<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 July 31, 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.
Class Outstanding at September 8, 2000
----------------------------------- -----------------------------------
Common Stock, $.01 Par Value 17,501,144 Shares
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
QUARTER ENDED JULY 31, 2000
PART I FINANCIAL INFORMATION Page No.
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 2000 1
(unaudited) and October 31, 1999
Condensed Consolidated Statements of Operations 2
(unaudited) for the three month and nine month periods
ended July 31, 2000 and July 31, 1999
Consolidated Statements of Comprehensive Income 3
(unaudited) for the three month and nine month periods
ended July 31, 2000 and July 31, 1999
Consolidated Statement of Shareholders' Equity 4
(unaudited) for the nine month period ended July 31, 2000
Condensed Consolidated Statements of Cash Flows 5
(unaudited) for the nine month periods ended
July 31, 2000 and July 31, 1999
Notes to Interim Consolidated Financial Statements 6
(unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 13
PART II OTHER INFORMATION 14
SIGNATURES 14
EXHIBIT INDEX 15
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 6,800 $ 16,310
Short-term investments 10,710 17,507
Accounts receivable, billed, net 18,622 17,001
Accounts receivable, unbilled, net 48,327 41,661
Other current assets 7,502 4,516
--------------- ---------------
Total current assets 91,961 96,995
Long term accounts receivable, unbilled, net 783 0
Property and equipment, net 7,601 7,766
Capitalized software costs, net 9,630 7,286
Goodwill, net 12,260 12,762
Notes receivable from officer 1,500 900
Other assets 4,954 5,212
--------------- ---------------
Total assets $ 128,689 $ 130,921
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,996 $ 18,050
Deferred revenue 3,101 4,541
Deferred income taxes 16,561 15,967
--------------- ---------------
Total current liabilities 34,658 38,558
Other liabilities 989 1,131
--------------- ---------------
Total liabilities 35,647 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;
18,550,000 shares issued and 17,501,144 shares outstanding at July 31, 2000
18,450,737 shares issued and 17,401,737 shares outstanding at October 31, 1999 185 184
Capital in excess of par value 72,147 71,714
Retained earnings 28,583 27,078
Accumulated other comprehensive income (loss) (123) 6
--------------- ---------------
100,792 98,982
Less treasury stock, at cost (1,049,000 shares at July 31, 2000 and October 31, 1999) (7,750) (7,750)
--------------- ---------------
Total shareholders' equity 93,042 91,232
--------------- ---------------
Total liabilities and shareholders' equity $ 128,689 $ 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 Nine months ended
July 31, July 31,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenue $ 24,660 $ 27,655 $ 78,834 $ 83,881
----------- ---------- ----------- ----------
Cost of services:
Compensation 15,386 16,137 47,553 47,882
Direct project costs 1,787 2,151 8,661 7,998
Data processing 1,173 1,397 4,181 4,936
Occupancy 2,575 2,333 7,623 6,730
Other 3,036 2,584 8,601 7,636
----------- ---------- ----------- ----------
23,957 24,602 76,619 75,182
----------- ---------- ----------- ----------
Operating margin before amortization of intangibles 703 3,053 2,215 8,699
Amortization of intangibles 227 209 682 609
----------- ---------- ----------- ----------
Operating income 476 2,844 1,533 8,090
Net interest and net other income 335 335 949 932
----------- ---------- ----------- ----------
Income before income taxes 811 3,179 2,482 9,022
Income tax expense 314 1,111 977 3,545
----------- ---------- ----------- ----------
Net income $ 497 $ 2,068 $ 1,505 $ 5,477
=========== ========== =========== ==========
Earnings per share data:
Basic:
Basic earnings per share $ 0.03 $ 0.12 $ 0.09 $ 0.32
=========== ========== =========== ==========
Weighted average common shares outstanding 17,496 17,376 17,481 17,349
=========== ========== =========== ==========
Diluted:
Diluted earnings per share $ 0.03 $ 0.12 $ 0.09 $ 0.31
=========== ========== =========== ==========
Weighted average common shares and common share equivalents 17,503 17,442 17,513 17,441
=========== ========== =========== ==========
</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 Nine months ended
July 31, July 31,
-------------------------- -------------------------
2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 497 $ 2,068 $ 1,505 $ 5,477
Other comprehensive income (loss), net of tax:
Change in net unrealized depreciation
on short-term investments (180) (49) (129) (77)
----------- ------------ ----------- -----------
Comprehensive income $ 317 $ 2,019 $ 1,376 $ 5,400
=========== ============ =========== ===========
</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
-------------------- Capital In Accumulated Total
# of Shares Par Excess Of Retained Other Comprehensive Treasury Shareholders'
Outstanding Value Par Value Earnings Income (Loss) 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 1,505 0 0 1,505
Stock option activity 66,916 1 308 0 0 0 309
Employee stock purchase plan activity 32,491 0 112 0 0 0 112
Disqualifying dispositions 0 0 13 0 0 0 13
Change in net unrealized depreciation
on short-term investments 0 0 0 0 (129) 0 (129)
----------- ------ ---------- -------- ------------------- -------- -------------
Balance at July 31, 2000 17,501,144 $185 $72,147 $28,583 ($123) ($7,750) $93,042
=========== ====== ========== ======== =================== ======== =============
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
July 31,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (9,937) $ 9,128
------------- -------------
Investing activities:
Acquisition of net assets of Health Receivables Management, LLC, net of cash acquired 0 (4,024)
Capital asset expenditures (2,194) (1,651)
Software capitalization (3,868) (3,048)
Increase in note receivable from officer (600) 0
Net proceeds from sales (purchases) of short-term investments 6,668 (1,794)
------------- -------------
Net cash used in investing activities 6 (10,517)
------------- -------------
Financing activities:
Proceeds from issuance of common stock 112 206
Proceeds from exercise of stock options 309 286
------------- -------------
Net cash provided by financing activities 421 492
------------- -------------
Net decrease in cash and cash equivalents (9,510) (897)
Cash and cash equivalents at beginning of period 16,310 13,883
------------- -------------
Cash and cash equivalents at end of period $ 6,800 $ 12,986
============= =============
</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 periods ended January 31, 2000 and April 30, 2000
included in the Company's Quarterly Reports on Form 10-Q, each as filed
with the Securities and Exchange Commission.
2. Reclassifications
Certain reclassifications were made to prior 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 Management, 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" or the "Chicago
operations"). 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. Interest income during the nine
months ended July 31, 2000 was $24,000.
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 July 31, 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 nine months ended July 31, 2000
and 1999 was $170,000 and $486,000, respectively. Cash paid for the
unused commitment fee pertaining to the credit facility during the nine
months ended July 31, 2000 and 1999 was $49,000 and $80,000,
respectively.
The Company recorded $13,000 and $29,000 for the nine months ended July
31, 2000 and 1999, respectively, as disqualified dispositions related
to the sale of stock acquired through the exercise of certain
compensatory stock options, thereby reducing the Company's tax
liability and increasing shareholders' equity in like amounts.
7. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share
is calculated as net income divided by the weighted average common
shares outstanding including the dilutive effects of potential common
shares, which include the Company's stock options. A reconciliation of
the numerator and denominator of the calculations for the three-month
and nine-month periods ended July 31, 2000 and 1999, respectively, is
presented below.
<TABLE>
<CAPTION>
($ and shares in 000's, except per share data) Three months ended Nine months ended
July 31, July 31,
------------------------ --------------------------
2000 1999 2000 1999
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 497 $ 2,068 $ 1,505 $ 5,477
========== =========== =========== ===========
Denominator:
Weighted average common shares 17,496 17,376 17,481 17,349
Potential common shares: stock options 7 66 32 92
---------- ----------- ----------- -----------
Weighted average common shares and
common share equivalents 17,503 17,442 17,513 17,441
========== =========== =========== ===========
Basic earnings per share $ 0.03 $ 0.12 $ 0.09 $ 0.32
========== =========== =========== ===========
Diluted earnings per share $ 0.03 $ 0.12 $ 0.09 $ 0.31
========== =========== =========== ===========
</TABLE>
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 conform to the current presentation.
7
<PAGE> 10
<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
July 31, 2000
Revenue $ 24,660 15,897 10,124 5,773 8,763 5,431 3,332
Operating income (loss) 476 (542) (412) (130) 1,018 1,063 (45)
-------------------------------------------------------------------------------------------------------------------
Three months ended
July 31, 1999
Revenue 27,655 16,921 10,918 6,003 10,734 5,368 5,366
Operating income 2,844 1,497 418 1,079 1,347 1,014 333
-------------------------------------------------------------------------------------------------------------------
Nine months ended
July 31, 2000
Revenue 78,834 52,946 36,181 16,765 25,888 15,399 10,489
Operating income (loss) 1,533 (1,174) (395) (779) 2,707 2,243 464
-------------------------------------------------------------------------------------------------------------------
Nine months ended
July 31, 1999
Revenue 83,881 47,390 29,105 18,285 36,491 17,019 19,472
Operating income (loss) $8,090 701 (2,753) 3,454 7,389 3,482 3,907
-------------------------------------------------------------------------------------------------------------------
</TABLE>
The difference between "Operating income" and "Income before income
taxes" is "Net interest and net other income," which was $335,000 for
each of the quarters ended July 31, 2000 and 1999, and $949,000 and
$932,000 for the nine months ended July 31, 2000 and 1999, respectively.
9. Legal Proceedings
On August 14, 2000, an Order and Final Judgment was entered in the United
States District Court for the Southern District of New York approving the
proposed settlement of the litigation described below in this paragraph. 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 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.
8
<PAGE> 11
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 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 was subject to review and
approval by the Court. A fairness hearing on the proposed settlement was
held before the Court on June 28, 2000. As noted, on August 14, 2000, the
Court signed an Order and Final Judgment approving the proposed
settlement.
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 that
a 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.
In May 2000, the Company commenced an action in the Supreme Court of
the State of New York, County of New York ("New York Supreme Court"),
for summary judgment in lieu of complaint against The Institutes for
Health & Human Services, Inc. ("IHHS") seeking judgment in the amount
of $270,000 on an unpaid promissory note. In July 2000, the Court
granted the Company judgment in that amount (together with interest and
attorneys' fees to be assessed at an inquest), but stayed enforcement
of the judgment pending assertion and resolution of claims IHHS
represented it had against the Company. Later in July, IHHS asserted
such claims against the Company in an action filed in New York Supreme
Court. The complaint alleges that the Company fraudulently withheld
information from IHHS to induce it to enter into various specified
contracts with the Company, and that the Company breached various
contractual obligations to IHHS. The complaint seeks an aggregate of
$9,100,000 in compensatory damages, and punitive damages in an
unspecified amount. The Company believes IHHS's claims to be without
merit and intends to contest them vigorously. Management believes a
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.
On September 13, 2000, the Company was served with a complaint in a lawsuit
commenced by Davis & Associates, Inc. ("D&A") in the United States District
Court for the Southern District of New York. The complaint alleges, among
other things, that the Company breached contractual obligations to D&A,
wrongfully induced D&A to enter into various contracts with the Company, and
wrongfully interfered with D&A's ability to perform under several contracts
and pursue unspecified business opportunities. D&A seeks compensatory and
punitive damages in unspecified amounts and injunctive and other equitable
relief. The Company believes D&A's claims to be without merit and intends to
contest them vigorously. Management believes that a 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 July 31, 2000 Compared to Three Months Ended July 31, 1999
Consolidated revenue for the third quarter of fiscal year 2000 was $24.7
million, a decrease of approximately $3.0 million from the comparable period in
1999. The Revenue Services Division, comprised of the Provider Revenue Services
Group and the Payor Revenue Services Group, produced revenue of $15.9 million,
a decrease of $1.0 million from the comparable prior year third quarter. The
Provider Revenue Services Group, which includes revenue recovery and
outsourcing offerings for healthcare providers, generated revenue of $10.1
million, a decrease of $0.8 million from the comparable prior year third
quarter. The decrease is principally attributable to the Company's
discontinuance of two large but unprofitable engagements in the comparable
prior year third quarter and to a one month delay in expected revenue
attributable to a changed billing protocol for a large client, partially offset
by the increased revenue from the Company's Chicago operations, acquired
towards the end of the prior year's third quarter. The Group generated lower
than expected sales of additional revenue maximization services and additional
revenue relating to existing revenue maximization efforts in the District of
Columbia was not recognized (see section on Liquidity and Capital Resources).
The Payor Revenue Services Group, which includes recovery activities for
third-party payors of healthcare, produced revenue of $5.8 million, a decrease
in revenue of approximately $0.2 million from the comparable prior year third
quarter. Within the quarter, the Group was successful in overcoming some of the
continuing delays in implementation of specific State recovery projects
hampering results during the year to date.
Revenue from the Software Systems and Services Division, comprised of the
Decision Support Group and the Payor Systems Group, was $8.8 million, a decrease
of $1.9 million from the comparable prior year third quarter. The Payor Systems
Group generated revenue of $3.3 million, a decrease of $2.0 million from the
comparable prior year third 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) the wind-down of a
multi-year project with a single customer, (3) non-recurrence of substantial
amounts of Y2K remediation work accomplished for clients during the comparable
prior year period, and (4) an elongated sales cycle reflected in delayed
purchasing of this Group's systems and software offerings, attributable to
10
<PAGE> 13
an industry-wide softness. Revenue generated by the Decision Support Group was
$5.4 million, an increase of $0.1 million over the comparable prior year third
quarter. The impact of the Decision Support Group's elongated software sales
cycle, attributable to prospects' financial constraints and their reluctance to
implement new software 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 third fiscal quarter ended July 31, 2000 was $24.0
million, a decrease of $0.6 million from the comparable prior year third
quarter. Compensation expense, the largest component of cost of services, was
$15.4 million for the third fiscal quarter ended July 31, 2000, a decrease of
$0.7 million from the comparable prior year third quarter as the cost of the
approximately 100 employees associated with the Company's Chicago operations
acquired at the end of June 1999 was more than offset by reductions in the
Software Division and reduced employee performance bonuses and temporary help
throughout the organization. Direct project costs were $1.8 million for the
fiscal quarter ended July 31, 2000, a decrease of $0.4 million from the
comparable prior year third quarter, reflective of the lower cost reporting and
audit settlement revenue generated in the Revenue Services Division. Data
processing costs were $1.2 million for the fiscal quarter ended July 31, 2000, a
decrease of $0.2 million from the comparable prior year third quarter,
reflective of the wind-down of the engagement by a Blue Cross client who was
acquired and converted to its affiliate's internal data center, the wind-down of
a multi-year project with a single client, and other project work being brought
in-house. Occupancy costs were $2.6 million for the fiscal quarter ended July
31, 2000, an increase of $0.2 million from the comparable prior year third
quarter, principally attributable to the Chicago operations acquired last year.
Other indirect expenses were $3.0 million for the quarter ended July 31, 2000,
an increase of $0.5 million from the comparable prior year third quarter,
reflecting a full quarter of the costs of the Chicago operations and increased
marketing, advertising, travel, and allowance for doubtful accounts, partially
offset by savings in consulting and employee related costs.
Nine Months Ended July 31, 2000 Compared to Nine Months Ended July 31, 1999
Consolidated revenue for the nine months ended July 31, 2000 of $78.8 million
represented a decrease of $5.0 million from the comparable period in 1999. The
Revenue Services Division achieved revenues of $52.9 million for the nine months
ended July 31, 2000, an increase of $5.6 million from the comparable period in
1999. Of these amounts, the Provider Revenue Services Group produced revenue of
$36.2 million, an increase of $7.1 million from the comparable period in 1999,
including $6.0 million in additional revenue attributable to the Chicago
operations acquired last year and its subsequent growth. The additional 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 $16.8 million, a decrease of $1.5 million 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 $25.9 million, a
decrease of $10.6 million from the comparable period in 1999. The Payor Systems
Group produced revenue of $10.5 million, a decrease of $9.0 million from the
comparable period in 1999, principally attributable to a combination of (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, (4) the wind-down
of a multi-year project with a single customer, and (5) an elongated software
sales cycle reflected in delayed purchasing of this Group's systems and software
offerings attributable to an industry-wide softness. Revenue generated by the
Decision Support Group was $15.4 million, a decrease of $1.6 million from the
11
<PAGE> 14
comparable period in 1999, principally attributable to prospects' financial
constraints and their reluctance to implement new 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 nine months ended July 31, 2000 of $76.6 million,
increased $1.4 million from the comparable period in 1999. Compensation expense
totaled $47.6 million for the nine months ended July 31, 2000, a decrease of
$0.3 million from 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 the Company's
Chicago operation in June 1999, was more than offset by reduced compensation
expense in the Software Division and reduced employee performance bonuses and
temporary help throughout the organization. Direct project costs were $8.7
million for the nine months ended July 31, 2000, an increase of $0.7 million
from the comparable prior year nine-month period, primarily attributable to the
Company's increased use of revenue-generating subcontractors and related
project consulting services in the first half of the year. Data processing
costs were $4.2 million for the nine months ended July 31, 2000, a decrease of
$0.8 million from the comparable prior year nine-month period, primarily
attributable to the (1) Company's reallocation of resources to develop
additional service offerings and major systems enhancements, as reflected by
increased capitalized software costs and (2) reduced data costs reflective of
the wind-down of the engagement by a Blue Cross client who was acquired and
converted to its affiliate's internal data center, the wind-down of a
multi-year project with a single client, and other project work being brought
in-house. Occupancy costs were $7.6 million for the nine months ended July 31,
2000, an increase of $0.9 million from the comparable prior year nine-month
period, principally attributable to the Chicago operations acquired last year.
Other indirect expenses were $8.6 million for the nine months ended July 31,
2000, an increase of $965,000 from the comparable prior year third quarter,
primarily attributable to the Company's increased marketing, advertising,
travel, and strategic planning costs.
Liquidity and Capital Resources
At July 31, 2000 and October 31, 1999, the Company had net working capital of
$57.3 million and $58.4 million, respectively. The Company's principal sources
of liquidity at July 31, 2000 consisted of cash, cash equivalents, and
short-term investments aggregating $17.5 million, net accounts receivable of
$67.7 million, of which $783,000 is classified as long term, and a $10.0 million
committed revolver and $20.0 million advised line of credit from a major money
center bank, expiring in February 2001 and under which no amounts are currently
outstanding. Accounts receivable at July 31, 2000 reflected an increase of $9.1
million 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. Included in accounts
receivable at July 31, 2000 are approximately $3.5 million for several revenue
enhancement efforts undertaken by the Company in conjunction with a
subcontractor, on behalf of the District of Columbia government, its schools,
and the public benefit corporation operating its healthcare facilities, with
related subcontractor costs fully accrued. As of July 31, 2000, the Company has
provided the subcontractor $2.6 million of funding in relation to several
revenue enhancement efforts, to be repaid from the proceeds of these efforts.
The Company has been disappointed by the pace at which it has been able to
resolve various audit, contract, and appropriations issues with the District of
Columbia agencies for whom it has performed the subject revenue enhancement
activities. In the face of these difficulties and the subcontractor's failure to
secure anticipated engagements outside of the District of Columbia, the Company
has suspended further advances to the subcontractor and is seeking to negotiate
a mutually acceptable plan of withdrawal from that relationship. On September
13, 2000, the Company was served with a complaint, as further described in
Note 9 of the Notes to Interim Consolidated Financial Statements. In view of the
difficulties encountered by the Company in its use of subcontractors, the
Company intends to build its own capacity to respond to future opportunities for
revenue maximization work.
12
<PAGE> 15
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 nine months ended July 31, 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 exist due, in
part, to competitive pressures on local service businesses that lack adequate
capital, technical, and management resources. The Company expects to divest
specific components of its business exhibiting lack of growth and constituting
unacceptably high opportunity cost to the Company, reconfigure its multiple
business office operations across the nation to improve quality (including
yield) and reduce costs, and continue to explore a number of possible partnering
and joint marketing situations.
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 July 31, 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 $ 5,576 $ -- $ -- $ 5,576 $ 5,576
Average interest rate 6.1%
Short-term investments:
Fixed income assets
Governmental Securities $ -- $9,747 $1,140 $10,887 $10,710
Average interest rate 5.34% 5.78% 5.23%
</TABLE>
13
<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 -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - See exhibit index
Reports on Form 8-K - None
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: September 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
14
<PAGE> 17
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit to Interim Consolidated Financial Statements
-------------- -------------------------------------------------------------------
<S> <C>
10.1 Fifth Amendment, dated May 30, 2000 to the lease for the entire
eighth, ninth, and tenth floors and part of the eleventh and twelfth
floor between 401 Park Avenue South Associates, LLC and Health Management
Systems, Inc.
10.2 Sixth Amendment, dated May 1, 2000 to the lease for the entire eighth,
ninth, and tenth floors and part of the eleventh and twelfth floor
between 401 Park Avenue South Associates, LLC and Health Management
Systems, Inc.
10.3 Third Amendment, dated May 30, 2000 to the lease for a portion of the
eleventh floor between 401 Park Avenue South Associates, LLC and Health
Management Systems, Inc.
10.4 Fourth Amendment, dated May 1, 2000 to the lease for a portion of the
eleventh floor between 401 Park Avenue South Associates, LLC and Health
Management Systems, Inc.
10.5 Sixth Amendment, dated May 30, 2000 to the lease for a portion of the
twelfth floor between 401 Park Avenue South Associates, LLC and Health
Management Systems, Inc.
10.6 Seventh Amendment, dated May 1, 2000 to the lease for a portion of the
twelfth floor between 401 Park Avenue South Associates, LLC and Health
Management Systems, Inc.
10.7 Fifth Amendment, dated May 30, 2000 to the lease for the fourth floor
and the penthouse between 401 Park Avenue South Associates, LLC and
Health Management Systems, Inc.
10.8 Sixth Amendment, dated May 1, 2000 to the lease for the fourth floor and
the penthouse between 401 Park Avenue South Associates, LLC and Health
Management Systems, Inc.
27 Financial Data Schedule (Submitted for informational purposes only and
not deemed to be filed)
</TABLE>
15
