<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-20946
Health Management Systems, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2770433
State of Incorporation (I.R.S. Employer Identification Number)
401 Park Avenue South, New York, New York 10016
(Address of principal executive offices, zip code)
(212) 685-4545
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at June 5, 2000
----- ---------------------------
<S> <C>
Common Stock, $.01 Par Value 17,486,369 Shares
</TABLE>
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED APRIL 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2000 (unaudited) 1
and October 31, 1999
Condensed Consolidated Statements of Operations (unaudited) for the 2
three month and six month periods ended April 30, 2000 and April 30,
1999
Consolidated Statements of Comprehensive Income (unaudited) for the 3
three month and six month periods ended April 30, 2000 and April 30,
1999
Consolidated Statement of Shareholders' Equity (unaudited) for the six 4
month period ended April 30, 2000
Condensed Consolidated Statements of Cash Flows (unaudited) for the six 5
month periods ended April 30, 2000 and April 30, 1999
Notes to Interim Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 10
Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 13
PART II OTHER INFORMATION 14
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
---------- -----------
Assets (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 8,401 $ 16,310
Short-term investments 13,759 17,507
Accounts receivable, billed, net 19,957 17,001
Accounts receivable, unbilled, net 46,771 41,661
Other current assets 6,031 4,516
--------- ---------
Total current assets 94,919 96,995
Long term accounts receivable, unbilled, net 353 0
Property and equipment, net 7,494 7,766
Capitalized software costs, net 8,897 7,286
Goodwill, net 12,428 12,762
Notes receivable from officer 1,500 900
Other assets 5,122 5,212
--------- ---------
Total assets $ 130,713 $ 130,921
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 17,195 $ 18,050
Deferred revenue 3,500 4,541
Deferred income taxes 16,293 15,967
--------- ---------
Total current liabilities 36,988 38,558
Other liabilities 1,037 1,131
--------- ---------
Total liabilities 38,025 39,689
--------- ---------
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;
18,529,020 shares issued and 17,480,020 shares outstanding at April 30, 2000
18,450,737 shares issued and 17,401,737 shares outstanding at October 31, 1999 185 184
Capital in excess of par value 72,110 71,714
Retained earnings 28,086 27,078
Accumulated other comprehensive income 57 6
--------- ---------
100,438 98,982
Less treasury stock, at cost (1,049,000 shares at April 30, 2000 and October 31, 1999) (7,750) (7,750)
--------- ---------
Total shareholders' equity 92,688 91,232
--------- ---------
Total liabilities and shareholders' equity $ 130,713 $ 130,921
========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE> 4
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ In Thousands, Except Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $27,600 $28,857 $54,174 $56,226
------- ------- ------- -------
Cost of services:
Compensation 16,382 16,407 32,168 31,742
Direct project costs 3,372 2,917 6,771 5,847
Data processing 1,123 1,704 3,008 3,539
Occupancy 2,447 2,209 5,048 4,391
Other 3,138 2,589 5,667 5,061
------- ------- ------- -------
26,462 25,826 52,662 50,580
------- ------- ------- -------
Operating margin before amortization of intangibles 1,138 3,031 1,512 5,646
Amortization of intangibles 228 200 455 400
------- ------- ------- -------
Operating income 910 2,831 1,057 5,246
Net interest and net other income 289 289 614 597
------- ------- ------- -------
Income before income taxes 1,199 3,120 1,671 5,843
Income tax expense 490 1,317 663 2,434
------- ------- ------- -------
Net income $ 709 1,803 $ 1,008 $ 3,409
======= ======= ======= =======
Earnings per share data:
Basic:
Basic earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.20
======= ======= ======= =======
Weighted average common shares outstanding 17,480 17,360 17,451 17,334
======= ======= ======= =======
Diluted:
Diluted earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.19
======= ======= ======= =======
Weighted average common shares and common share equivalents 17,544 17,402 17,561 17,485
======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
-------------------- --------------------
2000 1999 2000 1999
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net income $ 709 $ 1,803 $1,008 $ 3,409
Other comprehensive income, net of tax:
Change in net unrealized appreciation (depreciation)
on short-term investments 44 (27) 51 (28)
------ ------- ------ -------
Comprehensive income $ 753 1,776 $1,059 $ 3,381
====== ======= ====== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------------- Capital In Other Total
# of Shares Par Excess Of Retained Comprehensive Treasury Shareholders'
Outstanding Value Par Value Earnings Income Stock Equity
----------- ----- --------- -------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1999 17,401,737 $184 $71,714 $27,078 $ 6 ($7,750) $91,232
Net income 0 0 0 1,008 0 0 1,008
Stock option activity 66,916 1 308 0 0 0 309
Employee stock purchase plan 11,367 0 52 0 0 0 52
activity
Disqualifying dispositions 0 0 36 0 0 0 36
Change in net unrealized
appreciation on
short-term investments 0 0 0 0 51 0 51
---------- ---- ------- ------- ------------- -------- ---------
Balance at April 30, 2000 17,480,020 $185 $72,110 $28,086 $57 ($7,750) $92,688
========== ==== ======= ======= ============= ======== =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
April 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (7,541) $ 3,641
-------- --------
Investing activities:
Capital asset expenditures (1,364) (1,194)
Software capitalization (2,564) (2,008)
Increase in note receivable from officer (600) 0
Net proceeds from sales (purchases) of short-term investments 3,799 (4,993)
-------- --------
Net cash used in investing activities (729) (8,195)
-------- --------
Financing activities:
Proceeds from issuance of common stock 309 160
Proceeds from exercise of stock options 52 206
-------- --------
Net cash provided by financing activities 361 366
-------- --------
Net decrease in cash and cash equivalents (7,909) (4,188)
Cash and cash equivalents at beginning of period 16,310 13,883
-------- --------
Cash and cash equivalents at end of period $ 8,401 $ 9,695
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 8
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of Health Management Systems, Inc. ("HMS" or the "Company")
is responsible for the accompanying unaudited interim consolidated financial
statements and the related information included in these notes to the
unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements reflect
all adjustments, including normal recurring adjustments necessary for the
fair presentation of the Company's financial position and results of
operations and cash flows for the periods presented. Results of operations
for interim periods are not necessarily indicative of the results to be
expected for the entire year.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of and for the fiscal year ended October 31, 1999 included in the
Company's Annual Report on Form 10-K for such year, and the unaudited
interim consolidated financial statements as of and for the quarterly period
ended January 31, 2000 included in the Company's Quarterly Report on Form
10-Q, both as filed with the Securities and Exchange Commission.
2. Reclassifications
Certain reclassifications were made to prior year amounts to conform to the
current presentation.
3. Business Combinations
In June 1999, the Company's Quality Standards in Medicine, Inc. ("QSM")
subsidiary acquired substantially all of the assets and assumed specified
liabilities of Health Receivables, LLC ("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.
HRM's results are included in the Company's 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.
4. Long term accounts receivable
Certain of the Company's newer offerings have resulted in accounts
receivable whose collection cycles are expected to exceed 12 months.
Accordingly, these receivables are classified as long term and are recorded
at their discounted present value using the Company's borrowing rate of
10.125%, with imputed interest income recognized over the expected period of
collection. During the period ended April 30, 2000, "long term accounts
receivable, unbilled, net" and "interest income" of $353,000, net of
discount, and $3,000, respectively, were recognized.
5. Credit Facility
The facility is comprised of a $10 million committed revolver and a $20
million advised line of credit, with a major money center bank. The facility
expires in February 2001, bears interest at LIBOR plus 87.5 basis points,
and carries an unused commitment fee of 37.5 basis points. The interest rate
and unused commitment fee on the revolver are adjustable, subject to certain
earnings thresholds at November 1, 2000 to a maximum rate of LIBOR plus
1.125 percent and 0.625 percent, respectively.
6
<PAGE> 9
This revolving facility contains, among other things, restrictions on
additional borrowings, capital expenditures, leases, sales of assets, and
payments of dividends and contains covenants that require the Company, among
other things, to maintain minimum asset, debt coverage, and consolidated
tangible shareholders' equity, as defined in the agreement. As of April 30,
2000 and 1999, no amounts were outstanding under this or the predecessor
credit facility.
6. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the six months ended April 30, 2000 and
1999 was $86,000 and $316,000, respectively. Cash paid for interest during
the six months ended April 30, 2000 and 1999 was $49,000 and $53,000,
respectively.
The Company recorded $36,000 and $29,000 for the six months ended April 30,
2000 and 1999, respectively, as disqualified dispositions related to the
sale of stock acquired through the exercise of certain compensatory stock
options, thereby reducing the Company's tax liability and increasing
shareholders' equity in like amounts.
7. Earnings Per Share
Basic earnings per share is calculated as net income divided by the weighted
average common shares outstanding. Diluted earnings per share is calculated
as net income divided by the weighted average common shares outstanding
including the dilutive effects of potential common shares, which include the
Company's stock options. A reconciliation of the numerator and denominator
of the calculations for the three-month and six-month periods ended April
30, 2000 and 1999, respectively, is presented below.
<TABLE>
<CAPTION>
($ and shares in 000's, except per share data) Three months ended Six months ended
April 30, April 30,
------------------- ---------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 709 $1,803 $ 1,008 $ 3,409
====== ====== ======= =======
Denominator:
Weighted average common shares 17,480 17,360 17,451 17,334
Potential common shares: stock options 64 42 110 151
------ ------ ------- -------
Weighted average common shares and
common share equivalents 17,544 17,402 17,561 17,485
====== ====== ======= =======
Basic earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.20
====== ====== ======= =======
Diluted earnings per share $ 0.04 $ 0.10 $ 0.06 $ 0.19
====== ====== ======= =======
</TABLE>
7
<PAGE> 10
8. Segment Information
The Company measures the performance of its operating segments utilizing
"Operating Income" as defined on the accompanying condensed consolidated
statements of operations. Certain reclassifications were made to prior year
amounts to conform to the current presentation.
<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>
Three months ended
April 30, 2000
Revenue $27,600 $19,232 $14,294 $ 4,938 $ 8,368 $ 5,113 $ 3,255
Operating income (loss) 910 378 1,383 (1,005) 532 427 105
-----------------------------------------------------------------------------------------------------------
Three months ended
April 30, 1999
Revenue 28,857 15,993 9,567 6,426 12,864 5,111 7,753
Operating income (loss) 2,831 (46) (981) 935 2,877 572 2,305
-----------------------------------------------------------------------------------------------------------
Six months ended
April 30, 2000
Revenue 54,174 37,049 26,057 10,992 17,125 9,968 7,157
Operating income (loss) 1,057 (632) 17 (649) 1,689 1,180 509
-----------------------------------------------------------------------------------------------------------
Six months ended
April 30, 1999
Revenue 56,226 30,469 18,187 12,282 25,757 11,651 14,106
Operating income (loss) $5,246 $ (796) $(2,867) $ 2,071 $ 6,042 $ 2,468 $3,574
-----------------------------------------------------------------------------------------------------------
</TABLE>
The difference between "Operating income" and "Income before income taxes"
is "Net interest and net other income," which was $289,000 for both quarters
ended April 30, 2000 and 1999, and $614,000 and $597,000 for the six months
ended April 30, 2000 and 1999, respectively.
9. 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. The
consolidated proceeding was reassigned to another Judge. The Court
8
<PAGE> 11
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. The Company
recorded a charge of $845,000 in the fourth quarter ended October 31, 1999
related to this proposed settlement. On March 23, 2000, the Company and
plaintiffs entered into a Stipulation and Agreement of Settlement, which is
subject to review and approval by the Court. A fairness hearing on the
proposed settlement is scheduled to be held before the Court on June 28,
2000. 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 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.
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 cash
flows.
9
<PAGE> 12
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of HMS, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMS to contain costs in view of its revised revenue outlook to
grow internally or by acquisition and to integrate acquired businesses into the
HMS group of companies; (iii) the uncertainties of litigation; (iv) HMS's
dependence on significant customers; (v) changing conditions in the healthcare
industry which could simplify the reimbursement process and adversely affect
HMS's business; (vi) government regulatory and political pressures which could
reduce the rate of growth of healthcare expenditures; (vii) competitive actions
by other companies, including the development by competitors of new or superior
services or products or the entry into the market of new competitors; (viii) all
the risks inherent in the development, introduction, and implementation of new
products and services; and other factors both referenced and not referenced in
this document. When used in this document, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements, and the above described risks
inherent therein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999
Consolidated revenue for the second quarter of fiscal year 2000 was $27.6
million, a decrease of approximately $1.3 million or 4% from the comparable
period in 1999, with the decrease in the Software Systems and Services
("Software") Division partially offset by the increase in the Revenue Services
Division.
The Revenue Services Division, comprised of the Provider Revenue Services Group
and the Payor Revenue Services Group, achieved revenue of $19.2 million, an
increase of $3.2 million or 20.3% from the comparable prior year second quarter.
Of these amounts, the Provider Revenue Services Group, the largest segment of
the Company, produced revenue of $14.3 million, an increase of $4.7 million or
49.4% from the comparable prior year second quarter, including $2.0 million in
revenue attributable to the Company's acquisition of HRM in June 1999. The
additional $2.7 million revenue increase realized by the Provider Revenue
Services Group was generated from internal growth attributable to both (1) new
clients, and (2) delivery of services of expanded scope to existing clients. The
Payor Revenue Services Group produced revenue of $4.9 million, a decrease in
revenue of approximately $1.5 million or 23.2% from the comparable prior year
second quarter, principally reflective of the successful commencements of new
recovery projects for three states in the comparable prior period and of delays
in obtaining client data, securing client approvals to bill and executing
certain field work in the second quarter of the current fiscal year.
Revenue from the Software Division, comprised of the Decision Support Group and
the Payor Systems Group, was $8.4 million, a decrease of $4.5 million or 34.9%
from the comparable prior year second quarter. Of these amounts, the Payor
Systems Group generated revenue of $3.3 million, a decrease of $4.5 million or
58.0% from the comparable prior year second quarter, principally attributable to
(1) the winding down of an outsourcing engagement by a Blue Cross client who was
acquired and converted to its new affiliate's internal data center, (2)
non-recurrence of substantial amounts of Y2K remediation work accomplished for
clients during the comparable prior year period, (3) a non-recurring revenue
incentive bonus received in the comparable prior year period, and (4) an
elongated sales cycle attributable to clients' residual Y2K concerns and delayed
purchasing of this Group's large systems and software offerings. Revenue
generated by the Decision Support Group was $5.1 million, slightly ahead of
10
<PAGE> 13
the $5.1 million from the comparable prior year second quarter. The Decision
Support Group's elongated sales cycle, attributable to clients' financial
constraints and their reluctance to implement new software so quickly after
expending funds for their own internal Y2K conversions, was offset by both the
increase in revenue earned from the Company's recurring base of clients and new
installations.
Cost of services for the second fiscal quarter ended April 30, 2000 was $26.5
million, a decrease of $636,000 or 2% from the comparable prior year second
quarter. Compensation expense, the largest component of cost of services, was
$16.4 million for the second fiscal quarter ended April 30, 2000, slightly lower
than the $16.4 million in the comparable prior year second quarter, as the
increase in personnel to support the increased revenue in the Revenue Services
Division, including the approximately 100 employees added through the
acquisition of HRM in June 1999, was more than offset by reduced compensation
expense in the Software Division. Direct project costs were $3.4 million for the
fiscal quarter ended April 30, 2000, an increase of $455,000 or 16% from the
comparable prior year second quarter, primarily attributable to the Company's
increased use of revenue-generating subcontractors and related project
consulting services. Data processing costs were $1.1 million for the fiscal
quarter ended April 30, 2000, a decrease of $581,000 or 34% from the comparable
prior year second quarter, primarily attributable to the Company reallocation of
resources to develop additional service offerings and major systems
enhancements, as reflected by increased capitalized software costs. Occupancy
costs were $2.4 million for the fiscal quarter ended April 30, 2000, an increase
of $238,000 or 11% from the comparable prior year second quarter, principally
attributable to the acquisition of HRM in June 1999. Other indirect expenses
were $3.1 million for the fiscal quarter ended April 30, 2000, an increase of
$549,000 or 21% from the comparable prior year second quarter, primarily
attributable to the Company's increased marketing, advertising, travel, and
strategic planning costs.
Six Months Ended April 30, 2000 Compared to Six Months Ended April 30, 1999
Consolidated revenue for the six months ended April 30, 2000 of $54.2 million
represented decrease of $2.1 million or 3.6% from the comparable period in 1999,
with the decrease in the Software Division partially offset by the increase in
the Revenue Services Division.
The Revenue Services Division achieved revenues of $37.0 million for the six
months ended April 30, 2000, an increase of $6.6 million or 21.6% from the
comparable period in 1999. Of these amounts, the Provider Revenue Services Group
produced revenue of $26.1 million, an increase of $7.9 million or 43.3% from the
comparable period in 1999, including $4.1 million in revenue attributable to the
Company's acquisition of HRM in June 1999. The additional $3.8 million revenue
increase realized by the Provider Revenue Services Group was generated from
internal growth attributable to both (1) new clients, and (2) delivery of
services of expanded scope to existing clients. The Payor Revenue Services Group
produced revenue of $11.0 million, a decrease of $1.3 million or 10.5% from the
comparable period in 1999, principally reflective of the successful commencement
of new recovery projects for multiple states in the comparable prior period and
of delays in obtaining client data, securing client approvals to bill and
executing certain field work in the current fiscal year.
Revenue from the Software Systems and Services Division totaled $17.1 million, a
decrease of $8.6 million or 33.5% from the comparable period in 1999. Of these
amounts, the Payor Systems Group produced revenue of $7.2 million, a decrease of
$6.9 million or 49.3% from the comparable period in 1999, principally
attributable to (1) the winding down of an outsourcing engagement by a Blue
Cross client who was acquired and converted to its affiliate's internal data
center, (2) non-recurrence of substantial amounts of Y2K remediation work
accomplished for clients during the comparable prior year period, (3) a
non-recurring revenue incentive bonus received in the comparable prior year
period, and (4) an elongated sales cycle attributable to clients' residual Y2K
concerns and delayed purchasing of this Group's large systems and software
offerings. Revenue generated by the Decision Support Group Decision Support
Group was $10.0 million, a decrease of $1.7 million or 14.4% from the comparable
period in 1999, principally attributable to clients' financial constraints and
their reluctance to implement new
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<PAGE> 14
software so quickly after expending funds for their own internal Y2K
conversions, partially offset by the increase in revenue earned from the
Company's recurring base of clients.
Cost of services for the six months ended April 30, 2000 of $52.7 million,
increased $2.1 million or 4% from the comparable period in 1999. Compensation
expense totaled $32.2 million for the six months ended April 30, 2000, an
increase of $400,000 or 1% over the comparable period in 1999, as the increase
in personnel to support the increased revenue in the Revenue Services Division,
including the approximately 100 employees added through the acquisition of HRM
in June 1999, was partially offset by reduced compensation expense in the
Software Division. Direct project costs were $6.8 million for the six months
ended April 30, 2000, an increase of $924,000 or 16% from the comparable prior
year six-month period, primarily attributable to the Company's increased use of
revenue-generating subcontractors and related project consulting services. Data
processing costs were $3.0 million for the six months ended April 30, 2000, a
decrease of $531,000 or 15% from the comparable prior year six-month period,
primarily attributable to the Company reallocation of resources to develop
additional service offerings and major systems enhancements, as reflected by
increased capitalized software costs. Occupancy costs were $5.0 million for the
six months ended April 30, 2000, an increase of $657,000 or 15% from the
comparable prior year six-month period, principally attributable to the
acquisition of HRM in June 1999. Other indirect expenses were $5.7 million for
the six months ended April 30, 2000, an increase of $606,000 or 12% from the
comparable prior year second quarter, primarily attributable to the Company's
increased marketing, advertising, travel and strategic planning costs.
Liquidity and Capital Resources
At April 30, 2000 and October 31, 1999, the Company had net working capital of
$57.9 million and $58.4 million, respectively. The Company's principal sources
of liquidity at April 30, 2000 consisted of cash, cash equivalents, and
short-term investments aggregating $22.2 million, net accounts receivable of
$67.1 million, of which $353,000 is classified as long term, and a $10.0 million
committed revolver and $20.0 advised line of credit from a major money center
bank, expiring in February 2001 and to which no amounts are currently
outstanding. Accounts receivable at April 30, 2000 reflected an increase of $8.4
million or 14% from the balance at October 31, 1999, primarily attributable to
(1) a significant increase in the portion of the Company's revenue being
generated by the Revenue Services Division, whose receivables conversion cycle
is more elongated than that of the Software Division, and (2) delays in the
timing of receipts and governmental appropriation processes until after the
close of the quarter ended April 30, 2000. During the second fiscal quarter
ended April 30, 2000, the Company funded $1.1 million of the proposed settlement
of the class action lawsuits, for which the Company expects to receive partial
reimbursement (see Note 9 of the Notes to Interim Consolidated Financial
Statements for discussion of certain pending legal proceedings).
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 during the six months ended April 30, 2000.
The Company expects to continue to use a portion of its working capital to
finance product and systems development, system enhancements, and revenue
growth. The Company also 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
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<PAGE> 15
exist due, in part, to competitive pressures on local service businesses that
lack adequate capital, technical, and management resources.
Year 2000
In common with many other organizations, the Y2K computer issue created risks
for the Company. 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.
The Company believes that it has completed its Y2K remediation work in
accordance with a schedule which was responsive to the time sensitivity of the
clients. To the extent future unforeseen Y2K issues should arise, 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 negative impact of such events. To date, the Company has not
experienced any material Y2K issues, nor does it expect to experience any in the
future.
Item 3. 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 April 30, 2000, and the related weighted average
interest rates by fiscal year of maturity:
<TABLE>
<CAPTION>
Maturity Dates
----------------------------------------
($ in Thousands) 2000 2001 2002 Total Fair value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash equivalents:
Money Market Fund $ 6,293 $ -- $ -- $ 6,293 $ 6,293
Average interest rate 5.46%
Short-term investments:
Fixed income assets
Governmental Securities 2,607 9,647 1,140 13,394 13,256
Average interest rate 4.92% 5.48% 5.63% 5.46%
Corporate debt 500 503
Average interest rate 4.55%
-----------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- See Note 9 of the Notes to Interim Consolidated
Financial Statements for discussion of certain pending legal proceedings
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- The Annual
Meeting ("Meeting") of Shareholders of the Company was held on March 14,
2000. The 15,602,620 shares of common stock ("Common Stock") present at
the Meeting out of a then total 17,462,321 shares outstanding and
entitled to vote, acted as follows with respect to the following
proposals:
Approved, by a vote of: 15,459,750 shares of Common Stock for and
142,470 shares against the election of Randolph G. Brown as a
director of the Company; 15,433,548 shares of Common Stock for and
168,672 shares against the election of Robert V. Nagelhout as a
director of the Company; 15,455,665 shares of Common Stock for and
146,555 shares against the election of Galen D. Powers as a director
of the Company. In addition, 133,263 shares of Common Stock were
voted against the election of all of the nominees.
Ratified, by a vote of 15,502,072 shares of Common Stock for and
51,075 shares against the selection of KPMG LLP as the Company's
independent certified public accountants for the fiscal year ending
October 31, 2000.
Rejected, by a vote of 2,119,670 shares of Common Stock for and
5,949,341 shares against the shareholder proposal to urge the Board
of Directors to arrange for the prompt sale of the Company to the
highest bidder.
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - See exhibit index
Reports on Form 8-K - None
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 2000 HEALTH MANAGEMENT SYSTEMS, INC.
--------------------------------
(Registrant)
By: /s/ Paul J. Kerz
-------------------------------------
Paul J. Kerz
President and Chief Executive Officer
By: /s/ Alan L. Bendes
-------------------------------------
Alan L. Bendes
Senior Vice President and
Chief Financial Officer
By: /s/ Ernest W. D'Ambrose
-------------------------------------
Ernest W. D'Ambrose
Corporate Controller and
Chief Accounting Officer
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<PAGE> 18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description of Exhibit to Interim Consolidated Financial
Statements
10.3 Amendment No. 1 to the Credit Agreement and Guaranty, dated as
of February 15, 2000, among Health Management Systems, Inc.,
as Borrower, 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. as Guarantors, and The
Chase Manhattan Bank as Bank
27 Financial Data Schedule (Submitted for informational purposes
only and not deemed to be filed)
16
