1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20946
HEALTH MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-2770433
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER)
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
401 PARK AVENUE SOUTH 10016
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(212) 685-4545
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The aggregate market value of the registrant's common stock held by
non-affiliates as of January 24, 2001 was $26,491,256 based on the closing price
on the Nasdaq National Market System on that day.
Number of shares outstanding of the registrant's common stock, $.01 par value,
on January 24, 2001 was 17,832,431.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT WHERE INCORPORATED
PROXY STATEMENT FOR THE ANNUAL MEETING PART III
TO BE HELD ON MARCH 29, 2001
2
TABLE OF CONTENTS
PAGE
CONTENTS NUMBER
- -------- ------
Cover Page ......................................................................................... i
PART I
Item 1. Business ................................................................................ 1
Item 2. Properties .............................................................................. 10
Item 3. Legal Proceedings ....................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 12
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ................... 12
Item 6. Selected Financial Data ................................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risks ............................. 24
Item 8. Financial Statements and Supplementary Data ............................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 25
PART III
Item 10. Directors and Executive Officers of the Registrant ...................................... 25
Item 11. Executive Compensation .................................................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 25
Item 13. Certain Relationships and Related Transactions .......................................... 25
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 26
Signatures ....................................................................................... 27
Exhibit Index .................................................................................... 52
ii
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES AND THAT
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH
FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING
STATEMENTS INCLUDE THOSE RISKS IDENTIFIED IN "ITEM 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - CERTAIN FACTORS
THAT MIGHT AFFECT FUTURE OPERATING RESULTS" AND OTHER RISKS IDENTIFIED IN THIS
FORM 10-K AND FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION
STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
PART I
ITEM 1. BUSINESS
OVERVIEW
Health Management Systems, Inc. (the "Company" or "HMSY") furnishes
proprietary information management, data processing, and software (including
consulting) services to healthcare providers and payors, including government
health service agencies. The Company's product and service offerings benefit its
clients by enhancing revenue (achieved through improved reimbursability,
profitability, and/or collectability), accelerating cash flow, reducing
operating and administrative costs, and improving decision-making capabilities
(by supplying advanced information analytics). These services include decision
support, payor information systems and revenue enhancement, including business
office outsourcing, addressing the various types of data generated by the
interaction of the participants in the healthcare delivery process: the
providers of care, the third-party payors, and the patients. Through its product
and service offerings, the Company acts as an outsourcer of information
management functions addressing the operational, administrative, financial, and
clinical data that result from the rendering of healthcare services to patients.
The Company is currently reassessing its strategy for, and commitment to,
certain of its products, services, and business segments. See separate section
on Business Strategy below.
Healthcare providers receive payment for services from patients,
third-party payors, or a combination thereof. Third-party payors include
commercial insurance companies, governments or their fiscal agents and
intermediaries, health maintenance organizations, preferred provider
organizations, third-party administrators for self-insured companies, and
managed care companies. Although patients generally retain primary
responsibility for payment for all healthcare services, third-party payors bear
the preponderance of the responsibility for many charges for care. Obtaining
reimbursement from third-party payors has become increasingly difficult for
providers because of frequent changes in reimbursement formulae and contractual
requirements for pre-admission certification and utilization review, and
administrative procedures instituted by third-party payors in an effort to
control costs. To be successful in obtaining payment from third-party payors,
hospitals and other healthcare providers require regulatory knowledge and
technical skills to manage complex data collection, integration, analysis, and
accounts receivable management functions. To ensure that reimbursable costs are
not greater than necessary, third-party payors require knowledge and skills
analogous to those required by providers.
Using the operational, financial, administrative, and clinical data
generated as part of the healthcare delivery process, HMSY applies proprietary
software and other analytical tools to transform data into valuable information
that clients use to (i) minimize operating and administrative costs while
improving profitability, (ii) measure the quality of care, and (iii) increase
revenue by optimizing the outcome of the transfer payment processes linking
payors, providers, and patients. The Company believes its customers benefit from
the Company's unique understanding of the healthcare delivery and associated
transfer payment processes, from the perspective of both providers and payors.
COMPANY HISTORY
In fiscal year 1999, each of the Company's subsidiaries adopted use of
the corporate name, Health Management Systems, as part of an initiative to
strengthen the corporate identity. The Company is organized into two divisions:
the Revenue Services Division ("Revenue Services Division") and the Software
Systems and Services Division ("Software Division"). The Revenue Services
Division comprises two business units: the Provider Revenue Services Group and
the Payor Revenue Services Group. The Company's Software Division also comprises
two business units: the Decision Support Group and the Payor Systems Group.
Within the Revenue Services Division, the Provider Revenue Services
Group has delivered Retroactive Claims Reprocessing ("RCR")(SM) services since
1974 and began to deliver Comprehensive Account Management Services ("CAMS")(SM)
in 1986 and Electronic Data Interchange ("EDI") services with the acquisition in
1990 of Quality Medi-Cal Adjudication, Incorporated ("QMA"). Effective January
1, 2001, the Company sold its EDI business, consisting of substantially all of
the assets of the Company's QMA subsidiary and certain of the assets of its
Health Receivables Management, Inc. subsidiary. See Note 21 of Notes to
Consolidated Financial Statements. In 1997, the Company acquired a computerized
medical record-based processing system for managed care public health and
ambulatory care facilities as part of its purchase of substantially all the
assets of Global Health Systems, Inc. and GHS Management Services, Inc.
(collectively "Global"). In 1997, the Company formed a Business Office
Outsourcing unit and in 1998 consolidated this unit with the remainder of what
is currently entitled the Provider Revenue Services Group. In 1999, the
Company's Quality Standards in Medicine, Inc. ("QSM") subsidiary acquired
substantially all of the assets and specified liabilities of Health Receivables
Management, LLC ("Old HRM"), an Illinois based company that furnishes Medicaid
applications service, electronic billing, eligibility verification, accounts
receivable management, and collections services to providers. In connection with
the transaction, QSM changed its name to Health Receivables Management, Inc.
("HRM"). The Company offers pre-collection and collections services through HRM.
The Revenue Services Division's Payor Revenue Services Group began delivery of
Third Party Liability Recovery ("TPLR")(SM) services in 1985 and augmented its
product line in 1996 with the acquisition of CDR Associates, Inc. ("CDR"). CDR
is a provider of hospital-based claim audits to payors, principally Blue Cross
and Blue Shield organizations.
The Company entered the software business in 1995, merging with Health
Care microsystems, Inc. ("HCm"), a company furnishing microcomputer-based
distributed decision support software systems and services (including
consulting) to healthcare providers and payors. HCm now constitutes the Decision
Support Group. In 1996, the Decision Support Group acquired QSM and integrated
QSM's clinical information systems with HCm's decision support offerings. In
1997, the Company, which had owned a 43% equity interest in Health Information
Systems Corporation ("HISCo"), acquired from Welsh, Carson, Anderson & Stowe
("WCAS") and various of its affiliates, independent investors, and from certain
of the Company's executive officers and directors, the remaining 57% of HISCo's
equity. At the time of acquisition, HISCo merged with its sole operating
subsidiary, Health Systems Architects, Inc., and was renamed HSA Managed Care
Systems, Inc. ("HSA"). This entity now constitutes the Payor Systems Group and
furnishes automated business and information solutions, including software
systems and services, to healthcare providers and payors.
The HCm, CDR, and QSM mergers were accounted for using the pooling of
interest method, while the QMA, HISCo, Global, and HRM acquisitions were
accounted for using the purchase method.
HEALTHCARE REFORM AND REGULATORY MATTERS
The healthcare reimbursement landscape continues to change. Federal,
state, and local governments, as well as other third-party payors, continue
their efforts to reduce the rate of healthcare expenditures. Many of these
2
4
policy initiatives have contributed to the complex and time-consuming nature of
obtaining healthcare reimbursement for medical services.
Changes occurring in the healthcare industry have created an
increasingly complex reimbursement environment that impacts both providers and
payors. This environment is made even more complex as the historical distinction
between providers and payors has become less clear. Today, emphasis is placed on
improving the level of provider and payor accountability for both the delivery
and the utilization of healthcare services. Providers must ensure that they are
properly reimbursed by third-party payors for healthcare services rendered in
accordance with pre-established contracts. Likewise, payors must ensure that
they are making payments for only those services for which they are responsible
and in the dollar amounts specified by these pre-established contracts.
Although the Company cannot predict the nature of future healthcare
reforms that will be adopted by federal, state, and local governments, the
Company believes that the shifting of traditional insurance risk to providers of
care, the consolidation of providers, and the resulting additional information
management requirements placed on providers and payors should increase the
demand for the Company's offerings. Moreover, the Company believes that
providers, payors, and patients -- both separately and together -- will benefit
from the Company's integration of cost and other financial and clinical data,
enabling identification and management by all participants (providers, payors,
and patients) of the outcomes (benefits and costs) achieved.
The Company observes the continuing intensification of interest in
ensuring compliance by providers and payors with the statutory, regulatory, and
contractual requirements of managed care. The Company believes that the
intensifying concern regarding compliance has increased its costs, as the
Company seeks to ensure its own compliance and that of its customers. At the
same time, the Company believes that the increased focus on compliance creates a
potential market for its products and services.
The Company's services also are subject to regulations pertaining to
billing services, which primarily involve recordkeeping requirements and other
provisions designed to prevent fraud. The Company believes that it operates in a
manner consistent with such regulations, the enforcement of which is
increasingly more stringent.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA"), an agency of the United States Department of Health and
Human Services. HCFA currently contracts with numerous intermediaries and fiscal
agents to process regional claims for reimbursement. Although HCFA has
established the regulatory framework for Medicare claims administration,
Medicare intermediaries have the authority to develop independent procedures for
administering the claims reimbursement process. The Medicaid program is subject
to regulation by HCFA, but is administered by state governments. State
governments provide for Medicaid claims reimbursement either through the
establishment of state-owned and operated processing centers or through
contractual arrangements with third-party fiscal agents who own and operate
their own processing centers. The requirements and procedures for reimbursement
implemented by Medicaid differ from state to state. Similar to the claims
administration processes of Medicare and Medicaid, many national health
insurance companies and self-insured employers administer reimbursement of
claims through local or regional offices. Consequently, because guidelines for
the reimbursement of claims are generally established by third-party payors at
local or regional levels, hospital and other provider reimbursement managers
must remain current with the local procedures and requirements of third-party
payors.
The ownership and operation of hospitals is subject to comprehensive
federal and state regulation, which affects hospital reimbursement. In 1999,
Medicaid and Medicare revenue represented the majority of hospital income. Since
adoption, the Medicare and Medicaid programs have undergone significant and
frequent changes, and it is realistic to expect additional changes in the
future. The Balanced Budget Refinement Act of 1999 (BBRA) provides relief of
approximately $17 billion to the healthcare industry through 2004. The bill was
enacted to partially restore funds that were reduced as a result of the Balanced
Budget Act of 1997 (BBA). Current industry estimates suggest that the reduction
in Medicare outlay due to the Balanced Budget Act of 1997 even after the relief
expected from the Balanced Budget Refinement Act of 1999 exceed $110 billion. On
December 15, 2000, the
3
5
Medicare, Medicaid, SCHIP Benefits Improvement and Protections Act of 2000
(BIPA) was enacted, including provisions that increase certain Medicaid
reimbursements. While the Balanced Budget Act of 1997, as modified by the
Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid, SCHIP
Benefits Improvement and Protections Act of 2000, could still have an adverse
effect on the operations of hospitals and other providers of healthcare and
consequently reduce the amount of the Company's revenue, the Company believes
that healthcare organizations can use the Company's products and services to
reduce costs while maintaining or improving the quality of care (thereby
compensating, in part or whole, for losses in revenue due to the Balanced Budget
Act of 1997).
In addition, the Social Security Act imposes certain requirements on
the Company with regard to confidentiality and disclosure of Medicare and
Medicaid provider and beneficiary data. Specifically, the Company is prohibited
from disclosing information that is obtained by or from the Department of Health
and Human Services except as otherwise provided by regulations or other federal
law. Generally, the Company is required to maintain standards of confidentiality
that are comparable to those of an agency administering the Medicare or Medicaid
program when the Company uses data obtained from such programs.
Finally, the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") requires the Secretary of Health and Human Services to adopt
national standards for certain types of electronic health information
transactions and the data elements used in such transactions and to adopt
standards to ensure the integrity and confidentiality of health information. All
providers, payors, and clearinghouses will be mandated to use HIPAA standards
when electronically exchanging health data covered by HIPAA. Any material
restriction on the ability of healthcare providers and payors to obtain or
disseminate health information could adversely affect the Company's business,
financial condition, and results of operations. With the release of the Final
HIPAA Privacy Rule in December 2000 and the pending release of the Final HIPAA
Security Rule, the "protection of individually identifiable healthcare
information" becomes a key component of the way that covered healthcare entities
perform their day-to-day business. Some of the industry's current projections
suggest that it will cost healthcare providers 2-4 times the Y2K-Project
expenditures to properly implement the HIPAA regulatory requirements and many of
those healthcare providers will seek assistance from outside vendors to either
facilitate the implementation and/or provide clearinghouse translation
capabilities as a method to reduce those costs and/or meet the required
mandatory implementation dates. As such, while HIPAA could continue to have an
adverse affect on the operations of providers and payors and consequently reduce
the amount of the Company's revenue, the Company believes it possesses technical
and managerial knowledge and skills that could benefit healthcare organizations
seeking to establish compliance with HIPAA requirements. The Company has begun a
needs analysis to determine the extent to which it may need to alter its systems
to comply with these regulations.
The Company believes that the rapidity of consolidation within the
healthcare industry will continue to create opportunities for the Company in its
role as a data consolidator. Yet the rapidity of change suggests that some of
the consolidation may have been overdone and may be undone over the next several
years, as providers downsize and integrated delivery networks ("IDN's") begin to
unbundle. The Company believes these dynamics constitute both a risk to its
existing business relationship with its larger clients, and an opportunity for
new business in the future.
PRINCIPAL PRODUCTS AND SERVICES
PROVIDER REVENUE SERVICES GROUP
The Company's Provider Revenue Services Group offers information
management solutions across the accounts receivable spectrum, with offerings
performed on retroactive, concurrent, and prospective bases. This Group's
clients include large public and voluntary hospitals, public health clinics, and
outpatient treatment facilities. Fees are tailored to the particular
configuration of service furnished to the client, with the preponderance of the
Group's remuneration based upon contingent fee arrangements.
4
6
The Company's first product, RCR, entails the retroactive recovery of
third-party payments due provider healthcare organizations, principally large
public and voluntary hospitals. RCR services are used by a hospital (most
commonly for its emergency room and outpatient clinics) to realize third-party
revenue from patient accounts after the hospital has expended its own best
efforts at billing and collection, but before the accounts are referred to a
collection agency. The Company's specialized data aggregation, data
purification, data editing, and electronic claim preparation and transmission
routines are designed to facilitate the reimbursement of accounts that remain
unpaid because necessary billing information was missing or because third-party
coverage was not known. RCR services require the hospital to provide the Company
with copies of existing data files, demand minimal hospital staff support, and
generally involve no patient contact. Through the application of the Company's
proprietary technology, the Company's RCR services produce, for its hospital
clients, incremental revenue which otherwise would remain uncollected.
Field Work services are provided, where an expert recovery team is
placed onsite at the hospital and works with the hospital's existing systems to
review unbilled or unreimbursed accounts. These accounts are billed following a
detailed review of the client's aged trial balance, remittances, explanations of
benefits, medical records, physician documentation, pre-certifications and other
details. Field Work services are offered as a discrete project or as a component
of a larger RCR engagement, combining electronic analysis with onsite follow-up.
Field Work services offer a solution to short-term backlogs caused by system
transitions or staffing problems, or the challenges of handling difficult or
complex billings.
Using database-driven methodologies developed in connection with RCR,
the Provider Revenue Services Group offers a range of additional recovery
services to healthcare providers.
Cost Report reimbursement services include Medicare Bad Debt Recovery,
in which the Company assists providers in isolating coinsurance and deductible
amounts that qualify for Bad Debt reimbursement, and Disproportionate Share
services, in which, among other services, the Company identifies and
recalculates improperly classified claims that are eligible for Federal
Financial Participation. The Group also supports clients' substantiation of
future claims for Medicare Bad Debt by establishing appropriate concurrent
operating processes.
The Provider Revenue Services Group's Comprehensive Accounts Receivable
Services ("CARS"), facilitates the Company's ability to liquidate aged accounts
from a client's outgoing patient accounting system while the client's new
patient accounting system is being installed. CARS also assists providers in
liquidating aged accounts before they are transferred to a collection agency.
In conjunction with the Decision Support Group, the Provider Revenue
Services Group provides Managed Care Recovery Services (formerly referred to as
"underpayment recovery services") to assist healthcare providers in the recovery
of underpayments due from managed care payors.
RCR services have evolved from a strictly background process to a
process that can also be performed concurrently and integrated with
clients' internal processes, entailing onsite support, designed to maximize
results through targeted review, analysis, and opportunity identification.
In contrast to RCR services, which retrospectively reprocess patient
accounts receivable data delivered to healthcare providers, the Company's CAMS
offering provides concurrent third-party claim identification, editing, claim
preparation, electronic claims submission, bill follow-up, denial reprocessing,
and remittance management services thereby offering a hospital an opportunity to
improve the effectiveness (enhanced revenue and accelerated cash flow) of its
accounts receivable management program while decreasing its administrative
costs. Remittance management services automate and support remittance-based
provider activities including deposit reconciliation, accounts receivable
management and denial management. The Company is in the process of significantly
enhancing these services to expand its market, although there can be no
assurances that the Company will produce such results.
5
7
Using its medical records-based, practice-management processing system
acquired from Global, the Provider Revenue Services Group is also able to
provide products and services on a concurrent basis to municipal public health
agencies.
Through its HRM acquisition, the Company also provides pre-collection
and collections services to providers, and offers Medicaid Application Services,
which assist eligible patients in properly enrolling in public aid, ensuring
that providers receive reimbursement for care rendered to indigent patients.
Expanding transfer payment consulting services include: Charge
Description Master and Charge Capture Analysis services (which update and
monitor a hospital client's Charge Description Master and charge capture
processes to assess the accuracy of service codes to optimize the integrity of
their inclusion on submitted claims); Ambulatory Payment Classification ("APC")
Analysis services (which evaluate a client's utilization and costs and assign
competitive pricing for charge items to assist clients with their transition to
the APC payment model for outpatient services); and Appeals Management
Outsourcing services, which investigate the reasons behind reduced payment on
individual claims and appeal adverse payment reductions with the third-party
payors on the hospital's behalf.
PAYOR REVENUE SERVICES GROUP
In 1985, the Company began to offer TPLR services principally to state
Medicaid agencies, as a means of identifying third parties with prior liability
for Medicaid claims. In addition, via its 1996 acquisition of CDR, the Company
provides hospital-based claims audits on behalf of payors, for the purpose of
recovering credit balances and duplicate payments. Such services are offered to
state Medicaid agencies as well as to Medicaid HMO's and to Blue Cross/Blue
Shield organizations and commercial insurers (including managed care payors).
The Payor Revenue Services Group applies its proprietary information
management and coordination of benefits methodologies used in TPLR to examine
paid claims datasets in order to identify duplicate payments, overpayments,
compliance-related erroneous payments, and other inappropriate payments on
behalf of payor organizations, with the preponderance of the Group's
remuneration based upon contingent fee arrangements.
DECISION SUPPORT GROUP
The growth of managed care and the consolidation of healthcare
institutions is significantly increasing the complexity of the industry and the
associated demand for decision support systems. In the managed care environment,
the Company believes decision support to still be an important ingredient for
integrating, analyzing, and understanding key operational, financial,
administrative, and clinical data obtained from institutions' transaction-based
healthcare information systems. As such, decision support systems and services
are increasingly being relied upon to guide the management practices of
providers (in areas ranging from managed care contracting and clinical pathways
development to physician profiling) to ensure the success and financial and
operational viability of their organizations. The current clients for the
Decision Support Group include approximately 450 hospitals and IDN's located
primarily in the United States. These hospitals generally range in size from 50
to more than 1,000 beds, and include many of the most progressive and complex
health systems in the country, as well as some of the largest multi-site
hospital chains, managed care organizations, and long-term care institutions.
Developed in collaboration with several major healthcare organizations,
the Company's suite of decision support software and related consulting
services, called Alliance for Decision Support(TM) ("Alliance"), was released to
the market in June 1998. Alliance enables healthcare providers to perform
contract modeling and net revenue management, costing and clinical financial
analytics, and physician profiling and quality management from the perspective
of the provider, payor, and/or third-party administrator. Employing advanced
systems integration, data validation, and distribution methods, Alliance
supports evolving data warehousing and information systems initiatives. Alliance
was built with an open system architecture, running on a variety of platforms
that support client server processing and World Wide Web applications. In
addition to purchasing a license to use the
6
8
Company's software, customers have the option of outsourcing the processing of
part or all of the Alliance system to the Company. The Company continues to
integrate clinical quality measures within Alliance.
The Decision Support Group dedicates considerable resources to
providing a wide variety of related consulting applications, including decision
support planning and implementation services, and decision support outsourcing
and management. The Decision Support Group provides clients with prospective,
concurrent, and retrospective decision support applications and services,
including a concurrent managed care contract profiler and payment calculator
system. As a result, proper calculation of anticipated contractual allowances
are now provided as an integrated component of the managed care reimbursement
process. Through Alliance for Financial Management(TM) ("FM"), the Decision
Support Group offers healthcare organizations an enterprise-wide financial
analysis and modeling application, with capabilities including employee-level
budget and productivity support, operating and capital budget support, and
long-range strategic planning. FM version 6.3 was released during fiscal year
2000, and incorporates web publishing and a Microsoft(R) Excel spreadsheet
add-in for ease of use and quicker access to data. The application also
incorporates multi-dimensional, on-line analytical processing technology,
integrated with electronic mail applications and standard spreadsheet tools to
support communications and analysis. The Decision Support Group provides related
application consulting services, focusing on analysis and development of cost
accounting, contract management, budgeting, business lines, and treatment
patterns.
PAYOR SYSTEMS GROUP
The Payor Systems Group provides large-scale transaction processing
systems and services to large and medium-sized commercial payors and managed
care plans, including some large Blue Cross/Blue Shield organizations.
Both public and private entities have embraced managed care health
plans as a means of providing and managing the delivery and cost of healthcare
services. To support their businesses, these payors require systems to: manage
patient membership, provider contracts, and networks; process and adjudicate
claims; manage risk; and perform medical management.
The three principal offerings of the Payor Systems Group are:
ProAlliance(TM); CapAlliance(TM); and Alliance for Claims Outsourcing(TM)
("ACO"). ProAlliance is a data repository of integrated provider information,
enabling proactive management of complex process such as credentialing,
accreditation, and pricing arrangements via an open system architecture and web
user interface. CapAlliance, the Company's stand-alone capitation offering,
manages the payment to providers of pre-negotiated per capita amounts. Alliance
for Claims Outsourcing is a risk management solution for payors seeking a
strategy to manage their own health plans and market their own products,
providing data processing for plans offering a full spectrum of products, from
traditional indemnity coverage through complete managed care programs. Comprised
of modular systems, Alliance for Claims Outsourcing automates four major areas
of healthcare administration: membership and billing, provider administration,
capitation, and benefits and claims. Through its ACO offering, the Company
provides its managed care functionality, including hardware and software, in an
outsourcing or applications service provider mode. In fiscal year 1999, the
Payer Systems Group consummated a multi-year strategic partnership with Medical
Mutual of Ohio for the design and development of Alliance for Managed Care,
which will expand the current functionality of the Company's existing managed
care systems to incorporate graphical and web interfaces, a component-based
architecture, and the use of relational database technology. Having
substantially completed the first of four Java-based Alliance for Managed Care
modules for this next generation system, this Group's development partner's
agreement is subject to review during the Company's fiscal year 2001. There can
be no assurances that the development partner will continue to participate in
the development of this system although there are contractual penalties in the
event of early termination.
The Company's Payor Systems Group offerings are sold on a stand-alone
basis, or can be integrated into existing systems, the latter option enabling
payors to preserve their investments in information technology. The Company
believes that these offerings dramatically reduce the cost of processing claims
through auto-adjudication.
7
9
CUSTOMERS
The Company's client base includes hospitals, IDN's, multi-hospital
systems, one of the country's largest public health systems, long-term care
facilities, large commercial payors, Blue Cross/Blue Shield organizations, and
state Medicaid agencies. The Company also has a limited number of overseas
clients. Among the Company's domestic clients are three of the nation's largest
public health systems and one of the largest proprietary hospital corporations.
No single client of the Company accounted for 10% or more of the
Company's total revenue in fiscal year 2000. The Company's largest client is HCA
- - The Healthcare Company ("HCA"), a customer of the Decision Support Group. This
client accounted for 7%, 9%, and 10% of the Company's total revenue in fiscal
years 2000, 1999, and 1998, respectively. The Company provides its services to
HCA primarily pursuant to annual work order agreements. There is no assurance
that any of these agreements will be renewed.
The clients constituting the Company's ten largest clients change
periodically. The concentration of revenue in such accounts has decreased,
accounting for approximately 45%, 48%, and 50% of the Company's revenue in
fiscal years 2000, 1999, and 1998, respectively. In many instances, including
governmental clients, the Company provides its services pursuant to agreements
subject to competitive re-procurement. All of these agreements periodically
expire between fiscal year 2001 and 2004. There is no assurance that any of
these agreements will be renewed and, if renewed, that the fee rates will be
equal to those currently in effect.
The Company works with selected customers and other development
partners in the development and testing of its software products and services.
MARKET TRENDS/OPPORTUNITIES
The healthcare industry continues to face unrelenting financial
pressure, as provider reimbursement is constrained and payor costs are under
pressure. Where providers trim staff in response to these pressures, they are
more challenged to handle the volumes and complexities of reimbursement. Thus,
information relating to reimbursement, costs, and quality of care is of
increasing importance. Administrative costs within the healthcare industry
remain high and constitute a continuing target of opportunity for the Company.
The demands of managing the delivery of patient care with ever
increasing qualitative and quantitative rigor will continue to drive the need
for increased amounts of operational, financial, administrative, and clinical
information. The Company believes that it possesses the data content, analytic
tools, technology, communications, and process management skills required to
respond to the current and anticipated needs of provider and payor clients for
tools and services to manage this evolving complexity.
Cost pressures continue to drive horizontal and vertical integration of
providers and payors alike. Consolidation among healthcare organizations is
creating larger healthcare delivery systems, with greater regional market power.
This phenomenon is creating a new market for the Company's products, with fewer
but larger client prospects. Despite some belief that the rapidity of this
change may be undone over the next several years, as providers are downsized and
IDN's begin to unbundle, the Company believes that it has the opportunity to
leverage its products and services across larger enterprises, making the
Company's products and services more cost effective for clients.
The World Wide Web is a readily available means of enhancing
communications among the various participants in the healthcare delivery
process. Previously disenfranchised consumers, or patients, may now connect
readily with their providers of healthcare and the payors for care. Previously
isolated individual and small practitioners may now connect readily with larger
providers and with their payors. In the short term, the enhanced connectivity
should render various types of data more readily available, while in the longer
term the enhanced
8
10
connectivity has the potential to facilitate partial or full amelioration of
existing inefficiencies in the clinical, operational, financial, and
administrative aspects of healthcare. The Company views the Internet as a
conduit for additional data, thereby enabling the Company to increase its
value-added impact on the marketplace.
COMPETITION
Although the Company's products and services involve various
proprietary aspects, its business is highly competitive and some of the
Company's larger competitors have been acquired by larger organizations. While
the Company believes that no one company competes with all aspects of its
business, several companies, some of which may be larger and have greater
financial resources than the Company, compete with the Company in providing one
or more of the Company's offerings. The Company also encounters competition from
companies attempting to expand the scope of their products and services within
or into the healthcare information management services industry. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors - Competition.
PROVIDER REVENUE SERVICES GROUP
The Company's Provider Revenue Services Group competes with many
regional small companies offering accounts receivables recovery services, as
well as large companies, including hospital computer systems vendors (such as
McKesson HBOC, Inc. ("MCK") and Shared Medical Systems Corporation ("SMS")),
QuadraMed Corporation ("QMDC"), and national public accounting firms. The
Company competes on the basis of its proprietary systems, existing
relationships, long-standing reputation in the provider market segment, and
pricing.
PAYOR REVENUE SERVICES GROUP
The Company's Payor Revenue Services Group targets federal and state
healthcare agencies, large commercial payors, and managed care organizations and
competes primarily with national public accounting firms, Public Consulting
Group and, to some degree, Maximus. The Company competes on the basis of its
proprietary systems, data mining capabilities, historically high recovery rates,
and pricing.
DECISION SUPPORT GROUP
The Company's Decision Support Group competes with products provided by
Eclipsys Corporation ("ECLP"), MCK, QMDC, Kreg Information Systems, and SRC
Software. Companies that offer general-purpose financial management products,
including Hyperion Software and PeopleSoft, Inc., are also competitors. The
Company competes on the basis of its quality, proprietary software and
value-added management consulting services.
PAYOR SYSTEMS GROUP
The Company's Payor Systems Group competes against multiple companies,
including Health Systems Design Corporation, a subsidiary of Perot Systems
Corporation, Synertech, and ERISCO, Inc, as well as with payors' in-house
systems development groups. The Company sells its products to large payor
organizations. The Company's Payor Systems Group competes on the basis of its
proprietary software, healthcare software development expertise, and large-scale
project management capabilities.
RESEARCH AND DEVELOPMENT
The Company's performance in the healthcare information technology and
services arenas requires it to devote resources to research and development to
continue the acceptance of the Company's products in the
9
11
marketplace. See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors - New Product Development and
System Enhancement.
BUSINESS STRATEGY
The Company's current strategy includes (1) a thorough examination of
current businesses to reconfigure products and services under a centric business
plan that will incorporate more effective marketing and selling, and leverage
the Company's knowledge and know-how of the transfer payment process; (2) divest
non-strategic assets; (3) further reduce costly infrastructure and overhead,
including reengineering of its information systems "IT" platform with the
emphasis on utilizing more advanced technology to provide customers additional
solutions for managing their complex data needs; and (4) continue the
development of its new planned provider product opportunity. The Company
believes that some of its initiatives will reduce revenue streams in the near
term in order to become more product-focused and thereby become a more
formidable leader in its remaining core business. In its fiscal fourth quarter
ended October 31, 2000, the Company began a restructuring in order to refocus
its business and generate increased operating profitability in fiscal year 2001.
The Company also expects to implement a plan to restructure and re-engineer its
operating information systems and administrative infrastructures in fiscal year
2001. The Company's business strategy is to accelerate growth both internally
and through selective acquisitions thereafter.
As the Company divests non-strategic assets and builds on new services
offerings, it may seek to acquire companies that supply targeted healthcare
providers and/or payors with information management software, systems, or
services if the offerings of the Company or such companies would benefit from
access to the other's technology, software applications, or client base. The
Company believes that such acquisition opportunities exist due, in part, to
competitive pressures on local service businesses that lack adequate capital,
technical, and management resources.
EMPLOYEES
As of October 31, 2000, the Company employed approximately 825 employees.
No employees are covered by a collective bargaining agreement or are represented
by a labor union.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Specific financial information with respect to the Company's industry
segments is provided in Note 18, Segment and Geographical Information, of Notes
to Consolidated Financial Statements.
ITEM 2. PROPERTIES
The Company's New York City offices consist of approximately 149,000
square feet. In addition, the Company leases approximately 170,000 square feet
of office space in approximately 21 locations throughout the United States. See
Note 14 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The settlement of the following litigation became final in August 2000. 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
10
12
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 the settlement understanding,
without admitting any wrongdoing, certain of the defendants agreed to pay, in
complete settlement of this lawsuit, the sum of $4,500,000, not less than 75
percent of which was to be paid by the Company's insurance carriers. For the
fiscal year ended October 31, 1999, the Company has recorded a charge of
$845,000 related to this settlement. As noted, on August 14, 2000, the Court
signed an Order and Final Judgment approving the settlement. See Note 19 of
Notes to Consolidated Financial Statements and Item 7. - Management's Discussion
and Analysis of Financial Condition and Results of Operations Fiscal Years Ended
October 31, 1999 and 1998.
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.
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 assessed at an inquest in
January 2001 in the amount of $27,000), 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 alleged 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 sought an aggregate of $9,100,000
in compensatory damages, and punitive damages in an unspecified amount. The
action came on for trial in January, 2001, at which time the Court directed
entry for judgement, dismissing the case, and awarding the Company damages on
its counterclaims in an amount to be assessed at an inquest.
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
11
13
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, intends to
contest them vigorously and has moved for summary judgment dismissing the case.
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 liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is included in the NASDAQ-AMEX National Market
System (symbol: HMSY). As of the close of business on January 11, 2001, there
were approximately 9,000 holders of the Company's common stock, including the
individual participants in security position listings. The Company has not paid
any cash dividends on its common stock and does not anticipate paying cash
dividends in the foreseeable future. The Company's current intention is to
retain earnings to support the future growth of its business. The Company's
credit agreement with its bank contains limitations on the Company's ability to
pay cash dividends.
The table below summarizes the high and low sales prices per share for the
Company's common stock for the fiscal year periods indicated, as reported on the
NASDAQ-AMEX National Market System.
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-----------------------------------------------
2000:
HIGH $ 7.88 7.00 4.38 3.31
LOW 3.88 3.75 2.75 1.38
1999:
HIGH $ 10.13 8.00 6.63 6.09
LOW 6.13 4.13 4.44 3.81
12
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA (a)
(In Thousands, Except Per Common Share Data)
Years Ended October 31, 2000 1999 1998 1997 1996
===================================================================================================================================
STATEMENT OF OPERATIONS DATA:
Revenue:
Revenue Services Division
Provider Revenue Services Group $ 44,736 $ 41,536 $ 34,987 $ 39,007 $ 55,410
Payor Revenue Services Group 20,113 26,414 22,251 16,849 26,406
- -----------------------------------------------------------------------------------------------------------------------------------
64,849 67,950 57,238 55,856 81,816
Software Division
Decision Support Group 21,781 22,542 25,499 24,873 19,510
Payor Systems Group 11,457 23,563 22,515 8,788 --
- -----------------------------------------------------------------------------------------------------------------------------------
33,238 46,105 48,014 33,661 19,510
- -----------------------------------------------------------------------------------------------------------------------------------
98,087 114,055 105,252 89,517 101,326
Cost of services, including restructuring charges 104,321(b) 102,918 95,628 88,355 87,873
- -----------------------------------------------------------------------------------------------------------------------------------
Operating margin (loss) before amortization of (6,234) 11,137 9,624 1,162 13,453
intangibles
Amortization of intangibles (c) 948 840 1,964 1,331 204
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (7,182) 10,297 7,660 (169) 13,249
Net interest income 1,158 1,277 1,700 2,755 987
Other income (loss) -- -- 597 (856)(e) (1,371)(f)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle (6,024) 11,574 9,957 1,730 12,865
Income tax expense (benefit) (2,563) 4,091 3,869 (351) 5,574
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
change in accounting principle (3,461) 7,483 6,088 2,081 7,291
Cumulative effect of change in accounting
principle, net of tax 21,965(d) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (25,426) $ 7,483 $ 6,088 $ 2,081 $ 7,291
===================================================================================================================================
PER COMMON SHARE DATA:
Diluted loss per share before cumulative effect
of change in accounting principle $ (0.20) $ 0.43 $ 0.34 $ 0.12 $ 0.39
Diluted loss per share on cumulative effect of
change in accounting principle (1.26) -- -- -- --
Diluted earnings (loss) per share after
cumulative effect of change in
accounting principle $ (1.46) $ 0.43 $ 0.34 $ 0.12 $ 0.39
Weighted average common shares and common share
equivalents 17,467 17,419 17,833 17,979 18,494
- -----------------------------------------------------------------------------------------------------------------------------------
As of October 31, 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and short-term investments $ 16,740 $ 33,817 $ 28,402 $ 39,080 $ 39,521
Working capital 30,562 58,437 56,703 53,799 54,753
Total assets 85,333 130,921 117,802 109,694 109,643
Shareholders' equity $ 65,598 $ 91,232 $ 83,269 $ 79,806 $ 74,612
===================================================================================================================================
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(a) Included in each respective year's amounts are the revenue and costs
associated with the following acquisitions, accounted for using the
purchase method of accounting (see Item 1. Business - Company History):
HRM, since June 1999 acquisition; Global, since July 1997 acquisition; and
HISCo/HSA, since
13
15
March 1997 acquisition. In accordance with the pooling method of
accounting, financial data for fiscal year 1996 has been restated to
reflect the merger with QSM in fiscal year 1997.
(b) Restructuring costs of $3.5 million include the costs associated with
changes in corporate and information systems management, including a
one-time charge related to a severance arrangement with the Company's
co-founder and former Chief Executive Officer, specific reductions in
staff, and vacating of portions of office space in two cities. See Item
1. Business - Business Strategy, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors
- Restructuring, and Note 12 of Notes to Consolidated Financial
Statements.
(c) Intangible assets were principally recorded in connection with the
Company's fiscal year 1989 recapitalization, its acquisition of QMA in
fiscal year 1990, its HISCo and Global acquisitions in fiscal year 1997,
and its HRM acquisition in fiscal year 1999. The amortization of software
related to the HISCo acquisition was completed during fiscal year 1999.
See Item 1. Business - Company History and Notes 1(e) and 8 of Notes to
Consolidated Financial Statements.
(d) After analyzing the SEC's "Frequently Asked Questions and Answers"
bulletin released on October 12, 2000 pertaining to Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"),
the Company has elected early adoption for its fiscal year ended October
31, 2000, implementing a change in accounting in regard to revenue
generated from clients seeking reimbursement from third-party payors where
the Company's fees are contingent upon the client's collections from third
parties. As of November 1, 1999, the Company recognizes revenue
pertaining to such clients once the third-party payor has remitted payment
to its client, thereby eliminating unbilled receivables and substantially
reducing deferred tax liabilities. The change reduced revenue by $3.0
million and increased net loss by $503,000 for fiscal year 2000, excluding
the cumulative effect of the change. The cumulative effect pertaining to
this change as of the beginning of the Company's fiscal year 2000 is $22.0
million, net of tax benefit. See Notes 1(h), 5, 9, 18 and 20 of Notes to
Consolidated Financial Statements.
(e) Includes costs associated with the Company's merger with QSM, and
acquisition of the remaining outstanding shares of HISCo not already
owned by the Company. See Item 1. Business - Company History and Note
1(e) of Notes to Consolidated Financial Statements.
(f) Includes costs associated with the Company's merger with CDR. See Item 1.
Business - Company History.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 31, 2000 AND 1999
Consolidated revenue for the fiscal year ended October 31, 2000 was
$98,087,000 under the new accounting policy as compared to $114,055,000 for the
prior fiscal year under the Company's historical accounting policies pre-dating
the release of the SAB 101 current accounting literature. See footnote (d) of
Item 6. Selected Consolidated Financial Data and Notes 1(h) and 5 of Notes to
Consolidated Financial Statements. Had the new SEC guidelines been in effect in
the Company's prior fiscal year 1999, revenue year-over-year would have been
approximately $98.1 million for fiscal year 2000 and $98.9 million for fiscal
year 1999. See Risk Factors - Variability of Operating Results; Length of Sales
Cycles; Terminability of Customer Contracts, New Product Development and System
Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation
and Reform, Dependence upon Key Personnel, and Restructuring, below.
The Revenue Services Division, comprised of the Provider Revenue Services
Group and the Payor Revenue Services Group, generated revenue of $64,849,000
under the new accounting policy as compared to $67,950,000 for the prior fiscal
year under the Company's historical accounting policies pre-dating the release
of the SAB 101 current accounting literature. Had the new SEC guidelines been in
effect in the Company's prior
14
16
fiscal year 1999, revenue year-over-year would have been approximately $64.8
million for fiscal year 2000 and $54.3 million for fiscal year 1999, an increase
of 19% from the prior year.
The Provider Revenue Services Group generated revenue of $44,736,000 under
the new accounting policy as compared to $41,536,000 for the prior fiscal year
under the Company's historical accounting policies pre-dating the release of the
SAB 101 current accounting literature. Had the new SEC guidelines been in effect
in the Company's prior fiscal year 1999, revenue year-over-year would have been
approximately $44.7 million for fiscal year 2000 and $36.8 million for fiscal
year 1999, an increase of 21% from the prior year. Of this increase, the
Provider Revenue Services Group included $7.3 million in revenue growth
attributable to the HRM acquisition in July 1999. The increases in revenue
achieved as a result of the growth in the Company's fieldwork offering and the
recapture of the balance of the RCR engagement previously lost to a competitor
for one of the Company's ten largest clients, partially offset by the previously
reported discontinuance of two large but unprofitable engagements, and the
Group's disappointment in not recognizing additional revenue pertaining to an
existing revenue maximization engagement for the District of Columbia and in
generating lower than expected sales of additional revenue maximization
services. See Risk Factors - Variability of Operating Results; Length of Sales
Cycles; Terminability of Customer Contracts, New Product Development and System
Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation
and Reform, Dependence upon Key Personnel, and Restructuring, below.
The Payor Revenue Services Group generated revenue of $20,113,000 under
the new accounting policy as compared to $26,414,000 for the prior fiscal year
under the Company's historical accounting policies pre-dating the release of the
SAB 101 current accounting literature. Had the new SEC guidelines been in effect
in the Company's prior fiscal year 1999, revenue year-over-year would have been
approximately $20.1 million for fiscal year 2000 and $17.5 million for fiscal
year 1999, an increase of 15% from the prior year. Nevertheless, the Company
aspired to generate better recovery results and substantially greater sales of
new State recovery projects although recognizing the rather elongated sales
cycle associated with government contracts. With a new business unit manager in
place during the fourth quarter, the Company is reassessing its sales strategy
and strategic focus in regard to this Group. See Risk Factors - Variability of
Operating Results; Length of Sales Cycles; Terminability of Customer Contracts,
New Product Development and System Enhancement, Competition, Healthcare Payment
Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and
Restructuring, below.
The Software Services Division, comprised of the Payor Systems Group and
the Decision Support Group, generated revenue of $33,238,000 under the new
accounting policy as compared to $46,105,000 for the prior fiscal year under the
Company's historical accounting policies pre-dating the release of the SAB 101
current accounting literature. Had the new SEC guidelines been in effect in the
Company's prior fiscal year 1999, revenue year-over-year would have been
approximately $33.2 million for fiscal year 2000 and $44.5 million for fiscal
year 1999. This Division's decline in revenue was attributable entirely to the
Payor Systems Group, as the Decision Support Group's revenue increased over the
prior year.
The Payor Systems Group continued to be severely affected by the perceived
industry-wide softness in new sales of existing claims software systems and
consulting services while the Group is developing its next generation claims
adjudication system. This Group produced revenue of $11,457,000 for fiscal year
2000 as compared to $23,563,000 for fiscal year 1999 with virtually no impact on
the prior year periods had the new SEC guideline been in effect previously. As
previously reported, the decline was due to a combination of (1) the winding
down of an outsourcing engagement by a Blue Cross client which 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) the completion of the initial
implementation for a single customer and (4) the non-recurrence of substantial
amounts of Y2K remediation work accomplished for the Payor Systems Group's
clients last year. See Risk Factors - Variability of Operating Results; Length
of Sales Cycles; Terminability of Customer Contracts, New Product Development
and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare
Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below.
15
17
The Decision Support Group generated revenue of $21,781,000 under the new
accounting policy as compared to $22,542,000 for the prior fiscal year under the
Company's historical accounting policies pre-dating the release of the SAB 101
current accounting literature. Had the new SEC guidelines been in effect in the
Company's prior fiscal year 1999, revenue year-over-year would have been
approximately $21.8 million for fiscal year 2000 and $21.0 million for fiscal
year 1999. This Group's rate of closing new sales increased in fiscal year 2000
and the Group has demonstrated an ability to install new sales rapidly, both of
which produced the added benefit of continuing to reduce the concentration of
revenue in this Group's largest account, which appears to be making a concerted
effort to reverse its dependence on the Company as an "outside IT" vendor. See
Risk Factors - Variability of Operating Results; Length of Sales Cycles;
Terminability of Customer Contracts, New Product Development and System
Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation
and Reform, Dependence upon Key Personnel, and Restructuring, below.
Cost of services for fiscal year 2000 was $104,321,000 including
restructuring charges, as compared to $102,918,000 for fiscal year 1999. The
increase of $1.4 million from the prior year was a direct result of the $3.5
million of restructuring costs associated with changes in corporate and
information systems management, including a one-time charge related to a
severance arrangement with the Company's co-founder and former Chief Executive
Officer, specific reductions in staff, and vacating of portions of office space
in two cities. See Item 1. Business - Business Strategy, Risk Factors -
Restructuring and Note 12 of Notes to Consolidated Financial Statements.
Compensation expense, the largest component of cost of services, was
$62,986,000 for the fiscal year ended October 31, 2000, reflecting a decrease of
$1.3 million from the prior year, principally attributable to specific annual
employee performance bonuses being earned in the prior year and not in fiscal
year 2000. Data processing expense for the fiscal year 2000 was $4,488,000 as
compared to $6,746,000 for the prior year, with the decrease primarily
attributable to the Company's continued consolidation of its data processing
platforms, reduced support of older versions of its systems, products and
services, and the capitalization of additional software development costs
incurred to enhance existing products and introduce new offerings, including the
development costs of the Company's Payor Systems Group previously mentioned
multi-year joint development project. During fiscal year 2000, the Company
received approximately $1.7 million from this development partner which reduced
capitalized software costs. See Item 1. Business - Overview, Healthcare Reform
and Regulatory Matters, Principal Products and Services, Customers, Research and
Development, and Business Strategy; see also Risk Factors - New Product
Development and System Enhancement and Notes 1(f) and 7 of Notes to Consolidated
Financial Statements. Occupancy costs increased from $9,377,000 in fiscal year
1999 to $10,788,000 in fiscal year 2000 principally attributable to the first
full year of occupancy costs related to the acquisition of HRM in July 1999.
Other operating costs increased from $11,328,000 in fiscal year 1999 to
$11,389,000 in fiscal year 2000. Fiscal year 2000 included costs incurred for
the Company's formal strategic planning process and increases in advertising,
marketing and travel costs to support the Company's sales efforts while fiscal
year 1999 included an $845,000 charge for the previously reported settlement of
the Company's class action litigation.
Principally as a result of the above factors, the Company generated a loss
before income taxes for the fiscal year ended October 31, 2000 of $6,024,000
under the new accounting policy and including restructuring charges, as compared
to income before income taxes of $11,574,000 for the prior fiscal year under the
Company's historical accounting policies pre-dating the release of the SAB 101
current accounting literature. Had the new SEC guidelines been in effect in the
Company's prior fiscal year, the loss before income taxes year-over-year would
have been approximately $6.0 million for fiscal year 2000 and $2.0 million for
fiscal year 1999 with the change principally attributable to the impact of the
restructuring charges.
As previously noted, the Company implemented a change in accounting in
regard to revenue generated from clients seeking reimbursement from third-party
payors where the Company's fees are contingent upon the client's collections
from third parties. The Company now recognizes revenue pertaining to such
clients once the third-party payor has remitted payment to its client, thereby
eliminating unbilled receivables and substantially reducing deferred tax
liabilities. The cumulative effect of this change in accounting principle as of
the beginning of
16
18
the Company's fiscal year 2000 is $22.0 million, net of tax benefit. See
footnote (d) of Item 6. Selected Consolidated Financial Data and Notes 1(h), 5,
9, 18 and 20 of Notes to Consolidated Financial Statements.
Principally as a result of the above factors, net loss for the fiscal year
ended October 31, 2000 was $25.4 million, a loss per share of $0.20 before the
cumulative effect of the change in accounting principle and $1.46 per share
after the cumulative effect of this change.
FISCAL YEARS ENDED OCTOBER 31, 1999 AND 1998 (both years reported under the
Company's historical accounting policies pre-dating the release of the SAB 101
current accounting literature)
Consolidated revenue for the fiscal year ended October 31, 1999 was
$114,055,000, an increase of $8,803,000 or 8.4% over prior year revenue of
$105,252,000.
The Revenue Services Division, comprised of the Provider Revenue Services
Group and the Payor Revenue Services Group, achieved revenue of $67,950,000, an
increase of $10,712,000 or 19% from the prior year. Of these amounts, the
Provider Revenue Services Group produced revenue of $41,536,000, including the
$1,800,000 in revenue growth attributable to the HRM acquisition in July 1999,
an increase of $6,549,000 or 19% from the prior year. The Payor Revenue Services
Group produced revenue of $26,414,000, an increase in revenue of $4,163,000 or
19% from the prior year. Other than the revenue growth attributable to the HRM
acquisition, the balance of the revenue growth realized by each of the two
groups comprising the Revenue Services Division was internally generated from
both (1) "new clients," defined as clients generating revenue in the fiscal year
1999 who did not generate revenue in fiscal year 1998, and (2) delivery of
services of expanded scope to "existing clients," defined as clients who
generated revenue in the comparable prior period.
Revenue from the Software Division was $46,105,000, a decrease of
$1,909,000 or 4% compared with the prior year. Revenue from the Decision Support
Group was $22,542,000, a decrease of $2,957,000 or 11.6% from the prior year,
while revenue from the Payor Systems Group increased $1,048,000 to $23,563,000,
an increase of 5% from the prior period. Overall, the increased revenue realized
in the Payor Systems Group was offset by the decrease in revenue from the
Decision Support Group. The decrease in this Division's revenue was the result
of an elongated sales cycle, attributable to clients' reluctance to make
decisions regarding the implementation of new software while facing their own
internal Y2K conversion, partially offset by the revenue earned from the
Company's recurring base of clients and implementation of its sales backlog.
Cost of services for the fiscal year ended October 31, 1999 was
$102,918,000, an increase of $7,290,000 or 8% from the prior year. The increase
was attributable to higher compensation costs, and direct project
subcontractors, partially offset by lower data processing, occupancy, and other
employee related operating expenses. Compensation expense, the largest component
of cost of services, was $64,253,000 for the fiscal year ended October 31, 1999,
reflecting an increase of $4,965,000 or 8% over the prior year. As a percentage
of total revenue, compensation expense remained constant at 56% of total revenue
in the fiscal years ended October 31, 1999 and 1998, respectively. Increased
compensation expense was principally attributable to increases in average
salaries to reflect prevailing market conditions, and an increase in personnel
associated with the acquisition of HRM. Data processing expense for the fiscal
year ended October 31, 1999 was $6,746,000, a decrease of $2,025,000 from the
prior year. The decrease was primarily attributable to the Company's continued
consolidation of its data processing platforms, reduced support of older
versions of the Company's systems, products and services, the capitalization of
additional software development costs incurred to enhance existing products, and
the timing differences associated with amortization of multiple-period
maintenance and software license fees. Direct project costs were $11,214,000 for
the fiscal year ended October 31, 1999, reflecting an increase of $6,146,000
over the prior year, primarily attributable to the Company's increased use of
revenue-generating subcontractor services to support the growth in the Revenue
Services Division. Other operating expenses were $11,328,000 for the fiscal year
ended October 31, 1999 including $845,000 reserved for settlement of the
Company's class action litigation (see Note 19 of Notes to Consolidated
Financial Statements), reflecting a decrease of $1,510,000 over the
17
19
prior year. The change was primarily attributable to lower professional fees and
employee related costs, including recruiting costs.
Principally as a result of the above factors, operating margin before
amortization of intangible assets for the fiscal year ended October 31, 1999 was
$11,137,000, an increase of $1,513,000 or 16% from the $9,624,000 realized in
fiscal year 1998. The Company's operating margin rate before amortization of
intangible assets was 10%, compared to 9% in the years ended October 31, 1999
and 1998, respectively.
Amortization of intangible assets for the fiscal year ended October 31,
1999 was $840,000, a decrease of $1,124,000 from the prior year. This decrease
was due primarily to completion, in fiscal year 1999, of the amortization of the
excess purchase price related to the HISCo acquisition in fiscal year 1997
allocated to certain revenue contracts.
Net interest and other income for the fiscal year ended October 31, 1999
was $1,277,000, a decrease of $1,020,000 over the prior year, based upon the
combination of lower cash balances and interest rates, the HRM acquisition
transaction, and a $600,000 capital gain on investment recorded in the prior
fiscal year.
The Company's income tax expense for the fiscal year ended October 31,
1999 was $4,091,000, resulting in an effective tax rate of approximately 35.3%.
This compared to an income tax expense of $3,869,000 and an effective tax rate
of approximately 38.9% for fiscal year 1998. The increased income tax expense
was due primarily to the Company's higher pre-tax profit, offset by a more
favorable effective tax rate realized from the Company's ability to file
consolidated state tax returns in specific jurisdictions and from the newly
enacted provision of the tax code pertaining to utilization of existing prior
year net operating tax loss carryforwards, for which the Company had previously
provided a valuation allowance. The Company reduced its valuation allowance by
$372,000 related to this matter.
Principally as a result of the above factors, net income for the fiscal
year ended October 31, 1999 increased to $7,483,000, an increase of $1,395,000
or 23% from the prior year. Resultant diluted earnings per share was $0.43 in
fiscal year 1999, compared to $0.34 in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company had $30,562,000 in net working as
compared to $58,437,000 for the prior fiscal year under the Company's historical
accounting policies pre-dating the release of the SAB 101 current accounting
literature. As previously noted, under this new accounting principle, unbilled
receivables are no longer recognized. Had the new SEC guidelines been in effect
in the Company's prior fiscal year 1999, working capital year-over-year would
have been approximately $30.6 million for fiscal year 2000 and $32.7 million for
fiscal year 1999, a decrease of $2.1 million from the prior year. The Company
has historically devoted increasingly more resources to product and system
development and enhancements and believes that significant continuing
development efforts will be necessary to adapt to changing marketplace
requirements, to sustain its operations, and to integrate the products and
technologies of acquired businesses. The Company invested $7.2 million, $6.8
million, and $4.4 million in capitalized software development and fixed asset
purchases in fiscal years 2000, 1999, and 1998 respectively.
The Company's principal sources of liquidity at October 31, 2000 consisted
of cash, cash equivalents, and short-term investments aggregating $16,740,000,
and net accounts receivable of $24,261,000. In regard to use of cash and cash
equivalents and short-term investments, the Company's use declined from a peak
of approximately $7.9 million in the second quarter, to $4.7 million in the
third quarter, to less than $800,000 in the fourth quarter, while it continued
to invest in major product and system development and enhancements. This trend
may not be indicative of future results. As previously noted, the Company, while
continuing to invest in specific product and systems development and
enhancements, is in the process of reassessing its strategy for, and commitment
to,
18
20
certain of its products, services, and business segments; commenced a
restructuring in the fourth quarter; and anticipates additional restructuring in
fiscal year 2001. See Item 1. Business - Business Strategy and Risk Factors
below. The increase in accounts receivable billed, net at October 31, 2000 over
October 31, 1999 is principally attributable to the increase in invoicing
generated in the fourth quarter of fiscal year 2000. The Company was, however,
disappointed not to have yet received in excess of $2.7 million in payments from
the District of Columbia and from which it was expecting to retire various
subcontractor advances made to Davis and Associates during the year. See Note 19
of Notes to Consolidated Financial Statements.
The Company's credit facility with a major N.Y. money center institution
expires on February 13, 2001. Since the Company has not drawn on this facility
and has no current expectations to do so, the Company is in the process of
reassessing its strategy in regards to a potential new facility. The Company's
financial institution also waived the need for compliance with a fiscal year-end
financial ratio after giving effect to the change in accounting principle.
Should the Company pursue securing a new credit facility with its financial
institution, there can also be no assurance that the Company will be able to do
so on terms that are consistent with the current credit facility or terms that
are acceptable to the Company.
On May 28, 1997, the Board of Directors authorized the Company to
repurchase such number of shares of its common stock that have an aggregate
purchase price not in excess of $10,000,000. The Company may repurchase these
shares from time to time on the open market or in negotiated transactions at
prices deemed appropriate by the Company. Repurchased shares are deposited in
the Company's treasury and used for general corporate purposes. Since the
inception of the repurchase program in June 1997, the Company has repurchased
1,311,666 shares having an aggregate purchase price of $8,300,000, including
262,666 shares repurchased in fiscal year 2000 from the co-founder and former
Chief Executive Officer of the Company under the terms of a separation
agreement. See Note 10 to Notes to Consolidated Financial Statements.
In addition, the Company has made a commitment, as a condition of
employment, to provide for its new Chief Executive Officer to acquire
approximately 7% of the Company's common shares directly from the Company. In
January 2001, the Company's Accelerated Claims Processing, Inc. subsidiary, a
Delaware corporation, provided the financing for purchase of 550,000 shares of
the Company's common stock in exchange for a full recourse loan for $721,875,
bearing interest at the rate of 6.5% per annum, payable annually in two equal
installments commencing January 9, 2002 and the Company granted such executive
stock options to purchase 750,000 shares at $1.3125 per share under the
Company's 1999 Long-Term Incentive Stock Plan. The Company has also made
commitments to certain key employees to induce them to stay during the Company's
restructuring which may result in a charge in fiscal year 2001 of up to $2.6
million, depending on the completion of divestitures. As previously noted, the
Company is considering divesting some of its non-strategic assets. Effective
January 1, 2001, the Company sold its EDI business, consisting of substantially
all of the assets of the Company's QMA subsidiary and certain of the assets of
its Health Receivables Management, Inc. subsidiary. While the Company does not
view this particular sale as significant, the Company has also hired Cain
Brothers and Company to assist in other potential divestitures. As the Company
divests non-strategic assets and builds on new services offerings, it may seek
to acquire companies that supply targeted 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. See Item 1. Business - Business Strategy, Risk Factors -
Divestitures, Related Marketing and Sales Partnerships and Acquisitions,
Dependence upon Key Personnel, and Restructuring and Notes 12, 14 and 21 of
Notes to Consolidated Financial Statements.
19
21
INFLATION
Historically, inflation has not been a material factor affecting the
Company's revenue, and general operating expenses have been subject to normal
inflationary pressure. Notwithstanding, the Company's business is labor
intensive. Wages and other employee-related expenses increase during periods of
inflation and when shortages in the skilled labor market occur. Although the
moderate inflation rates of the past several years have not imposed significant
problems for the Company, in light of current shortages in the skilled labor
market, the Company has implemented selective wage increases, and other
retention compensation in fiscal year 2000 to promote retention of qualified
personnel in key areas of its operations. The Company also has a
performance-based bonus plan to foster retention of and incent certain
employees.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criteria for hedge accounting is that the derivative must be
highly effective in achieving offsetting changes in fair value or cash flows of
the hedged items during the term of the hedge. The effective date of SFAS No.
133 was delayed to the Company's fiscal year beginning November 1, 2000 by the
issuance of SFAS No. 137. The Company has determined that the effect of adopting
this new standard is insignificant to the consolidated financial statements.
RISK FACTORS
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR COMPLIANCE STATEMENT
FOR FORWARD-LOOKING STATEMENTS
In passing the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"), Congress encouraged public companies to make "forward-looking
statements" by creating a safe harbor to protect companies from securities law
liability in connection with forward-looking statements. The Company intends to
qualify both its written and oral forward-looking statements for protection
under the Reform Act and any other similar safe harbor provisions.
"Forward-looking statements" are defined by the Reform Act. Generally,
forward-looking statements include expressed expectations of future events and
the assumptions on which the expressed expectations are based. All
forward-looking statements are inherently uncertain as they are based on various
expectations and assumptions concerning future events and they are subject to
numerous known and unknown risks and uncertainties which could cause actual
events or results to differ materially from those projected. Due to those
uncertainties and risks, prospective investors are urged not to place undue
reliance on written or oral forward-looking statements of the Company. The
Company undertakes no obligation to update or revise this safe harbor compliance
statement for forward-looking statements to reflect future developments. In
addition, the Company undertakes no obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.
The Company provides the following risk factor disclosure in connection
with its continuing effort to qualify its written and oral forward-looking
statements for the safe harbor protection of the Reform Act and any other
similar safe harbor provisions. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include the following:
20
22
VARIABILITY OF OPERATING RESULTS; LENGTH OF SALES CYCLES; TERMINABILITY OF
CUSTOMER CONTRACTS.
The Company's revenue and operating results may vary significantly from
quarter to quarter as a result of a number of factors, including the number and
timing of systems sales; the termination of, or a reduction in, offerings of the
Company's products and services; the loss of customers due to consolidation in
the healthcare industry; the length of the sales cycles and delays in the
implementation process; the timing of periodic revenue enhancement projects; the
timing and delays in third-party payors' adjudication of claims and ultimate
payment to the Company's clients where the Company's fees are contingent upon
such collections; and general economic conditions. The Company experiences sales
cycles of approximately three to eighteen months. As a result, the Company's
results of operations are subject to significant fluctuations and its results of
operations for any particular quarter or fiscal year may not be indicative of
results of operations for future periods. A significant portion of the Company's
operating expenses is fixed, and planned expenditures are based primarily on
sales forecasts. Any inability of the Company to reduce spending or to
compensate for any failure to meet sales forecasts or receive anticipated
revenues could magnify the adverse impact of such events on the Company's
operating results. Further, the commencement of one or more major
implementations could generate a large increase in revenue and net income for
any given quarter or fiscal year, which increase may prove anomalous when
compared to changes in revenue and net income in other periods, and which may
not provide a valid basis for future projections. The Company's ability to
complete implementation of its systems and recognize revenue is dependent on
certain factors outside the control of the Company, including its customers'
ability to allocate internal resources to the implementation process and, with
respect to certain customers, the need to obtain necessary approvals upon
completion of work but prior to customer acceptance. In addition, many of the
Company's agreements with its customers may be terminated under certain
circumstances upon 30 to 90 days notice. The termination of customer and/or
development partnership agreements, if not replaced, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT
The Company's future performance will depend in large part upon the
Company's ability to provide the increasing functionality required by its
customers through the timely development and successful introduction of new
products and enhancements to its existing suite of products. The Company has
historically devoted increasingly more resources to product and system
development and enhancements and believes that significant continuing
development and enhancement efforts will be necessary to adapt to changing
marketplace requirements, to sustain its operations, and to integrate the
products and technologies of acquired businesses. There can be no assurance that
the Company will successfully or in a timely manner develop, acquire, integrate,
introduce, and market new product enhancements or products, or that product
enhancements or new products developed by the Company will meet the requirements
of hospitals or other healthcare providers and payors and achieve or sustain
market acceptance.
LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT
The Company's success is dependent to a significant extent on its ability
to maintain the proprietary and confidential aspects of its data processing and
computer software technology. The Company relies on a combination of trade
secrets, copyright and trademark laws, nondisclosure and other contractual
provisions to protect its proprietary rights. There can be no assurance that the
measures taken by the Company to protect its intellectual property will be
adequate or that the Company's competitors will not independently develop
products and services that are substantially equivalent or superior to those of
the Company.
Substantial litigation regarding intellectual property rights exists in
the software industry, and the Company expects that software products may be
increasingly subject to third-party infringement claims as the number of
competitors in the Company's industry segment grows and the functionality of
products overlaps. Although the Company believes that its products do not
infringe upon the proprietary rights of third parties, there can be no assurance
that third parties will not assert infringement claims against the Company in
the future or that
21
23
a license or similar agreement will be available on reasonable terms in the
event of an unfavorable ruling on any such claim. In addition, any claim may
require the Company to incur substantial litigation expenses or subject the
Company to significant liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be successful in its defense of any such
claims.
RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA
Products and services such as those offered by the Company at times
contain errors or failures, especially when initially introduced or when new
versions are released or processes implemented. Although the Company conducts
extensive testing, software errors are sometimes discovered in certain
enhancements and products and services after their introduction. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors or performance failures will not occur in products and
services under development or in other enhancements or products after
commencement of commercial shipments or implementations, resulting in loss of
revenue and customers, delay in market acceptance, diversion of development
resources, damage to the Company's reputation or increased service and warranty
costs, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
DIVESTITURES, RELATED MARKETING AND SALES PARTNERSHIPS AND ACQUISITIONS
The Company's strategy includes divestitures of non-core assets and the
subsequent expansion of its business through selective acquisitions and
marketing and sales partnerships. In pursuing divestitures, there can be no
assurance that such divestitures will be successful or sufficient to allow the
Company to generate improved operating results or financial position in future
periods. In addition, divestiture plans could generate potential disruptions to
the business, which could materially adversely affect the Company's operating
results and financial position.
In pursuing subsequent expansion opportunities, the Company competes with
others, some of which may have greater financial resources than the Company.
There can be no assurance that suitable opportunities will be identified or can
be consummated or integrated successfully into the Company's operations. In
addition, future expansion transactions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
tangible assets, any of which could materially adversely affect the Company's
operating results and financial position.
Growth through acquisition entails certain risks in that acquired
operations could be subject to unanticipated business uncertainties or legal
liabilities. The Company seeks to minimize these risks through investigation and
evaluation of the operations proposed to be acquired and through transaction
structure and indemnification. The various risks associated with the
acquisitions and operational integration of future acquisitions and the
subsequent performance of such acquired operations may adversely affect the
Company's results of operations. The ability of the Company to acquire
additional operations may depend upon its ability to obtain appropriate
financing and personnel.
COMPETITION
The business of providing information management and data processing
products and services to hospitals and other healthcare providers and to
government health service agencies and other healthcare payors is highly
competitive. The Company's competitors vary in the size, scope and breadth of
the products and services they offer. There can be no assurance that competitors
will not develop or offer products with superior functionality, or that other
features of competitive products will not be preferred by the Company's
customers. Several of the Company's competitors have significantly greater
financial, technical, product development and marketing resources than the
Company. In the future, additional competitors could enter the market, including
providers of information systems to other segments of the healthcare industry,
and compete with the Company. A substantial amount of the
22
24
Company's sales are derived from competitive procurement processes managed
directly by sophisticated clients or consultants that require specific, highly
detailed presentations from several qualified vendors. There can be no assurance
that future competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
HEALTHCARE PAYMENT COMPLEXITY
The complexity of the healthcare transfer payment process, and the
experience of the Company in offering services that improve the ability of its
customers to recover incremental revenue through that process, have been
contributing factors to the success of the Company's service offerings.
Complexities of the healthcare transfer payment process include multiple payors,
the coordination and utilization of clinical, operational, financial and/or
administrative review instituted by third-party payors in an effort to control
costs and manage care. If the payment processes associated with the healthcare
industry are simplified, the need for services such as those offered by the
Company could be reduced, and there could be a resulting adverse effect on the
Company's business, results of operations or financial condition.
HEALTHCARE REGULATION AND REFORM
The healthcare industry in the United States is subject to changing
political, economic and regulatory influences that may affect the procurement
practices and operations of healthcare organizations. The Company's products are
designed to function within the structure of the healthcare financing and
reimbursement system currently being used in the United States. During the past
several years, the healthcare industry has been subject to increasing levels of
governmental regulation of, among other things, reimbursement rates, certain
capital expenditures, and data confidentiality and privacy. From time to time,
certain proposals to reform the healthcare system have been considered by
Congress. These proposals, if enacted, may increase government involvement in
healthcare, lower reimbursement rates and otherwise change the operating
environment for the Company's clients. Healthcare organizations may react to
these proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's products and services.
The Company cannot predict with any certainty what impact, if any, such
proposals or healthcare reforms might have on its results of operations,
financial condition or business.
DEPENDENCE UPON KEY PERSONNEL
As the Company's success depends upon the continued contributions of its
senior management, the loss of services of certain of the Company's executive
officers could have an adverse effect on the Company's business. The Company has
entered into a three-year employment agreement with its Chief Executive Officer
as of October 2, 2000. Although the Company does not have long term service
agreements with its other executive officers, the Company's policy is to enter
into confidentiality, non-compete and non-solicitation agreements with its
employees. In general, such agreements (i) require the employee to protect the
confidential and proprietary information of the Company and (ii) preclude the
employee from soliciting other employees of the Company or competing with the
Company for periods of up to three years following termination of employment. In
addition, the Company believes that its continued success also will depend in
large part on its ability to attract and retain highly skilled management,
technology, marketing, and sales personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel as necessary. Furthermore, the Company's
ability to manage change and growth successfully will require the Company to
continue to improve its management expertise as well as its financial systems
and controls. Additions of new personnel, and departures of existing skilled
employees, can be disruptive and could have a material adverse effect on the
Company's business, financial condition and results of operations.
23
25
POSSIBLE VOLATILITY OF STOCK PRICES
The market price of the Company's common stock has been subject in the
past and could be subject in the future to significant fluctuations in response
to variations in the Company's quarterly operating results and other factors,
such as announcements of technological innovations or new products by the
Company or by the Company's competitors, adoption of new or amended government
regulations, challenges to or changes in patent or other proprietary rights,
divestitures, acquisitions, and developments in the Company's relationships with
its customers. In addition, the stock market has in recent years experienced and
continues to experience significant price fluctuations. These fluctuations often
have been unrelated to the operating performance of the specific companies whose
stock is traded. Broad market fluctuations, as well as fluctuating economic
conditions generally, may adversely affect the market price of the Company's
common stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined by the Company's Board
of Directors. Accordingly, the Company's Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which could adversely affect
the voting power or, other rights of holders of the Company's common stock. In
the event of issuance, preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. In addition, the Company's by-laws provide for a
classified Board of Directors, which provision could also have the effect of
discouraging a change of control of the Company.
LITIGATION
The Company is a party to various proceedings as described under Item 3,
"Legal Proceedings," of this Report, which description is incorporated herein by
reference. Although the Company believes that it has meritorious defenses to the
claims of liability or for damages in the actions against the Company, there can
be no assurance that an outcome favorable to the Company will be reached in any
of these litigations or that additional lawsuits will not be filed against the
Company. Further, there can be no assurance that these lawsuits will not have a
disruptive effect upon the operations of the business, that the defense of the
lawsuits will not consume the time and attention of the senior management of the
Company, or that the resolution of the lawsuits will not have a material adverse
effect upon the Company, including without limitation, the Company's results of
operations, financial position and cash flow.
RESTRUCTURING
There can be no assurance that the restructuring activities described
elsewhere in this Annual Report on Form 10-K will be successful or sufficient to
allow the Company to generate improved operating results in future periods. It
is possible that additional changes in the Company's business or in its industry
may necessitate additional restructurings in the future. The necessity for
additional restructuring activities may result in expenses that adversely affect
reported results of operations in the period the restructuring plan is adopted,
and require incremental cash payments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's holdings of financial instruments are comprised of federal,
state and local government debt. 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
24
26
manages these funds accordingly. The Company seeks reasonable assuredness of the
safety of principal and market liquidity by investing in rated fixed income
securities while, at the same time, seeking to achieve a favorable rate of
return. The Company's market risk exposure consists principally of exposure to
changes in interest rates. The Company's holdings are also exposed to the risks
of changes in the credit quality of issuers. The Company typically invests in
the shorter-end of the maturity spectrum or highly liquid investments.
The table below presents the historic cost basis, and the fair value for
the Company's investment portfolio as of October 31, 2000, and the related
weighted average interest rates by year of maturity:
Fiscal year Fiscal year Total Total
2001 2002 Historical Cost Fair value
- -----------------------------------------------------------------------------------------------
Fixed income assets:
Governmental Securities $ 5,216,000 $ 1,140,000 $ 6,356,000 $ 6,167,000
Average interest rate 5.61% 5.63% 5.62%
- -----------------------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 is found on pages 30 to 51 of this
report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 will be included in the Company's
Proxy Statement for the 2000 Annual Meeting of Shareholders (the "Proxy
Statement"), which will be mailed within 120 days after the close of the
Company's fiscal year ended October 31, 2000, and is hereby incorporated herein
by reference to such Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 2000, and is hereby incorporated herein by
reference to such Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 2000, and is hereby incorporated herein by
reference to such Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be included in the Proxy
Statement, which will be mailed within 120 days after the close of the Company's
fiscal year ended October 31, 2000, and is hereby incorporated herein by
reference to such Proxy Statement.
25
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements:
See Index to Consolidated Financial Statements on page 28
B. Schedule:
Schedule II - Valuation and Qualifying Accounts on page 51
C. Reports on Form 8-K:
None
D. Exhibits:
See Exhibit Index on page 52
26
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTH MANAGEMENT SYSTEMS, INC.
------------------------------
(REGISTRANT)
BY: /S/ WILLIAM F. MILLER III
----------------------------
William F. Miller III
President and Chief Executive Officer
DATE: February 13, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----
/S/ WILLIAM F. MILLER III Chairman, President, February 13, 2001
- -------------------------- Chief Executive Officer,
William F. Miller III and Director
/S/ ALAN L. BENDES Senior Vice President and February 13, 2001
- ------------------ Chief Financial Officer
Alan L. Bendes
/S/ RANDOLPH G. BROWN Director February 13, 2001
- ---------------------
Randolph G. Brown
/S/ ROBERT V. NAGELHOUT Director, and President of Software February 13, 2001
- ----------------------- Systems and Services Division
Robert V. Nagelhout
/S/ WILLIAM W. NEAL Director February 13, 2001
- -------------------
William W. Neal
/S/ GALEN D. POWERS Director February 13, 2001
- -------------------
Galen D. Powers
/S/ ELLEN A. RUDNICK Director February 13, 2001
- --------------------
Ellen A. Rudnick
/S/ RICHARD H. STOWE Director February 13, 2001
- --------------------
Richard H. Stowe
27
29
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS : NUMBER
- ----------------------------------- ------
Independent Auditors' Report 29
Consolidated Balance Sheets as of October 31, 2000 and 1999 30
Consolidated Statements of Operations for the Years Ended October 31, 2000,
1999, and 1998 31
Consolidated Statements of Comprehensive Income (loss) for the Years Ended
October 31, 2000, 1999, and 1998 32
Consolidated Statements of Shareholders' Equity for the Years Ended October 31,
2000, 1999, and 1998 33
Consolidated Statements of Cash Flows for the Years Ended October 31, 2000,
1999, and 1998 34
Notes to Consolidated Financial Statements 35
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts 51
28
30
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Health Management Systems, Inc.:
We have audited the accompanying consolidated financial statements of
Health Management Systems, Inc. and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial statements,
we also have audited the financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health
Management Systems, Inc. and subsidiaries as of October 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the years in
the three-year period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
January 5, 2001
29
31
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
October 31,
-------------------------
2000 1999
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 10,573 $ 16,310
Short-term investments 6,167 17,507
Accounts receivable, billed, net 24,261 17,001
Accounts receivable, unbilled, net -- 41,661
Income tax receivable 829 588
Prepaid expenses and other current assets 6,921 3,928
--------- ---------
Total current assets 48,751 96,995
Property and equipment, net 7,216 7,766
Capitalized software costs, net 9,922 7,286
Goodwill, net 12,055 12,762
Deferred income taxes, net 6,643 3,797
Notes receivable from officer -- 900
Other assets 746 1,415
--------- ---------
Total assets $ 85,333 $ 130,921
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,502 $ 18,050
Deferred revenue 3,687 4,541
Deferred income taxes, net -- 15,967
--------- ---------
Total current liabilities 18,189 38,558
Other liabilities 1,546 1,131
--------- ---------
Total liabilities 19,735 39,689
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued
and outstanding -- --
Common stock - $.01 par value; 45,000,000 shares authorized;
18,563,922 shares issued and 17,252,256 shares outstanding at October 31, 2000;
18,450,737 shares issued and 17,401,737 shares outstanding at October 31, 1999 186 184
Capital in excess of par value 72,170 71,714
Retained earnings 1,652 27,078
Accumulated other comprehensive income (loss) (110) 6
--------- ---------
73,898 98,982
Less treasury stock, at cost (1,311,666 shares and 1,049,000 shares at
October 31, 2000 and October 31, 1999, respectively) (8,300) (7,750)
--------- ---------
Total shareholders' equity 65,598 91,232
--------- ---------
Total liabilities and shareholders' equity $ 85,333 $ 130,921
========= =========
See accompanying notes to consolidated financial statements.
30
32
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Years ended October 31,
-----------------------------------------
2000 1999 1998
--------- --------- ---------
Revenue: $ 98,087 $ 114,055 $ 105,252
--------- --------- ---------
Cost of services:
Compensation 62,986 64,253 59,288
Data processing 4,488 6,746 8,771
Occupancy 10,788 9,377 9,663
Direct project costs 11,187 11,214 5,068
Other operating costs 11,389 11,328 12,838
Restructuring costs 3,483 -- --
--------- --------- ---------
104,321 102,918 95,628
--------- --------- ---------
Operating margin (loss) before amortization of intangibles (6,234) 11,137 9,624
Amortization of intangibles 948 840 1,964
--------- --------- ---------
Operating income (loss) (7,182) 10,297 7,660
--------- --------- ---------
Other income:
Interest income, net 1,158 1,277 1,700
Other income, net -- -- 597
--------- --------- ---------
1,158 1,277 2,297
--------- --------- ---------
Income (loss) before income taxes and cumulative effect of change in
accounting principle (6,024) 11,574 9,957
Income tax expense (benefit) (2,563) 4,091 3,869
--------- --------- ---------
Income (loss) before cumulative effect of change in accounting principle (3,461) 7,483 6,088
Cumulative effect of change in accounting principle, net of tax benefit
("cumulative effect") 21,965 -- --
--------- --------- ---------
Net income (loss) $ (25,426) $ 7,483 $ 6,088
========= ========= =========
Earnings per share data:
Basic:
Basic earnings (loss) per share before cumulative effect $ (0.20) $ 0.43 $ 0.35
Basic earnings (loss) per share on cumulative effect (1.26) -- --
--------- --------- ---------
Basic earnings (loss) per share after cumulative effect $ (1.46) $ 0.43 $ 0.35
========= ========= =========
Weighted average common shares outstanding 17,467 17,357 17,366
========= ========= =========
Diluted:
Diluted earnings (loss) per share before cumulative effect $ (0.20) $ 0.43 $ 0.34
Diluted earnings (loss) per share on cumulative effect (1.26) -- --
--------- --------- ---------
Diluted earnings (loss) per share after cumulative effect $ (1.46) $ 0.43 $ 0.34
========= ========= =========
Weighted average common shares and common share equivalents 17,467 17,419 17,833
========= ========= =========
Pro forma net income (loss) assuming new accounting
principle is applied retroactively $ (3,461) $ (1,297) $ 476
========= ========= =========
Pro forma basic and diluted earnings (loss) per share assuming new
accounting principle is applied retroactively $ (0.20) $ (0.07) $ 0.03
========= ========= =========
See accompanying notes to consolidated financial statements.
31
33
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
Years ended October 31,
--------------------------------------
2000 1999 1998
-------- -------- --------
Net income (loss) $(25,426) $ 7,483 $ 6,088
Other comprehensive loss, net of tax:
Change in net unrealized depreciation on short-term investments (116) (101) (574)
-------- -------- --------
Comprehensive income (loss) $(25,542) $ 7,382 $ 5,514
======== ======== ========
See accompanying notes to consolidated financial statements.
32
34
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
Common Stock
------------------- Accumulated
Number of Capital In Other Total
Shares Par Excess Of Retained Comprehensive Treasury Shareholders'
Outstanding Value Par Value Earnings Income Stock Equity
----------- ----- --------- -------- ------ ----- ------
Balance at October 31, 1997 17,459,153 $178 $67,304 $ 13,507 $ 681 ($1,863) $ 79,807
Net income -- -- -- 6,088 -- -- 6,088
Stock option activity 440,316 4 2,713 -- -- -- 2,717
Employee stock purchase plan activity 118,398 -- 515 -- -- -- 515
Treasury stock acquisition (734,500) 1 -- -- -- (5,887) (5,886)
Disqualifying dispositions -- -- 602 -- -- -- 602
Change in net unrealized depreciation
on short-term investments -- -- -- -- (574) -- (574)
---------- ---- ------- -------- ----- ------- --------
Balance at October 31, 1998 17,283,367 183 71,134 19,595 107 (7,750) 83,269
Net income -- -- -- 7,483 -- -- 7,483
Stock option activity 41,247 -- 210 -- -- -- 210
Employee stock purchase plan activity 77,123 1 337 -- -- -- 338
Disqualifying dispositions -- -- 33 -- -- -- 33
Change in net unrealized depreciation
on short-term investments -- -- -- -- (101) -- (101)
---------- ---- ------- -------- ----- ------- --------
Balance at October 31, 1999 17,401,737 184 71,714 27,078 6 (7,750) 91,232
Net loss -- -- -- (25,426) -- -- (25,426)
Stock option activity 67,090 1 309 -- -- -- 310
Employee stock purchase plan activity 46,095 1 134 -- -- -- 135
Treasury stock acquisition (262,666) -- -- -- -- (550) (550)
Disqualifying dispositions -- -- 13 -- -- -- 13
Change in net unrealized depreciation
on short-term investments -- -- -- -- (116) -- (116)
---------- ---- ------- -------- ----- ------- --------
Balance at October 31, 2000 17,252,256 $186 $72,170 $ 1,652 ($110) $(8,300) $ 65,598
========== ==== ======= ======== ===== ======= ========
See accompanying notes to consolidated financial statements.
33
35
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
Years ended October 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Operating activities:
Net income (loss) $(25,426) $ 7,483 $ 6,088
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization of capitalized software 5,138 3,755 3,520
Amortization of intangibles 948 840 1,964
Provision for doubtful accounts 397 690 838
Deferred tax expense (benefit) (2,247) 4,166 4,022
Disqualifying dispositions 13 33 602
Cumulative effect of change in accounting principle, net of tax 21,965 -- --
Changes in assets and liabilities:
Increase in accounts receivable (7,657) (2,496) (16,312)
(Increase) decrease in income tax receivable (241) 1,752 (1,830)
(Increase) decrease in prepaid expenses and other current assets (1,893) 133 (1,147)
Increase (decrease) in accounts payable and accrued expenses (1,519) 491 (289)
Increase (decrease) in deferred revenue (854) (401) 754
Increase (decrease) in other assets and liabilities, net 844 (477) (511)
-------- -------- --------
Net cash provided by (used in) operating activities (10,532) 15,969 (2,301)
-------- -------- --------
Investing activities:
Software capitalization (4,672) (4,107) (3,138)
Capital asset expenditures (2,552) (2,720) (1,263)
Net sales (purchases) of short-term investments 11,224 (3,089) 3,295
Acquisition of net assets of Health Receivables Management, LLC, net of cash acquired -- (4,024) --
Net repayment (borrowing) from officer 900 (150) (750)
-------- -------- --------
Net cash provided by (used in) investing activities 4,900 (14,090) (1,856)
-------- -------- --------
Financing activities:
Proceeds from issuance of common stock 135 338 515
Proceeds from exercise of stock options 310 210 2,717
Common stock repurchases (550) -- (5,886)
-------- -------- --------
Net cash provided by (used in) financing activities (105) 548 (2,654)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,737) 2,427 (6,811)
Cash and cash equivalents at beginning of period 16,310 13,883 20,694
-------- -------- --------
Cash and cash equivalents at end of period $ 10,573 $ 16,310 $ 13,883
======== ======== ========
See accompanying notes to consolidated financial statements.
34
36
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Health Management Systems, Inc. (the "Company") furnishes proprietary
information management, data processing, and software (including consulting)
services to healthcare providers and payors, including government health service
agencies. The Company is organized into two divisions: the Revenue Services
Division ("Revenue Services Division") and the Software Systems and Services
Division ("Software Division"). The Revenue Services Division comprises two
business units: the Provider Revenue Services Group and the Payor Revenue
Services Group. The Company's Software Division also comprises two business
units: the Decision Support Group and the Payor Systems Group.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
(including money market instruments of $9,341,000 and $11,461,000 at October 31,
2000 and 1999, respectively) to be cash equivalents.
(c) Short-Term Investments
Short-term investments are recorded at fair value. Included in
short-term investments are investments classified as available for sale and
carried at fair value. Debt securities that the Company does not have the intent
and ability to hold to maturity are classified either as "available for sale" or
as "trading" and are carried at fair value. Unrealized gains and losses on
securities classified as available for sale are carried as a separate component
of shareholders' equity. Unrealized gains and losses on securities classified as
trading are reported in earnings. Management determines the appropriate
classification of its investments in debt and equity securities at the time of
purchase and reevaluates such determination at each balance sheet date.
(d) Depreciation and Amortization of Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of the property and equipment utilizing the
straight-line method. Amortization of leasehold improvements is provided over
the estimated useful lives of the assets or the terms of the leases, whichever
is shorter, utilizing the straight-line method. The estimated useful lives are
as follows:
Equipment 3-5 years
Leasehold improvements 5-10 years
Furniture and fixtures 5-7 years
(e) Intangible Assets
Intangible assets have been recorded primarily as a result of the
recapitalization of the Company in 1989, the acquisition of Quality Medi-Cal
Adjudication, Incorporated ("QMA") in 1990, the acquisition of the remaining
shares of Health Information Systems Corporation ("HISCo") in March 1997, the
acquisition of the assets of Global Health Systems, Inc. and GHS Management
Services, Inc. (collectively "Global") in July 1997, and the acquisition of the
assets of Health Receivables Management, LLC ("Old HRM") in July 1999.
Intangible assets consist primarily of goodwill, which are being amortized on a
straight-line basis between ten and forty years.
(f) Software Development Cost
The Company capitalizes software development costs incurred related to
software developed for resale subsequent to the establishment of technological
feasibility until the product is released for commercial use. Similarly, costs
incurred to develop upgrades are capitalized until the upgrades are commercially
released. Before technological feasibility has been established, the Company
expenses all costs incurred for the product. Any cash received from a
development partner is recorded first as an offset to any previously capitalized
software development costs on the related development project before revenue is
recognized. During fiscal year 2000, the
35
37
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company received approximately $1.7 million from a development partner, which
reduced capitalized software costs. No revenue was recognized related to the
Company's software development partnerships during fiscal year 2000. The Company
also capitalizes certain software development costs related to software
developed for internal use while in the application development stage. All other
costs incurred to develop software for internal use, either in the preliminary
project stage or post implementation stage are expensed as incurred.
Amortization of software development costs is calculated on a straight-line
basis over the expected economic life of the product, generally estimated to be
36-48 months.
(g) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets approximate estimated fair value as of
October 31, 2000 and 1999.
(h) Revenue Recognition
After analyzing the SEC's "Frequently Asked Questions and Answers"
bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"), the Company
elected early adoption in its fourth quarter for its fiscal year ended October
31, 2000, implementing a change in accounting in regard to revenue generated
from clients seeking reimbursement from third-party payors where the Company's
fees are contingent upon the client's collections from third parties. As of
November 1, 1999, the Company recognizes revenue pertaining to such clients once
the third-party payor has remitted payment to its client, thereby eliminating
unbilled receivables and substantially reducing deferred tax liabilities. In
previous years, prior to SAB 101, the Company recognized revenue pertaining to
clients seeking reimbursement from third-party payors when billings were
submitted to clients or their third-party payors or intermediaries as a
consequence of completion and acceptance of services performed by the Company
for a client. Certain of these clients' contracts contain periodic fee
limitations or fixed-fees. The fees allowable under these contracts are
recognized once cash is collected by the client on a straight-line basis over
the fee limitation or fixed-fee period and amounts billed in excess in any one
period are deferred. Transaction-related revenue is recognized based upon the
completion of those transactions or services rendered during a given period.
Revenue from consulting, technical and training services is recognized
as the services are provided. Revenue from software products sold to customers
under license agreements is deferred and recognized as revenue primarily upon
software installation and satisfaction of significant Company obligations, if
any, and when collection of the resulting receivable is reasonably assured.
Revenue from ongoing maintenance agreements is deferred and recognized as
revenue on a straight-line basis over the periods of the respective maintenance
agreements.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that includes the enactment date.
(j) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives will be reported in the statement of operations or as a deferred
item, depending on the use of the derivatives and whether they qualify for hedge
accounting. The key criteria for hedge accounting is that the derivative must be
highly effective in achieving offsetting changes in fair value or cash flows of
the hedged items during the term of the hedge. The
36
38
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effective date of SFAS No. 133 was delayed to the Company's fiscal year
beginning November 1, 2000 by the issuance of SFAS No. 137. The Company has
determined that the effect of adopting this new standard is insignificant to the
consolidated financial statements.
(k) Net Income Per Common Share
Basic earnings per share is based on the net income for the relevant
period divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based on the net income for the
relevant period divided by the weighted average number of common shares and
common stock equivalents outstanding during the period. The Company had weighted
average common shares and common stock equivalents outstanding during fiscal
years 2000, 1999, and 1998 of 17,467,000, 17,357,000, and 17,366,000 and of
10,000, 62,000, and 467,000, respectively. The common stock equivalents for
fiscal year 2000 are excluded from the weighted average shares as it would be
antidilutive to the per share calculation. The Company's common stock
equivalents consist of stock options.
(l) Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reported period. The actual results could differ from those
estimates.
(m) Reclassifications
Certain reclassifications were made to prior year amounts to conform to
the current presentation.
(n) Stock-Based Compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On October 31,
1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro-forma net income and pro-forma
earnings per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value based method defined in SFAS No. 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS No.
123.
(o) Accounting for the Impairment of Long-Lived Assets
The Company reviews its long-lived assets, certain identifiable
intangibles, and goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future discounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair value of the assets.
2. BUSINESS COMBINATIONS
In June 1999, the Company's Quality Standards in Medicine, Inc. ("QSM")
subsidiary acquired substantially all of the assets and assumed specified
liabilities of Old HRM for $4,024,000, net of cash acquired and subject to
certain purchase price adjustments. In connection with the transaction, QSM
changed its name to Health Receivables Management, Inc. ("HRM"). HRM currently
furnishes Medicaid application services, electronic billing, eligibility
verification, accounts receivable management and collection services to
healthcare providers, principally in the State of Illinois.
37
39
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of operations of HRM from the date of
acquisition through October 31, 1999 are included in the accompanying
consolidated financial statements. Its results are included in the Provider
Revenue Services Group. The $1,618,000 excess of the purchase price over the
fair market value of the identifiable assets acquired was recorded as goodwill
and is being amortized over a period not to exceed 15 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and HRM as if the acquisition had
occurred as of the beginning of fiscal years 1999 and 1998, after giving effect
to certain adjustments. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the Company and
HRM constituted a single entity during such periods.
(Unaudited)
Year ended October 31,
1999 1998
-----------------------------------------------------------------------
Revenue $119,209,000 $113,066,000
Net income 7,556,000 5,571,000
Basic earnings per share 0.41 0.32
Diluted earnings per share $ 0.40 $ 0.31
-----------------------------------------------------------------------
3. SHORT-TERM INVESTMENTS
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 historical cost basis, and the fair value
for the Company's investment portfolio as of October 31, 2000 (by year of
maturity) and as of October 31,1999:
Fiscal year Fiscal year Total
October 31, 2000 2001 2002 Historical Cost Fair value
- ------------------------------------------------------------------------------------------------
Fixed Income Governmental Securities $ 5,216,000 $ 1,140,000 $ 6,356,000 $ 6,167,000
- ------------------------------------------------------------------------------------------------
Total
October 31, 1999 Historical Cost Fair value
- --------------------------------------------------------------------------------
Fixed income assets
Governmental Securities $17,276,000 $17,005,000
Corporate debt 500,000 502,000
- --------------------------------------------------------------------------------
$17,776,000 $17,507,000
- --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE
Accounts receivable are reflected net of an allowance for doubtful
accounts of $1,848,000 and $1,823,000 at October 31, 2000 and 1999,
respectively.
5. CHANGE IN ACCOUNTING PRINCIPLE FOR REVENUE RECOGNITION
After analyzing the SEC's "Frequently Asked Questions and Answers"
bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements ("SAB 101"),
38
40
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company elected early adoption in its fourth quarter for its fiscal year
ended October 31, 2000, implementing a change in accounting in regard to revenue
generated from clients seeking reimbursement from third-party payors where the
Company's fees are contingent upon the client's collections from third parties.
As of November, 1999, the Company recognizes revenue pertaining to such clients
once the third-party payor has remitted payment to its client, thereby
eliminating unbilled receivables and substantially reducing deferred tax
liabilities. In previous years, prior to SAB 101, the Company recognized revenue
pertaining to clients seeking reimbursement from third-party payors when
billings were submitted to clients or their third-party payors or intermediaries
as a consequence of completion and acceptance of services performed by the
Company for a client. Accounts receivable, unbilled, net, in the prior year,
represents amounts recognized for services rendered but not yet invoiced and was
based on the Company's estimate of the fees that would have been invoiced upon
receipt of remittance data. Accounts receivable, billed, net, represents amounts
invoiced to clients. As of October 31, 1999, the Company had unbilled accounts
receivable of approximately $41.7 million under its historic accounting policy,
pre-dating the SEC release of SAB 101. Of this amount, $24.6 million completed
its cycle and was included in the Company's revenue and operating results
during fiscal year 2000 in accordance with the Company's early adoption of SAB
101.
The consolidated statement of operations for the year ended October 31,
2000 has been presented in the accompanying financial statements based on this
newly adopted revenue recognition policy. The change reduced revenue by $3.0
million and increased net loss by $503,000 for fiscal year 2000, excluding the
cumulative effect of the change. The cumulative effect pertaining to this change
as of the beginning of the Company's fiscal year 2000 is $22.0 million, net of
tax benefit. The $22.0 million cumulative effect reflects $41.7 million of
unbilled receivables offset by $1.5 million of related direct costs and $18.2
million of income tax benefit. The proforma effects to net income and related
per share amounts for the years ended October 31, 1999 and 1998 are also
presented in the accompanying consolidated statements of operations.
6. PROPERTY AND EQUIPMENT
Property and equipment as of October 31, 2000 and 1999 consisted of the
following:
1999 2000
------------ ------------
Equipment $ 15,516,000 $ 19,022,000
Leasehold improvements 6,190,000 6,161,000
Furniture and fixtures 5,227,000 5,192,000
------------ ------------
26,933,000 30,375,000
Less accumulated depreciation and amortization (19,717,000) (22,609,000)
------------ ------------
Property and equipment, net $ 7,216,000 $ 7,766,000
============ ============
Depreciation and amortization expense related to property and equipment
charged to operations for the years ended October 31, 2000, 1999, and 1998 was
$3,102,000, $2,731,000, and $2,564,000, respectively. Of the $30,375,000 of
property and equipment as of October 31, 1999, $5,994,000 were fully depreciated
and no longer in use as of October 31, 2000 and are excluded from the balances
as of October 31, 2000.
7. CAPITALIZED SOFTWARE COSTS
Capitalized software costs as of October 31, 2000 and 1999 consisted of
the following:
2000 1999
------------ ------------
Capitalized software costs $ 15,672,000 $ 11,000,000
Less accumulated amortization (5,750,000) (3,714,000)
------------ ------------
Capitalized software costs, net $ 9,922,000 $ 7,286,000
============ ============
Amortization expense for the years ended October 31, 2000, 1999, and
1998 was $2,036,000, $1,024,000, and $956,000, respectively.
39
41
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets as of October 31, 2000 and 1999
consisted of the following:
2000 1999
---------- ----------
Goodwill $ 15,811,000 $ 15,916,000
Less accumulated amortization (3,756,000) (3,154,000)
------------ ------------
Goodwill, net 12,055,000 12,762,000
============ ============
Other intangible assets 1,443,000 1,443,000
Less accumulated amortization (1,213,000) (973,000)
------------ ------------
Other intangible assets, net $ 230,000 $ 470,000
============ ============
Amortization expense related to intangible assets charged to operations
for the years ended October 31, 2000, 1999, and 1998, was $948,000, $840,000,
and $1,964,000, respectively. During fiscal year 2000, the Company completed
amortization of the $105,000 of goodwill related to the QMA acquisition in
fiscal year 1990 and is no longer reflected in the balances as of October 31,
2000. During fiscal year 1999, the Company completed the amortization of the
$5,593,000 of excess purchase price allocated to certain revenue contracts
related to the HISCo acquisition in fiscal year 1997 and is no longer reflected
in the balances as of October 31, 2000 and 1999, respectively.
9. INCOME TAXES
Income tax expense (benefit) related to income before income taxes and
cumulative effect of the change in accounting principle for the years ended
October 31, 2000, 1999, and 1998 was comprised of the following (fiscal years
1999 and 1998 reflect the previously noted historical accounting policy related
to revenue recognition, pre-dating the SEC release of SAB 101):
2000 1999 1998
---------- ---------- ----------
Current tax expense (benefit):
Federal $ (608,000) $ (145,000) $ (577,000)
State and local 292,000 70,000 423,000
----------- ----------- -----------
(316,000) (75,000) (154,000)
----------- ----------- -----------
Deferred tax expense (benefit):
Federal (1,424,000) 3,254,000 3,505,000
State and local (823,000) 912,000 518,000
----------- ----------- -----------
(2,247,000) 4,166,000 4,023,000
----------- ----------- -----------
Income tax expense (benefit), net $(2,563,000) $ 4,091,000 $ 3,869,000
============ =========== ===========
40
42
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the income tax expense (benefit) related to income
before income taxes and cumulative effect of the change in accounting principle
to the applicable federal statutory rates follows:
2000 1999 1998
----------------------- ---------------------- -----------------------
Income tax expense (benefit):
Computed at federal statutory rate $(2,049,000) (34.0%) $ 3,951,000 34.1% $ 3,386,000 34.0%
State and local tax expense, net (345,000) (5.7) 647,000 5.6 621,000 6.2
of federal benefit
Amortization of goodwill 56,000 0.9 56,000 0.5 83,000 0.8
Municipal interest (186,000) (3.1) (199,000) (1.7) (181,000) (1.8)
Decrease in valuation allowance (93,000) (1.5) (372,000) (3.2) -- --
Amortization of software -- -- -- -- 104,000 1.0
Tax contingency -- -- -- -- (261,000) (2.6)
Other, net 54,000 0.9 8,000 -- 117,000 1.3
----------- ------ ----------- ------ ----------- ------
Total income tax expense (benefit) $(2,563,000) (42.5)% $ 4,091,000 35.3% $ 3,869,000 38.9%
=========== ====== =========== ====== =========== ======
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement and tax bases of assets
and liabilities. The tax effect of temporary differences that give rise to a
significant portion of the deferred tax assets and deferred tax liabilities at
October 31, 2000 and 1999 were as follows:
2000 1999
------------ ------------
Deferred tax assets:
Accounts receivable/deferred revenue $ 948,000 $ 193,000
Allowance for doubtful accounts 887,000 777,000
Property and equipment 3,739,000 3,732,000
HHL one-time charges 300,000 325,000
Accounts payable and accrued expenses 154,000 203,000
Federal, state and local net operating loss carryforward 10,358,000 7,261,000
Minimum tax credit -- 572,000
Other 1,559,000 684,000
------------ ------------
Total deferred tax assets before valuation
allowance 17,945,000 13,747,000
Less: Valuation allowances (931,000) (1,024,000)
------------ ------------
Total deferred tax assets after valuation allowance 17,014,000 12,723,000
------------ ------------
Deferred tax liabilities:
Accounts receivable/deferred items -- 18,446,000
Capitalized software development cost 4,909,000 3,194,000
Federal impact of state and local net operating losses 1,537,000 1,207,000
Other 2,314,000 2,046,000
------------ ------------
Total deferred tax liabilities 8,760,000 24,893,000
============ ============
Total net deferred tax asset (liabilities) $ 8,254,000 $(12,170,000)
============ ============
Net current deferred tax asset (liabilities) $ 1,611,000 $(15,967,000)
Net non-current deferred tax asset 6,643,000 3,797,000
------------ ------------
Total net deferred tax asset (liabilities) $ 8,254,000 $(12,170,000)
============ ============
The valuation allowances for the fiscal years ended October 31, 2000,
1999, and 1998 were $931,000, $1,024,000 and $1,396,000, respectively. At
October 31, 2000, the Company had a net operating loss carryforward of
$16,000,000 and $20,000,000, which is available to offset future federal and
state/local taxable income, respectively. Of the federal amount, $3,998,000 is
subject to annual limitation of $266,000 under Internal Revenue Code Section
382. The federal and state/local net operating loss carryforwards expire between
fiscal years 2012 through 2020, and fiscal years 2012 through 2015,
respectively. The Company's management believes that the utilization of certain
net operating loss carryforward is not more likely than not to be realized, and
therefore has maintained a valuation allowance of $931,000 at October 31, 2000.
The Company believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize the
deferred tax assets, net of valuation of allowance, specifically based upon: (a)
an existing work-in-progress backlog, (b) cost cutting efforts being
implemented, including the commencement of a restructuring effect as a result of
the completion of its first full scale strategic planning process, and (c)
certain
41
43
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
tax planning strategies which the Company is considering which would result in
accelerated taxable income allowing for further assurance of the realization of
the deferred tax benefit.
Cash payments attributable to income taxes for the years ended October
31, 2000, 1999, and 1998 were $166,000, $522,000, and $2,412,000, respectively.
The Company has had disqualifying disposition transactions during the
three years ended October 31, 2000. The tax benefit derived from disqualifying
dispositions increased shareholders' equity by $13,000, $33,000, and $602,000
during the fiscal years ended October 31, 2000, 1999, and 1998, respectively.
10. NOTES RECEIVABLE FROM OFFICER
During October 1998, the Company's HSA subsidiary, a Delaware
corporation, made two loans to Paul J. Kerz, an officer and director of HSA, who
was also, at the time, the Company's Chairman and Chief Executive Officer. One
loan, in the principal amount of $500,000, was secured by a pledge of 162,666
shares of the Company's common stock owned by Mr. Kerz, while the other loan, in
the principal amount of $250,000, was unsecured. Both loans bore interest at the
rate of 5.3125% per annum, payable semi-annually commencing April 30, 1999, and
were due as to principal and all then accrued but unpaid interest on October 31,
2000. During October 1999, HSA (i) extended the due date of both loans to
December 31, 2001 and (ii) increased the total principal amount of the unsecured
loan to $1,000,000, of which a total of $400,000 was outstanding as of October
31, 1999. During November 1999, Mr. Kerz drew down the remaining $600,000 of the
unsecured loan. In addition, the interest rate on the amended loans was
increased to 5.9686% per annum. The amendments to the loans were unanimously
approved by the Board of Directors of HSA and the Company as the sole
stockholder of HSA, following the recommendation of the Compensation Committee
of the Company's Board of Directors that the amendment to the loans was in the
best interest of HSA and the Company, and the unanimous approval of the
amendment to the loans by the independent members of the Company's Board of
Directors. The loans were repaid in full from a portion of the compensation
received by Mr. Kerz under the terms of a separation agreement as of October 2,
2000. Pursuant to the terms of separation, Mr. Kerz received separation
compensation of $1.5 million and an additional payment of $150,000 in exchange
for his non-compete through April 2006. In addition, the Company purchased
262,666 shares of his common stock at fair market value as reflected in the
treasury stock classification on the balance sheet, will provide full salary
continuation for two years, a consulting arrangement for $50,000 per year
thereafter until April 2006, health insurance coverage for the related periods,
and Mr. Kerz surrendered all of his unexercised stock options. The total charge
of approximately $2.7 million related to this separation was included in
restructuring charges for fiscal year 2000.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of October 31, 2000 and 1999
consisted of the following:
2000 1999
----------- -----------
Accounts payable $ 4,192,000 $ 5,922,000
Accrued compensation 3,694,000 5,113,000
Accrued direct project costs 4,072,000 3,112,000
Accrued restructuring costs 1,165,000 --
Accrued other expenses 1,379,000 3,903,000
----------- -----------
$14,502,000 $18,050,000
=========== ===========
12. RESTRUCTURING
In the fourth quarter of fiscal year 2000, having completed a
full-scale strategic planning process, the Company began implementation of a
restructuring plan and recorded a restructuring charge of $3,483,000. The amount
accrued included the costs associated with changes in corporate and information
systems management and specific reductions in staff (17 employees representing
$3,041,000), including a charge related to a separation arrangement with the
Company's co-founder and former Chief Executive Officer (see Note 10 of Notes to
42
44
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated financial statements, and the planned vacating of portions of
office space in two cities ($442,000). Of the restructuring charges relating to
occupancy costs, all $442,000 remains as a liability at October 31, 2000 and of
the $3,041,000 restructuring charge relating to compensation, $1,329,000 is the
remaining liability at October 31, 2000, of which $606,000 is recorded as a
long-term liability.
13. 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 on February 13, 2001. The interest rate and unused commitment fee on the
revolver were LIBOR plus 87.5 basis points, and 37.5 basis points, respectively
through October 31, 2000 and LIBOR plus 1.125 percent and 0.625 percent,
respectively thereafter. The 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 cash, asset, debt coverage, and
consolidated tangible shareholders' equity, as defined in the agreement. The
Company's financial institution waived the need for compliance with a fiscal
year-end financial ratio after giving effect to the change in accounting
principle and any outstanding amounts would be secured by the Company's
marketable securities. As of October 31, 2000 and 1999, no amounts were
outstanding under this or the predecessor credit facility.
Cash interest payments including bank charges attributable to the
aforementioned credit facility for the years ended October 31, 2000, 1999, and
1998 were $59,000, $105,000, and $102,000, respectively.
14. COMMITMENTS
(a) Lease commitments
The Company leases office space and data processing equipment under
operating leases that expire at various dates through 2013. The lease agreements
provide for rent escalations. Rent expense, net of sublease income, for the
years ended October 31, 2000, 1999, and 1998, including escalations, was
$7,943,000, $6,806,000, and $6,801,000, respectively. Sublease income was
$826,000, $1,401,000 and $751,000 for the years ended October 31, 2000, 1999,
and 1998, respectively.
Minimum annual lease payments to be made and sublease payments to be
received for each of the next five years ending October 31 and thereafter are as
follows:
Year Payments Sublease Payments
---- ----------- -----------------
2001 $ 7,002,000 $1,066,000
2002 6,405,000 1,067,000
2003 5,051,000 1,066,000
2004 4,604,000 1,067,000
2005 3,914,000 1,066,000
'Thereafter 14,626,000 178,000
----------- ----------
Total $41,602,000 $5,510,000
=========== ==========
(b) Retention Compensation
The Company has made commitments to certain key employees to induce
them to stay during the Company's restructuring which may result in a charge in
fiscal year 2001 of up to $2.6 million, depending on the completion of
divestitures.
(c) Employment Commitment
The Company made a commitment, as a condition of employment, to provide
for its new Chief Executive Officer to acquire approximately 7% of the Company's
common shares directly from the Company. In January 2001, the Company's
Accelerated Claims Processing, Inc. subsidiary, a Delaware corporation, provided
the
43
45
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financing for purchase of 550,000 shares of the Company's common stock in
exchange for a full recourse loan for $721,875, bearing interest at the rate of
6.5% per annum, payable annually in two equal installments commencing January 9,
2002 and the Company granted such executive stock options to purchase 750,000
shares at $1.3125 per share under the Company's 1999 Long-Term Incentive Stock
Plan.
15. EQUITY
On May 28, 1997, the Board of Directors authorized the Company to
repurchase such number of shares of its common stock that have an aggregate
purchase price not in excess of $10,000,000. The Company is authorized to
repurchase these shares from time to time on the open market or in negotiated
transactions at prices deemed appropriate by the Company. Repurchased shares are
deposited in the Company's treasury and used for general corporate purposes. In
fiscal year 2000, the Company repurchased a total of 262,666 shares of common
stock for $550,000, or $2.09 per share. Since the inception of the repurchase
program in June 1997, the Company has repurchased 1,311,666 shares of common
stock at an average price of $6.33 per share having an aggregate purchase price
of $8,300,000.
The Company's certificate of incorporation, as amended, authorizes the
issuance of up to 5,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined by the Company's Board
of Directors.
16. PROFIT SHARING AND 401(K) PLAN
Effective October 31, 1997, the Company terminated its profit sharing
plan, including the 401(k) plan. A replacement, but identical, 401(k) plan was
established as of November 1, 1997. Having obtained approval by the Internal
Revenue Service, an initial distribution of the assets of the terminated profit
sharing plan was completed on December 18, 1998; the majority of the individual
accounts were distributed in March 1999.
At its discretion, the Company may make annual contributions to the
401(k) plan for the benefit of participating employees. For the years ended
October 31, 2000, 1999, and 1998, 401(k) plan expense was $1,120,000,
$1,102,000, and $959,000, respectively.
17. STOCK-BASED COMPENSATION PLANS
At October 31, 2000, the Company had three stock-based compensation
plans, which are described below. The Company has adopted the disclosure-only
provisions of SFAS 123 and applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no employee
compensation costs have been recognized for its stock purchase plan and stock
option plans. Had compensation costs for the Company's three stock-based
compensation plans been determined consistent with the fair value method
prescribed by SFAS 123, the Company's net income (loss) and related per share
amounts would have been adjusted to the pro forma amounts indicated below:
(In Thousands, Except Per Common Share Amounts) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Net income (loss) As reported $(25,426) $7,483 $6,088
Pro forma (27,759) 6,325 2,189
Net income (loss) per basic share As reported (1.46) 0.43 0.35
Pro forma (1.59) 0.36 0.13
Net income (loss) per diluted share As reported (1.46) 0.43 0.34
Pro forma $ (1.59) $0.36 $0.12
- ---------------------------------------------------------------------------------------------------
The effect noted above by applying the disclosure-only provisions of
SFAS 123 may not be representative of the pro forma effect in future years.
44
46
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the stock options granted in 2000, 1999, and 1998 is
estimated at the grant date using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 0% (the Company does not pay
dividends); expected volatility of 271.3%, 58.3%, and 48.9%; a risk-free
interest rate of 6.1%, 4.7%, and 5.7%; and expected lives of 3.70, 4.76, and
4.91 years, respectively.
The Company's 1999 Long-Term Incentive Stock Plan (the "Plan"), which
replaced the Health Management Systems, Inc. Stock Option and Restricted Stock
Purchase Plan terminated in May 1999, was approved by its shareholders at the
Annual Meeting of Shareholders held on March 9, 1999. The primary purposes of
the Plan are (i) to promote the interests of the Company and its shareholders by
strengthening the Company's ability to attract and retain highly competent
individuals to serve as Board of Directors, officers and other key employees and
(ii) to provide a means to encourage stock ownership and proprietary interest by
such persons. The Plan provides for the grant of (a) options to purchase shares
of the Company's common stock at an exercise price no less than 100% of the
estimated fair market value of the Company's common stock; (b) stock
appreciation rights ("SAR") representing the right to receive a payment, in
cash, shares of common stock, or a combination thereof, equal to the excess of
the fair market value of a specified number of shares of the Company's common
stock on the date the SAR is exercised over the fair market value of such shares
on the date the SAR was granted; or (c) stock awards made or valued, in whole or
in part, by reference to shares of common stock. Options are granted under the
Plan with various vesting provisions, including time based and/or performance
based vesting periods. Stock options currently outstanding become exercisable
and expire at various dates through October 2010. As of October 31, 2000, no
SAR's or stock purchase awards had been granted. The Plan authorizes the
issuance of up to 4,751,356 shares of common stock. The Plan expires in January
2009.
The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP")
was adopted by the Board of Directors on November 30, 1994, which action was
subsequently approved by shareholders at the Annual Meeting of Shareholders held
on March 7, 1995. Under the NEDP, directors of the Company who are not employees
of the Company or its subsidiaries are granted options to purchase 1,500 shares
of common stock of the Company during the fourth fiscal quarter of each year
commencing with fiscal year 1995. Options for the purchase of up to 112,500
shares of common stock may be granted under the NEDP and the Company will
reserve the same number of shares for issuance. The options available for grant
are automatically increased to the extent any granted options expire or
terminate unexercised.
Presented below is a summary of the stock option plans for the years
ended October 31, 2000, 1999, and 1998:
2000 1999 1998
---------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares Price Shares price
--------- ------- --------- -------- --------- --------
Outstanding at beginning of year 3,335,928 $ 6.85 1,801,098 $ 7.50 1,925,856 $ 7.82
Granted 536,000 4.79 1,965,250 6.16 541,504 6.57
Exercised (67,090) 4.59 (41,247) 5.09 (440,316) 6.17
Cancelled (935,716) 8.22 (389,173) 6.58 (225,946) 10.63
--------- ------ --------- ------ --------- ------
Outstanding at end of year 2,869,122 $ 6.06 3,335,928 $ 6.85 1,801,098 $ 7.50
========= ====== ========= ====== ========= ======
Weighted average
Grant-date fair value of options
Granted (Black-Scholes) $ 4.74 $ 2.30 $ 3.17
====== ====== ======
45
47
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information for stock options
outstanding at October 31, 2000:
Total outstanding options Outstanding exercisable options
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number average average average
Range of outstanding remaining exercise Number exercise
exercise prices as of 10/31/00 contractual life price exercisable price
- -----------------------------------------------------------------------------------------------------------------
$ 1.30 - 4.70 683,542 8.57 $ 4.47 264,642 $ 4.42
4.76 - 6.32 837,986 7.04 5.97 648,975 6.05
6.44 - 6.44 1,195,184 8.04 6.44 216,899 6.44
6.67 - 23.00 152,268 5.47 10.59 116,393 11.01
70.51 - 70.51 142 5.25 70.51 114 70.51
- -----------------------------------------------------------------------------------------------------------------
$1.30 - $70.51 2,869,122 7.73 $ 6.06 1,247,023 $ 6.24
=================================================================================================================
On May 28, 1997, the Board of Directors authorized a stock option
exchange program for employee participants in the Plan. Eligible employees who
held stock options ("Old Options") with exercise prices in excess of $10.00 per
share were able to exchange them for stock options ("New Options") exercisable
for a lesser number of shares with an exercise price of $5.88 per share, the
average price of the Company's common stock on the NASDAQ-Amex National Market
System on June 2, 1997 ("Grant Date"). Approximately 1,600,000 Old Options were
eligible to be exchanged for 900,000 New Options. At the end of the exchange
program, 1,288,000 Old Options were exchanged for 609,000 New Options. The New
Options received in the exchange entailed a new vesting schedule where one
quarter vested immediately on the Grant Date, with an additional quarter vesting
on each of November 1, 1998, 1999, and 2000, respectively. To the extent that
the fair market value of the Company's common stock exceeded $12.50 on each day
for ten consecutive trading days, the vesting of all New Options not otherwise
vested would become accelerated and 100% fully vested. On March 30, 1998, these
New Options became fully vested as a consequence of the fair market value of the
Company's common stock having exceeded $12.50 for the requisite ten consecutive
trading day period.
On May 28, 1993, the Board of Directors adopted the Health Management
Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently
approved by shareholders at the Annual Meeting of Shareholders held on February
28, 1994. The Company has reserved for issuance up to 1,125,000 shares of common
stock pursuant to the ESPP, which is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code of
1986. The ESPP provides that all full-time employees of the Company and its
subsidiaries may elect to participate in the ESPP without regard to length of
service if their customary employment is a minimum of 20 hours per week. For the
years ended October 31, 2000, 1999, and 1998, the Company had sold 46,095,
77,123, and 118,398 shares, respectively, of common stock pursuant to the ESPP
for aggregate consideration of $135,000, $338,000, and $515,000, respectively,
which activity is reflected in the accompanying consolidated financial
statements. The weighted-average fair value of those purchase rights granted in
2000, 1999, and 1998, respectively, based on the Black-Scholes model was $2.83,
$2.35, and $3.52 respectively.
18. SEGMENT AND GEOGRAPHICAL INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of An Enterprise and Related Information." SFAS No. 131 established standards
for reporting information about operating segments in annual financial
statements and in interim financial reports issued to stockholders.
(a) Segment Information
The Company measures the performance of its operating segments through
"Operating Income" as defined in the accompanying consolidated statements of
operations (1999 and 1998 reflect the previously noted historic accounting
policy related to revenue recognition, pre-dating the SEC release of SAB 101).
46
48
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TOTAL Provider Payor
REVENUE Revenue Revenue TOTAL Decision Payor
TOTAL SERVICES Services Services SOFTWARE Support Systems
($ In Thousands) HMS DIVISION Group Group DIVISION Group Group
- ----------------------------------------------------------------------------------------------------------------
2000
Revenue $98,087 $64,849 $44,736 $20,113 $33,238 $21,781 $11,457
Operating income (loss) (7,182) (9,350) (4,203) (5,147) 2,168 2,438 (270)
Total assets 85,333 40,997 26,996 14,001 44,336 24,790 19,546
Depreciation and
Amortization 6,086 2,338 1,852 486 3,748 2,350 1,398
Capital expenditures and
Software capitalization 7,234 4,146 2,508 1,638 3,088 2,005 1,083
- ----------------------------------------------------------------------------------------------------------------
1999
Revenue 114,055 67,950 41,536 26,414 46,105 22,542 23,563
Operating income (loss) 10,297 2,150 (2,988) 5,138 8,147 4,328 3,819
Total assets 130,921 84,948 41,850 43,098 45,973 25,846 20,127
Depreciation and
Amortization 4,595 2,263 1,611 652 2,332 1,408 924
Capital expenditures and
Software capitalization 6,827 2,177 1,562 615 4,650 3,165 1,485
- ----------------------------------------------------------------------------------------------------------------
1998
Revenue 105,252 57,238 34,987 22,251 48,014 25,499 22,515
Operating income (loss) 7,660 1,481 (1,620) 3,101 6,179 4,645 1,534
Total assets 117,802 77,515 40,448 37,067 40,287 22,516 17,771
Depreciation and
Amortization 5,484 2,343 1,559 786 3,141 1,285 1,856
Capital expenditures and
Software capitalization $4,401 $687 $420 $267 $3,714 $2,941 $773
- ----------------------------------------------------------------------------------------------------------------
Corporate assets, including cash, prepaid expenses, property and
equipment and goodwill that are not specifically identified by segment have been
allocated to identified segments based upon actual usage, occupancy, percentage
of each segment's revenue to the consolidated revenue or other correlations with
operating metrics. Fiscal 1999 and 1998 amounts include reclassifications to
conform to the Company's refined current methodology.
(b) Geographic Information
The Company operates within the continental United States. The Company
also has a limited number of overseas clients. Substantially all identifiable
assets of the Company are located and safeguarded throughout the continental
United States.
(c) Major Customers
No single client of the Company accounted for 10% or more of the
Company's total revenue in fiscal year 2000. The Company's largest client is
HCA-The Healthcare Company ("HCA"), a customer of the Decision Support Group.
This client accounted for 7%, 9%, and 10% of the Company's total revenue in
fiscal years 2000, 1999, and 1998, respectively. The Company provides its
services to HCA primarily pursuant to annual work order agreements. There is no
assurance that any of these agreements will be renewed.
(d) Concentration of Revenue
The clients constituting the Company's ten largest clients change
periodically. The concentration of revenue in such accounts has decreased;
accounting for approximately 45%, 48%, and 50% of the Company's
47
49
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
revenue in fiscal years 2000, 1999, and 1998, respectively. In many instances,
including governmental clients, the Company provides its services pursuant to
agreements subject to competitive re-procurement. All of these agreements
periodically expire between fiscal year 2001 and 2004. There is no assurance
that any of these agreements will be renewed and, if renewed, that the fee rates
will be equal to those currently in effect.
19. LEGAL
The settlement of the following litigation became final in August 2000.
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 the settlement understanding,
without admitting any wrongdoing, certain of the defendants agreed to pay, in
complete settlement of this lawsuit, the sum of $4,500,000, not less than 75
percent of which was to be paid by the Company's insurance carriers. For the
fiscal year ended October 31, 1999, the Company has recorded a charge of
$845,000 related to this settlement. As noted, on August 14, 2000, the Court
signed an Order and Final Judgment approving the 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 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.
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
48
50
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
note. In July 2000, the Court granted the Company judgment in that amount
(together with interest and attorneys' fees assessed at an inquest in January
2001 in the amount of $27,000), 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 alleged 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 sought an aggregate of $9,100,000 in
compensatory damages, and punitive damages in an unspecified amount. The action
came on for trial in January, 2001, at which time the Court directed entry for
judgement, dismissing the case, and awarding the Company damages on its
counterclaims in an amount to be assessed at an inquest.
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, intends to contest them
vigorously and has moved for summary judgment dismissing the case. 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 liquidity.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the Company's unaudited quarterly operating
results for its last two fiscal years. Fiscal year 1999 reflects the previously
noted historical accounting policy related to revenue recognition, pre-dating
the SEC release of SAB 101, as reported in the Company's Quarterly Reports on
Form 10-Q and Annual Report on Form 10-K relating to fiscal year 1999. Fiscal
year 2000 reflects the restated first three quarters in accordance with the
early adoption of SAB 101 implemented in the Company's fourth quarter, as
described in Note 5 of consolidated financial statements.
First Second Third Fourth
($ In Thousands, Except Per Common Share Amounts) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
2000:
Revenue $ 24,523 $ 24,314 $ 21,858 $27,392
Operating loss (1,335) (2,552) (1,477) (1,818)(a)
Net loss (22,556) (1,335) (675) (860)(a)
Basic and diluted loss per share $ (1.29) $ (0.08) $ (0.04) $ (0.05)(a)
- ----------------------------------------------------------------------------------------------------------------
1999:
Revenue $ 27,369 $ 8,857 $ 27,655 $ 30,174
Operating income 2,415 2,831 2,844 2,207
Net income 1,606 1,803 2,068 2,006
Basic and diluted earnings per share $ 0.09 $ 0.10 $ 0.12 $ 0.12
- ----------------------------------------------------------------------------------------------------------------
(a) Includes restructuring costs of $3,483,000 as described in Note 12 to the
consolidated financial statements
49
51
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below reflects the effect of the change in accounting
principle on each of the previous unaudited Quarterly Reports of Form 10-Q.
First Second Third Fourth
($ In Thousands, Except Per Common Share Amounts) Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) under historical accounting principle $299 $709 $497 ($4,463)(a)
Effect of change in accounting principle (890) (2,044) (1,172) 3,603
Cumulative effect of change in accounting principle, net of tax (21,965) -- -- --
--------------------------------------------
Net loss after effect of change in accounting principle ($22,556) ($1,335) ($675) ($860)(a)
- -----------------------------------------------------------------------------------------------------------------
Basic and Diluted Earnings Per Share:
Earnings (loss) per share, under historical accounting principle $0.02 $0.04 $0.03 ($0.26)(a)
Effect of change in accounting principle (0.05) (0.12) (0.07) 0.21
Cumulative effect of change in accounting principle, net of tax (1.26) -- -- --
-----------------------------------------------
Loss per share after effect of change in accounting principle ($1.29) ($0.08) ($0.04) ($0.05)(a)
- -----------------------------------------------------------------------------------------------------------------
(a) Including restructuring costs of $3,483,000 as described in Note 12 to the
consolidated financial statements
21. SUBSEQUENT EVENT
Effective January 1, 2001, the Company sold its EDI business,
consisting of substantially all of the assets of the Company's QMA subsidiary
and certain of the assets of its HRM subsidiary, to Medi, Inc. ("Medi"), a
privately held entity. The purchase price of $2.8 million was comprised of a
cash down payment of $450,000, a one-year secured promissory note in the
principal amount of $275,000 and $2.1 million of service credits, which the
Company will offset against subcontracted services to be rendered to it by Medi.
The Company's EDI business generated a net loss of approximately $200,000 on
$4.0 million in revenue for fiscal year 2000 and total assets at October 31,
2000 were approximately $2.5 million.
50
52
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts:
Balance, October 31, 1997 $ 1,428,000
Provision 838,000
Recoveries --
Charge-offs (413,000)
-------------
Balance, October 31, 1998 1,853,000
Provision 690,000
Recoveries --
Charge-offs (720,000)
-------------
Balance, October 31, 1999 1,823,000
Provision 397,000
Recoveries --
Charge-offs (372,000)
-------------
Balance, October 31, 2000 $ 1,848,000
-------------
51
53
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
2.1 Agreement and Plan of Merger dated as of January 18, 1995
among Health Management Systems, Inc., HCm Acquisition Corp.,
and all the shareholders of Health Care microsystems, Inc., as
amended (Incorporated by reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K for the year ended
October 31, 1994 and to Exhibit 10.2 to the Company's
Registration Statement on Form S-3, file no. 33-91518)
2.2 Agreement and Plan of Merger, dated as of April 29, 1996 among
Health Management Systems, Inc., CDR Acquisition Corp., CDR
Associates, Inc., and all the shareholders of CDR Associates,
Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated April 29, 1996)
2.2(i) First Amendment to Agreement and Plan of Merger, dated as of
April 29, 1996, among Health Management Systems, Inc., CDR
Acquisition Corp., CDR Associates, Inc., and all the
shareholders of CDR Associates, Inc. (Incorporated by
reference to Exhibit 2.2(i) to the Company's Annual Report on
Form 10-K for the year ended October 31, 1996 (the "1996 Form
10-K"))
2.3 Agreement and Plan of Merger, dated as of September 3, 1996,
by and among Health Management Systems, Inc., QSM Acquisition
Corporation and Quality Standards in Medicine, Inc.
(Incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-4, File No. 333-13513 (the
"S-4"))
2.3(i) Amendment to Agreement and Plan of Merger, dated as of
November 20, 1996, by and among Health Management Systems,
Inc., QSM Acquisition Corporation, and Quality Standards in
Medicine, Inc. (Incorporated by reference to Exhibit 10.1 to
Post-Effective Amendment No. 1 to the S-4)
2.4 Agreement and Plan of Merger, dated as of March 18, 1997, by
and among Health Management Systems, Inc., HISCo Acquisition
Corp., Health Information Systems Corporation and HSA Managed
Care Systems, Inc. (Incorporated by reference to Exhibit 2.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended April 30, 1997 (the "April 1997 Form 10-Q"))
2.5 Asset Purchase Agreement, dated as of March 10, 1997, by and
among GHS, Inc., Global Health Systems, Inc. GHS Management
Services, Inc., Health Management Systems, Inc. and Global
Health Acquisition Inc. (Incorporated by reference to Exhibit
2.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended July 31, 1997 (the "July 1997 Form 10-Q"))
2.5(i) Assignment and Assumption Agreement, dated as of July 15,
1997, between Global Health Acquisition Corp. and HSA Managed
Care Systems, Inc. (Incorporated by reference to Exhibit 2.2
to the July 1997 Form 10-Q)
2.6 Asset Purchase Agreement, dated as of June 30, 1999, by and
among ARC Ventures, LLC, and Health Receivables Management,
LLC and Health Management Systems, Inc., and Quality Standards
In Medicine, Inc. (Incorporated by reference to Exhibit 2 to
the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1999 (the "July 1999 Form 10-Q"))
*2.7 Asset Purchase Agreement, dated as of January 1, 2001, by and
among Medi, Inc. and Health Management Systems, Inc., Quality
Medi-Cal Adjudication Incorporated and Health Receivables
Management, Inc.
52
54
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1 Amended and Restated Certificate of Incorporation of Health
Management Systems, Inc. (Incorporated by reference to Exhibit
3.1 to Amendment No. 1 (Amendment No. 1) to the Company's
Registration Statement on Form S-1, File No. 33-4644 (the
Registration Statement) and Exhibit 3(i) to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1996 (the "January 1996 Form 10-Q"))
3.2 By-Laws of Health Management Systems, Inc. (Incorporated by
reference to Exhibit 3.2 to Amendment No. 1)
10.1 Amendment, dated as of September 1, 1995, to Master Software
License, dated June 29, 1992, by and between Health Care
microsystems, Inc. and Columbia/HCA. (Incorporated by
reference to Exhibit 10.2(ii) to the Company's Annual Report
on Form 10-K for the year ended October 31, 1997 (the "1997
Form 10-K"))
10.2(i) Health Management Systems, Inc. Stock Option and Restricted
Stock Purchase Plan, as amended (Incorporated by reference to
Exhibit 10.3 to the Registration Statement, to Exhibit 10.3 to
Amendment No. 2 (Amendment No. 2) to the Registration
Statement, Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended January 31, 1994 (the "January
1994 Form 10-Q") and Exhibit 10 to the January 1996 Form 10-Q)
10.2(ii) Amendment No. 6, dated as of December 2, 1997, to the Health
Management Systems, Inc., Stock Option and Restricted Stock
Purchase Plan. (Incorporated by reference to Exhibit 10.3(iii)
to the 1997 Form 10-K)
10.2(iii) Health Management Systems, Inc. Employee Stock Purchase Plan,
as amended (Incorporated by reference to Exhibit 10.2 to the
January 1994 Form 10-Q and to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1995 (the "January 1995 Form 10-Q"))
10.2(iv) Health Management Systems, Inc. 1995 Non-Employee Director
Stock Option Plan (Incorporated by reference to Exhibit 10.2
to the January 1995 Form 10-Q)
10.2(v) Health Management Systems, Inc. Profit Sharing Plan
(Incorporated by reference to Exhibit 10.3(iv) to the
Company's Annual Report on Form 10-K for the year ended
October 31, 1995 (the "1995 Form 10-K"))
10.2(vi) Health Management Systems, Inc. Profit Sharing Plan, as
amended (Incorporated by reference to Exhibit 10.3(vi) to the
1995 Form 10-K)
10.2(vii) Health Management Systems, Inc. 1999 Long-Term Incentive Stock
Plan (Incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-8, File No. 333-77121)
10.3(i) Credit Agreement and Guaranty Among Health Management Systems,
Inc., as Borrower, Accelerated Claims Processing, Inc.,
Quality Medi-Cal Adjudication, Incorporated, Health Care
microsystems, Inc., and CDR Associates, Inc., as Guarantors,
and The Chase Manhattan Bank, as Bank (Incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended July 31, 1996 (the "July 1996
Form 10-Q"))
10.3(ii) First Amendment to Credit Agreement and Waiver (Incorporated
by reference to Exhibit 10.1(i) to the July 1996 Form 10-Q)
53
55
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
10.3(iii) Guaranty Agreement, dated as of April 16, 1997, between Health
Management Systems, Inc. and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10.1 to the April 1997
Form 10-Q)
10.3(iv) Second Amendment to Credit Agreement and Guaranty, dated as of
April 16, 1997, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medical
Adjudication, Incorporated, Health Care microsystems, Inc.,
CDR Associates, Inc., and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10.1 to the July 1997
Form 10-Q)
10.3(v) Third Amendment to Credit Agreement and Guaranty, dated as of
June 30, 1997, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medical
Adjudication, Incorporated, Health Care Microsystems, Inc.,
CDR Associate, Inc., HSA Managed Care Systems, Inc., Quality
Standards in Medicine, Inc. and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10.1 to the July 1997
Form 10-Q)
10.3(vi) Fourth Amendment To Credit Agreement And Guaranty, dated as of
July 15, 1999 among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc.,
CDR Associates Inc., HSA Managed Care Systems, Inc., Quality
Standards In Medicine, Inc. and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 2 to the July 1999 Form
10-Q)
10.3(vii) Fifth Amendment To Credit Agreement And Guaranty, dated as of
September 30, 1999, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc.,
CDR Associates Inc., HSA Managed Care Systems, Inc., Health
Receivables Management, Inc. and The Chase Manhattan Bank
(Incorporated by reference to Exhibit 10.4(vii) to the
Company's Annual Report on Form 10-K for the year ended
October 31, 1999)
10.3(viii) Sixth Amendment to Credit Agreement and Guaranty, dated as of
December 30, 1999, among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc.,
CDR Associates Inc., HSA Managed Care Systems, Inc., Health
Receivables Management, Inc. and The Chase Manhattan Bank )
Incorporated by reference to Exhibit 10.4(viii) to the 1999
Form 10-K)
10.4 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 (Incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 2000 (the "January 2000 Form 10-Q"))
10.4(i) Advised line of credit (Incorporated by reference to Exhibit
10.2 to the January 2000 Form 10-Q)
10.4(ii) 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 (Incorporated by reference to
Exhibit 10.3 to Company's Quarterly Report on Form 10-Q for
the quarter ended April 30, 2000)
54
56
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
*10.4(iii) Amendment No. 2 to the Credit Agreement and Guaranty, dated as
of January 12, 2001, 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
10.5(i) Leases, dated February 1, 1980, September 24, 1981, September
24, 1982, and January 6, 1986, as amended, between 401 Park
Avenue South Associates and Health Management Systems, Inc.
(Incorporated by reference to Exhibit 10.13 to the
Registration Statement and to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January
31, 1994)
10.5(ii) Lease, dated as of March 15, 1996, by and between 387 PAS
Enterprises, as Landlord, and Health Management Systems, Inc.,
as Tenant (Incorporated by reference to Exhibit 10.2 to the
July 1996 Form 10-Q)
10.5(iii) 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.
(Incorporated by reference to Exhibit 10.1 to Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
2000 (the July 2000 Form 10-Q"))
10.5(iv) 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. Tenant (Incorporated by
reference to Exhibit 10.2 to the July 2000 Form 10-Q)
10.5(v) 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.
(Incorporated by reference to Exhibit 10.3 to the July 2000
Form 10-Q)
10.5(vi) 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.
(Incorporated by reference to Exhibit 10.4 to the July 2000
Form 10-Q)
10.5(vii) 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. (Incorporated by
reference to Exhibit 10.5 to the July 2000 Form 10-Q)
10.5(viii) 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.
(Incorporated by reference to Exhibit 10.6 to the July 2000
Form 10-Q)
10.5(ix) 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.
(Incorporated by reference to Exhibit 10.7 to the July 2000
Form 10-Q)
10.5(x) 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.
(Incorporated by reference to Exhibit 10.8 to the July 2000
Form 10-Q)
55
57
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
10.6 Lease, dated September 1996, by and between Pacific Corporate
Towers LLC, Health Management Systems, Inc., and Health Care
microsystems, Inc. (Incorporated by reference to Exhibit 10.13
to the 1996 Form 10-K)
10.7 Agreement and Release of Claims dated as of October 29, 1996,
by and among HHL Financial Services, Inc., Health Management
Systems, Inc., and the First National Bank of Chicago
(Incorporated by reference to Exhibit 10.12 to the 1996 Form
10-K)
10.8 Sublease Agreement, dated December 23, 1997, between Health
Management Systems, Inc. and Shandwick USA, Inc. (Incorporated
by reference to Exhibit 10.1 to the company's Quarterly Report
on Form 10-Q for the quarter ended January 31, 1998 (the
"January 1998 Form 10-Q"))
10.9 Consent to Sublease, dated December 23, 1997, by 387 P.A.S.
Enterprises to the subletting by Health Management Systems,
Inc. to Shandwick USA, Inc. (Incorporated by reference to
Exhibit 10.2 to the January 1998 Form 10-Q)
10.10 Promissory note, dated as of October 15, 1998, in the
principal amount of $500,000 between Paul J. Kerz and HSA
Managed Care Systems, Inc. (Incorporated by reference to
Exhibit 10.16 to the Company's Annual Report on Form 10-K for
the year ended October 31, 1998 (the "1998 Form 10-K")
10.11 Promissory note, dated as of October 15, 1998, in the
principal amount of $250,000 between Paul J. Kerz and HSA
Managed Care Systems, Inc. (Incorporated by reference to
Exhibit 10.17 to the 1998 Form 10-K)
10.12 Security Agreement, dated as of October 15, 1998, between Paul
J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by
reference to Exhibit 10.18 to the 1998 Form 10-K)
10.13 Amended and restated promissory note, dated as of October
1999, in the principal amount of $500,000 between Paul J. Kerz
and HSA Managed Care Systems, Inc. (Incorporated by reference
to Exhibit 10.16 to the 1999 Form 10-K)
10.14 Amended and restated promissory note, dated as of October
1999, in the principal amount of $1,000,000 between Paul J.
Kerz and HSA Managed Care Systems, Inc. (Incorporated by
reference to Exhibit 10.17 to the 1999 Form 10-K)
*10.15 Separation Agreement and Release, dated as of October 2, 2000,
between Health Management Systems, Inc. and Paul J. Kerz
*10.16 Employment Letter, dated January 29,1999, between Health
Management Systems, Inc. and Alan Bendes
*10.17(i) Employment Agreement, dated as of October 2, 2000, between
Health Management Systems, Inc. and William F. Miller III
*10.17(ii) Restricted Stock Purchase Agreement for 550,000 Common Shares
dated January 10, 2001, between Health Management Systems,
Inc. and William F. Miller III
*10.17(iii) Pledge Agreement, dated January 10, 2001, between Accelerated
Claims Processing, Inc. and William F. Miller III
56
58
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT
NUMBER
*10.17(iv) Promissory note, dated January 10, 2001, in the principal
amount of $721,875 between William F. Miller III and
Accelerated Claims Processing, Inc.
*11 Computation of Earnings per Share
*21 List of subsidiaries of Health Management Systems, Inc.
*23 Consent of KPMG LLP, independent certified public accountants
* Filed herewith
57