Incorporated by
reference to Exhibit 10.1 to the company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1998 (the January
1998 Form 10-Q))
10.12 Consent to Sublease, dated December 23, 1997, by 387 P.A.S.
Enterprises to the subletting by Health Management Systems, Inc.
to Shandwick USA, Inc. (Incorporated by reference to Exhibit 10.2
to the January 1998 Form 10-Q)
10.13 Promissory note, dated as of October 15, 1998, in the principal
amount of $500,000 between Paul J. Kerz and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended October
31, 1998 (the "1998 Form 10-K")
10.14 Promissory note, dated as of October 15, 1998, in the principal
amount of $250,000 between Paul J. Kerz and HSA Managed Care
Systems, Inc. (Incorporated by reference to Exhibit 10.17 to the
1998 Form 10-K)
10.15 Security Agreement, dated as of October 15, 1998, between Paul J.
Kerz and HSA Managed Care Systems, Inc. (Incorporated by
reference to Exhibit 10.18 to the 1998 Form 10-K)
*10.16 Amended and restated promissory note, dated as of October 1999,
in the principal amount of $500,000 between Paul J. Kerz and HSA
Managed Care Systems, Inc.
*10.17 Amended and restated promissory note, dated as of October 1999,
in the principal amount of $1,000,000 between Paul J. Kerz and
HSA Managed Care Systems, Inc.
</TABLE>
57
<PAGE> 60
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
*11 Computation of Earnings per Share
*21 List of subsidiaries of Health Management Systems, Inc.
*23 Consent of KPMG LLP, independent certified public accountants
*27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for informational purposes
only
</TABLE>
* Filed herewith
58
<PAGE> 1
Exhibit 10.4(vii)
FIFTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
FIFTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
September 30, 1999 (the "Fifth Amendment") among HEALTH MANAGEMENT SYSTEMS, INC.
(the "Borrower"), ACCELERATED CLAIMS PROCESSING, INC. ("ACP"), QUALITY MEDI-CAL
ADJUDICATION, INCORPORATED ("QMA"), HEALTH CARE MICROSYSTEMS, INC. ("HCM"), CDR
ASSOCIATES INC. ("CDR"), HSA MANAGED CARE SYSTEMS, INC. ("HSA"), HEALTH
RECEIVABLES MANAGEMENT, INC. (formerly QUALITY STANDARDS IN MEDICINE, INC.)
("HRM") and THE CHASE MANHATTAN BANK (the "Bank").
PRELIMINARY STATEMENT. The Borrower, ACP, QMA, HCM, CDR and
the Bank have entered into a Credit Agreement and Guaranty dated as of July 15,
1996, as amended by First Amendment to Credit Agreement and Guaranty dated as of
September 9, 1996, the Second Amendment to Credit Agreement and Guaranty dated
as of April 16, 1997, the Third Amendment to Credit Agreement and Guaranty dated
as of June 30, 1997 and the Fourth Amendment to Credit Agreement and Guaranty
dated as of July 15, 1999 (as so amended and as it may be further amended,
supplemented or modified, the "Credit Agreement"). Any term used herein and not
otherwise defined herein shall have the meaning assigned to such term in the
Credit Agreement.
The Borrower, ACP, QMA, HCM, CDR, HSA, HRM and the Bank have
agreed to amend the Credit Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
condition precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The following definition shall be added in its proper
alphabetical order:
""Fifth Amendment" means the Fifth Amendment to Credit
Agreement and Guaranty dated as of September 30, 1999 among the Borrower, each
of the Guarantors and the Bank.";
(b) The definition of "Revolving Credit Facility Termination
Date" is amended in full to read as follows:
""Revolving Credit Facility Termination Date" means December
30, 1999."; and
(c) Section 9.02. Minimum Consolidated Tangible Net Worth, is
hereby amended by replacing "October 1998, January 1999, April 1999, July 1999"
with
<PAGE> 2
"October 1998, January 1999, April 1999, July 1999, October 1999".
SECTION 2. Conditions of Effectiveness. This Fifth Amendment
shall become effective as of the date on which each of the following conditions
shall have been fulfilled:
(a) the Borrower, ACP, QMA, HCM, CDR, HSA, HRM and the Bank shall each have
executed and delivered this Fifth Amendment; and
(b) the Bank shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof (a) certifying that no Default or
Event of Default has occurred and is continuing; and (b) with computations
demonstrating compliance with the covenants contained in Article IX of the
Credit Agreement.
SECTION 3. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Fifth
Amendment shall not operate as a waiver of any right, power or remedy of the
Bank under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents, and, except as specifically provided herein, the
Credit Agreement and each other Loan Document shall remain in full force and
effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Bank on demand for all out-of-pocket costs, expenses and charges
(including, without limitation, all fees and charges of legal counsel for the
Bank) incurred by the Bank in connection with the preparation, reproduction,
execution and delivery of this Fifth Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Fifth
Amendment and any other instruments and documents to be delivered hereunder, and
agrees to save the Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 5. Governing Law. This Fifth Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Fifth Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Fifth Amendment for any other purpose.
2
<PAGE> 3
SECTION 7. Counterparts. This Fifth Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this Fifth Amendment
by signing any such counterpart.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Fifth
Amendment to be duly executed as of the day and year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By
--------------------------------
Name:
Title:
ACCELERATED CLAIMS PROCESSING, INC.
By
--------------------------------
Name:
Title:
QUALITY MEDI-CAL ADJUDICATION,
INCORPORATED
By
--------------------------------
Name:
Title:
HEALTH CARE MICROSYSTEMS, INC.
By
--------------------------------
Name:
Title:
CDR ASSOCIATES, INC.
By
--------------------------------
Name:
Title:
4
<PAGE> 5
HSA MANAGED CARE SYSTEMS, INC.
By
--------------------------------
Name:
Title:
QUALITY STANDARDS IN MEDICINE, INC.
By
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By
--------------------------------
Name:
Title:
5
<PAGE> 1
Exhibit 10.4(viii)
SIXTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
SIXTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
December 30, 1999 (the "Sixth Amendment") among HEALTH MANAGEMENT SYSTEMS, INC.
(the "Borrower"), ACCELERATED CLAIMS PROCESSING, INC. ("ACP"), QUALITY MEDI-CAL
ADJUDICATION, INCORPORATED ("QMA"), HEALTH CARE MICROSYSTEMS, INC. ("HCM"), CDR
ASSOCIATES INC. ("CDR"), HSA MANAGED CARE SYSTEMS, INC. ("HSA"), HEALTH
RECEIVABLES MANAGEMENT, INC. (formerly QUALITY STANDARDS IN MEDICINE, INC.)
("HRM") and THE CHASE MANHATTAN BANK (the "Bank").
PRELIMINARY STATEMENT. The Borrower, ACP, QMA, HCM, CDR and
the Bank have entered into a Credit Agreement and Guaranty dated as of July 15,
1996, as amended by First Amendment to Credit Agreement and Guaranty dated as of
September 9, 1996, the Second Amendment to Credit Agreement and Guaranty dated
as of April 16, 1997, the Third Amendment to Credit Agreement and Guaranty dated
as of June 30, 1997, the Fourth Amendment to Credit Agreement and Guaranty dated
as of July 15, 1999 and the Fifth Amendment to Credit Agreement and Guaranty
dated as of September 30, 1999 (as so amended and as it may be further amended,
supplemented or modified, the "Credit Agreement"). Any term used herein and not
otherwise defined herein shall have the meaning assigned to such term in the
Credit Agreement.
The Borrower, ACP, QMA, HCM, CDR, HSA, HRM and the Bank have
agreed to amend the Credit Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
condition precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The following definition shall be added in its proper
alphabetical order:
""Sixth Amendment" means the Sixth Amendment to Credit
Agreement and Guaranty dated as of December 30, 1999 among the Borrower, each of
the Guarantors and the Bank.";
(b) The definition of "Revolving Credit Facility Termination
Date" is amended in full to read as follows:
""Revolving Credit Facility Termination Date" means February
15, 2000."; and
(c) Section 9.02. Minimum Consolidated Tangible Net Worth, is
hereby
<PAGE> 2
amended by replacing "October 1998, January 1999, April 1999, July 1999"
with "October 1998, January 1999, April 1999, July 1999, October 1999, January
2000".
SECTION 2. Conditions of Effectiveness. This Sixth Amendment
shall become effective as of the date on which each of the following conditions
shall have been fulfilled:
(a) the Borrower, ACP, QMA, HCM, CDR, HSA, HRM and the Bank shall each have
executed and delivered this Sixth Amendment; and
(b) the Bank shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof (a) certifying that no Default or
Event of Default has occurred and is continuing; and (b) with computations
demonstrating compliance with the covenants contained in Article IX of the
Credit Agreement.
SECTION 3. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Sixth
Amendment shall not operate as a waiver of any right, power or remedy of the
Bank under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents, and, except as specifically provided herein, the
Credit Agreement and each other Loan Document shall remain in full force and
effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Bank on demand for all out-of-pocket costs, expenses and charges
(including, without limitation, all fees and charges of legal counsel for the
Bank) incurred by the Bank in connection with the preparation, reproduction,
execution and delivery of this Sixth Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Sixth
Amendment and any other instruments and documents to be delivered hereunder, and
agrees to save the Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 5. Governing Law. This Sixth Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Sixth Amendment
are included herein for convenience of reference only and shall not constitute a
part of this
2
<PAGE> 3
Sixth Amendment for any other purpose.
SECTION 7. Counterparts. This Sixth Amendment may be executed
in any number of counterparts, all of which taken together shall constitute one
and the same instrument, and any party hereto may execute this Sixth Amendment
by signing any such counterpart.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Sixth
Amendment to be duly executed as of the day and year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By
--------------------------------
Name:
Title:
ACCELERATED CLAIMS PROCESSING, INC.
By
--------------------------------
Name:
Title:
QUALITY MEDI-CAL ADJUDICATION,
INCORPORATED
By
--------------------------------
Name:
Title:
HEALTH CARE MICROSYSTEMS, INC.
By
--------------------------------
Name:
Title:
CDR ASSOCIATES, INC.
By
--------------------------------
Name:
Title:
4
<PAGE> 5
HSA MANAGED CARE SYSTEMS, INC.
By
--------------------------------
Name:
Title:
HEALTH RECEIVABLES MANAGEMENT, INC.
By
--------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By
--------------------------------
Name:
Title:
5
<PAGE> 1
Exhibit 10.16
AMENDED AND RESTATED
PROMISSORY NOTE
(SECURED LOAN)
Reference is made to the $500,000 Promissory Note dated October 29,
1998 of Paul J. Kerz and payable to HSA Managed Care Systems, Inc. (the
"Original Note"). To the extent that this Amended and Restated
Promissory Note amends the Original Note, the Original Note is amended.
To the extent this Amended and Restated Promissory Note restates the
Original Note, the Original Note is restated.
Date of Note: October 19, 1999
Amount of Note: $500,000
Borrower: Paul J. Kerz
Interest Rate: 5.9686% per annum
1. Borrower's Promise to Pay. In return for a loan (the "Loan") that I
have received, I promise to pay, in one lump sum payment on the maturity date
(defined below), U.S. $500,000 (this amount is hereinafter called the
"principal"), plus interest, to the order of the Lender. The "Lender" is HSA
MANAGED CARE SYSTEMS, INC. The Lender or anyone who takes this Note by transfer
and who is entitled to receive payments under this Note is called the "Note
Holder".
2. Interest. Interest will be charged on the principal until the full
amount of the principal has been paid. I will pay interest at a yearly rate as
described above.
The interest rate required by this Section 2 is the rate I will pay
both before and after any default described in Section 6(b) of this Note.
3. Payments.
Time and Place of Payments. I will pay interest semi-annually by making
payments on the last day of April and October of each year and on December 31,
2001.
<PAGE> 2
I will make my first semi-annual payment of interest on April 30, 2000.
I will continue to make these payments every six months until I have paid all of
the principal and interest and any other charges described below that I may owe
under this Note. My semi-annual payments will be applied to interest before
principal. I will pay all of the unpaid principal of the Loan along with any
accrued and unpaid interest related thereto on December 31, 2001 (the "Maturity
Date").
4. Borrower's Right to Prepay. I have the right to make payments of
principal at any time before they are due. Any such payment of principal is
hereinafter called a "prepayment". When I make a prepayment, I will notify the
Note Holder in writing of such prepayment.
I may make a full prepayment or partial prepayment without paying any
prepayment charge. The Note Holder will use all of my prepayments to reduce the
amount of principal that I owe under this Note. If I make a partial prepayment,
there will be no changes in the due date of my semi-annual payments unless the
Note Holder agrees in writing to those changes. Any amounts of the Loan prepaid
may not be reborrowed.
5. Loan Charges. If a law, which applies to this Loan and which sets
maximum loan charges, is finally interpreted so that the interest or other loan
charges collected or to be collected in connection with this Loan exceed the
permitted limits, then: (i) any such loan charge shall be reduced by the amount
necessary to reduce the charge to the permitted limit; and (ii) any sums already
collected from me which exceeded permitted limits will be refunded to me. The
Note Holder may choose to make this refund by reducing the principal I owe under
this Note or by making a direct payment to me. If a refund reduces principal,
the reduction will be treated as a partial prepayment.
6. Borrower's Failure to Pay as Required.
(a) Late Charge for Overdue Payments. Any amount of principal or
interest which is not paid when due, whether at stated maturity, by
acceleration, or otherwise, shall bear interest from the date when due until
said principal or interest amount is paid in full, payable on demand, at the
prime commercial lending rate announced from time to time by The Chase Manhattan
Bank at its principal office in New York City.
2
<PAGE> 3
(b) Default. If I do not pay the full amount of each semi-annual
payment on the date it is due, I will be in default.
(c) Notice of Default. If I am in default, the Note Holder may send me
a written notice telling me that if I do not pay the overdue amount, the Note
Holder may require me to pay immediately the full amount of principal which has
not been paid and all the interest that I owe on that amount. That date must be
at least fifteen (15) days after the date on which the notice is delivered or
mailed to me.
(d) No Waiver By Note Holder. Even if, at a time when I am in default,
the Note Holder does not require me to pay immediately in full as described
above, the Note Holder will still have the right to do so if I am in default at
a later time.
(e) Payment of Note Holder's Costs and Expenses. If the Note Holder has
required me to pay immediately in full as described above, the Note Holder will
have the right to be paid back by me for all of its costs and expenses in
enforcing this Note to the extent not prohibited by applicable law. Those
expenses include reasonable attorneys' fees.
7. Giving of Notices. Unless applicable law requires a different
method, any notice that must be given to me under this Note will be given by
delivering it or by mailing it by first class mail to me at 126 East 65th
Street, New York, New York 10021, or at a different address if I give the Note
Holder a notice of my different address.
Any notice that must be given to the Note Holder under this Note will
be given by delivering it or mailing it by first class mail to the Note Holder
at: HSA Managed Care Systems, Inc., c/o Health Management Systems, Inc., 401
Park Avenue South, New York, New York 10016, Attention: Alan L. Bendes, or at a
different address if I am given a notice of that different address.
8. Waivers. I and any other person who has obligations under this Note
waive the rights of presentment and notice of dishonor. "Presentment" means the
right to require the Note Holder to demand payment of amounts due. "Notice of
dishonor" means the right to require the Note Holder to give notice to other
persons that amounts due have not been paid.
3
<PAGE> 4
9. Secured Note. In addition to the protections given to the Note
Holder under this Note, the Security Agreement which I have entered into with
the Lender dated as of October 29, 1998 (the "Security Agreement") protects the
Note Holder from possible losses which might result if I do not keep the
promises which I make in this Note.
10. Events of Default. Notwithstanding anything to the contrary
provided herein, the occurrence of any one or more of the following shall be an
"Event of Default" hereunder and upon the occurrence of an Event of Default, any
and all principal and interest due hereunder shall be immediately due and
payable:
(a) if I shall fail to pay when due and payable any obligations owing
under this Note or another note of even date herewith (the "Unsecured Loan
Note") I executed in favor of the Lender in connection with an unsecured loan
made to me by the Lender (the "Unsecured Loan");
(b) if I cease to be actively involved in the management of the Lender
or its parent company, Health Management Systems, Inc. ("HMS");
(c) if the Security Agreement ceases to be in full force and effect;
(d) if an Event of Default has occurred under the Unsecured Loan;
(e) if I shall file a petition in bankruptcy or for an arrangement or
for reorganization pursuant to the Federal Bankruptcy Act or any similar law,
federal or state, or if, by decree of a court of competent jurisdiction, I shall
be adjudicated a bankrupt, or be declared insolvent, or shall make an assignment
for the benefit of creditors, or shall admit in writing my inability to pay my
debts generally as they become due, or shall consent to the appointment of a
receiver or receivers of all or any part of my property;
(f) if any of my creditors shall file a petition in bankruptcy against
me or for my reorganization pursuant to the Federal Bankruptcy Act or any
similar law, federal or state, and if such petition shall not be discharged or
dismissed within sixty (60) days after the date on which such petition was
filed;
(g) if I shall fail to observe or perform any covenant, condition or
agreement in this Note, the Security Agreement or
4
<PAGE> 5
in any other document that I shall have executed or delivered in connection with
this Loan; or
(h) if any representation or warranty made by me in this Note, the
Security Agreement or in any other document that I shall have executed or
delivered in connection with this Loan shall prove to have been incorrect in any
material respect on or as of the date made.
5
<PAGE> 6
IN WITNESS WHEREOF, I have executed and delivered this Note on the day
and year first above written.
PAUL J. KERZ
6
<PAGE> 1
Exhibit 10.17
AMENDED AND RESTATED
PROMISSORY NOTE
(UNSECURED LOAN)
Reference is made to the $250,000 Promissory Note dated October 29,
1998 of Paul J. Kerz and payable to HSA Managed Care Systems, Inc. (the
"Original Note"). To the extent that this Amended and Restated
Promissory Note amends the Original Note, the Original Note is amended.
To the extent this Amended and Restated Promissory Note restates the
Original Note, the Original Note is restated.
Date of Note: October 19, 1999
Amount of Note: $1,000,000
Borrower: Paul J. Kerz
Interest Rate: 5.9686% per annum
1. Borrower's Promise to Pay. In return for a loan (the "Loan") that I
have received, I promise to pay, in one lump sum payment on the maturity date
(defined below), U.S. $1,000,000 (this amount is hereinafter called the
"principal"), plus interest, to the order of the Lender. The "Lender" is HSA
MANAGED CARE SYSTEMS, INC. The Lender or anyone who takes this Note by transfer
and who is entitled to receive payments under this Note is called the "Note
Holder".
2. Interest. Interest will be charged on the principal until the full
amount of the principal has been paid. I will pay interest at a yearly rate as
described above.
The interest rate required by this Section 2 is the rate I will pay
both before and after any default described in Section 6(b) of this Note.
3. Payments.
Time and Place of Payments. I will pay interest semi-annually by making
payments on the last day of April and October of each year and on December 31,
2001.
<PAGE> 2
I will make my first semi-annual payment of interest on April 30, 2000.
I will continue to make these payments every six months until I have paid all of
the principal and interest and any other charges described below that I may owe
under this Note. My semi-annual payments will be applied to interest before
principal. I will pay all of the unpaid principal of the Loan along with any
accrued and unpaid interest related thereto on December 31, 2001 (the "Maturity
Date").
4. Borrower's Right to Prepay. I have the right to make payments of
principal at any time before they are due. Any such payment of principal is
hereinafter called a "prepayment". When I make a prepayment, I will notify the
Note Holder in writing of such prepayment.
I may make a full prepayment or partial prepayment without paying any
prepayment charge. The Note Holder will use all of my prepayments to reduce the
amount of principal that I owe under this Note. If I make a partial prepayment,
there will be no changes in the due date of my semi-annual payments unless the
Note Holder agrees in writing to those changes. Any amounts of the Loan prepaid
may not be reborrowed.
5. Loan Charges. If a law, which applies to this Loan and which sets
maximum loan charges, is finally interpreted so that the interest or other loan
charges collected or to be collected in connection with this Loan exceed the
permitted limits, then: (i) any such loan charge shall be reduced by the amount
necessary to reduce the charge to the permitted limit; and (ii) any sums already
collected from me which exceeded permitted limits will be refunded to me. The
Note Holder may choose to make this refund by reducing the principal I owe under
this Note or by making a direct payment to me. If a refund reduces principal,
the reduction will be treated as a partial prepayment.
6. Borrower's Failure to Pay as Required.
(a) Late Charge for Overdue Payments. Any amount of principal or
interest which is not paid when due, whether at stated maturity, by
acceleration, or otherwise, shall bear interest from the date when due until
said principal or interest amount is paid in full, payable on demand, at the
prime commercial lending rate announced from time to time by The Chase Manhattan
Bank at its principal office in New York City.
2
<PAGE> 3
(b) Default. If I do not pay the full amount of each semi-annual
payment on the date it is due, I will be in default.
(c) Notice of Default. If I am in default, the Note Holder may send me
a written notice telling me that if I do not pay the overdue amount, the Note
Holder may require me to pay immediately the full amount of principal which has
not been paid and all the interest that I owe on that amount. That date must be
at least fifteen (15) days after the date on which the notice is delivered or
mailed to me.
(d) No Waiver By Note Holder. Even if, at a time when I am in default,
the Note Holder does not require me to pay immediately in full as described
above, the Note Holder will still have the right to do so if I am in default at
a later time.
(e) Payment of Note Holder's Costs and Expenses. If the Note Holder has
required me to pay immediately in full as described above, the Note Holder will
have the right to be paid back by me for all of its costs and expenses in
enforcing this Note to the extent not prohibited by applicable law. Those
expenses include reasonable attorneys' fees.
7. Giving of Notices. Unless applicable law requires a different
method, any notice that must be given to me under this Note will be given by
delivering it or by mailing it by first class mail to me at 126 East 65th
Street, New York, New York 10021, or at a different address if I give the Note
Holder a notice of my different address.
Any notice that must be given to the Note Holder under this Note will
be given by delivering it or mailing it by first class mail to the Note Holder
at: HSA Managed Care Systems, Inc., c/o Health Management Systems, Inc., 401
Park Avenue South, New York, New York 10016, Attention: Alan L. Bendes, or at a
different address if I am given a notice of that different address.
8. Waivers. I and any other person who has obligations under this Note
waive the rights of presentment and notice of dishonor. "Presentment" means the
right to require the Note Holder to demand payment of amounts due. "Notice of
dishonor" means the right to require the Note Holder to give notice to other
persons that amounts due have not been paid.
3
<PAGE> 4
9. Events of Default. Notwithstanding anything to the contrary provided
herein, the occurrence of any one or more of the following shall be an "Event of
Default" hereunder and upon the occurrence of an Event of Default, any and all
principal and interest due hereunder shall be immediately due and payable:
(a) if I shall fail to pay when due and payable any obligations owing
under this Note or another note of even date herewith (the "Secured Loan Note")
I executed in favor of Lender in connection with a secured loan made to me by
the Lender (the "Secured Loan");
(b) if I cease to be actively involved in the management of the Lender
or its parent company, Health Management Systems, Inc.;
(c) if an Event of Default has occurred under the Secured Loan;
(d) if I shall file a petition in bankruptcy or for an arrangement or
for reorganization pursuant to the Federal Bankruptcy Act or any similar law,
federal or state, or if, by decree of a court of competent jurisdiction, I shall
be adjudicated a bankrupt, or be declared insolvent, or shall make an assignment
for the benefit of creditors, or shall admit in writing my inability to pay my
debts generally as they become due, or shall consent to the appointment of a
receiver or receivers of all or any part of my property;
(e) if any of my creditors shall file a petition in bankruptcy against
me or for my reorganization pursuant to the Federal Bankruptcy Act or any
similar law, federal or state, and if such petition shall not be discharged or
dismissed within sixty (60) days after the date on which such petition was
filed;
(f) if I shall fail to observe or perform any covenant, condition or
agreement in this Note or in any other document that I shall have executed or
delivered in connection with this Loan; or
(g) if any representation or warranty made by me in this Note or in any
other document that I shall have executed or delivered in connection with this
Loan shall prove to have been incorrect in any material respect on or as of the
date made.
IN WITNESS WHEREOF, I have executed and delivered this Note on the day
and year first above written.
4
<PAGE> 5
PAUL J. KERZ
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended October 31,
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Numerator:
Net income $ 7,483 $ 6,088 $ 2,081
============ ============ ===========
Denominator:
Weighted average common shares outstanding 17,357 17,366 17,611
Net effect of dilutive stock options - based on the
Treasury stock method using average market price 62 467 368
------------ ------------ -----------
Weighted average common shares and common
share equivalents 17,419 17,833 17,979
============ ============ ===========
Basic earnings per share: 0.43 0.35 0.12
============ ============ ===========
Diluted earnings per share: $ 0.43 $ 0.34 $ 0.12
============ ============ ===========
</TABLE>
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 21 - LIST OF SUBSIDIARIES OF HEALTH MANAGEMENT SYSTEMS, INC.
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
---------- -------------
<S> <C>
Accelerated Claims Processing, Inc. Delaware
401 Park Avenue South
New York, NY 10016
Quality Medi-Cal Adjudication, Incorporated California
10381 Old Placerville Road
Sacramento, CA 95827
Health Care microsystems, Inc. California
200 North Sepulveda Boulevard, Suite 600
El Segundo, CA 90245
CDR Associates, Inc. Maryland
9642 Deereco Road
Timonium, MD 21093
Health Receivables Management, Inc. Delaware
820 West Jackson Boulevard, Suite 725
Chicago, IL 60607
HSA Managed Care Systems, Inc. Delaware
234 Spring Lake Drive
Itasca, IL 60143 - 3203
</TABLE>
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Health Management Systems, Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-3 (File No. 33-91518) and Form S-8 (File Nos. 33-65560, 33-76638, 33-76770,
33-95326, 333-33706 and 333-77121) of Health Management Systems, Inc. of our
report dated December 1, 1999, except for paragraph 1 of footnote 17 which is as
of December 20, 1999, relating to the consolidated balance sheets of Health
Management Systems, Inc. and subsidiaries as of October 31, 1999 and 1998, and
the related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended October 31, 1999 and related schedule, which report appears in the
October 31, 1999, annual report on Form 10-K of the Health Management Systems,
Inc.
/s/ KPMG LLP
New York, New York
January 25, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial statement information extracted from
Consolidated Balance Sheets at October 31, 1999 and 1998 and the Statement of
Operations for the years ended October 31, 1999, 1998, and 1997 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> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-1998 OCT-31-1997
<PERIOD-START> NOV-01-1998 NOV-01-1997 NOV-01-1996
<PERIOD-END> OCT-31-1999 OCT-31-1998 OCT-31-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 16,310 13,883 20,694
<SECURITIES> 17,507 14,519 18,386
<RECEIVABLES> 60,485 56,846 40,947
<ALLOWANCES> 1,823 1,853 1,428
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 96,995 89,756 81,983
<PP&E> 30,375 26,565 25,302
<DEPRECIATION> 22,609 19,878 17,314
<TOTAL-ASSETS> 130,921 117,802 109,694
<CURRENT-LIABILITIES> 38,558 33,053 28,184
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 184 183 178
<OTHER-SE> 91,048 83,086 79,628
<TOTAL-LIABILITY-AND-EQUITY> 130,921 117,802 109,694
<SALES> 114,055 105,252 89,517
<TOTAL-REVENUES> 114,055 105,252 89,517
<CGS> 102,918 95,628 88,355
<TOTAL-COSTS> 102,918 95,628 88,355
<OTHER-EXPENSES> 0 597 (856)
<LOSS-PROVISION> 690 838 538
<INTEREST-EXPENSE> 105 102 80
<INCOME-PRETAX> 11,574 9,957 1,730
<INCOME-TAX> 4,091 3,869 (351)
<INCOME-CONTINUING> 10,297 7,660 (169)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 7,483 6,088 2,081
<EPS-BASIC> 0.43 0.35 0.12
<EPS-DILUTED> 0.43 0.34 0.12
</TABLE>
