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 January 31, 1998
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
- -------------------------------- ----------------------------------
(I.R.S. Employer
State of Incorporation 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 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. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at February 28,
Class 1998
--------------------------------- --------------------------------
Common Stock, $.01 Par Value 17,264,007 Shares
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HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JANUARY 31, 1998
PART I FINANCIAL INFORMATION Page No.
Item 1 Financial Statements
Consolidated Balance Sheets as of January 31,
1998 (unaudited) and October 31, 1997 1
Consolidated Statements of Operations
(unaudited) for the three month periods ended
January 31, 1998 and January 31, 1997 2
Consolidated Statement of Shareholders' Equity
(unaudited) for the three month period ended
January 31, 1998 3
Consolidated Statement of Cash Flows
(unaudited) for the three month periods ended
January 31, 1998 and January 31, 1997 4
Notes to Interim Consolidated Financial
Statements (unaudited) 5
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
PART II OTHER INFORMATION 10
SIGNATURES 11
EXHIBIT INDEX 12
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
January 31, October 31,
1998 1997
--------- ---------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 15,790 20,694
Short-term investments 19,347 18,386
Accounts receivable, net 42,223 39,519
Other current assets 3,265 3,384
--------- ---------
Total current assets 80,625 81,983
Property and equipment, net 7,573 7,988
Goodwill, net 12,160 12,316
Capitalized software costs, net 3,167 3,060
Deferred income taxes 2,698 2,721
Other assets 1,249 1,626
--------- ---------
Total assets $ 107,472 109,694
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,422 16,153
Deferred revenue 5,031 5,122
Deferred income taxes 7,056 6,909
--------- ---------
Total current liabilities 26,509 28,184
Other liabilities 1,622 1,704
--------- ---------
Total liabilities 28,131 29,888
--------- ---------
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;
17,790,741 shares issued and 17,236,741 shares outstanding at January 31, 1998;
17,773,653 shares issued and 17,459,153 shares outstanding at October 31, 1997 178 178
Capital in excess of par value 67,383 67,304
Retained earnings 14,385 13,506
Unrealized appreciation on short-term investments 758 681
--------- ---------
82,704 81,669
Less treasury stock, at cost
554,000 shares at January 31, 1998 and 314,500 shares at October 31, 1997 (3,363) (1,863)
--------- ---------
Total shareholders' equity 79,341 79,806
--------- ---------
Total liabilities and shareholders' equity $ 107,472 109,694
========= =========
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts In Thousands, Except Per Share Amounts)
Three months ended
January 31,
------------------
1998 1997
-------- --------
Revenue
Trade $ 25,037 21,309
Affilliates 0 964
-------- --------
25,037 22,273
Cost of services:
Compensation 14,412 11,659
Data processing 2,506 1,793
Occupancy 2,254 2,143
Other 4,332 3,350
-------- --------
23,504 18,945
-------- --------
Operating margin before amortization of intangibles 1,533 3,328
Amortization of intangibles 523 46
-------- --------
Operating income 1,010 3,282
Other income (expense):
Net interest and net other income 460 441
Merger related costs 0 (500)
Equity in loss of affiliate 0 (16)
-------- --------
460 (75)
Income before income taxes 1,470 3,207
Income tax expense (591) (1,403)
-------- --------
Net income $ 879 1,804
======== ========
Earnings per share data:
Basic:
Basic earnings per share $ 0.05 0.10
======== ========
Weighted average common shares outstanding 17,347 17,631
======== ========
Diluted:
Diluted earnings per share $ 0.05 0.10
======== ========
Weighted average common shares and common share equivalents 17,519 18,236
======== ========
See accompanying notes to interim consolidated financial statements.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
($ In Thousands)
Common Stock Unrealized
------------------ Capital In Retained Appreciation Total
Par Excess Of Earnings on Short-term Treasury Shareholders'
Shares Value Par Value (Deficit) Investments Stock Equity
------ ----- --------- --------- ----------- ----- ------
Balance at October 31, 1997 17,459,153 $ 178 67,304 13,506 681 (1,863) 79,806
Net income 0 0 0 879 0 0 879
Stock option activity 562 0 3 0 0 0 3
Employee stock purchase plan activity 16,526 0 76 0 0 0 76
Treasury stock acquisition (239,500) 0 0 0 0 (1,500) (1,500)
Appreciation on short-term investments 0 0 0 0 77 0 77
-----------------------------------------------------------------------------------
Balance at January 31, 1998 17,236,741 $ 178 67,383 14,385 758 (3,363) 79,341
===================================================================================
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 ended
January 31,
--------------------
1998 1997
-------- --------
Operating activities:
Net income $ 879 1,803
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 835 729
Software capitalization (593) (305)
Amortization of intangibles 523 46
Provision for doubtful accounts 0 (17)
Deferred tax expense 170 561
Equity in loss of affiliate 0 16
Changes in assets and liabilities:
Increase in accounts receivable (2,704) (2,236)
Decrease in other current assets 119 716
Decrease in accounts payable and accrued expenses (1,731) (5,309)
Decrease in amounts payable to affiliates 0 (162)
Decrease in deferred revenue (91) (670)
Increase in other assets and liabilities, net 231 352
-------- --------
Net cash used in operating activities (2,362) (4,476)
-------- --------
Investing activities:
Capital asset expenditures (238) (363)
Proceeds from sale of short-term investments (883) (80)
-------- --------
Net cash used in investing activities (1,121) (443)
-------- --------
Financing activities:
Proceeds from issuance of common stock 3 431
Proceeds from exercise of stock options 76 156
Common stock repurchase (1,500) 0
-------- --------
Net cash (used in) provided by financing activities (1,421) 587
-------- --------
Net decrease in cash and cash equivalents (4,904) (4,332)
Cash and cash equivalents at beginning of period 20,694 22,340
-------- --------
Cash and cash equivalents at end of period $ 15,790 18,008
======== ========
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
The management of Health Management Systems, Inc. ("HMS" or the "Company")
is responsible for the accompanying unaudited interim consolidated
financial statements and the related information included in these notes
to the unaudited interim consolidated financial statements. In the opinion
of management, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position
and results of operations and cash flows for the periods presented.
Results of operations of interim periods are not necessarily indicative of
the results to be expected for the entire year.
These unaudited interim consolidated financial statements should be read
in conjunction with the audited consolidated financial statements of the
Company as of and for the year ended October 31, 1997 included in the
Company's Annual Report on Form 10-K for such year as filed with the
Securities and Exchange Commission (the "Commission").
2. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the quarters ended January 31, 1998 and
1997 was $774,000 and $129,000, respectively.
The Company recorded $0 and $2,574,000 for the three months ended January
31, 1998 and 1997, respectively, as disqualified dispositions related to
certain compensatory stock option exercises, which has the effect of
reducing the Company's tax liability with an offsetting increase to
shareholders' equity. Additionally, the Company recorded non-cash
transactions during the quarter ended January 31, 1997, which included the
issuance of 87,850 shares of the Company's common stock to settle
$1,182,000 of Quality Standards in Medicine, Inc. ("QSM") notes payable
plus accrued interest for the comparable prior year period. The Company
acquired QSM in November 1996 using the pooling of interest method of
accounting.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). The Company adopted SFAS 128 during the quarter ended January
31, 1998, and earnings per share amounts for all periods presented in the
accompanying unaudited interim consolidated statement of operations are
calculated and presented in accordance with SFAS 128. The statement
specifies new standards for the computation and presentation of earnings
per share, requiring the presentation of both "basic" and "diluted"
earnings per share. Basic earnings per share is calculated as net earnings
divided by the weighted average common shares outstanding. Diluted
earnings per share is calculated calculated as net earnings divided by the
weighted average common shares outstanding including the dilutive effects
of potential common shares, which include the Company's stock options.
A reconciliation of the numerator and denominator of the calculations for
the three month periods ended January 31, 1998 and 1997 is presented
below.
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3. Earnings Per Share, cont'd
Three months ended
January 31,
1998 1997
------- ------
($ in thousands, except per share data)
Numerator:
Net Income $ 879 1,804
======= ======
Denominator:
Weighted average common shares 17,347 17,631
Potential common shares:
Stock options 172 605
------- ------
Weighted average common shares and common share equivalents 17,519 18,236
======= ======
Basic earnings per share $ 0.05 0.10
======= ======
Diluted earnings per share $ 0.05 0.10
======= ======
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Item 2--Management's Discussion and Analysis of Results of Operations and
Financial Condition--Three Month Periods Ended January 31, 1998 and 1997
Operating Results
Three Months Ended January 31, 1998
Revenue for the first quarter of fiscal year 1998 was $25,037,000, an increase
of $2,764,000 or 12% from the comparable period in 1997. The Company's Transfer
Payment Services ("TPS") division, which includes both Provider and Payor
services, accounted for $12,870,000 or 51% of the Company's consolidated revenue
for the first quarter of 1998, a decrease from 73% from the comparable period in
1997. Revenue from Provider services, comprised of Retroactive Claims
Reprocessing ("RCR"), Comprehensive Account Management Services ("CAMS"), and
Outsourcing, totaled $8,558,000, a decrease of $2,768,000 from the comparable
period in 1997. Outsourcing included $665,000 in revenue attributable to the
assets of Global Health Systems, Inc. and GHS Management Services, Inc.,
subsidiaries of GHS, Inc. (collectively, "Global"), acquired in July 1997, for
which there was no revenue in the comparable prior year period. Revenue from
Payor services, comprised of Third Party Liability Recovery ("TPLR") services
and the Company's CDR Associates, Inc. subsidiary, totaled $4,312,000, a
decrease of $719,000.
Revenue from the Software Systems and Services ("Software") division, comprised
of Decision Support Software ("DSS") and Managed Care Information Systems
("MCIS"), totaled $12,167,000 or 49% of the Company's consolidated revenue for
the first quarter of 1998, an increase of $6,251,000, and an increase from 37%
from the comparable period in 1997. Revenue from DSS was $6,903,000, an increase
of $987,000 or 17% from the comparable period in 1997. Revenue from MCIS was
$5,264,000, for which there was no comparable revenue during the first quarter
of 1997.
Cost of services for the first quarter of 1998 was $23,504,000, an increase of
$4,559,000 or 24% from the comparable period in 1997. The increase in cost of
services was due primarily to the addition of HSA Managed Care Systems, Inc.
("HSA"), comprising the Company's MCIS offering, and the addition of Global to
the Company's Outsourcing offering and acquired as a purchase in July 1997. The
Company purchased the remaining 57% of the equity of HSA, not previously owned
by it, in March 1997.
Compensation expense for the first quarter of 1998, the Company's largest
expense component, totaled $14,412,000, an increase of $2,753,000 or 24% over
the comparable period in 1997. The HSA acquisition added $2,946,000 in
compensation expense to the Software division, which was offset by a net
decrease in headcount of 113 in the TPS division.
Data processing expense for the first quarter of 1998 was $2,506,000, an
increase of $713,000 or 40% over the comparable period in 1997. This increase
was primarily attributable to the acquisition of HSA, which added $532,000 in
data processing expense.
Occupancy expense for the first quarter of 1998 was $2,254,000, an increase of
$111,000 or 5% over the comparable period in 1997. The increase was due to the
acquisition of HSA, which added $312,000 to occupancy expense, offset by the
sublease of two floors at the Company's New York City offices.
Other operating expense for the first quarter of 1998 was $4,332,000, an
increase of $982,000 or 29% over the comparable period in 1997. The acquisition
of HSA accounted for $563,000 of the increase, while higher professional fees
and employee related costs accounted for the balance of the increase.
Operating margin for the first quarter of 1998 before amortization of intangible
assets was $1,533,000, a decrease of $1,795,000 or 54% from the comparable
period in 1997.
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Amortization of intangible assets for the first quarter of 1998 was $523,000, an
increase of $477,000 over the comparable period in 1997. The increase was due
primarily to the goodwill associated with the HSA acquisition.
Net interest income in the first quarter of 1998 was $460,000, an increase of
$19,000 or 58% over the comparable period in 1997. The Company did not incur any
merger-related costs in the first quarter of 1998, while the comparable period
in 1997 included $500,000 in one-time costs relating to the QSM merger.
Income tax expense for the first quarter of 1998 was $591,000, a decrease of
$812,000 or 58% from the comparable period in 1997. The decrease in income tax
expense was due both to the Company's lower pre-tax profit and an effective tax
rate for the first quarter of 1998 of 40.3%, as compared with 43.8% for the
first quarter of 1997.
Net income for the first quarter of 1998 was $879,000, a decrease of $925,000 or
51% from the comparable period in 1997. Basic earnings per share for the first
quarter of 1998 was $0.05, a decrease of $0.05 from the comparable period in
1997. Excluding the QSM merger related costs from the comparable period in 1997,
basic earnings per share decreased $0.08.
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Liquidity and Capital Resources
At January 31, 1998, the Company had $54,116,000 in net working capital, an
increase of $317,000 over the level at October 31, 1997. The Company's principal
sources of liquidity at January 31, 1998 consisted of cash, cash equivalents,
and short-term investments aggregating $35,137,000, net accounts receivable of
$42,223,000, and an available balance of $28,400,000 under a line of credit.
Accounts receivable at January 31, 1998 reflected an increase of $2,704,000 or
6.8% from the October 31, 1997 balance. There has been no significant change in
the nature, age, or composition of the Company's accounts receivable portfolio.
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 will be deposited in the
Company's treasury and used for general corporate purposes. In the first quarter
of fiscal year 1998, the Company repurchased in the open market 239,500 shares
having an aggregate purchase price of $1,500,000; since the inception of the
repurchase program in June 1997, the Company has repurchased in the open market
554,000 shares having an aggregate purchase price of $3,363,000.
* * * * *
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of HMS, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMS to contain costs in view of its revised revenue outlook, to
grow internally or by acquisition and to integrate acquired businesses into the
HMS group of companies; (iii) the uncertainties of litigation; (iv) HMS's
dependence on significant customers; (v) changing conditions in the healthcare
industry which could simplify the reimbursement process and adversely affect
HMS's business; (vi) government regulatory and political pressures which could
reduce the rate of growth of health care expenditures; (vii) competitive actions
by other companies, including the development by competitors of new or superior
services or products or the entry into the market of new competitors; (viii) the
ability of HMS to deal with the Year 2000 Problem on a timely basis; (ix) all
the risks inherent in the development, introduction, and implementation of new
products and services; and other factors both referenced and not referenced in
this document. When used in this document, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe," and similar expressions are
intended to identify forward-looking statements, and the above described risks
inherent therein.
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II--OTHER INFORMATION
Item 1 Legal Proceedings--In April and May 1997, five purported class
action lawsuits were commenced in the United States District Court
for the Southern District of New York against the Company and
certain of its present and former officers and directors alleging
violations of the Securities Exchange Act of 1934 in connection with
certain allegedly false and misleading statements. These lawsuits,
which seek damages in an unspecified amount, have been consolidated
into a single proceeding captioned In re Health Management Systems,
Inc., Securities Litigation (97 CIV-1965 (HB) and a Consolidated
Amended Complaint has been filed. Defendants have made a motion to
dismiss the Consolidated Amended Complaint. The motion was submitted
to the Court on December 18, 1997 following oral argument and is sub
judice. Discovery has been stayed pending a determination of the
Company's motion to dismiss. The Company believes it has meritorious
defenses to the claims asserted against it and intends to vigorously
defend this litigation should the pending motion to dismiss not be
granted. It is too early to form any opinion as to the eventual
outcome of this matter.
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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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 6, 1998 HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------
(Registrant)
/s/ Paul J. Kerz
-------------------------------------
Paul J. Kerz
President and Chief Executive Officer
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
10.1 Sublease Agreement, dated December 23, 1997, between
Health Management Systems, Inc. and Shandwick USA, Inc.
10.2 Consent to Sublease, dated December 23, 1997, by 387
P.A.S. Enterprises to the subletting by Health
Management Systems, Inc to Shandwick USA, Inc.
11 Computations of Earnings Per Share
27 Financial Data Schedule (Submitted for informational
purposes only and not deemed to be filed)
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