1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
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 "x" 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 August 31, 1997
Common Stock, $.01 Par Value 17,517,940 Shares
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HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JULY 31, 1997
PART I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of July 31, 1997 1
(unaudited) and October 31, 1996
Consolidated Statements of Operations 2
(unaudited) for the three month and nine month
periods ended July 31, 1997 and July 31, 1996
Consolidated Statement of Shareholders' Equity 3
(unaudited) for the nine month period ended July
31, 1997
Consolidated Statements of Cash Flows 4
(unaudited) for the three month and nine month
periods ended July 31, 1997 and July 31, 1996
Notes to Interim Consolidated Financial 5
Statements (unaudited)
Item 2 Management's Discussion and Analysis of Results of 7
Operations and Financial Condition
PART II OTHER INFORMATION 11
SIGNATURES 12
EXHIBIT INDEX 13
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
July 31, October 31,
1997 1996
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 20,892 22,340
Short-term investments 18,109 17,181
Accounts receivable, net 36,682 42,730
Other current assets 3,972 4,706
Total current assets 79,655 86,957
---------- -------
Property and equipment, net 7,437 7,823
Intangible assets, net 14,798 5,257
Capitalized software costs, net 2,142 1,472
Investments in affiliates 0 6,824
Other assets 3,766 1,310
---------- -------
Total assets $ 107,798 109,643
========== =======
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,046 19,676
Amounts payable to affiliates 0 585
Deferred revenue 4,918 4,975
Deferred income taxes 7,561 6,968
---------- -------
Total current liabilities 26,525 32,204
Other liabilities 1,744 2,770
Deferred income taxes 0 57
---------- -------
Total liabilities 28,269 35,031
---------- -------
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
none issued and outstanding 0 0
Common stock - $.01 par value; 45,000,000 shares authorized;
17,511,686 shares issued and outstanding at July 31, 1997;
17,520,991 shares issued and outstanding at October 31, 1996 177 175
Capital in excess of par value 67,029 62,541
Retained earnings 12,906 11,425
Unrealized appreciation on short-term investments 675 471
---------- -------
80,787 74,612
Less treasury stock, at cost (237,500 shares) (1,258) 0
---------- -------
Total shareholders' equity 79,529 74,612
---------- -------
Commitments and contingencies
Total liabilities and shareholders' equity $ 107,798 109,643
========== =======
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ In Thousands, Except Per Share Amounts)
Three months end Nine months ended
July 31, July 31,
1997 1996 1997 1996
---- ---- ---- ----
Revenue:
Trade $22,103 25,807 64,152 72,765
Affiliates 0 128 331 4,496
22,103 25,935 64,483 77,261
------- ------ ------ ------
Cost of services:
Compensation 13,784 14,295 38,948 37,942
Data processing 1,739 4,136 5,327 8,413
Occupancy 2,637 2,111 7,196 5,594
Other 4,903 8,013 12,856 16,764
------- ------ ------ ------
23,063 28,555 64,327 68,713
------- ------ ------ ------
Operating (loss) margin before amortization of
intangibles (960) (2,620) 156 8,548
Amortization of intangibles 512 51 797 161
------- ------ ------ ------
Operating (loss) income (1,472) (2,671) (641) 8,387
Other income:
Net interest income 437 186 2,209 665
Loss on investment 0 (927) 0 (927)
Merger related costs 0 0 (537) (489)
Equity in (loss) earnings of affiliate 0 (109) (310) 188
------- ------ ------ ------
437 (850) 1,362 (563)
(Loss) income before income taxes (1,035) (3,521) 721 7,824
Income tax benefit (expense) 432 1,424 760 (3,209)
------- ------ ------ ------
Net (loss) income $ (603) (2,097) 1,481 4,615
======= ====== ====== ======
Earnings per share data:
Net (loss) income per weighted average share of
common stock outstanding $ (0.03) (0.12) 0.08 0.25
======= ====== ====== ======
Weighted average shares outstanding 17,627 17,365 17,936 18,448
======= ====== ====== ======
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
($ In Thousands)
Unrealized
Common Stock Capital In Appreciation
Par Excess Of Retained on Short-term
Shares Value Par Value Earnings Investments
------ ----- --------- -------- -----------
Balance at October 31, 1996, as originally reported 17,348,841 $174 57,583 18,301 471
Adjustments for Quality Standards in
Medicine, Inc. ("QSM") pooling of interests 172,150 1 4,958 (6,876) 0
---------- ---- ------ ------ ---
Balance at October 31, 1996, as restated 17,520,991 175 62,541 11,425 471
Net income 0 0 0 1,481 0
Stock option activity 55,455 0 289 0 0
Employee Stock Purchase Plan activity 84,890 1 636 0 0
Stock issued to retire QSM debt 87,850 1 1,434 0 0
Stock options issued to non-employees 0 0 87 0 0
Treasury stock (237,500) 0 0 0 0
Disqualifying dispositions 0 0 2,042 0 0
Appreciation on
short-term investments 0 0 0 0 204
---------- ---- ------ ------ ---
Balance at July 31, 1997 17,511,686 $177 67,029 12,906 675
========== ==== ====== ====== ===
Total
Treasury Shareholders'
Stock Equity
----- ------
Balance at October 31, 1996, as originally reported 0 76,529
Adjustments for Quality Standards in
Medicine, Inc. ("QSM") pooling of interests 0 (1,917)
------ ------
Balance at October 31, 1996, as restated 0 74,612
Net income 0 1,481
Stock option activity 0 289
Employee Stock Purchase Plan activity 0 637
Stock issued to retire QSM debt 0 1,435
Stock options issued to non-employees 0 87
Treasury stock (1,258) (1,258)
Disqualifying dispositions 0 2,042
Appreciation on
short-term investments 0 204
------ ------
Balance at July 31, 1997 (1,258) 79,529
====== ======
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ In Thousands)
Three months end Nine months ended
July 31, July 31,
1997 1996 1997 1996
---- ---- ---- ----
Operating activities:
Net (loss) income $ (603) (2,097) 1,481 4,615
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
Loss on investment 0 927 0 927
Depreciation and amortization 1,389 806 3,383 2,436
Software capitalization (334) (283) (1,116) (834)
Increase (Decrease) in Provision for doubtful accounts (126) 2,871 (252) 3,168
Deferred tax expense 754 138 383 626
Equity in loss (earnings) of affiliate 0 137 311 (217)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 5,191 (5,247) 7,843 (18,940)
Decrease (increase) in other current assets 2,525 (3,998) 3,402 (4,063)
Increase (decrease) in accounts payable and accrued expenses (279) 6,782 (5,019) 3,507
Increase (decrease) in amounts payable to affiliates 0 2,038 (747) 2,038
Increase (decrease) in deferred revenue (373) 442 (779) 1,061
Decrease (increase) in other assets and liabilities, net (1,955) 126 (2,509) 1,363
-------- ------ ------ -------
Total adjustments 6,792 4,739 4,900 (8,928)
-------- ------ ------ -------
Net cash provided by (used in) operating activities 6,189 2,642 6,381 (4,313)
-------- ------ ------ -------
Investing activities:
Capital asset expenditures (234) (1,672) (1,055) (3,271)
Acquisition of assets of subsidiaries of GHS, Inc. (2,146) 0 (2,146) 0
Acquisition of Health Information Systems Corporation, net of cash
acquired 0 0 (3,689) 0
Net decrease (increase) in short-term investments (347) 1,771 (693) 1,134
-------- ------ ------ -------
Net cash provided by (used in) investing activities (2,727) 99 (7,583) (2,137)
-------- ------ ------ -------
Financing activities:
Proceeds from issuance of common stock 84 334 637 2,101
Proceeds from exercise of stock options 142 2,174 375 5,414
Treasury stock acquisition (1,258) 0 (1,258) 0
Proceeds from issuance of notes payable 0 0 0 148
-------- ------ ------ -------
Net cash provided by (used in) financing activities (1,032) 2,508 (246) 7,663
-------- ------ ------ -------
Net increase (decrease) in cash and cash equivalents 2,430 5,249 (1,448) 1,213
Cash and cash equivalents at beginning of period 18,462 6,789 22,340 10,825
-------- ------ ------ -------
Cash and cash equivalents at end of period $ 20,892 12,038 20,892 12,038
======== ====== ====== ======
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
Health Management Systems, Inc. ("HMS" or the "Company") management is
responsible for the accompanying unaudited interim consolidated financial
statements and the related information included in these notes to the
unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position
and results of operations and cash flows for the periods presented.
Results of operations for interim periods are not necessarily indicative
of the results to be expected for the entire year. The Company completed
an acquisition during the third quarter of fiscal year 1997. The
acquisition transaction was accounted for using the purchase method of
accounting. For further details see Note 2 of the unaudited notes to
interim consolidated financial statements.
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 year ended October 31, 1996 included in the
Company's Annual Report on Form 10-K for such year as filed with the
Securities and Exchange Commission (the "Commission"). However, the reader
should be aware that the October 31, 1996 financial statements have been
retroactively restated for the acquisition of Quality Standards in
Medicine, Inc. ("QSM") as noted in the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1997.
2. ACQUISITION OF THE ASSETS OF GLOBAL HEALTH SYSTEMS INC. AND GHS MANAGEMENT
SERVICES
In July 1997, the Company acquired substantially all the assets of the
subsidiaries of GHS, Inc. ("GHSI"), Global Health Systems, Inc. and GHS
Management Services, Inc. (collectively, "Global"),for $2,146,000. These
subsidiaries provide computerized record-based processing systems and
services for managed care, public health and ambulatory care facilities.
The acquisition was accounted for using the purchase method of accounting
and accordingly the results of operations for Global from the date of
acquisition through July 31, 1997 are included in the accompanying
unaudited interim consolidated financial statements. The $1,701,000 excess
of the purchase price over the fair market value of the assets acquired
was recorded as goodwill and is being amortized over a period not to
exceed 20 years.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes during the quarters ended July 31, 1997 and
1996 was $74,000, and $1,406,000, respectively. Cash paid for income taxes
during the nine months ended July 31, 1997 and 1996 was $253,000 and
$5,887,000, respectively. During the quarter ended July 31, 1997, the
Company received an income tax refund of $3,497,000, which had previously
been accrued.
The Company recorded significant non-cash transactions during the nine
months ended July 31, 1997 and 1996. The non-cash transactions in the nine
months ended July 31, 1997 included the issuance of 87,850 shares of the
Company's common stock to settle $1,435,000 of QSM notes payable plus
accrued interest. Additionally, the Company recorded $2,042,000
and $1,077,000 for the nine months ended July 31, 1997 and 1996 as
disqualified dispositions related to certain compensatory stock option
exercises, which had the effect of reducing the Company's tax liability
with an offsetting increase to stockholders' equity.
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4. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earning
Per Share". SFAS 128 establishes standards for computing and presenting
earnings per share. In accordance with the effective date of SFAS 128, the
Company will adopt SFAS 128 as of January 31, 1998. This statement is not
expected to have a material impact on the Company's financial statements.
5. TREASURY STOCK
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 will be deposited in the Company's treasury and used
for general corporate purposes. Through July 31, 1997, the Company had
repurchased in the open market 237,500 shares, for an aggregate purchase
price of $1,258,000.
6. STOCK OPTION EXCHANGE PROGRAM
On May 28, 1997, the Board of Directors authorized a stock option exchange
program for employee participants in the Company's Stock Option and
Restricted Stock Purchase Plan. Eligible employees who held stock options
("Old Options") with exercise prices in excess of $10.00 per share were
able to exchange them for stock options ("New Options") exercisable for a
lesser number of shares with an exercise price of $5.88 per share, the
average price of the Company's Common Stock on the Nasdaq National Market
System on June 2, 1997. Approximately, 1,600,000 Old Options were eligible
to be exchanged for 900,000 New Options. Certain executive officers of the
Company were either ineligible to participate, or had limitations on their
ability to participate, in the stock option exchange. Eligible employees
had approximately one month's time until June 30, 1997, to exchange their
Old Options for New Options. At the end of the exchange program, 1,209,100
Old Options were exchanged for 606,300 New Options.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- THREE MONTH AND NINE MONTH PERIODS ENDED JULY 31, 1997
AND 1996
OPERATING RESULTS
THREE MONTHS ENDED JULY 31, 1997
Consolidated revenue for the quarter ended July 31, 1997 was $22,103,000, a
decrease of $3,832,000 or 15% after the one-time HHL Financial Services, Inc.
("HHL") revenue reversal of $2,180,000 from the comparable prior year period.
Before the effect of the one-time HHL revenue reversal, consolidated revenue
decreased $6,012,000 or 21% from the comparable prior year period. The Company's
Transfer Payment Services ("TPS"), previously referred to as the Company's
Revenue Enhancement Services and which include Retroactive Claims Reprocessing
("RCR") Services, Third Party Liability Recovery ("TPLR") Services, and
Comprehensive Account Management Services ("CAMS"), accounted for $10,933,000 or
49% of the Company's consolidated revenue for the third quarter of 1997,
compared to $18,194,000 or 70% last year. Revenue from TPS decreased $7,261,000
or 40% from the comparable year period principally due to timing differences in
processing projects, one-time projects completed in the third quarter of 1996, a
contract hiatus with a major client, lower billing volumes and lower fee
structures. Before the one-time HHL revenue reversal, TPS revenue decreased
$9,441,000 or 46% from the comparable prior year period. Revenue from Managed
Care Support ("MCS") services was $6,314,000, an increase of $870,000 or 16%
over the comparable prior year period. Combined revenue from HSA Managed Care
Systems, Inc. ("HSA") and Global were $3,602,000 for the third quarter of 1997.
There was no comparable prior year period revenue for HSA and Global because
they were acquired during fiscal 1997 in transactions accounted for under the
purchase method of accounting. The Company's Electronic Data Interchange ("EDI")
services revenue was $1,254,000 for the third quarter of 1997, a decrease of
$1,043,000 or 45% from the comparable prior year period.
Cost of Services for the quarter was $23,063,000, a decrease of $5,492,000 from
the comparable prior year period primarily as a result of the HHL one-time
charge of $6,704,000 in the third quarter of 1996. The one-time charge in the
third quarter of 1996 was comprised of $1,362,000 of compensation costs,
$2,199,000 of data processing costs and $3,143,000 of other operating expenses,
including $2,881,000 of bad debt expense related to HHL accounts receivables.
Excluding the one-time charge, operating expenses increased $1,212,000 or 6%
from the comparable prior year period.
Compensation expense for the quarter was $13,784,000, a decrease of $511,000
from the comparable prior year period. Before the one-time HHL charge in 1996 of
$1,362,000, compensation expense increased $851,000 or 7%. The increase was
primarily due to an increase in salaries of $2,039,000 resulting from the
acquisition of HSA and Global, which was partially offset by a reduction in
bonus and profit sharing accruals of $1,166,000 in the TPS business.
Data processing expense for the quarter was $1,739,000, a decrease of $2,397,000
from the comparable prior year period. Before the one-time HHL charge in 1996 of
$2,199,000, data processing costs decreased $198,000 or 10% due to general cost
savings and fewer personal computer purchases in the quarter.
Occupancy expense for the quarter was $2,637,000, an increase of $526,000 or 25%
from the comparable prior year period. The increase resulted from the addition
of $288,000 in occupancy cost for HSA and Global, with the balance coming from
the expansion of the New York City office and other satellite offices.
Other operating expense for the quarter was $4,903,000, a decrease of $3,110,000
from the comparable prior year period. Before the one-time HHL charge in 1996 of
$3,143,000, other
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operating expenses increased $33,000 or less than 1% primarily attributable to
higher professional fees, offset by lower direct costs.
Operating loss before amortization of intangible assets for the quarter ended
July 31, 1997 was $960,000, an improvement of $1,660,000 from the comparable
prior year period. Before the one-time HHL charge and revenue reversal in 1996,
operating margin decreased $7,224,000.
Net interest income of $437,000 in the third quarter of 1997 increased by
$251,000 or 135% from the comparable prior year period. The increase in net
interest income in the third quarter of 1997 was primarily attributable to
additional interest expense in 1996 related to a potential tax liability and
loan origination fees for the Company's $40,000,000 line of credit. The
Company's investment in HHL of $927,000 was written off in the third quarter of
1996 as part of the one-time charge.
The Company's income tax benefit for the third quarter of 1997 was $432,000.
This compares to an income tax benefit of $1,424,000, after the one-time HHL
charge and revenue reversal, for the comparable prior year period. The Company's
effective tax rates for the third quarter of 1997 and 1996 were approximately
41.7% and 40.4%, respectively.
Net loss for the three month period ended July 31, 1997 was $603,000, an
improvement of $1,494,000 from the comparable prior year period. Before the
after-tax effect of the one-time HHL charge and revenue reversal in 1996 of
$5,514,000, net income decreased $4,020,000.
The Company experienced a loss per share of $0.03 compared to a loss per share
of $0.12 for the comparable period last year. Before the one-time HHL charge and
revenue reversal in 1996, earnings per share decreased $0.23.
NINE MONTHS ENDED JULY 31, 1997
Consolidated revenue for the nine months ended July 31, 1997 was $64,483,000 a
decrease of $12,778,000 or 17% from the comparable prior year period. Before the
one-time HHL revenue reversal in 1996 of $2,180,000, consolidated revenue
decreased $14,958,000 or 19% from the comparable prior year period. TPS revenue
for the nine months ended July 31, 1997 was $36,131,000, a decrease of
$20,436,000. Before the effects of the one-time HHL revenue reversal, TPS
revenue decreased $22,616,000 or 38% from the comparable prior year period,
principally due to one-time projects in fiscal year 1996 for the RCR and TPLR
business, contract expirations, a contract hiatus with a major client, lower
billing volumes and lower fee structures. Revenue from MCS services was
$18,332,000, an increase of $4,180,000 or 30% over the comparable prior year
period. Revenue from HSA and Global was $5,396,000. There are no comparable
prior year figures since HSA and Global were acquired during fiscal 1997 in
transactions accounted for under the purchase method of accounting. Revenue from
EDI services was $4,624,000, a decrease of $1,918,000 or 29% from the comparable
period in 1996.
Cost of services for the nine months ended July 31, 1997 was $64,327,000, a
decrease of $4,386,000 from the comparable prior year period Before the one-time
HHL charge in 1996 of $6,704,000 in the third quarter of 1996, operating
expenses increased $2,318,000 or 4%.
Compensation expense for the nine months was $38,948,000, an increase of
$1,006,000 from the comparable prior year period. Before the one-time HHL charge
in 1996 of $1,362,000, compensation cost increased $2,368,000 or 6%, primarily
due to an increase in salaries of $5,140,000 resulting from the HSA and Global
acquisitions and a 32% increase in average number of employees at a subsidiary
performing MCS services. However, salary increases were offset by lower bonus
and profit sharing accruals of $2,902,000 in the TPS business.
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Data processing expense for the nine months was $5,327,000, a decrease of
$3,086,000 from the comparable prior year period. Before the one-time HHL charge
in 1996 of $2,199,000, data processing expense decreased $887,000 or 14% as a
result of reduced revenue and general cost savings.
Occupancy expense for the nine months was $7,196,000, an increase of $1,602,000
or 29% from the comparable prior year period. The increase was related to the
acquisition of HSA and the expansion of the Company's New York City office and
satellite offices.
Other operating expense for the nine months was $12,856,000, a decrease of
$3,908,000 from the comparable prior year period. Before the one-time HHL charge
in 1996 of $3,143,000, other operating expense decreased $765,000 or 6% due to
lower direct costs and bad debt expense, offset by higher professional fees and
other operating expenses.
Operating margin before amortization of intangible assets for the nine months
ended July 31, 1997 was $156,000, a decrease of $8,392,000, from the comparable
prior year period. Before the one-time HHL charge and revenue reversal in 1996,
operating margin decreased $17,276,000.
Net interest income of $2,209,000 in the nine months ended July 31, 1997
increased by $1,544,000 from the comparable prior year period, primarily due to
a reversal of accrued interest expense resulting from a favorable resolution of
an Internal Revenue Services audit ("IRS audit resolution") in 1997. Merger
related costs of $537,000 were incurred in the nine months ended July 31, 1997
relating to the merger- with QSM in November 1996 and $489,000 in the nine
months ended July 31, 1996 relating to the merger with CDR Associates, Inc.
("CDR") in April 1996. The Company's investment in HHL of $927,000 was written
off in the third quarter of 1996 as part of the one-time charge.
The Company's income tax benefit for the nine months ended July 31, 1997 was
$760,000 resulting primarily from the IRS audit resolution allowing for the
reversal of $1,093,000 in previously accrued tax liability. The Company's
effective tax rate, exclusive of the effect of the IRS audit resolution, for the
nine months ended July 31, 1997 was approximately 46.2%. This compares to income
tax expense of $3,209,000 after the one-time HHL charge and revenue reversal in
1996, and an effective tax rate of approximately 41.0% for the comparable period
in 1996.
Net income for the nine months ended July 31, 1997 was $1,481,000, a decrease of
$3,134,000 from the comparable prior year period. Excluding the IRS audit
resolution in 1997 and the one-time HHL charge and revenue reversal in 1996, net
income decreased $10,128,000 from the comparable prior year period.
The Company's earnings per share for the nine month period ended July 31, 1997
was $0.08, a decrease of $0.17 from the comparable prior year period. Excluding
all one-time events, the Company's year-to-date earnings per share decreased
from $0.58 in 1996 to $0.02 in 1997.
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LIQUIDITY AND CAPITAL RESOURCES
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 would repurchase these shares from
time to time on the open market or in negotiated transactions at prices deemed
appropriate by the Company. Repurchased shares are deposited in the Company's
treasury and used for general corporate purposes. As of July 31, 1997, the
Company had repurchased in the open market 237,500 shares having an aggregate
purchase price of $1,258,000.
On June 30, 1997, the Company amended its unsecured revolving credit facility
with a major money center financial institution in order to remain in compliance
with one of the financial covenants of the credit agreement. The Company's plans
to repurchase $10,000,000 in common stock would have brought the Company below
the minimum consolidated tangible net worth test in fiscal year 1998. The
amended credit agreement reduced the credit facility to $30,000,000 and lowered
the minimum consolidated tangible net worth test for fiscal years 1998 and 1999.
At July 31, 1997, the Company had $53,130,000 in net working capital, a decrease
of $1,623,000 from the level at October 31, 1996. The Company's principal
sources of liquidity at July 31, 1997 consisted of cash, cash equivalents, and
short-term investments aggregating $39,001,000, net accounts receivable of
$36,682,000 and an available balance of $28,400,000 under a line of credit.
Accounts receivable at July 31, 1997 reflected a decrease of $6,048,000 or 14%
from the October 31, 1996 balance. There has been no significant change in the
nature, age or composition of the Company's accounts receivable portfolio.
* * * * *
Except for the historical financial matters discussed above, the statements in
this Form 10-Q are forward looking and are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. These
statements include statements regarding the intent, belief or current
expectations of HMSY and its management. Prospective investors are cautioned
that any such forward looking statements are not guarantees of future
performance and involve a number of risks and uncertainties, and that actual
results may differ materially from those indicated 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 contain
costs in view of its revised revenue outlook, to grow internally or by
acquisition and to integrate acquired businesses into the HMSY group of
companies; (iii) the uncertainties of litigation; (iv) HMSY's dependence on
significant customers; (v) changing conditions in the health care 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 health care expenditures; (vii) competitive actions by other
companies, including the development by competitors of new or superior service
or products or the entry into the market of new competitors; and (viii) other
factors detailed from time to time in HMSY's filings with the Commission. HMSY
assumes no obligation to update the information contained in this press release,
whether as a result of new information, future events or otherwise.
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13
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1 Legal Proceedings -- A consolidated class action lawsuit has
been filed against the Company and certain of its present and
former officers and directors:
1) Baker v. Health Management Systems. Inc., et al., No. 97-
CIV-1865 (HB);
2) Zola v. Health Management Systems, Inc., et. al., No. 97-
CIV-2112 (HB);
3) Ronis v. Health Management Systems, Inc., et. al., No. 97-
CIV-2585 (HB); and
4) Korsinky v. Health Management Systems, Inc., et. al., No.
97-CIV-3637 (HB)
The Complaints in this lawsuit, which are pending in the United
States Court for the Southern District of New York, allege
violations of the Securities Exchange Act of 1934 in connection
with certain allegedly false and misleading statements and seek
damages in an unspecified amount. The Company intends to
vigorously defend these lawsuits.
Item 2 Changes in Securities -- None
Item 3 Defaults Upon Senior Securities -- Not applicable
Item 4 Submission of Matters to a Vote of Security Holders -- None
Item 5 Other Information -- None
Item 6 Exhibits and Reports on Form 8-K -- None
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14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 12, 1997 HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------
(Registrant)
/s/ Phillip Siegel
Phillip Siegel
Vice President and Chief Financial Officer
- 12 -
15
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
2.1 Asset Purchase Agreement, dated as of March 10, 1997, by
and among GHS, Inc., Global Health Systems, Inc. GHS
Management Services, Inc., Health Management Systems, Inc.
and Global Health Acquisition Inc.
2.2 Assignment and Assumption Agreement, dated as of July 15,
1997, between Global Health Acquisition Corp. and HSA
Managed Care Systems, Inc.
10.1 Third Amendment to Credit Agreement and Guaranty,
dated as of June 30, 1997 among Health Management
Systems, Inc., Accelerated Claims Processing,
Inc., Quality Medical Adjudication, Incorporated,
Health Care Microsystems, Inc., CDR Associate,
Inc., HSA Managed Care Systems, Inc., Quality
Standards in Medicine, Inc. and The Chase
Manhattan Bank.
10.2 Consulting Service Agreement, dated as of May 1, 1997 by
and between Improved Funding Techniques, Inc. and Health
Management Systems, Inc.
10.3 Employment Agreement, as of May 1, 1997 by and between
Joseph H. Czajkowski and CDR Associates, Inc., a wholly-
owned subsidiary of Health Management Systems, Inc.
10.4 Employment Agreement, as of May 1, 1997 by and between
Jeffrey R. Donnelly and CDR Associates, Inc., a wholly-
owned subsidiary of Health Management Systems, Inc.
11 Computations of Earnings Per Share
27 Financial Data Schedule (Submitted for informational
purposes only and not deemed to be filed)
13