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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________________
Commission File Number 0-20946
Health Management Systems, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2770433
State of Incorporation (I.R.S. Employer Identification Number)
401 Park Avenue South, New York, New York 10016
(Address of principal executive offices, zip code)
(212) 685-4545
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes _____ No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 1, 2001
Common Stock, $.01 Par Value 17,855,339 Shares
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HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED APRIL 30, 2001
PART I FINANCIAL INFORMATION Page No.
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2001 (unaudited) 1
and October 31, 2000
Condensed Consolidated Statements of Operations (unaudited) for the 2
three month and six month periods ended April 30, 2001 and April 30,
2000
Consolidated Statements of Comprehensive Income (Loss) (unaudited) for 3
the three month and six month periods ended April 30, 2001 and April
30, 2000
Consolidated Statement of Shareholders' Equity (unaudited) for the six 4
month period ended April 30, 2001
Condensed Consolidated Statements of Cash Flows 5
(unaudited) for the six 5 month periods ended April
30, 2001 and April 30, 2000
Notes to Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 11
Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risks 16
PART II OTHER INFORMATION 16
SIGNATURES 18
EXHIBIT INDEX 19
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
April 30, October 31,
2001 2000
-------- --------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 13,762 $ 10,573
Short-term investments 4,669 6,167
Accounts receivable, net 21,743 24,261
Income tax receivable -- 829
Prepaid expenses and other current assets 7,052 6,921
-------- --------
Total current assets 47,226 48,751
Property and equipment, net 5,346 7,216
Capitalized software costs, net 7,357 9,922
Goodwill, net 7,248 12,055
Deferred income taxes, net 10,347 6,643
Other assets 2,162 746
-------- --------
Total assets $ 79,686 $ 85,333
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,250 $ 14,502
Deferred revenue 3,551 3,687
-------- --------
Total current liabilities 18,801 18,189
Other liabilities 1,180 1,546
-------- --------
Total liabilities 19,981 19,735
-------- --------
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;
19,167,005 shares issued and 17,855,339 shares outstanding at April 30, 2001;
18,563,922 shares issued and 17,252,256 shares outstanding at October 31, 2000 192 186
Capital in excess of par value 72,934 72,170
Retained earnings (accumulated deficit) (4,356) 1,652
Accumulated other comprehensive income (loss) (43) (110)
-------- --------
68,727 73,898
Less: Treasury stock, at cost (1,311,666 shares at April 30, 2001 and October 31, 2000 (8,300) (8,300)
Note receivable from shareholder (722) --
-------- --------
Total shareholders' equity 59,705 65,598
-------- --------
Total liabilities and shareholders' equity $ 79,686 $ 85,333
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three months ended April 30, Six months ended April 30,
---------------------------- --------------------------
2001 2000* 2001 2000*
-------- -------- -------- --------
Revenue $ 23,746 $ 24,314 $ 46,625 $ 48,837
-------- -------- -------- --------
Cost of services:
Compensation 12,984 14,695 26,255 29,447
Data processing 2,738 2,765 5,518 5,659
Occupancy 2,225 2,447 4,789 5,048
Direct project costs 2,648 3,603 4,624 6,454
Other operating costs 2,346 3,129 4,354 5,662
Restructuring costs 5,870 -- 5,870 --
Impairment of assets 4,586 -- 4,586 --
-------- -------- -------- --------
33,397 26,639 55,996 52,270
-------- -------- -------- --------
Operating income (loss) before amortization of intangibles (9,651) (2,325) (9,371) (3,433)
Amortization of intangibles 225 227 450 454
-------- -------- -------- --------
Operating income (loss) (9,876) (2,552) (9,821) (3,887)
Net interest and net other income 190 289 389 614
-------- -------- -------- --------
Income (loss) before income taxes and cumulative effect of
change in accounting principle (9,686) (2,263) (9,432) (3,273)
Income tax expense (benefit) (3,528) (928) (3,424) (1,347)
-------- -------- -------- --------
Income (loss) before cumulative effect of change in accounting
principle (6,158) (1,335) (6,008) (1,926)
Cumulative effect of change in accounting principle, net of tax benefit
("cumulative effect") -- -- -- 21,965
-------- -------- -------- --------
Net income (loss) $ (6,158) $ (1,335) $ (6,008) $(23,891)
======== ======== ======== ========
Basic and diluted earnings per share data:
Earnings (loss) per share before cumulative effect $ (0.35) $ (0.08) $ (0.34) $ (0.11)
Earnings (loss) per share on cumulative effect -- -- -- (1.26)
-------- -------- -------- --------
Earnings (loss) per share after cumulative effect $ (0.35) $ (0.08) $ (0.34) $ (1.37)
======== ======== ======== ========
Weighted average common shares outstanding 17,840 17,480 17,611 17,451
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
* restated for 2000, see note 4.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ IN THOUSANDS)
(UNAUDITED)
Three months ended Six months ended
April 30, April 30,
------------------------ ------------------------
2001 2000* 2001 2000*
-------- -------- -------- --------
Net income (loss) $ (6,158) $ (1,335) $ (6,008) $(23,891)
Other comprehensive income, net of tax:
Change in net unrealized appreciation on short-term investments 5 44 67 51
-------- -------- -------- --------
Comprehensive income (loss) $ (6,153) $ (1,291) $ (5,941) $(23,840)
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
*restated for 2000, see note 4.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
(UNAUDITED)
Common Stock Retained Accumulated Note
------------------ Capital In Earnings Other Receivable Total
# of Shares Par Excess Of (Accumulated Comprehensive Treasury From Shareholders'
Outstanding Value Par Value Deficit) Income (loss) Stock Shareholders Equity
----------- ----- ---------- -------- ------------- ----- ------------ ------
Balance at October 31, 2000 17,252,256 $ 186 $ 72,170 $ 1,652 ($ 110) ($ 8,300) $ -- $ 65,598
Net income (loss) -- -- -- (6,008) -- -- -- (6,008)
Common stock issued 550,000 5 717 -- -- -- -- 722
Note receivable -
shareholder -- -- -- -- -- -- (722) (722)
Employee stock purchase
plan activity 53,083 1 47 -- -- -- -- 48
Change in net unrealized
appreciation on
short-term investments -- -- -- -- 67 -- -- 67
---------- ----- -------- --------- ------ -------- ------- --------
Balance at April 30, 2001 17,855,339 $ 192 $ 72,934 ($ 4,356) ($ 43) ($ 8,300) ($ 722) $ 59,705
========== ===== ======== ========= ====== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
Six months ended April 30,
--------------------------
2001 2000*
-------- --------
Net cash provided by (used in) operating activities $ 4,832 $ (7,541)
-------- --------
Investing activities:
Capital asset expenditures (914) (1,364)
Software capitalization, net of cash received (2,792) (2,564)
Proceeds from sale of EDI operations' assets 450 --
Increase in note receivable from officer -- (600)
Net proceeds from sales of short-term investments 1,565 3,799
-------- --------
Net cash used in investing activities (1,691) (729)
-------- --------
Financing activities:
Proceeds from issuance of common stock 48 52
Proceeds from exercise of stock options -- 309
-------- --------
Net cash provided by financing activities 48 361
-------- --------
Net increase (decrease) in cash and cash equivalents 3,189 (7,909)
Cash and cash equivalents at beginning of period 10,573 16,310
-------- --------
Cash and cash equivalents at end of period $ 13,762 $ 8,401
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
* restated for 2000, see note 4.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of Health Management Systems, Inc. ("HMSY" or the "Company")
is responsible for the accompanying unaudited interim consolidated
financial statements and the related information included in these notes to
the unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements reflect
all adjustments, including normal recurring adjustments necessary for the
fair presentation of the Company's financial position and results of
operations and cash flows for the periods presented. Results of operations
for interim periods are not necessarily indicative of the results to be
expected for the entire year.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of and for the fiscal year ended October 31, 2000 included in
the Company's Annual Report on Form 10-K for such year, and the unaudited
interim consolidated financial statements as of and for the quarterly
period ended January 31, 2001 included in the Company's Quarterly Report on
Form 10-Q, both as filed with the Securities and Exchange Commission (the
"SEC").
2. Reclassifications
Certain reclassifications were made to prior amounts to conform to the
current presentation.
3. Divestiture
Effective January 1, 2001, the Company sold its electronic transaction
processing ("EDI") business, consisting of substantially all of the assets
of the Company's Quality Medi-Cal Adjudication, Incorporated ("QMA")
subsidiary and certain of the assets of its Health Receivables Management,
Inc. ("HRM") subsidiary, to Medi, Inc. ("Medi"), a privately held entity.
Pursuant to the post closing adjustment provisions of the agreement, the
service credit portion of the sales price to be received by the Company was
adjusted from $2.1 million to $2.3 million. The total price of $3.0 million
was comprised of a cash payment of $450,000, a one-year secured promissory
note in the principal amount of $275,000 and $2.3 million of service
credits, which the Company will continue to offset against subcontracted
services to be rendered by Medi to the Company pursuant to a service
agreement entered into between Medi and the Company at the closing of the
sale. Through April 30, 2001, the Company has utilized $230,000 in service
credits. The Company's EDI business generated a net loss of approximately
$200,000 on $4.0 million in revenue for fiscal year 2000. Total assets sold
and related transaction costs as of January 1, 2001 were approximately $3.0
million. Accordingly, no gain or loss was recognized as a result of this
transaction.
4. 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"), the Company
elected early adoption in the fourth quarter of 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. 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. As a result of this change in accounting principle, the prior
year first and second quarters ended January 31, 2000 and April 30, 2000,
respectively, have been restated to reflect the newly adopted policy. The
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cumulative effect of this change in accounting principle as of the
beginning of the Company's fiscal year 2000 was $22.0 million, net of tax
benefit.
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, a total of $33.3
million has subsequently completed its cycle and was included in the
Company's revenue and operating results through April 30, 2001 in
accordance with the Company's early adoption of SAB 101, of which $3.8 and
$8.7 million related to the three months and six months ended April 30,
2001, respectively.
5. Restructuring and Impairment of Assets
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.
In the second quarter of fiscal year 2001, the Company's Payor Systems
Group discontinued development of its managed care system offering after
considering alternatives to its development partner's notification that it
neither wished to purchase this group nor continue to participate in the
development of this system. As a result, the Company recorded a
restructuring charge of $5,080,000. The charges include the write-off of
capitalized software and equipment, net of payments from the development
partner ($3,464,000), costs associated with specific reductions of
approximately 60 staff and consulting positions ($810,000), related prepaid
expenses and other related miscellaneous costs ($128,000), and the planned
vacating of related office space, including the unamortized balance of
specific leasehold improvements ($678,000). The Company also recorded a
restructuring charge of $790,000 associated with specific reductions of all
but 1 individual in its Washington, D.C. office ($508,000), the planned
vacating of related office space not currently under sublet ($32,000), and
the initial fee paid for a third party liability recovery system which will
not be utilized by the Company in the future. ($250,000). In addition, as a
result of the triggering event noted above, the Company recorded asset
impairments of $4,586,000 relating to the unamortized balance of goodwill
and other intangible assets associated with the Company's prior acquisition
of the Payor Systems Group.
Of the total restructuring charges, $910,000 relating to occupancy costs
and $1,401,000 relating to compensation remain as liabilities at April 30,
2001, of which $414,000 is a long-term liability.
6. Equity Transaction
In March 2001, as a condition of the employment of Robert M. Holster as
President and Chief Operating Officer of the Company, Mr. Holster was
granted options to purchase 700,000 shares of the Company's common stock,
exercisable at $1.19 per share, which price was equal to the fair market
value, which was the closing price of such shares on March 30, 2001, Mr.
Holster's date of employment. The options vest as to 100,000 shares on
March 30, 2002 and as to the remaining 600,000 shares in eight equal
quarterly installments, commencing June 30, 2002. The grant of options to
Mr. Holster was exempt from the registration provisions of the Securities
Act of 1933, as amended, pursuant to Section 4(2) of that Act relating to
transactions not involving a public offering.
In January 2001, as a condition of the employment of William F. Miller III
as Chairman and Chief Executive Officer of the Company, the Company's
Accelerated Claims Processing, Inc. subsidiary, a Delaware corporation,
provided the financing for Mr. Miller to purchase directly from the Company
550,000 shares of the Company's common stock in exchange for a full
recourse loan for $721,875, bearing interest at the rate of 6.5% per annum,
with the principal and interest payable annually in two equal installments
commencing January 9, 2002. The sale of common stock to Mr. Miller was
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exempt from the registration provisions of the Securities Act of 1933
pursuant to Section 4(2) of that Act relating to transactions not involving
a public offering.
7. Credit Facility
The Company's credit facility with a major N.Y. money center institution
expired on February 13, 2001. Since the Company had not drawn and did not
intend to draw on this facility, the Company did not renew the facility.
8. Segment Information
The Company measures the performance of its operating segments utilizing
operating income (loss), excluding restructuring and asset impairment
charges as reflected in the accompanying condensed consolidated statements
of operations. Certain reclassifications were made to prior year amounts to
conform to the current presentation.
Total Provider Payor
Revenue Revenue Revenue Total Decision Payor
Total Services Services Services Software Support Systems
($ in Thousands) HMS Division Group Group Division Group Group
- ---------------------------------------------------------------------------------------------------------------------
Three months ended April 30, 2001
Revenue $23,746 $15,277 $8,289 $6,988 $8,469 $5,778 $2,691
Operating income (loss), excluding
restructuring and impairments 580 (474) (708) 234 1,054 900 154
- ---------------------------------------------------------------------------------------------------------------------
Three months ended April 30, 2000
Revenue 24,314 15,962 11,301 4,661 8,352 5,247 3,105
Operating income (loss), excluding
restructuring and impairments (2,552) (2,957) (1,773) (1,184) 405 473 (68)
- ---------------------------------------------------------------------------------------------------------------------
Six months ended April 30, 2001
Revenue 46,625 29,971 17,272 12,699 16,654 11,552 5,102
Operating income (loss), excluding
restructuring and impairments 635 (1,195) (1,491) 296 1,830 1,634 196
- ---------------------------------------------------------------------------------------------------------------------
Six months ended April 30, 2000
Revenue 48,837 31,488 23,667 7,821 17,349 10,492 6,857
Operating income (loss), excluding
restructuring and impairments (3,887) (5,603) (2,356) (3,247) 1,716 1,527 189
- ---------------------------------------------------------------------------------------------------------------------
The difference between "Operating income (loss), excluding restructuring
and impairment charges" and "Income (loss) before income taxes" is
"Restructuring costs", "Impairment of assets" and "Net interest and net
other income," which totaled $10,266,000 and $289,000 for the three months
ended April 30, 2001 and 2000, respectively, and $10,067,000 and $614,000
for the six months ended April 30, 2001 and 2000, respectively.
9. Legal Proceedings
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 first cause of action) and that defendants intentionally
caused HHL's default under the Notes (the second cause of action). The
complaint alleges that, as a result of the alleged breaches of fiduciary
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 moved in the Bankruptcy Court to have the Court
abstain from hearing the Adversary Proceeding in deference to the New York
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State Court action. The Company 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 decided by the Court on June 5,
2001. At that time, the Court dismissed the first cause of action and ruled
that it would abstain on dismissal of the second cause of action. The
Company intends to continue its vigorous defense of the remaining second
cause of action in the lawsuit in the New York State Court. 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 July 2000, the Supreme Court of the State of New York, County of New
York ("New York Supreme Court"), granted the Company's motion for summary
judgment against The Institutes for Health & Human Services, Inc. ("IHHS")
in the amount of $270,000 on an unpaid promissory note (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 2000, 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. IHHS has filed a notice of appeal of the Court's
decision, although it has not moved for a stay of the decision pending
appeal. Therefore, the Company will continue in its enforcement efforts
against IHHS. The Company's position is that it will prevail on the merits
on any appeal of this matter. Although the ultimate outcome of this matter
cannot be predicted with certainty, the Company believes that any liability
that may result will not, in the aggregate, have a material adverse effect
on the Company's financial position or cash flows, although it could be
material to the Company's operating results in any one accounting period.
On May 1, 2001, the United States District Court for the Southern District
of New York issued an Opinion and Order granting the Company's motion for
summary judgement and dismissing the complaint alleged in a lawsuit
commenced by Davis & Associates, Inc. ("D&A"). The complaint alleged, 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 sought
compensatory and punitive damages in unspecified amounts and injunctive and
other equitable relief. D&A filed a Notice of Appeal on June 4, 2001. The
Company intends to continue its vigorous defense of the lawsuit, 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 March, 2001, the Company commenced a lawsuit in the Superior Court of
the District of Columbia, Civil Division, against the District of Columbia
("D.C." or the "District"), Carolyn N. Graham, in her official capacity as
Interim Director of the District of Columbia Department of Human Services
(the "DHS"), and Ivan C. A. Walks, M.D., in his official capacity as
Director of the District of Columbia Department of Health, seeking to
recover amounts owed to the Company by the District for services rendered
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in conducting a retroactive Disproportionate Share Hospital ("DSH") revenue
recovery project for the D.C. Medicaid program. The attorney handling this
matter for the District and the two individual defendants advised the
Company's counsel that his clients intended to make a motion to dismiss the
Company's complaint on the grounds that the Court lacks jurisdiction and
that any legal proceedings related to the Company's claims are to be
brought before the D.C. Board of Contract Appeals. The defendants' answer
or motion to dismiss the Company's complaint is due on or before June 18,
2001. In the interim, the Chief Contracting Officer of the Department of
Health has taken the position that the Company has no claim, issuing his
decision dated May 23, 2001, that the contract pursuant to which the
Company rendered services in connection with the DSH revenue recovery
project, including eight amendments to that contract, had been signed by a
Contracting Officer of the DHS without the requisite contracting authority
and therefore the contract was determined by the Chief Contracting Officer
to be void ab initio, noting that the Company may submit a request for
compensation of its actual costs allocable to the work performed under the
contract. A decision of a Contracting Officer is subject to appeal
to the District Board of Contract Appeals. The Company believes that the
decision of the Chief Contracting Officer was erroneous and an attempt on
the part of the District to avoid paying fees properly owing for revenues
recovered by the District as a result of services rendered by the Company.
The Company intends to continue to pursue its claims through all
appropriate means and believes that it will ultimately prevail. However,
there can be no assurance as to the ultimate outcome of this matter.
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.
10. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share is
calculated as net income divided by the weighted average common shares
outstanding including the dilutive effects of potential common shares,
which include the Company's stock options. The common stock equivalents are
excluded from the weighted average shares as it would be antidilutive to
the per share calculation.
11. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the six months ended April 30, 2001 and
2000 was $92,000 and $86,000, respectively. Cash paid for interest during
the six months ended April 30, 2001 and 2000 was $30,000 and $49,000,
respectively.
The Company recorded $0 and $36,000 for the six months ended April 30, 2001
and 2000, respectively, as disqualified dispositions related to the sale of
stock acquired through the exercise of certain compensatory stock options,
thereby reducing the Company's tax liability and increasing shareholders'
equity in like amounts.
Non-cash financing and investing activities in relation to the sale of the
EDI business is comprised of a note receivable for $275,000 and service
credits for $2.3 million. Non-cash financing and investing activities also
includes the sale of 550,000 shares of the Company's common stock to its
Chief Executive Officer in return for a note receivable for $721,875.
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Certain statements in this press release constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of HMSY, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMSY to reduce costs in view of its revised revenue outlook, to
grow internally or by acquisition, to integrate acquired businesses into the
HMSY group of companies, and to divest non-strategic assets; (iii) the
uncertainties of litigation; (iv) HMSY's dependence on significant customers;
(v) changing conditions in the healthcare industry which could simplify the
reimbursement process and adversely affect HMSY's business; (vi) government
regulatory and political pressures which could reduce the rate of growth of
healthcare expenditures and/or discourage the assertion of claims for
reimbursement against and delay the ultimate receipt of payment from third party
payors; (vii) competitive actions by other companies, including the development
by competitors of new or superior services or products or the entry into the
market of new competitors; (viii) all the risks inherent in the development,
introduction, and implementation of new products and services; and other factors
both referenced and not referenced in this document. When used in this document,
the words "estimate," "project," "anticipate," "expect," "intend," "believe,"
and similar expressions are intended to identify forward-looking statements, and
the above described risks inherent therein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended April 30, 2001 Compared to Three Months Ended April 30, 2000
Excluding the non-recurring restructuring and impairment charges, the Company
generated net income and operating income on revenue of $23.7 million in the
second quarter ended April 30, 2001 as compared to a net loss and operating loss
on $24.3 million of revenue in the second quarter of the prior fiscal year 2000.
The decrease in revenue from the comparable prior year second quarter, reflects
increases in revenue in two of the Company's four operating groups offset by
decreases in revenue in the other two groups, including the effect of the
previously reported sale of the Company's EDI business. See Note 3 of Notes to
Interim Consolidated Financial Statements.
The Revenue Services Division, comprised of the Provider Revenue Services Group
and the Payor Revenue Services Group, generated revenue of $15.3 million for the
second quarter of fiscal year 2001, a decrease of $700,000 from the comparable
prior year second quarter. Of these amounts, the Provider Revenue Services
Group, the largest segment of the Company, which includes the Company's claims
reprocessing, revenue recovery and outsourcing offerings for providers of
healthcare reported revenue of $8.3 million. The decrease of $3.0 million from
the second quarter of last fiscal year is principally attributable to the sale
of the Company's EDI business in the first quarter of this fiscal year and the
significant revenue recorded in the prior fiscal year pertaining to a revenue
maximization engagement for the District of Columbia (see Note 9 of Notes to
Interim Consolidated Financial Statements), partially offset by multiple new
accounts sold and revenue recovery projects commenced in the second quarter of
the current fiscal year. The Payor Revenue Services Group, which includes the
Company's claims reprocessing and recovery activities for third-party payors of
healthcare, produced revenue of $7.0 million, an increase of $2.3 million over
the comparable prior year period, as the Group realized revenue from specific,
expanded-scope projects in one state and from projects in two other states that
did not yet produce significant revenue in the prior year's comparable quarter,
as this Group gains momentum.
Revenue from the Software Division, comprised of the Decision Support Group and
the Payor Systems Group, was $8.5 million for the second quarter of fiscal year
2001, an increase of $100,000 from the comparable prior year period, as the
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decrease in revenue in the Payor Systems Group was more than offset by the
increase in revenue in the Decision Support Group. The Payor Systems Group,
which provides large-scale claims transaction processing systems and services to
commercial insurance and managed care payor organizations, generated revenue of
$2.7 million, a decline in revenue of $400,000 from the second quarter of last
fiscal year. The decline from the prior year second quarter was due principally
to the previously reported wind-down of a multi-year project with a single
customer, partially offset by a new software license sale of this Group's
ProAlliance offering. While increasing sequentially over the first quarter as to
revenue, this Group continues to be severely affected by the perceived
industry-wide softness in new sales of existing, payor, claims-processing
software, systems, and consulting services. The Decision Support Group, which
provides the Company's suite of decision support software and related consulting
services to providers of healthcare, generated revenue of $5.8 million,
increasing over the comparable prior year period by $500,000 driven by multiple
add-on sales, conversions of existing clients to the Group's latest offerings,
and sales to customers outside of the Group's existing client base. The increase
in such sales for this Group in the second quarter of fiscal year 2001 over the
second quarter of the prior fiscal year combined with its demonstrated ability
to install new sales rapidly, allowed it to continue to reduce the concentration
of revenue in its largest account.
Cost of services for the second quarter of fiscal year 2001 was $33.4 million,
including non-recurring restructuring charges and asset impairment charges of
$5.9 million and $4.6 million, respectively. See Note 5 of Notes to Interim
Consolidated Financial Statements. Excluding these non-recurring costs, cost of
services was $22.9 million as compared to $26.6 million for the comparable prior
year period, reflecting the favorable impact from the sale of the Company's EDI
business completed in the first quarter of fiscal year 2001 (see Note 3 of Notes
to Interim Consolidated Financial Statements), savings generated from the
restructuring reported in the last quarter of fiscal year 2000 (see Note 5 of
Notes to Interim Consolidated Financial Statements) and the implementation of
other process improvements and operating efficiencies. Compensation, the
Company's largest cost element, comprising over half of these operating costs,
totaled $13.0 million, a decrease of approximately $1.7 million from the second
quarter of the prior fiscal year reflecting reduced staffing levels required to
support the revenue base and the previously noted sale of the Company's EDI
business, partially offset by costs incurred for commitments to certain key
employees to induce them to stay during the Company's strategic refocusing. See
"Liquidity and Capital Resources," below. Occupancy costs for the second quarter
decreased from the comparable prior year period by approximately $200,000,
principally attributable to a combination of the previously noted sale of the
Company's EDI business, reduced telephone costs on decreased staffing levels,
and the concluding of a successful arrangement with the landlord for the
Company's N.Y.C. headquarters, in which the Company provided a substitute tenant
for one of the floors for seven of the remaining twelve years, guaranteed by the
Company and for which the Company shares in the incremental rent received.
Direct project costs for the second quarter decreased by approximately $1.0
million from the comparable prior year period, principally attributable to the
discontinued subcontractor relationship pertaining to the previously reported
District of Columbia revenue maximization projects, partially offset by
increases in other project marketing partner costs. Other indirect operating
costs for the second quarter decreased by approximately $800,000 from the
comparable prior year period due principally to a combination of (1) reduced
staff-related costs, such as recruiting fees and travel expenses, (2) lower
advertising and marketing costs, and (3) the inclusion of charges for the
Company's formal strategic planning process in the prior year period, partially
offset by the current period increase in professional fees relating to specific
potential divestitures.
As compared to the second quarter of the prior fiscal year which produced an
operating loss of $2.6 million and a net loss of $1.3 million or $.08 per share,
the Company, for the current year's second quarter, as a result of the above
factors, generated operating income of approximately $600,000 and net income of
approximately $400,000 or $.02 per share, excluding non-recurring restructuring
and impairment charges, and an operating loss of $9.9 million and a net loss of
12
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$6.2 million or $.35 per share including restructuring and impairment charges.
The Company's effective tax rate was approximately 36% and 41% for the second
quarter of fiscal years 2001 and 2000, respectively, with the change in
effective rate attributable to the tax effect of the deductible portion of
impairment charges recorded in the current year second quarter. Management
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 allowance. In addition, the net deferred income tax asset may be
offset in part by future taxable gains from divestitures, although there can be
no assurances that such divestitures will be concluded or produce taxable gains.
Six Months Ended April 30, 2001 Compared to Six Months Ended April 30, 2000
Excluding the non-recurring restructuring and impairment charges, the Company
generated net income and operating income on revenue of $46.6 million for the
six months ended April 30, 2001 as compared to a net loss and operating loss on
$48.8 million of revenue for the first six months of the prior fiscal year 2000.
The decrease in revenue from the comparable prior year six month period,
reflects increases in revenue in two of the Company's four operating groups
offset by decreases in revenue in the other two groups, including the effect of
the previously reported sale of the Company's EDI business. See Note 3 of Notes
to Interim Consolidated Financial Statements.
The Revenue Services Division generated revenue of $30.0 million for the six
months ended April 30, 2001, a decrease of $1.5 million from the comparable
prior year period. Of these amounts, the Provider Revenue Services Group
generated revenue of $17.3 million, a decrease of $6.4 million from the
comparable prior year period, reflecting (1) the sale of the Company's EDI
business in January 2001, (2) the change in billing protocol for a single
client, (3) the previously reported revenue recorded in the prior fiscal year
pertaining to an existing revenue maximization engagement for the District of
Columbia, and (4) lower than expected sales of additional services. The Payor
Revenue Services Group produced revenue of $12.7 million, an increase of $4.9
million over the comparable prior year period, as the Group realized revenue
from specific, expanded-scope projects in one state, more favorable yields in a
second state, and realization of revenue from projects in two other states that
did not yet produce significant revenue in the prior year's comparable period,
as this Group gains momentum.
Revenue from the Software Division, comprised of the Decision Support Group and
the Payor Systems Group, was $16.7 million for the six months ended April 30,
2001, a decrease of $700,000 from the comparable prior year period, attributable
entirely to the Payor Systems Group, as the Decision Support Group's revenue
increased approximately 10% over the comparable prior year period. The Payor
Systems Group generated revenue of $5.1 million, a decline in revenue of $1.8
million from the comparable prior year period, due principally to a combination
of the wind-down of a multi-year project with a single customer, the completion
of the initial implementation for a single customer during last fiscal year, and
the slow rate of new sales closed in the current fiscal year. This Group
continues to be severely affected by the perceived industry-wide softness in new
sales of existing, payor, claims-processing software, systems, and consulting
services. The Decision Support Group generated revenue of $11.6 million,
increasing over the comparable prior year period by $1.1 million, driven by
multiple add-on sales, conversions of existing clients to the Group's latest
offerings, and sales to customers outside of the Group's existing client base,
more than offsetting the decrease in revenue realized from this Group's largest
client.
Cost of services for the six months ended April 30, 2001 was $56.0 million,
including non-recurring restructuring charges and asset impairment charges of
$5.9 million and $4.6 million, respectively. See Note 5 of Notes to Interim
Consolidated Financial Statements. Excluding these non-recurring costs, cost of
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services was $45.5 million as compared to $52.3 million for the comparable prior
year period, reflecting the favorable impact from the sale of the Company's EDI
business completed in the first quarter of fiscal year 2001 (see Note 3 of Notes
to Interim Consolidated Financial Statements), savings generated from the
restructuring reported in the last quarter of fiscal year 2000 (see Note 5 of
Notes to Interim Consolidated Financial Statements) and the implementation of
other process improvements and operating efficiencies. Compensation, the
Company's largest cost element, totaled $26.3 million, a decrease of
approximately $3.2 million from the comparable prior year period, reflecting
reduced staffing levels required to support the revenue base and the previously
noted sale of the Company's EDI business, partially offset by costs incurred for
commitments to certain key employees to induce them to stay during the Company's
strategic refocusing. See "Liquidity and Capital Resources," below. Occupancy
costs decreased from the comparable prior year period by approximately $300,000,
principally attributable to a combination of the previously noted sale of the
Company's EDI business, reduced telephone costs on decreased staffing levels,
and the concluding of a successful arrangement with the landlord for the
Company's N.Y.C. headquarters, in which the Company provided a substitute tenant
for one of the floors for seven of the remaining twelve years, guaranteed by the
Company and for which the Company shares in the incremental rent received.
Direct project costs decreased by approximately $1.8 million from the comparable
prior year period, principally attributable to the discontinued subcontractor
relationship pertaining to the previously reported District of Columbia revenue
maximization projects, partially offset by increases in other project marketing
partner costs. Other indirect operating costs decreased by approximately $1.3
million from the comparable prior year period due principally to a combination
of (1) reduced staff-related costs, such as recruiting fees and travel expenses,
(2) lower advertising and marketing costs, and (3) the inclusion of charges for
the Company's formal strategic planning process in the prior year period,
partially offset by the current period increase in professional fees relating to
specific potential divestitures.
As a result of the above factors, excluding the non-recurring charges in both
years, the Company generated operating income of $600,000 and net income of
$600,000 or $.03 per share on $46.6 million in revenue for the current
year-to-date period as compared to an operating loss and net loss on $48.8
million of revenue for the comparable prior year period. The Company generated a
net loss of $6.0 million, or $.34 per share including the restructuring and
impairment charges as compared to a net loss of $23.9 million or $1.37 per share
including the cumulative effect of the change in accounting principle for the
Company's early adoption of SAB 101 in the comparable prior year period. The
Company's effective tax rate was approximately 36% and 41% for the six months of
fiscal years 2001 and 2000, respectively, with the change in effective rate
attributable to the tax effect of the deductible portion of impairment charges
recorded in the current year second quarter. Management 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 allowance.
In addition, the net deferred income tax asset may be offset in part or in full
by future taxable gains from divestitures, although there can be no assurances
that such divestitures will be concluded or produce taxable gains.
Liquidity and Capital Resources
At April 30, 2001, the Company's cash and net working capital were approximately
$18.4 million and $28.4 million, respectively, as compared to $16.7 million and
$30.6 million, respectively at October 31, 2000. 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. In the first six months of fiscal years 2001 and 2000, the Company
invested $3.7 million and $3.9 million, respectively, for capitalized software
development and fixed asset purchases. Each of these amounts is net of cash
received from a development partner pertaining to the Payor System Group's
development of its new managed care offering (a new payor claims adjudication
system), which was terminated during the Company's second fiscal quarter ended
April 30, 2001. See Note 5 of Notes to Interim Consolidated Financial
Statements. The Company is assessing alternatives for operating the balance of
this group's business, as the Company is currently committed to servicing its
clients where generating profitable results.
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The Company's principal sources of liquidity at April 30, 2001 consisted of
cash, cash equivalents, and short-term investments aggregating $18.4 million and
net accounts receivable of $21.7 million. While the Company is still pursuing
multiple options to collect in excess of $2.7 million in payments from the
District of Columbia and from which the Company expects to retire various
subcontractor advances made during the year, the Company continued to be
successful in the collection of accounts receivable. Further, as reported in the
first quarter, the Company received the $250,000 balance of insurance
reimbursement pertaining to a previously settled long outstanding litigation,
$900,000 from an income tax refund, and the $450,000 initial cash payment
pertaining to the sale of its EDI business, all while continuing to invest in
major product and system development and enhancements. Accounts receivable at
April 30, 2001 reflected a decrease of $2.5 million from the accounts receivable
at the end of fiscal year 2000, principally attributable to both the sale of the
Company's EDI business as well as the increased collections achieved during the
period, as the Company collected more receivables during the second quarter than
during any quarter since the fourth quarter of fiscal year 1999.
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 HRM subsidiary. The Company also
hired Cain Brothers and Company to assist in other potential divestitures. As
previously reported, the Company has made commitments to certain key employees
to induce them to stay during the Company's restructuring which it currently
estimates may result in a charge in fiscal year 2001 of up to $2.4 million
depending on the completion of divestitures, and of which approximately $100,000
and $500,000 was charged to compensation expense during the first and second
quarters of fiscal year 2001, respectively. Further, as previously reported, the
Company is also in the midst of developing additional restructuring plans
focused on reducing and re-engineering information systems and administrative
infrastructures which may result in additional operating and restructuring
charges, although currently no additional restructuring charges are expected for
the balance of fiscal year 2001.
The Company's credit facility with a major N.Y. money center institution expired
on February 13, 2001. Since the Company has not drawn and did not intend to draw
on this facility, the Company did not pursue a renewal of the facility while it
is in the process of refocusing its business. As the Company divests
non-strategic assets and adds on new service 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. There can be no assurances that the Company will have or be able to
obtain the necessary resources to acquire subsequently identified candidates.
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 may be 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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's holdings of financial instruments are comprised of federal, state
and local government debt. All such instruments are classified as securities
available for sale. The Company does not invest in portfolio equity securities
or commodities or use financial derivatives for trading purposes. The Company's
debt security portfolio represents funds held temporarily, pending use in the
Company's business and operations. The Company manages these funds accordingly.
The Company seeks reasonable assuredness of the safety of principal and market
liquidity by investing in rated fixed income securities while, at the same time,
seeking to achieve a favorable rate of return. The Company's market risk
exposure consists principally of exposure to changes in interest rates. The
Company's holdings are also exposed to the risks of changes in the credit
quality of issuers. The Company typically invests in the shorter-end of the
maturity spectrum or highly liquid investments.
The table below presents the historic cost basis and fair value for the
Company's investment portfolio as of April 30, 2001, and the related weighted
average interest rates by year of maturity:
Fiscal year Fiscal year Fiscal year Total Total
2001 2002 2003 Historical Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------
Fixed income assets:
Governmental Securities $1,017,000 $2,647,000 $1,000,000 $4,664,000 $4,669,000
Average interest rate 5.00% 5.78% 4.15% 5.72%
- ------------------------------------------------------------------------------------------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- See Note 9 of Notes to Interim Consolidated
Financial Statements for discussion of certain pending legal
proceedings.
Item 2. Changes in Securities -- See Note 6 of Notes to Interim
Consolidated Financial Statements for information regarding the
issuance of non-registered stock options to the Company's Chief
Operating Officer.
Item 3. Defaults Upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- The
Annual Meeting ("Meeting") of Shareholders of the Company was held
on March 29, 2001. The 15,724,365 shares of common stock ("Common
Stock") present at the Meeting out of a then total of 17,832,431
shares outstanding and entitled to vote, acted as follows with
respect to the following proposals:
Approved, by a vote of: 15,367,608 shares of Common Stock for
and 356,757 shares against the election of William F. Miller
III as a director of the Company; 15,365,110 shares of Common
Stock for and 359,255 shares against the election of William W.
Neal as a director of the Company; 15,366,933 shares of Common
Stock for and 357,432 shares against the election of Ellen A.
Rudnick as a director of the Company; 15,368,316 shares of
Common Stock for and 356,049 shares against the election of
Richard H. Stowe as a director of the Company. In addition,
350,629 shares of Common Stock were voted against the election
of all of the nominees.
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Ratified, by a vote of 15,406,698 shares of Common Stock for
and 264,111 shares against the selection of KPMG LLP as the
Company's independent certified public accountants for the
fiscal year ending October 31, 2001.
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K
Exhibits - See exhibit index
Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 13, 2001 HEALTH MANAGEMENT SYSTEMS, INC.
--------------------------------
(Registrant)
By: /s/ William F. Miller III
-------------------------------------
William F. Miller III
Chairman and Chief Executive Officer
By: /s/ Alan L. Bendes
-------------------------------------
Alan L. Bendes
Senior Vice President and
Chief Financial Officer
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description of Exhibits
10.1(i) Surrender Agreement dated as of March 23, 2001 for
the twelfth floor to the lease by and between 401
Park Avenue South Associates LLC and Health
Management Systems, Inc.
10.1(ii) Guaranty and Compensation Agreement dated as of
March 23, 2001 for the twelfth floor to the lease
by and between Health Management Systems, Inc. and
401 Park Avenue South Associates LLC
10.1(iii) Agreement of Lease dated as of March 23, 2001 for
the twelfth floor by and between 401 Park Avenue
South Associates LLC and Health Management
Systems, Inc.
10.1(iv) Seventh Amendment of Lease dated as of March 1,
2001 to the lease of the fourth floor and
penthouse by and between 401 Park Avenue South
Associates LLC and Health Management Systems, Inc.
10.1(v) Seventh Amendment of Lease dated as of April 1,
2001 to the lease for the eighth, ninth, tenth, a
portion of the eleventh and a portion of the
twelfth floors by and between 401 Park Avenue
South Associates LLC and Health Management
Systems, Inc.
10.1(vi) Fifth Amendment of Lease dated as of May 1, 2003
to the lease for a portion of the eleventh floor
by and between 401 Park Avenue South Associates
LLC and Health Management Systems, Inc.
10.2(i) Employment Agreement dated as of March 30, 2001 by
and between Health Management Systems, Inc. and
Robert M. Holster
10.2(ii) Stock Option Agreement dated as of March 30, 2001
by and between Health Management Systems, Inc. and
Robert M. Holster
10.3 Employment Agreement dated as of March 1, 2001, by
and between Health Management Systems, Inc. and
Alan Hayes
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