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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 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 February 25, 2000
------------------------------------------------ -----------------------------------------------
Common Stock, $.01 Par Value 17,477,261 Shares
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HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JANUARY 31, 2000
PART I FINANCIAL INFORMATION Page No.
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of January 31, 2000
(unaudited) and October 31, 1999 1
Condensed Consolidated Statements of Operations (unaudited) for the
three month periods ended January 31, 2000 and January 31, 1999 2
Consolidated Statements of Comprehensive Income (unaudited) for the
three month periods ended January 31, 2000 and January 31, 1999 3
Consolidated Statement of Shareholders' Equity (unaudited) for the
three month period ended January 31, 2000 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three month periods ended January 31, 2000 and January 31, 1999 5
Notes to Interim Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 12
PART II OTHER INFORMATION 13
SIGNATURES 14
EXHIBIT INDEX 15
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
January 31, October 31,
2000 1999
--------------- ---------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 13,299 $ 16,310
Short-term investments 16,733 17,507
Accounts receivable, billed, net 16,712 17,001
Accounts receivable, unbilled, net 44,710 41,661
Other current assets 4,976 4,516
--------------- ---------------
Total current assets 96,430 96,995
Property and equipment, net 7,297 7,766
Capitalized software costs, net 7,724 7,286
Goodwill, net 12,599 12,762
Notes Receivable from officer 1,520 900
Other assets 5,437 5,212
--------------- ---------------
Total assets $ 131,007 $ 130,921
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 17,465 $ 18,050
Deferred revenue 4,459 4,541
Deferred income taxes 16,131 15,967
--------------- ---------------
Total current liabilities 38,055 38,558
Other liabilities 1,084 1,131
--------------- ---------------
Total liabilities 39,139 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; 18,520,761 shares
issued and 17,471,761 shares outstanding at
January 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 72,043 71,714
Retained earnings 27,377 27,078
Accumulated other comprehensive income 13 6
--------------- ---------------
99,618 98,982
Less treasury stock, at cost (1,049,000 shares at
January 31, 2000 and October 31, 1999) (7,750) (7,750)
--------------- ---------------
Total shareholders' equity 91,868 91,232
--------------- ---------------
Total liabilities and shareholders' equity $ 131,007 $ 130,921
=============== ===============
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended
January 31,
------------------------
2000 1999
-------- --------
Revenue $ 26,574 $ 27,369
-------- --------
Cost of services:
Compensation 15,786 15,331
Data processing 1,885 1,835
Occupancy 2,601 2,188
Direct project costs 3,399 2,930
Other 2,529 2,470
-------- --------
26,200 24,754
-------- --------
Operating margin before amortization of intangibles 374 2,615
Amortization of intangibles 227 200
-------- --------
Operating income 147 2,415
Net interest and net other income 325 308
-------- --------
Income before income taxes 472 2,723
Income tax expense 173 1,117
-------- --------
Net income $ 299 $ 1,606
======== ========
Earnings per share data:
Basic:
Basic earnings per share $ 0.02 $ 0.09
======== ========
Weighted average common shares outstanding 17,422 17,310
======== ========
Diluted:
Diluted earnings per share $ 0.02 $ 0.09
======== ========
Weighted average common shares and common share equivalents 17,573 17,848
======== ========
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ IN THOUSANDS)
(UNAUDITED)
Three months ended
January 31,
------------------------------
2000 1999
------------- --------------
Net income $ 299 $ 1,606
Other comprehensive income, net of tax:
Change in net unrealized appreciation (depreciation)
on short-term investments 7 (1)
------------- --------------
Comprehensive income $ 306 $ 1,605
============= ==============
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
Common Stock Accumulated
------------------------ Capital In Other Total
# of Shares Par Excess Of Retained Comprehensive Treasury Shareholders'
Outstanding Value Par Value Earnings Income Stock Equity
----------- ------ --------- -------- ------------- --------- -------------
Balance at October 31, 1999 17,401,737 $ 184 $ 71,714 $ 27,078 $ 6 $ (7,750) $ 91,232
Net income 0 0 0 299 0 0 299
Stock option activity 60,630 1 274 0 0 0 275
Employee stock purchase 9,394 0 42 0 0 0 42
plan activity
Disqualifying dispositions 0 0 13 0 0 0 13
Change in net unrealized
appreciation on
short-term investments 0 0 0 0 7 0 7
---------- ------ ---------- -------- ----------- ---------- -----------
Balance at January 31, 2000 17,471,761 $ 185 $ 72,043 $ 27,377 $ 13 $ (7,750) $ 91,868
========== ====== ========== ======== =========== ========== ===========
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
Three months ended
January 31,
-----------------------------
2000 1999
----------- ----------
Net cash used in operating activities $ (2,208) $ (3,707)
----------- -----------
Investing activities:
Capital asset expenditures (366) (222)
Software capitalization (915) (945)
Increase in note receivable from officer (620) 0
Net proceeds from sales (purchases) of short-term investments 781 (345)
----------- -----------
Net cash used in investing activities (1,120) (1,512)
----------- -----------
Financing activities:
Proceeds from issuance of common stock 42 160
Proceeds from exercise of stock options 275 206
----------- -----------
Net cash provided by financing activities 317 366
----------- -----------
Net decrease in cash and cash equivalents (3,011) (4,853)
Cash and cash equivalents at beginning of period 16,310 13,883
----------- -----------
Cash and cash equivalents at end of period $ 13,299 $ 9,030
=========== ===========
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of Health Management Systems, Inc. ("HMS" or the "Company")
is responsible for the accompanying unaudited interim consolidated
financial statements and the related information included in these notes
to the unaudited interim consolidated financial statements. In the opinion
of management, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments
necessary for the fair presentation of the Company's financial position
and results of operations and cash flows for the periods presented.
Results of operations 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 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. Credit Facility
As of February 15, 2000, upon the expiration of its existing credit
facility, the Company entered into a new unsecured revolving credit
facility with its existing major money center financial institution. The
facility is comprised of a $10 million committed revolver and a $20
million advised line of credit. The facility, subject to the
satisfaction of certain closing conditions, has a 364 day term, 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 .625
percent, respectively. 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 January 31, 2000 and 1999, no amounts were
outstanding under this or the predecessor credit facility.
5. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the quarters ended January 31, 2000 and
1999 was $53,000 and $113,000, respectively. Cash paid for interest during
the quarters ended January 31, 2000 and 1999 was $33,000 and $29,000,
respectively.
The Company recorded $13,000 and $29,000 for the three months ended
January 31, 2000 and 1999, respectively, as disqualified dispositions
related to the sale of stock acquired through the exercise of
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certain compensatory stock options, thereby reducing the Company's tax
liability and increasing shareholders' equity in like amounts.
6. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share is
calculated as net income divided by the weighted average common shares
outstanding including the dilutive effects of potential common shares,
which include the Company's stock options. A reconciliation of the
numerator and denominator of the calculations for the three month periods
ended January 31, 2000 and 1999, respectively, is presented below.
($ and shares in 000's, except per share data) Three months ended
January 31,
-----------------------
2000 1999
---------- ----------
Numerator:
Net Income $ 299 $ 1,606
---------- ----------
Denominator:
Weighted average common shares 17,422 17,310
Potential common shares: stock options 151 538
---------- ----------
Weighted average common shares and
common share equivalents 17,573 17,848
========== ==========
Basic earnings per share $ 0.02 $ 0.09
========== ==========
Diluted earnings per share $ 0.02 $ 0.09
========== ==========
7. Segment Information
The Company measures the performance of its operating segments utilizing
"Operating Income" as defined on the accompanying consolidated statements
of operations. Certain reclassifications were made to prior period amounts
to conform to current presentation.
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
---------------------------------------------------------------------------------------------------------------
Three months ended
January 31, 2000
Revenue $26,574 $ 17,817 $11,763 $6,054 $8,757 $4,855 $3,902
Operating income (loss) 147 (1,010) (1,366) 356 1,157 753 404
---------------------------------------------------------------------------------------------------------------
Three months ended
January 31, 1999
Revenue 27,369 14,476 8,620 5,856 12,893 6,540 6,353
Operating income (loss) 2,415 (750) (1,886) 1,136 3,165 1,930 1,235
---------------------------------------------------------------------------------------------------------------
The difference between Operating income and Income before income taxes is
Net interest and net other income, which was $325,000 and $308,000 for the
quarters ended January 31, 2000 and 1999, respectively.
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8. 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
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. 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 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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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.
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of HMS, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMS to contain costs in view of its revised revenue outlook to
grow internally or by acquisition and to integrate acquired businesses into the
HMS group of companies; (iii) the uncertainties of litigation; (iv) HMS's
dependence on significant customers; (v) changing conditions in the healthcare
industry which could simplify the reimbursement process and adversely affect
HMS's business; (vi) government regulatory and political pressures which could
reduce the rate of growth of healthcare expenditures; (vii) competitive actions
by other companies, including the development by competitors of new or superior
services or products or the entry into the market of new competitors; (viii)
the ability of HMS to deal with the Year 2000 Problem on a timely basis; (ix)
all the risks inherent in the development, introduction, and implementation of
new products and services; and other factors both referenced and not referenced
in this document. When used in this document, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements, and the above described risks
inherent therein.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended January 31, 2000 Compared to Three Months Ended January 31,
1999 Consolidated revenue for the first quarter of fiscal year 2000 was $26.6
million, a decrease of approximately $800,000 or 2.9% 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 $17.8
million, an increase of $3.3 million or 23% from the comparable prior year
first quarter. Of these amounts, the Provider Revenue Services Group produced
revenue of $11.8 million, an increase of $3.1 million or 36% from the
comparable prior year first quarter, including $2.1 million in revenue
attributable to the Company's acquisition of HRM in June 1999. The Payor
Revenue Services Group produced revenue of $6.1 million, an increase in revenue
of approximately $200,000 or 3% from the comparable prior year first quarter.
Revenue from the Software Division, comprised of the Decision Support Group and
the Payor Systems Group, was $8.8 million, a decrease of $4.1 million or 32.1%
from the comparable prior year first quarter. Of these amounts, the Decision
Support Group produced revenue of $4.9 million, a decrease of $1.7 million or
25.8% from the comparable prior year first quarter. The decrease in this
Group's revenue was the result of an elongated sales cycle, attributable to
clients' reluctance to implement new software while facing their own internal
Y2K conversions, offset by the increase in revenue earned from the Company's
recurring base of clients. Revenue from the Payor Systems Group was $3.9
million, a decrease of $2.5 million or 38.6% from the comparable prior year
first quarter, principally attributable to a combination of the wind down of an
outsourcing engagement by a Blue Cross client who was acquired and converted to
their affiliate's internal data center, and the non-recurrence of substantial
amounts of Y2K remediation work accomplished for our Payor Systems clients last
year.
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Cost of services for the first fiscal quarter ended January 31, 2000 was $26.2
million, an increase of $1.4 million or 6% from the comparable prior year first
quarter. Compensation expense, the largest component of cost of services, was
$15.8 million for the first fiscal quarter ended January 31, 2000, reflecting
an increase of approximately $500,000 or 3.0% from the comparable prior year
first quarter. The increase was principally attributable to the increase in
personnel costs to support the increased revenue in the Revenue Services
Division, including the personnel added through the acquisition of HRM in June
1999, partially offset by reduced compensation expense in the Software Division.
Occupancy costs of $2.6 million increased approximately $400,000 or 19% from the
comparable prior year first quarter, principally attributable to the acquisition
of HRM in June 1999. Direct project costs were $3.4 million for the fiscal
quarter ended January 31, 2000, reflecting an increase of approximately $500,000
or 16% from the comparable prior year first quarter, primarily attributable to
the Company's increased use of revenue-generating subcontractors and related
project consulting services ("subcontractor costs").
As a result of the above factors, operating margin before amortization of
intangible assets for the first quarter of fiscal year 2000 was $374,000, a
decrease of $2.2 million or 86% from the comparable prior year first quarter.
The Company's income tax expense for the first fiscal quarter ended January 31,
2000 was $173,000, a decrease of approximately $900,000 or 85% from the
comparable prior year first quarter. The decrease was primarily attributable to
the Company's lower pre-tax profit.
Principally as a result of the above factors, net income for the first fiscal
quarter ended January 31, 2000 decreased to $299,000, a decrease of $1.3
million or 81% from the comparable prior year first quarter. Resultant diluted
earnings per share for the first fiscal quarter ended January 31, 2000 was
$0.02, compared to $0.09 in the comparable prior year first quarter.
Liquidity and Capital Resources
At January 31, 2000 and October 31, 1999, the Company had $58.4 million in net
working capital. The Company's principal sources of liquidity at January 31,
2000 consisted of cash, cash equivalents, and short-term investments
aggregating $30.0 million, and net accounts receivable of $61.4 million.
Accounts receivable at January 31, 2000 reflected an increase of $2.7 million
or 5% from the balance at October 31, 1999. The increase was primarily
attributable to the historically strong fourth quarter revenue and to an
increasing 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.
As of February 15, 2000, upon the expiration of its existing credit facility,
the Company entered into a new unsecured revolving credit facility with its
existing major money center financial institution. The facility is comprised of
a $10 million committed revolver and a $20 million advised line of credit. The
facility, subject to the satisfaction of certain closing conditions, has a 364
day term, 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 .625
percent, respectively. 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
January 31, 2000 and 1999, no amounts were outstanding under this or the
predecessor credit facility.
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 fiscal quarter ended January 31, 2000.
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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.
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.
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 Y2K-related event
has surfaced through the time of filing of this Form 10-Q 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 January 2000. 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
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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 $2.5 million. The Company currently expects
that the total cost of these programs, including both incremental spending and
redeployed resources, will not exceed $2.8 million. 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.
The expenses incurred by the Company to identify and address the Y2K matters
discussed above, or the expenses or liabilities to which the Company may become
subject as a result of such matters, could have a material adverse effect on
the Company's business, financial condition and results of operation. In
addition, there can be no assurance that failure to ensure Y2K capability by a
supplier, client or another third party would not have a material adverse
effect on the Company.
Item 3. Quantitative and Qualitative Disclosures About Market 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.
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The table below presents the historic cost basis, and the fair value for the
Company's investment portfolio as of January 31, 2000, and the related weighted
average interest rates by fiscal year of maturity:
Maturity Dates
------------------------------------------
($ in Thousands) 2000 2001 Total Fair value
- ----------------------------------------------------------------------------------------------
Cash equivalents:
Money Market Fund $ 3,205 $ -- $ 3,205 $ 3,205
Average interest rate 5.64%
Short-term investments:
Fixed income assets
Governmental Securities 8,415 8,141 16,556 16,228
Average interest rate 5.32% 5.41% 5.36%
Corporate debt 500 505
Average interest rate 4.55%
- ----------------------------------------------------------------------------------------------
PART II--OTHER INFORMATION
Item 1. Legal Proceedings --See Note 4 of the Notes to Interim Consolidated
Financial Statements for discussion of certain pending legal
proceedings
Item 2. Changes in Securities --None
Item 3. Defaults Upon Senior Securities --Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information --None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - See exhibit index
Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 16, 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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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description of Exhibit to Interim Consolidated Financial Statements
- -------------- -------------------------------------------------------------------
10.1 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.
10.2 Advised line of credit
27 Financial Data Schedule (Submitted for informational purposes only and not deemed
to be filed)
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