1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 29, 1996
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016
212-685-4545
Incorporated under the laws of Commission File Number I.R.S. Employer Identification Number
State of New York 0-20946 13-2770433
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective as of April 29, 1996 (the "CDR Effective Time"), Health
Management Systems, Inc. (the "Company") consummated a merger with CDR
Associates, Inc. ("CDR"), in accordance with an Agreement and Plan of Merger,
(the "CDR Merger Agreement") among the Company, CDR Acquisition Corp. ("CDR
Sub"), a wholly-owned subsidiary of the Company, CDR, and all Shareholders of
CDR (the "CDR Principals"). CDR is a supplier of third-party liability recovery
services to the health care industry.
Pursuant to the CDR Merger Agreement, CDR merged (the "CDR Merger") with
CDR Sub, with the result that CDR became a wholly-owned subsidiary of the
Company. Each share of CDR capital stock issued and outstanding immediately
prior to the CDR Effective Time of the CDR Merger was converted into 460 shares
of common stock, $.01 par value per share (the "CDR Merger Shares"), of the
Company, or an aggregate of 460,000 CDR Merger Shares. The CDR Merger Shares
were issued to the CDR Principals as follows:
Name of Principal Number of Merger Shares
- - ----------------- -----------------------
Joseph H. Czajkowski 230,000
Jeffrey R. Donnelley 230,000
The CDR Merger Agreement provides that the Company will undertake to
register the CDR Merger Shares with the Securities and Exchange Commission for
resale under the Securities Act of 1933, as amended.
The CDR Merger Agreement contains not-to-compete provisions which prohibit
the CDR Principals from competing with the businesses of CDR and the Company
during the period of their employment and for a period of three years
thereafter.
The CDR Merger will be treated as a tax free reorganization for federal
income tax purposes, and is being accounted for using the pooling of interests
method of accounting.
The foregoing description of the CDR Merger Agreement is qualified in its
entirety by reference to the full text of the CDR Merger Agreement, a copy of
which is included as Exhibit 10.1 to this Current Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Financial Statements of CDR Associates, Inc. for the year ended
October 31, 1995.
(B) PRO FORMA FINANCIAL INFORMATION.
Supplemental consolidated financial statements of Health Management
Systems, Inc. and CDR Associates, Inc.
1
3
(C) EXHIBITS.
10.1 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.
23.1 Consents of KPMG Peat Marwick LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand LLP, Independent Accountants
23.3 Report of Independent Accountants on the financial statements
of Health Care microsystems, Inc. as of December 31, 1994 and
1993 and for the years then ended
23.4 Consent of Ernst & Young LLP, Independent Auditors
23.5 Report of Independent Auditors on the financial statements of
Health Information Systems Corporation as of and for the period
ended October 31, 1995
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for informational
purposes only and not filed
99 Press Release of Health Management Systems, Inc. relating to the
consummation of the merger with CDR Associates, Inc.
2
4
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.
HEALTH MANAGEMENT SYSTEMS, INC.
By: /s/ Gregory K. Schraer
----------------------------------------
Gregory K. Schraer
Controller and Principal Accounting Officer
Date: May 13, 1996
3
5
CDR ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Contents Number
- - -------- ------
Report of Independent Auditors............................................................................. F-1
Balance Sheet at October 31,1995........................................................................... F-2
Statement of Operations and Accumulated Deficit for the Year Ended October 31, 1995....................... F-3
Statement of Cash Flows for the Year Ended October 31, 1995................................................ F-4
Notes to Financial Statements.............................................................................. F-5
F
6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CDR Associates, Inc.:
We have audited the accompanying balance sheet of CDR Associates, Inc. as of
October 31, 1995, and the related statements of operations and accumulated
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CDR Associates, Inc. as of
October 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
---------------------
March 29, 1996
F-1
7
CDR ASSOCIATES, INC.
Balance Sheet
October 31, 1995
ASSETS
Current assets:
Cash and cash equivalents $ 898,770
Accounts receivable, net of allowance for doubtful
accounts of $58,690 940,465
Other current assets 49,374
-----------
$ 1,888,609
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses 1,452,959
Due to insurance companies 621,092
-----------
Total current liabilities 2,074,051
Stockholders' deficit:
Common stock, $1.00 par value. Authorized 5,000 shares;
issued and outstanding 1,000 shares 1,000
Accumulated deficit (186,442)
-----------
Total stockholders' deficit (185,442)
-----------
$ 1,888,609
===========
See accompanying notes to financial statements.
F-2
8
CDR ASSOCIATES, INC.
Statement of Operations and Accumulated Deficit
Year ended October 31, 1995
Revenue:
Contract fees $ 3,045,904
-----------
Cost of services:
Compensation:
Officers 2,454,306
Office salaries 326,498
Occupancy 12,144
Other (includes provision for doubtful accounts
of $58,690) 395,556
-----------
3,188,504
-----------
Operating loss (142,600)
Interest income 27,485
-----------
Net loss (115,115)
Accumulated deficit at beginning of year (71,327)
-----------
Accumulated deficit at end of year $ (186,442)
===========
See accompanying notes to financial statements.
F-3
9
CDR ASSOCIATES, INC.
Statement of Cash Flows
Year ended October 31, 1995
Cash flows from operating activities:
Net loss $ (115,115)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Changes in assets and liabilities:
Increase in accounts receivable (905,262)
Increase in other current assets (27,000)
Increase in accounts payable and accrued expenses 1,110,490
Decrease in due to insurance companies (44,697)
-----------
Net cash provided by operating activities 18,416
Cash and cash equivalents at beginning of year 880,354
-----------
Cash and cash equivalents at end of year $ 898,770
===========
See accompanying notes to financial statements.
F-4
10
CDR ASSOCIATES, INC.
Notes to Financial Statements
October 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Founded in 1991, CDR Associates, Inc. (CDR or the Company) provides
consulting services to the insurance industry in the area of claim
payment recoveries. The Company's clients consist primarily of commercial
insurance companies with a significant concentration of their business
with various Blue Cross entities around the United States. The Company is
an S corporation.
(a) CASH AND CASH EQUIVALENTS
For the purpose 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
$77,750 at October 31, 1995) to be cash equivalents.
(b) REVENUE RECOGNITION
The Company generally recognizes revenue for financial reporting
purposes when billings are submitted to the insurance company as a
consequence of services performed for that particular insurance
company. The Company earns revenue for all contracts on a full
contingency basis, usually a negotiated percentage of actual
overpayment recoveries.
(c) DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
The Company expenses all individual property and equipment
purchases of less than $1,000. At October 31, 1995, the Company
has not recorded any property and equipment amounts as such
amounts consist of individual purchases of less than $1,000.
(d) INCOME TAXES
The Company is an S corporation and, accordingly, the Company's
taxable income passes through to the Company's stockholders.
Accordingly, the Company records no tax liability since such
liability belongs to the individual stockholders. The Company
files its tax returns on the cash basis of accounting.
(2) DUE TO INSURANCE COMPANIES
Amounts due to insurance companies represent remittances collected on
behalf of such organizations. Such amounts are remitted to the insurance
companies, generally within sixty to ninety days after receipt.
(Continued)
F-5
11
2
CDR ASSOCIATES, INC.
Notes to Financial Statements
(3) PROFIT SHARING PLAN
The Company has a discretionary defined contribution pension plan. For
the year ended October 31, 1995, profit sharing expense was $66,228.
(4) COMMITMENTS
The Company leases office space under an operating lease which expires on
April 30, 1996. The amounts owed under this lease total $6,813. At this
date, the Company expects to renew the existing lease on a month-to-month
basis. Total rent expense for the year ended October 31, 1995 was
$12,144.
(5) SIGNIFICANT CUSTOMERS
For the year ended October 31, 1995, the Company's largest customer
accounted for 34% of the Company's revenue. The Company's next four
largest customers account for 53% of the Company's revenue.
(6) RELATED PARTY TRANSACTIONS
At October 31, 1995, the Company advanced its two stockholders $49,374.
Such amounts will be repaid in April of 1996.
(7) SUBSEQUENT EVENTS
In February 1996, the Company and its stockholders entered into a letter
of intent to be acquired by Health Management Systems, Inc., a NASDQ
listed company who furnishes proprietary data processing and information
management services and software to providers of health care, public and
commercial payers of health care expenses and other companies serving the
health care industry.
F-6
12
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
Page
Contents Number
- - -------- ------
Report of Independent Auditors............................................................................. F-8
Supplemental Consolidated Statements of Operations for the Years Ended October 31, 1995,
1994, and 1993 and the three months ended January 31, 1996 and 1995 (unaudited).......................... F-9
Supplemental Consolidated Balance Sheets at October 31, 1995 and 1994 and
January 31, 1996 (unaudited).............................................................................. F-10
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1995, 1994, and 1993 and the three months ended January 31, 1996
(unaudited)............................................................................................... F-11
Supplemental Consolidated Statements of Cash Flows for the Years Ended October 31, 1995,
1994, and 1993 and the three months ended January 31, 1996 and 1995 (unaudited)........................... F-12
Notes to Supplemental Consolidated Financial Statements..................................................... F-13
SCHEDULE:
Schedule II - Valuation and Qualifying Accounts............................................................. F-29
F - 7
13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Health Management Systems, Inc.:
We have audited the accompanying supplemental consolidated financial statements
of Health Management Systems, Inc. and subsidiaries as listed in the
accompanying index. In connection with our audits of the supplemental
consolidated financial statements, we also have audited the supplemental
financial statement schedule as listed in the accompanying index. These
supplemental consolidated financial statements and supplemental financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements and supplemental financial statement schedule based on our
audits. We did not audit the financial statements of Health Care microsystems,
Inc. (HCm), a wholly owned consolidated subsidiary, for the years ended October
31, 1994 and 1993 and Health Information Systems Corporation (HISCo), a 43%
owned investee company, for the year ended October 31, 1995. The financial
statements of HCm reflect total assets constituting 13% in 1994 and total
revenue constituting 17% and 22% in 1994 and 1993, respectively, of the related
supplemental consolidated totals. The Company's investment in HISCo at October
31, 1995 was $6,746,000 and its equity in earnings of HISCo was $-0- for the
period from June 19, 1995 through October 31, 1995. The financial statements of
HCm and HISCo for the aforementioned periods were audited by other auditors
whose reports were furnished to us, and our opinion, insofar as it relates to
the amounts included for HCm and HISCo, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the reports of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements and supplemental financial
statement schedule give retroactive effect to the merger of Health Management
Systems, Inc. and CDR Associates, Inc. on April 29, 1996, which has been
accounted for as a pooling of interests as described in note 1(f) to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Health Management Systems, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, based on our audits and the reports of the other auditors, the
supplemental 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1995 in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination. Also, in our
opinion, based on our audits and the reports of the other auditors, the related
supplemental financial statement schedule, when considered in relation to the
basic supplemental consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
New York, New York
November 21, 1995, except as to note 17,
which is as of December 15, 1995 and
note 1(f) which is as of May 13, 1996.
F-8
14
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Quarters Ended January 31, Years Ended October 31,
-------------------------- -----------------------------------
1996 1995 1995 1994 1993
------------ ---------- ----------- ----------- ----------
(Unaudited)
Revenue:
Trade $ 23,238 18,770 80,305 63,275 53,938
Affiliate 2,152 2,215 9,422 9,901 6,011
------------------------ -----------------------------------
25,390 20,985 89,727 73,176 59,949
Cost of services:
Compensation 11,559 9,977 43,373 35,355 31,179
Data processing 2,155 1,713 8,144 6,872 4,361
Occupancy 1,670 1,621 6,529 5,911 5,196
Other 4,174 3,160 13,581 11,161 8,053
------------------------ -----------------------------------
19,558 16,471 71,627 59,314 48,989
------------------------ -----------------------------------
Operating margin before
amortization of intangibles 5,832 4,514 18,100 13,862 10,960
Amortization of intangibles 55 80 243 190 303
------------------------ -----------------------------------
Operating income 5,777 4,434 17,857 13,672 10,657
Other income (expense) :
Interest income (expense),net 251 191 942 464 (114)
Merger related expense 0 (968) (1,045) (59) 0
Equity in earnings of affiliate 123 0 0 0 0
------------------------ -----------------------------------
374 (777) (103) 405 (114)
Income before income tax
expense and extraordinary item 6,151 3,657 17,754 14,077 10,543
Income tax expense (2,408) (1,850) (8,152) (6,353) (4,766)
------------------------ -----------------------------------
Income before extraordinary item 3,743 1,807 9,602 7,724 5,777
Extraordinary loss, net of income tax benefit 0 0 0 0 (306)
------------------------ -----------------------------------
Net income 3,743 1,807 9,602 7,724 5,471
Accretion of preferred stock redemption value 0 0 0 0 (33)
------------------------ -----------------------------------
Net income attributable to
common shareholders $ 3,743 1,807 9,602 7,724 5,438
======================== ===================================
Net income per common share:
Income before extraordinary item $ 0.21 0.11 0.55 0.46 0.37
Extraordinary item 0.00 0.00 0 0.00 (0.02)
------------------------ -----------------------------------
Net income $ 0.21 0.11 0.55 0.46 0.35
======================== ===================================
Weighted average shares outstanding 18,008 17,065 17,407 16,674 15,508
======================== ===================================
See accompanying notes to supplemental consolidated financial statements.
F-9
15
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
January 31, October 31, October 31,
1996 1995 1994
----------- ---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $11,843 10,801 14,962
Short-term investments 19,587 19,287 12,798
Accounts receivable, net 36,765 31,630 24,023
Other current assets 5,393 4,328 2,511
------- ------ -------
Total current assets 73,588 66,046 54,294
Property and equipment, net 5,822 5,874 6,611
Intangible assets, net 5,406 5,461 6,004
Capitalized software costs, net 1,031 865 721
Investments in affiliates 7,796 7,673 405
Other assets 865 1,465 1,742
------- ------ -------
Total assets $94,508 87,384 69,777
======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $12,722 14,842 10,413
Deferred revenue 5,184 3,941 4,733
Deferred income taxes 6,195 5,620 3,206
------- ------ -------
Total current liabilities 24,101 24,403 18,352
Other liabilities 1,907 1,739 1,048
Deferred income taxes 1,988 2,018 3,334
------- ------ -------
Total liabilities 27,996 28,160 22,734
------- ------ -------
Shareholders' equity:
Preferred stock - $.01 par value; 5,015,000 shares authorized;
none issued and outstanding 0 0 0
Common stock - $.01 par value; 20,000,000 shares authorized; 16,777,138
shares issued and outstanding at January 31, 1996; 16,390,762 shares issued
and outstanding at October 31, 1995;
15,976,423 shares issued and outstanding at October 31, 1994; 168 164 160
Capital in excess of par value 51,966 48,481 45,710
Retained earnings 13,858 10,115 1,185
Unrealized appreciation (depreciation) on short-term investments 520 464 (12)
------- ------ -------
Total shareholders' equity 66,512 59,224 47,043
------- ------ -------
Commitments and contingencies
Total liabilities and shareholders' equity $94,508 87,384 69,777
======= ====== =======
See accompanying notes to supplemental consolidated financial statements.
F-10
16
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
Unrealized
Appreciation
Common Stock Capital In Retained (Depreciation) Total
-----------------------
Par Excess Of Earnings on Short-term Shareholders'
Shares Value Par Value (Deficit) Investments Equity
Balance at October 31, 1992, as
originally reported 9,660,944 $97 12,029 (11,909) 0 217
Adjustments for CDR Associates, Inc.
pooling of interests 460,000 5 (4) 14 0 15
----------------------------------------------------------------------------
Balance at October 31, 1992,
as restated 10,120,944 102 12,025 (11,895) 0 232
Net income 0 0 0 5,471 0 5,471
Stock option activity 39,528 0 61 0 0 61
Unearned compensation 0 0 57 0 0 57
Effect of change in accounting
for short-term investments 0 0 0 0 170 170
Issuance of common stock 5,175,000 52 31,098 0 0 31,150
Exchange of redeemable preferred stock
for common stock 225,000 2 1,165 0 0 1,167
Common stock surrendered and retired (48,641) 0 (12) (82) 0 (94)
Accretion of preferred stock
redemption value 0 0 0 (33) 0 (33)
----------------------------------------------------------------------------
Balance at October 31, 1993 15,511,831 156 44,394 (6,539) 170 38,181
Net income 0 0 0 7,724 0 7,724
Stock option activity 348,659 3 480 0 0 483
Employee Stock Purchase Plan activity 115,933 1 801 0 0 802
Unearned compensation 0 0 35 0 0 35
Depreciation on
short-term investments 0 0 0 0 (182) (182)
----------------------------------------------------------------------------
Balance at October 31, 1994 15,976,423 160 45,710 1,185 (12) 47,043
Net income 0 0 0 9,602 0 9,602
Stock option activity 272,595 3 1,485 0 0 1,488
Employee Stock Purchase Plan activity 141,744 1 1,272 0 0 1,273
Unearned compensation 0 0 14 0 0 14
Appreciation on
short-term investments 0 0 0 0 476 476
Adjustment to reflect change in Health
Care microsystems, Inc. fiscal year 0 0 0 (672) 0 (672)
----------------------------------------------------------------------------
Balance at October 31, 1995 16,390,762 164 48,481 10,115 464 59,224
Net income (unaudited) 0 0 0 3,743 0 3,743
Stock option activity (unaudited) 259,211 3 1,913 0 0 1,916
Employee Stock Purchase Plan
activity (unaudited) 127,165 1 1,572 0 0 1,573
Appreciation on
short-term investments (unaudited) 0 0 0 0 56 56
============================================================================
Balance at January 31, 1996 (unaudited) 16,777,138 $168 51,966 13,858 520 66,512
============================================================================
See accompanying notes to supplemental consolidated financial statements.
F-11
17
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
Quarters Ended January 31, Years Ended October 31,
-------------------------- --------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ---------- ----------
Operating activities: (Unaudited)
Net income $ 3,743 1,807 9,602 7,724 5,471
Adjustments to reconcile net income to net cash
(used in) provided by
operating activities:
Depreciation and amortization 720 692 2,750 2,524 1,809
Amortization of intangibles 55 80 243 190 303
Write-down of software development costs 0 0 0 332 0
Accretion of debt discounts 0 0 0 0 10
Amortization of unearned compensation 0 3 14 35 57
Amortization of deferred financing costs 0 0 0 0 110
(Gain) loss on disposal of assets 0 (19) (19) 0 5
Deferred tax expense 545 222 1,203 1,007 1,684
Equity in earnings of affiliate (123) 0 0 0 0
Unrealized appreciation on short-term investments 0 8 8 0 0
Extraordinary loss, net of income tax benefit 0 0 0 0 306
Other 0 (3) (3) 40 19
Changes in assets and liabilities:
Increase in accounts receivable (5,135) (3,773) (9,106) (7,031) (3,678)
(Increase) decrease in other current assets (1,065) 453 (1,046) (159) (119)
(Decrease) increase in accounts payable and
accrued expenses (2,120) (516) 5,165 1,266 3,084
Increase (decrease) in deferred revenue 1,243 (294) (728) (755) 1,334
Increase (decrease) in other assets and
liabilities, net 768 733 636 (386) 877
------- ------- ------- ------- --------
Total adjustments (5,112) (2,414) (883) (2,937) 5,801
------- ------- ------- ------- --------
Net cash (used in) provided by
operating activities (1,369) (607) 8,719 4,787 11,272
------- ------- ------- ------- --------
Investing activities:
Capital asset expenditures (555) (300) (1,503) (2,827) (3,845)
Software capitalization (279) (254) (840) (721) (527)
Investments in affiliates 0 (522) (7,268) 0 0
Intangibles resulting from acquisitions 0 0 0 (550) 0
Purchase of short-term investments (244) (4,958) (7,252) (9,025) (1,763)
Proceeds from sale of short-term investments 0 685 1,788 0 0
------- ------- ------- ------- --------
Net cash used in investing activities (1,078) (5,349) (15,075) (13,123) (6,135)
------- ------- ------- ------- --------
Financing activities:
Proceeds from issuance of common stock, net 1,916 846 1,201 802 31,129
Proceeds from exercise of stock options 1,573 326 1,083 483 61
Proceeds from bank borrowings 0 0 0 0 500
Repayment of notes payable 0 (342) (342) (479) (6,097)
Decrease in deferred financing costs 0 0 0 0 449
Repayment of long-term obligations:
Deferred payment notes 0 0 0 0 (8,100)
Subordinated debentures 0 0 0 0 (6,000)
Other 0 0 0 0 (87)
------- ------- ------- ------- --------
Net cash provided by financing activities 3,489 830 1,942 806 11,855
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents 1,042 (5,126) (4,414) (7,530) 16,992
Cash and cash equivalents at beginning of period 10,801 14,082 14,962 22,492 5,500
Adjustment to cash to reflect change in Health Care
microsystems, Inc. fiscal year 0 253 253 0 0
======= ======= ======= ======= ========
Cash and cash equivalents at end of period $ 11,843 9,209 10,801 14,962 22,492
======= ======= ======= ======= ========
See accompanying notes to supplemental consolidated financial statements.
F-12
18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Founded in 1974, Health Management Systems, Inc. ("HMSY" or the "Company")
furnishes proprietary data processing and information management services and
software to providers of health care, public and commercial payors of health
care expenses, and other companies serving the health care industry.
(a) Recapitalization
On March 23, 1989, HMSY underwent a recapitalization in which its
outstanding capital stock was acquired by HMS Holdings Corporation ("HMS
Holdings"). Subsequently, HMS Holdings was merged with and into HMSY.
(b) Acquisition of Quality Medi-Cal Adjudication, Inc.
On February 6, 1990, HMSY acquired all of the outstanding capital stock of
Quality Medi-Cal Adjudication, Incorporated ("QMA") from National Medical
Enterprises, Inc. ("NME"). QMA provides hospitals, principally in California,
with electronic billing and follow-up services for claims submitted to Medi-Cal
and various commercial insurance carriers.
In connection with the acquisition of QMA, the Company entered into an
agreement that granted a service credit of 50% of all charges incurred by health
care facilities owned by NME ("service credits"). This agreement obligated HMSY
to provide a total of up to $1,600,000 in service credits for the period
February 6, 1990 to May 6, 1995. As of October 31, 1995, the service credit
obligation was satisfied in full. The service credit obligation was recorded at
its estimated net present value of $1,266,000, utilizing a discount rate of 11%.
Service credits issued in connection with this obligation for the years ended
October 31, 1995, 1994, and 1993 were $234,000, $307,000, and $317,000,
respectively.
(c) Initial Public Offering
In December 1992, the Company completed the sale of 5,175,000 shares of
common stock as part of an underwritten initial public offering. The offering
price of the stock was $6.67 per share. The Company realized net proceeds from
the offering of $31,150,000 after deducting the underwriters' discount and other
costs of the offering. Also in connection with the initial public offering, the
Company: (i) issued 225,000 shares of common stock in exchange for all of the
redeemable preferred stock then outstanding and held by affiliates, (ii) issued
393,750 stock options to certain members of management with an exercise price
equal to the initial public offering price, and (iii) renegotiated the terms of
the unredeemed deferred payment notes held by certain members of management to
reduce the rate of interest on such notes.
(d) Merger with Health Care microsystems, Inc.
On January 18, 1995, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") among the Company; HCM Acquisition Corp.
("Sub"), a wholly owned subsidiary of the Company; Health Care microsystems,
Inc. ("HCm"); and all shareholders of HCm (the "Principals"). HCm is a provider
of microcomputer-based decision support software and services to the health care
industry. Effective as of February 14, 1995 (the "Effective Time"), the Company
consummated the merger with HCm in accordance with the Merger Agreement, as
amended.
Pursuant to the Merger Agreement, HCm merged with Sub (the "Merger"), with
the result that HCm became a wholly-owned subsidiary of the Company. Each share
of HCm capital stock issued and outstanding immediately prior to the Effective
Time of the Merger was converted into 156.9039 shares of the Company's common
stock, or an aggregate of 2,250,002 shares.
F-13
19
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Merger Agreement provided that the Company would undertake to register
the common stock issued to effect the Merger with the Securities and Exchange
Commission ("the Commission") for resale under the Securities Act of 1933, as
amended. Pursuant thereto, the Company filed a Registration Statement on Form
S-3 (File No. 33-91518) with the Commission, which Registration Statement became
effective on July 7, 1995. Moreover, pursuant to the Merger Agreement, one of
the Principals was elected as a director of the Company.
As of the Effective Time, each of the four Principals entered into
employment agreements (each, an "Employment Agreement") with HCm. The term of
each Employment Agreement continues until December 31, 1996, subject to earlier
termination as provided therein.
The Merger has been accounted for using the pooling of interests method of
accounting. Accordingly, the accompanying consolidated financial statements have
been retroactively restated for all periods presented to include the financial
position, results of operations, and cash flows of HCm. In addition, the
accompanying consolidated financial statements reflect certain adjustments to
conform the accounting policies of the two companies, and to reflect the
adoption of Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities."
HCm previously used the fiscal year ended December 31 for its financial
reporting. To conform to the Company's October 31 fiscal year end, HCm's
operating results for the period November 1, 1994 through December 31, 1994 have
been included in the operating results of the Company for the fiscal years ended
October 31, 1995 and 1994. The resulting duplication of revenue and net income
of HCm for the period November 1, 1994 through December 31, 1994 amounted to
$2,842,000 and $672,000, respectively, which has been adjusted by a $672,000
charge to retained earnings during the year ended October 31, 1995.
(e) Formation of Health Information Systems Corporation
At October 31, 1995, the Company had a $6,746,000 investment, which
represented approximately a 43% ownership interest, in Health Information
Systems Corporation ("HISCo"), a privately owned Delaware corporation. The
investment in HISCo has been accounted for using the equity method of
accounting. Under the equity method, the Company recognizes in earnings its
proportionate share of net income or loss of HISCo. During June 1995, the
Company, together with Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), a
Delaware limited partnership affiliated with Welsh, Carson, Anderson & Stowe
("WCAS"), affiliates of WCAS, and certain of their respective executive officers
and partners (collectively, the "Original Purchasers"), formed the predecessor
of HISCo for the purpose of investing in health care information management
companies that require significant additional investment and maturation. At such
time, the Company and certain of its executive officers purchased 1,250,000
shares of HISCo common stock ("HISCo Stock") for an aggregate purchase price of
$12,500. WCAS VI and its affiliates subscribed for an additional 1,250,000
shares of HISCo Stock on identical terms. As used below, the term "HISCo" refers
both to HISCo and its predecessor.
In connection with HISCo's initial acquisition, effective June 30, 1995,
the Company subscribed for 560,000 shares of HISCo Stock with an aggregate
subscription price of $5,600,000 and WCAS VI subscribed for 650,000 shares of
HISCo Stock with aggregate subscription price of $6,500,000.
F-14
20
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
To finance additional proposed acquisitions, effective October 31, 1995
(the "Closing Date") the Original Purchasers, affiliates of several of the
original purchasers; several independent investors (collectively with the
Original Purchasers, "the Purchasers"), and HISCo entered into a subscription
agreement (the "Subscription Agreement") which superseded in its entirety an
earlier subscription agreement between the Original Purchasers and HISCo dated
as of June 19, 1995. Pursuant to the Subscription Agreement, the Company,
certain of its executive officers, affiliates, and the independent investors
purchased 142,798 shares of HISCo Stock as of the Closing Date for an aggregate
purchase price of $1,428,000, and WCAS VI and its affiliates purchased 47,199
shares of HISCo Stock for an aggregate purchase price of $472,000. The
Subscription Agreement contemplated that, for a period of three years commencing
on the Closing Date, HISCo may require the Purchasers to purchase, on a pro rata
basis, up to an aggregate additional 8,597,503 shares of HISCo common stock
("Additional Shares") for a per share purchase price of $10.00, or an aggregate
purchase price of $85,975,000. With respect to each acquisition, the
Subscription Agreement requires HISCo to deliver written notice to the
Purchasers specifying, among other information, the terms of the proposed
acquisition and the aggregate number of Additional Shares that HISCo proposes to
sell to the Purchasers. Purchasers other than the Company and WCAS VI may decide
not to purchase all or any portion of their respective pro rata amount of
Additional Shares, in which event the Company and WCAS VIare required to
purchase the Additional Shares so declined. Neither the Company nor WCAS VI may
decline to purchase their respective pro rata portions of Additional Shares. The
Company and WCAS VI have committed to purchase Additional Shares having an
aggregate purchase price of $41,367,000 and $40,560,000, respectively.
The Company and HISCo entered into an agreement, dated as of October 31,
1995 (the "HISCo Agreement"), pursuant to which the Company will provide HISCo
with certain services ("Basic Services"), including executive, acquisition
support, and corporate support services. For these Basic Services, the Company
is entitled to receive a fee, payable monthly, calculated at the Company's then
current standard hourly rates plus 20%. The Company, in addition, may provide to
subsidiaries ("Subsidiaries") of HISCo, and such Subsidiaries may provide to the
Company, additional services on such terms as the parties may mutually agree.
The term of the HISCo Agreement continues until the later of (i) June 30, 2000
or (ii) the expiration of any outstanding work order related to additional
services. The Company believes that the terms of the HISCo Agreement are fair
and reasonable and are no less favorable to the Company than those that could
have been obtained with respect to comparable engagements with independent third
parties. In fiscal year 1995, the Company received approximately $545,000 in
fees from HISCo for services provided pursuant to the HISCo Agreement.
F-15
21
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Condensed financial information of HISCo as of and for the period from June
19, 1995 through October 31, 1995 is summarized below:
As of October 31 1995
- - --------------------------------------------------------------------------------
HISCo Consolidated Balance Sheet:
Current assets $ 6,318,000
- - --------------------------------------------------------------------------------
Total assets $ 15,833,000
- - --------------------------------------------------------------------------------
Current liabilities $ 1,807,000
- - --------------------------------------------------------------------------------
Stockholders' equity $ 14,026,000
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,833,000
- - --------------------------------------------------------------------------------
Four Months Ended October 31 1995
- - --------------------------------------------------------------------------------
HISCo Consolidated Statement of Operations:
Revenue $ 5,284,000
- - --------------------------------------------------------------------------------
Operating margin $ 550,000
- - --------------------------------------------------------------------------------
Net income $ 1,000
- - --------------------------------------------------------------------------------
(f) Merger with CDR Associates, Inc.
Effective as of April 29, 1996 (the "CDR Effective Time"), the Company
consummated a merger with CDR Associates, Inc. ("CDR"), in accordance with an
Agreement and Plan of Merger, (the "CDR Merger Agreement") among the Company,
CDR Acquisition Corp. ("CDR Sub"), a wholly-owned subsidiary of the Company,
CDR, and all Shareholders of CDR (the "CDR Principals"). CDR is a supplier of
third-party liability recovery services to the health care industry.
Pursuant to the CDR Merger Agreement, CDR merged with CDR Sub (the "CDR
Merger"), with the result that CDR became a wholly-owned subsidiary of the
Company. Each share of CDR capital stock issued and outstanding immediately
prior to the CDR Effective Time of the CDR Merger was converted into 460 shares
of the Company's common stock, or an aggregate of 460,000 shares.
The CDR Merger Agreement provides that the Company will undertake to
register the common stock issued to effect the merger with the Commission for
resale under the Securities Act of 1933. Moreover, the CDR Merger Agreement
contains not-to-compete provisions which prohibit the CDR Principals from
competing with the businesses of CDR and the Company during the period of their
employment and for a period of three years thereafter.
The merger with CDR has been accounted for using the pooling of interests
method of accounting. Accordingly, the accompanying supplemental consolidated
financial statements have been retroactively restated for all periods presented
to include the financial position, results of operations, and cash flows of CDR.
These restated supplemental consolidated financial statements will become the
historical consolidated financial statements of the Company upon issuance of its
unaudited interim financial statements for the quarter ended April 30, 1996.
F-16
22
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(g) Principles of Consolidation
The consolidated financial statements include the accounts of HMSY and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(h) 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 $2,741,000 and $13,975,000 at October 31,
1995 and 1994, respectively) to be cash equivalents.
(i) Short-Term Investments
As of October 31, 1993, the Company adopted SFAS 115. Under SFAS 115, debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. 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.
Included in short-term investments at October 31, 1994 is a trading
security which is stated at fair value, determined by reference to closing
quoted market prices at the balance sheet date. Realized and unrealized gains
and losses for the trading security are charged or credited to operations and
are determined using the first-in, first-out method. For the years ended October
31, 1995 and 1994, the Company recognized $39,000 in unrealized gains and
$293,000 in unrealized losses, respectively.
Also included in short-term investments are investments classified as
available for sale and carried at fair value. Unrealized gains and losses on
these assets are reported as a separate component of shareholders' equity. At
October 31, 1995 and 1994, the Company recorded unrealized appreciation of
$464,000 and unrealized depreciation of $12,000, respectively, on these
short-term investments.
(j) 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 5-8 years
Furniture and fixtures 5-7 years
(k) Intangible Assets
Intangible assets have been recorded primarily as a result of the
recapitalization of the Company in 1989 and the acquisition of QMA in 1990.
Intangible assets consist of software, non-compete agreements, and goodwill,
which are being amortized on a straight-line basis over three years, 43 months,
and between 10 and 40 years, respectively.
The Company assesses the recoverability of the carrying amount of
intangible assets through consideration of the estimated future cash flows to be
derived from the use of such assets. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." The impact of the adoption of SFAS 121 was not material to the Company's
consolidated financial statements.
F-17
23
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(l) Revenue Recognition
The Company generally recognizes revenue for financial reporting purposes
when billings are submitted to the third-party payors as a consequence of
services performed by the Company for a client. Several client contracts contain
periodic fee limitations that the Company believes will be exceeded in the
normal course of business. As a result, the fees allowable under these contracts
are recognized on a straight-line basis over the fee limitation period as
services are performed, and amounts billed in excess of revenue recognized are
deferred. Other contracts have sliding fee scales for which revenue is fairly
predictable. For these, the Company recognizes revenue, at the estimated
effective fee rate, ratably over the client's contract year. Finally, certain
contracts are subject to fixed-fee arrangements covering specified periods,
which the Company realizes on a straight-line basis over the corresponding
periods.
The Company recognizes revenue from consulting services as the services are
provided. Revenue from software products sold to customers under license
agreements is deferred and recognized as revenue upon software installation and
satisfaction of significant Company obligations, if any. Revenue from ongoing
maintenance agreements is deferred and recognized as revenue on a straight-line
basis over the periods of the respective maintenance agreements.
Trade accounts receivable are reflected net of an allowance for doubtful
accounts of $296,000 and $269,000 at October 31, 1995 and 1994, respectively.
(m) Software Development Costs
Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed"
requires that certain software development costs be capitalized. In accordance
with SFAS 86, the Company capitalizes software development costs (related to
software developed for resale) incurred subsequent to the establishment of
technological feasibility of the product, including costs incurred to develop
upgrades subsequent to the commercial release of the product. Amortization of
software development costs is determined on a product-by-product basis to be the
greater of the amount computed on a straight-line basis over the expected
economic life of the product, generally estimated to be 36-60 months, or using
the ratio of current gross revenue to total current and anticipated future gross
revenue, whichever is greater. Software development costs are stated at original
cost of $3,929,000 and $3,061,000 less accumulated amortization of $3,064,000
and $2,340,000 at October 31, 1995 and 1994, respectively. Amortization expense
for the years ended October 31, 1995, 1994, and 1993 was $587,000, $486,000, and
$408,000, respectively. During 1994, software development costs were written
down by $332,000 to reflect the related net realizable value.
(n) Income Taxes
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
the asset and liability method of SFAS 109, 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. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The cumulative effect of this accounting change was not material
to the Company's consolidated financial statements.
F-18
24
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Pursuant to the asset and liability method under SFAS 96, which was applied
in 1993 and 1992, deferred tax assets and liabilities were recognized for all
events that had been recognized in the financial statements. Under SFAS96, the
future tax consequences of recovering assets or settling liabilities at their
financial statement carrying amounts were considered in calculating deferred
taxes. Generally, SFAS96 prohibited consideration of any other future events in
calculating deferred taxes.
(o) Net Income Per Common Share
Net income per common share has been computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during each year. Common stock equivalents utilizing the
treasury stock method are included in the computation of weighted average number
of shares outstanding for the years ended October 31, 1995, 1994, and 1993. (See
Note 17 of Notes to Consolidated Financial Statements.)
(p) Reclassifications
Certain reclassifications were made to prior year amounts to conform to the
1995 presentation.
(q) Stock Dividend
On February 28, 1995, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% stock dividend, payable on or
about March 31, 1995, to holders of record of the Company's common stock as of
March 17, 1995. The effect of the stock dividend has been retroactively recorded
in the accompanying consolidated financial statements. (See Note 17 of Notes to
Consolidated Financial Statements.)
(r) Interim Unaudited Financial Information
The accompanying supplemental consolidated balance sheet at January 31,
1996, the supplemental consolidated statements of operations and cash flows for
the three month periods ended January 31, 1996 and 1995, and the supplemental
consolidated statement of shareholders' equity for the three month period ended
January 31, 1996 of Health Management Systems, Inc. and the related information
included in these notes to the supplemental consolidated financial statements
are unaudited. In the opinion of management, the supplemental consolidated
financial statements reflect all 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 of interim periods are not
necessarily indicative of the results to be expected for the entire year.
2. ACCOUNTS RECEIVABLE
Accounts receivable as of October 31, 1995 and 1994 consisted of the
following:
1995 1994
- - --------------------------------------------------------------------------------
Trade $ 31,517,000 23,187,000
Affiliates 113,000 836,000
- - --------------------------------------------------------------------------------
$ 31,630,000 24,023,000
- - --------------------------------------------------------------------------------
F-19
25
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
3. FEES HELD IN ESCROW
The Company is obligated to maintain a portion of fees received from two
clients in escrow accounts. The Company's obligation to maintain such fees in
escrow generally terminates at either: (a) the earlier of six years from the
dates of service associated with fees generated and settlement of the client's
Medicaid and/or Medicare audits for each applicable year, and/or (b) the
termination of contract. Due to the 1994 renewal of one client contract that
eliminated future escrow requirements and the Company's fulfillment of its
maximum escrow deposit for the second client, the Company completed its
obligation to make escrow deposits as of October 31, 1994. For the years ended
October 31, 1995, 1994, and 1993, revenue subject to such escrow requirements
approximated $0, $1,202,000, and $4,312,000, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment as of October 31, 1995 and 1994 consisted of the
following:
1995 1994
- - ---------------------------------------------------------------------------------------------------------
Equipment $ 9,697,000 8,721,000
Leasehold improvements 3,438,000 3,259,000
Furniture and fixtures 2,034,000 1,920,000
- - ---------------------------------------------------------------------------------------------------------
15,169,000 13,900,000
Less accumulated depreciation and amortization (9,295,000) (7,289,000)
- - ---------------------------------------------------------------------------------------------------------
$ 5,874,000 6,611,000
- - ---------------------------------------------------------------------------------------------------------
Depreciation and amortization expense related to property and equipment
charged to operations for the years ended October 31, 1995, 1994, and 1993 was
$2,205,000, $2,038,000, and $1,401,000, respectively.
5. INTANGIBLE ASSETS
Intangible assets as of October 31, 1995 and 1994 consisted of the
following:
Accumulated
Cost Amortization Balance
- - ---------------------------------------------------------------------------------------------------------
1995
Software costs $ 10,356,000 (10,312,000) 44,000
Non-compete agreements 4,500,000 (4,500,000) 0
Goodwill 6,487,000 (1,070,000) 5,417,000
- - --------------------------------------------------------------------------------------------------------
$ 21,343,000 (15,882,000) 5,461,000
- - --------------------------------------------------------------------------------------------------------
1994
Software costs $ 10,656,000 (10,238,000) 418,000
Non-compete agreements 4,500,000 (4,500,000) 0
Goodwill 6,487,000 (901,000) 5,586,000
- - --------------------------------------------------------------------------------------------------------
$ 21,643,000 (15,639,000) 6,004,000
- - --------------------------------------------------------------------------------------------------------
Amortization expense related to intangible assets charged to operations for
the years ended October 31, 1995, 1994, and 1993, was $243,000, $190,000, and
$303,000, respectively.
F-20
26
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of October 31, 1995 and 1994
consisted of the following:
1995 1994
- - --------------------------------------------------------------------------------------------------------
Accrued compensation $ 8,324,000 4,694,000
Accrued computer-related costs 1,479,000 1,065,000
Accrued professional fees 1,371,000 1,223,000
Accounts payable and other accrued expenses 3,668,000 3,431,000
- - --------------------------------------------------------------------------------------------------------
$ 14,842,000 10,413,000
- - --------------------------------------------------------------------------------------------------------
7. CREDIT FACILITIES
On April 26, 1993, the Company entered into a $10,000,000 unsecured
revolving credit facility with a major money center financial institution. The
credit facility has a term of three years, carries an unused commitment fee of
50 basis points, and bears interest at the institution's prime lending rate, or
LIBOR plus 150 basis points, at the Company's option. The revolving credit
facility contains, among other things, restrictions on additional borrowings,
capital expenditures, leases, sales of assets, and payments of dividends. The
revolving credit facility also contains covenants that require the Company to
maintain minimum tangible consolidated shareholders' equity and limit
debt-to-equity and debt-to-asset relationships as defined in the agreement. As
of October 31, 1995 and 1994, no amounts were outstanding under this credit
facility. As of October 31, 1995, the Company had a $50,000 letter of credit
included under this credit facility. In December 1992, the Company utilized
$6,000,000 of the proceeds of the initial public offering to repay the
$3,000,000 outstanding revolving credit loan and $3,000,000 term loan related to
its prior credit agreement.
The Company had a note payable to a bank at October 31, 1993 in the amount
of $403,000. The note was payable in monthly principal installments plus
interest at the bank's prime lending rate plus 1%. The note carried an original
maturity date of December 30, 1993, but was subsequently renewed by the bank
until December 31, 1994. This note payable was paid in full during the year
ended October 31, 1994.
In December 1992, the Company also utilized $9,100,000 of the proceeds of
its initial public offering to repay a portion of the outstanding debt to
affiliates. The indebtedness repaid included: (a) $3,100,000 of deferred payment
notes, and (b) $6,000,000 principal amount of subordinated debentures. In June
1993, the Company repaid the remaining $5,000,000 of the deferred payment notes.
Concurrent with the prepayment of the subordinated debentures, the Company
recorded an extraordinary loss of $306,000, net of $251,000 income tax benefit,
representing the write-off of the unamortized discount related to the
subordinated debentures.
Cash interest payments including bank charges attributable to the
aforementioned debt for the years ended October 31, 1995, 1994, and 1993 were
$60,000, $88,000, and $1,008,000, respectively. Cash interest payments,
including bank charges, attributable to the aforementioned debt for the three
months ended January 31, 1996 and 1995 were $13,000 and $13,000, respectively.
F-21
27
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
8. INCOME TAXES
Income tax expense for the years ended October 31, 1995, 1994, and 1993 was
comprised of the following:
1995 1994 1993
- - -------------------------------------------------------------------------------------------------------
Current tax expense:
Federal $ (4,677,000) (3,286,000) (2,459,000)
State and local (2,272,000) (2,060,000) (623,000)
- - -------------------------------------------------------------------------------------------------------
(6,949,000) (5,346,000) (3,082,000)
- - -------------------------------------------------------------------------------------------------------
Deferred tax (expense) benefit:
Federal (1,285,000) (578,000) (916,000)
State and local 82,000 (429,000) (768,000)
- - -------------------------------------------------------------------------------------------------------
(1,203,000) (1,007,000) (1,684,000)
- - -------------------------------------------------------------------------------------------------------
Income tax expense, net $ (8,152,000) (6,353,000) (4,766,000)
- - -------------------------------------------------------------------------------------------------------
A reconciliation of the income tax expense to the federal statutory rate of
34% follows:
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------
Income tax expense
computed at Federal
statutory rate $ (6,036,000) (34.0)% (4,786,000) (34.0)% (3,585,000) (34.0)%
State and local tax expense,
net of federal benefit (1,445,000) (8.1) (1,643,000) (11.7) (918,000) (8.7)
Amortization of goodwill (55,000) (0.3) (55,000) (0.4) (55,000) (0.5)
Merger related costs (355,000) (2.0) 0 0.0 0 0.0
Other, net (261,000) (1.5) 131,000 0.9 (208,000) (2.0)
- - -----------------------------------------------------------------------------------------------------
Total income tax expense $ (8,152,000) (45.9)% (6,353,000) (45.1)% (4,766,000) (45.2)%
- - -----------------------------------------------------------------------------------------------------
F-22
28
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
8. INCOME TAXES, CONTINUED
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 types of temporary differences that give rise to the
deferred tax liability, and the effect on the deferred income tax expense of
changes in those temporary differences, are as follows:
1995 1994 1993
- - -------------------------------------------------------------------------------------------------------
Accounts receivable $ (1,609,000) (1,263,000) (2,737,000)
Amortization of software costs (186,000) 168,000 (48,000)
Fees held in escrow 117,000 107,000 (553,000)
Depreciable assets (214,000) 288,000 391,000
Unbilled costs (6,000) 17,000 (80,000)
Non-compete agreements, net 0 (224,000) (127,000)
Accrued expenses 403,000 81,000 206,000
Deferred revenue (543,000) (723,000) 864,000
Deferred rent 72,000 352,000 0
Contract termination contingency 0 0 529,000
Other 763,000 190,000 (129,000)
- - -------------------------------------------------------------------------------------------------------
Deferred income tax expense $ (1,203,000) (1,007,000) (1,684,000)
- - -------------------------------------------------------------------------------------------------------
Temporary differences that give rise to a significant portion of the
deferred tax assets and deferred tax liabilities at October 31, 1995 are as
follows:
Deferred tax assets Deferred tax liabilities
- - --------------------------------------------------------------------------------------------------------
Accounts receivable/deferred items $ 509,000 6,793,000
Property and equipment 915,000 437,000
Accrued expenses 878,000 0
Contract termination contingency 0 3,260,000
Other 1,243,000 693,000
- - --------------------------------------------------------------------------------------------------------
Subtotal 3,545,000 11,183,000
Valuation allowance 0 --
- - --------------------------------------------------------------------------------------------------------
Total deferred taxes 3,545,000 11,183,000
- - --------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 0 7,638,000
- - --------------------------------------------------------------------------------------------------------
Based on the Company's financial history and current situation, management
believes it is more likely than not that the Company will realize the benefits
of the deferred tax assets as shown above. Accordingly, no valuation allowance
has been provided.
Cash payments attributable to income taxes for the years ended October 31,
1995, 1994, and 1993 were $6,355,000, $4,917,000, and $4,185,000, respectively.
Cash payments attributable to income taxes for the three months ended January
31, 1996 and 1995 were $1,896,000 and $723,000, respectively.
F-23
29
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
9. PROFIT SHARING AND 401(K) PLAN
The Company has a discretionary defined contribution profit sharing plan in
which a substantial number of its employees participate. For the years ended
October 31, 1995, 1994, and 1993, profit sharing expense was $800,000, $582,000,
and $657,000, respectively.
Effective January 1, 1992, the Company amended its profit sharing plan to
include for its employees a 401(k) plan, which permits an employee to contribute
a portion of the employee's compensation, subject to certain limitations. 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, 1995, 1994,
and 1993, 401(k) plan expense was $543,000, $368,000, and $315,000,
respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
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. Originally, all full-time employees of the Company and its subsidiaries
could elect to participate in the ESPP if they had been employed at least six
months prior to January 1 of the year in which they desired to commence
participation and if their customary employment was a minimum of 20 hours per
week. On November 30, 1994, the Board of Directors amended the eligibility
requirements of the ESPP, which action was subsequently approved by shareholders
at the Annual Meeting of Shareholders held on March 7, 1995. The amendment
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 year ended October 31, 1995, the Company had sold 141,744 shares of
common stock pursuant to the ESPP for aggregate consideration of $1,273,000,
which activity is reflected in the accompanying financial statements.
11. STOCK OPTION PLAN AND RESTRICTED STOCK PURCHASE PLAN
Effective May 31, 1989, the Company adopted the Health Management Systems,
Inc. Stock Option and Restricted Stock Purchase Plan (the "Plan") under which:
(a) options can be granted to purchase shares of the Company's common stock at
an exercise price equal to (incentive stock options) or less than (non-qualified
stock options) the estimated fair market value of the Company's common stock, or
(b) rights can be granted in the form of an award to purchase shares of the
Company's common stock at a price equal to, more than, or less than the
estimated fair market value of the Company's common stock. Subsequent amendments
to the Plan, which have been approved by shareholders, have increased the number
of shares allowed to be issued under the Plan to 3,690,000 shares.
Stock option activity for the years ended October 31, 1995, 1994, and 1993
was as follows:
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------
Options outstanding, beginning of period 2,143,641 1,921,679 987,228
Options granted 906,042 626,120 975,452
Options surrendered (22,945) (55,499) (1,473)
Options exercised (272,595) (348,659) (39,528)
- - --------------------------------------------------------------------------------------------------------
Options outstanding, end of period 2,754,143 2,143,641 1,921,679
- - --------------------------------------------------------------------------------------------------------
Options exercisable, end of period 1,774,925 1,425,509 1,250,370
- - --------------------------------------------------------------------------------------------------------
Average exercise price of options granted $ 16.97 9.99 7.49
- - --------------------------------------------------------------------------------------------------------
F-24
30
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
11. STOCK OPTION PLAN AND RESTRICTED STOCK PURCHASE PLAN, CONTINUED
The stock options become exercisable on various dates through December 1998
and expire at various dates through October 2005. As of October 31, 1995, no
stock appreciation rights or stock purchase awards had been granted.
For financial reporting purposes, the majority of the stock options granted
during 1992 and 1991 have been accounted for as having been issued with an
exercise price below fair market value at the time of grant. The amount computed
by multiplying the number of shares covered by the stock options granted by the
difference between the exercise price per share ($4.04 and $1.30 in 1992 and
1991, respectively) and the deemed fair market value per share at the time of
grant ($4.89 and $2.01 in 1992 and 1991, respectively), or $325,000 and
$486,000, is reflected at the date of grant as unearned compensation and capital
in excess of par value in the stockholders' equity section of the balance sheet.
Compensation expense of $14,000, $35,000, and $57,000 was recognized in 1995,
1994, and 1993, respectively, with respect to options that vested during the
respective years, resulting in a corresponding reduction in the initially
recorded unearned compensation amount.
12. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
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. The purpose of the NEDP is to provide compensation in the form
of equity participation in the Company, in consideration of the services
provided by directors not employed by the Company. Under the NEDP, directors of
the Company who are not employees of the Company or its subsidiaries will be
granted options to purchase common stock of the Company. 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 will be increased to the extent any granted options expire
or terminate unexercised.
The NEDP provides that a grant of options to purchase 1,500 shares of
common stock will be made to each non-employee director during the fourth fiscal
quarter of each fiscal year commencing with fiscal year 1995. The exercise price
of options issued under the NEDP will be the fair market value of the common
stock as of the date of grant, and must be paid in cash at the time of exercise.
Options granted under the NEDP will have a term of ten years, with 25% of the
options exercisable immediately upon grant and an additional 25% exercisable at
the end of each of the three subsequent fiscal years. In the event that the
holder of options granted under the NEDP ceases to be a director for any reason,
all outstanding vested options will be exercisable for one year following the
date the director's service on the Board of Directors of the Company terminates,
or until their expiration date, whichever period is shorter. Unvested options
will lapse immediately upon cessation of the director's service on the Board of
Directors. No options may be granted under the NEDP after October 31, 2004.
The NEDP is administered by the Compensation Committee of the Company's
Board of Directors. The Compensation Committee may amend the NEDP, except that
shareholder approval is required to increase the number of shares available
under the NEDP other than for anti-dilution purposes, to change the class of
participants eligible to participate in the NEDP, or to increase materially the
benefits to such participants. The provisions of the NEDP relating to the number
of options to be awarded to directors, the exercise price of such options, and
the timing of awards may not be amended more than once every six months, other
than to conform to changes in certain statutes.
F-25
31
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
12. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN, CONTINUED
NEDP stock option activity for the year ended October 31, 1995 was as
follows:
1995
- - --------------------------------------------------------------------------------------------------------
Options outstanding, beginning of period 0
Options granted 11,250
Options surrendered 0
Options exercised 0
- - --------------------------------------------------------------------------------------------------------
Options outstanding, end of period 11,250
- - --------------------------------------------------------------------------------------------------------
Options exercisable, end of period 2,813
- - --------------------------------------------------------------------------------------------------------
Average exercise price of options granted $ 17.50
- - --------------------------------------------------------------------------------------------------------
13. COMMITMENTS
The Company leases office space and equipment under operating leases which
expire at various dates through May 31, 2003. The lease agreements provide for
rent escalations resulting from increases in real estate taxes and other
operating expenses. Total rent expense for the years ended October 31, 1995,
1994, and 1993, including escalations, was $5,193,000, $4,037,000, and
$3,133,000, respectively.
Minimum annual lease payments for each of the next five years ending
October 31 and thereafter are as follows:
Year Payments
---------------------------------------------------------
1996 $ 4,113,000
1997 3,277,000
1998 2,555,000
1999 2,071,000
2000 1,556,000
Thereafter 3,413,000
---------------------------------------------------------
Total $ 16,985,000
---------------------------------------------------------
14. SIGNIFICANT CONTRACTS
For the years ended October 31, 1995, 1994, and 1993, the Company's largest
client accounted for 16%, 17%, and 18%, respectively, of the Company's
consolidated revenue. The next largest client accounted for approximately 11%,
6%, and 7%, respectively, of the Company's consolidated revenue for the same
periods.
F-26
32
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
15. RELATED PARTY TRANSACTIONS
Effective January 31, 1992, the Company entered into a management and data
processing services agreement ("Management Agreement") with HHL Financial
Services, Inc. ("HHL"). Under the Management Agreement, the Company provides HHL
with executive management, data processing, and technical support services
through June 30, 1996, subject to certain termination and renewal provisions.
For services provided under the Management Agreement, the Company is entitled to
compensation in the form of: (a) contingent fees based on HHL's revenue and
pre-tax operating income each year (as defined), and (b) a warrant, exercisable
at any time during its five-year term, to purchase shares of HHL's common stock
constituting approximately 8% of HHL's fully diluted common stock as of March
15, 1992. The aggregate exercise price of the warrant was approximately
$556,000. The warrant was valued at $405,000. For financial reporting purposes,
the value of the warrant has been offset against the costs associated with the
termination of the proposed merger of HHL and the Company due to its
non-recurring nature and is separately reflected on the balance sheet. This
investment in HHL was accounted for utilizing the cost method of accounting.
Effective July 1, 1993, the Management Agreement was amended ("Outsourcing
Amendment") to include the Company's provision of comprehensive data processing
and information management services to HHL. The five-year term of the
Outsourcing Amendment calls for fixed annual fees that range from $6,700,000 to
$9,500,000 subject to upward adjustment in the event of material changes in the
scope of service and/or growth in HHL revenue in excess of 7% annually. The
Company assumed the financial responsibility for all personnel, equipment, and
software costs required to provide such services effective July 1, 1993, and the
former HHL employees retained to provide services under the Outsourcing
Amendment became employees of the Company on January 1, 1994.
During the years ended October 31, 1995, 1994, and 1993, the Company
received approximately $8,877,000, $9,548,000, and $5,831,000 in fees from HHL
related to these agreements, and, in connection with jointly executed client
projects, HHL has charged the Company expenses for services totaling $1,337,000,
$1,091,000, and $478,000 in 1995, 1994, and 1993, respectively.
The Company also earned revenue from other related parties of $545,000,
$353,000, and $180,000 in 1995, 1994, and 1993, respectively. In fiscal year
1995, the Company's related party revenue of $545,000 resulted from fees from
HISCo for services provided pursuant to the HISCo Agreement.
During the year ended October 31, 1995, the Company made an additional
investment in HHL. The investment of $522,000 represented the purchase of 522
shares of HHL Convertible Preferred Stock. This additional investment is
reflected in the accompanying consolidated financial statements.
F-27
33
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the Company's unaudited quarterly operating
results for its last three fiscal years.
(In Thousands, Except Earnings Per Common Share) First QuarterSecond QuarterThird QuarterFourth Quarter
- - ------------------------------------------------------------------------------------------------------------
1995:
Revenue $ 20,985 21,041 23,020 24,681
Cost of services 16,471 16,752 18,786 19,618
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 4,514 4,289 4,234 5,063
Operating income 4,434 4,234 4,180 5,009
Income before extraordinary item 1,807 2,417 2,413 2,965
Income per common share before extraordinary item $ 0.11 0.14 0.14 0.17
- - ------------------------------------------------------------------------------------------------------------
1994:
Revenue $ 17,091 17,620 18,742 19,723
Cost of services 14,093 14,481 14,966 15,774
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 2,998 3,139 3,776 3,949
Operating income 2,958 3,099 3,734 3,881
Income before extraordinary item 1,647 1,706 2,238 2,133
Income per common share before extraordinary item $ 0.10 0.10 0.13 0.13
- - ------------------------------------------------------------------------------------------------------------
1993:
Revenue $ 13,312 14,021 14,957 17,659
Cost of services 11,078 11,600 11,715 14,596
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 2,234 2,421 3,242 3,063
Operating income 2,051 2,381 3,202 3,023
Income before extraordinary item 881 1,402 1,947 1,547
Income per common share before extraordinary item $ 0.06 0.09 0.12 0.09
- - ------------------------------------------------------------------------------------------------------------
17. SUBSEQUENT EVENTS
On November 28, 1995, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% stock dividend payable on
December 29, 1995, to holders of record of the Company's common stock as of
December 15, 1995. The effect of the stock split has been retroactively
reflected in the accompanying consolidated financial statements and Notes to
Consolidated Financial Statements.
F-28
34
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for doubtful Accounts:
Balance, October 31, 1992 $ 141,000
Provision 31,000
Recoveries 0
Charge-offs (18,000)
------------
Balance, October 31, 1993 154,000
Provision 190,000
Recoveries 0
Charge-offs (75,000)
------------
Balance, October 31, 1994 269,000
Provision 111,000
Recoveries 0
Charge-offs (84,000)
------------
Balance, October 31, 1995 $ 296,000
------------
F - 29
35
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
10.1 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.
23.1 Consents of KPMG Peat Marwick LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand LLP, Independent Accountants
23.3 Report of Independent Accountants on the financial
statements of Health Care microsystems, Inc. as of
December 31, 1994 and 1993 and for the years then ended
23.4 Consent of Ernst and Young LLP, Independent Auditors
23.5 Report of Independent Auditors on the financial statements
of Health Information Systems Corporation as of and for
the period ended October 31, 1995
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for informational
purposes only and not filed
99 Press Release of Health Management Systems, Inc. relating to
the consummation of the acquisition of CDR Associates, Inc.