10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2005
OR
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| o |
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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: 0-50194
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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New York
(State or other jurisdiction of
incorporation or organization)
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11-3656261
(I.R.S. Employer)
Identification No.) |
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401 Park Avenue South, New York, New York
(Address of principal executive offices)
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10016
(Zip Code) |
(212) 725-7965
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).
Yes þ No o
The
number of shares common stock, $.01 par value, outstanding as of November 8, 2005 was
20,095,377.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
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September 30, |
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December 31, |
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2005 |
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2004 |
|
Assets |
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|
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|
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Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,861 |
|
|
$ |
9,196 |
|
Short-term investments |
|
|
32,050 |
|
|
|
22,500 |
|
Accounts receivable, net |
|
|
18,309 |
|
|
|
13,544 |
|
Prepaid expenses and other current assets, including deferred tax assets of
$2,270 and $1,981 at September 30, 2005 and December 31, 2004, respectively |
|
|
3,713 |
|
|
|
3,196 |
|
Current assets of discontinued operations |
|
|
— |
|
|
|
10,605 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
59,933 |
|
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|
59,041 |
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Property and equipment, net |
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5,007 |
|
|
|
4,183 |
|
Goodwill, net |
|
|
2,382 |
|
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|
2,382 |
|
Deferred income taxes, net |
|
|
6,650 |
|
|
|
6,939 |
|
Other assets |
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|
5,398 |
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|
|
37 |
|
Noncurrent assets of discontinued operations |
|
|
— |
|
|
|
4,081 |
|
|
|
|
|
|
|
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Total assets |
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$ |
79,370 |
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|
$ |
76,663 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable, accrued expenses and other liabilities |
|
$ |
9,993 |
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|
$ |
11,228 |
|
Current liabilities of discontinued operations |
|
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— |
|
|
|
3,666 |
|
|
|
|
|
|
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Total current liabilities |
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|
9,993 |
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|
|
14,894 |
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|
|
|
|
|
|
|
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Other liabilities |
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|
1,550 |
|
|
|
1,371 |
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|
|
|
|
|
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Total liabilities |
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11,543 |
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|
|
16,265 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock — $.01 par value; 5,000,000 shares authorized; none issued |
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— |
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— |
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Common stock — $.01 par value; 45,000,000 shares authorized;
21,698,325 shares issued and 20,035,479 shares outstanding at September 30, 2005;
20,980,331 shares issued and 19,335,415 shares outstanding at December 31, 2004 |
|
|
217 |
|
|
|
210 |
|
Capital in excess of par value |
|
|
79,430 |
|
|
|
77,237 |
|
Accumulated deficit |
|
|
(2,423 |
) |
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|
(7,761 |
) |
Treasury stock, at cost; 1,662,846 and 1,644,916 shares at September 30, 2005
and December 31, 2004, respectively |
|
|
(9,397 |
) |
|
|
(9,288 |
) |
|
|
|
|
|
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Total shareholders’ equity |
|
|
67,827 |
|
|
|
60,398 |
|
|
|
|
|
|
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Total liabilities and shareholders’ equity |
|
$ |
79,370 |
|
|
$ |
76,663 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Month and Nine Month Periods ended September 30, 2005 and 2004
(in thousands, except per share amounts)
(unaudited)
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Three months ended September 30, |
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Nine months ended September 30, |
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2005 |
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2004 |
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|
2005 |
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2004 |
|
Revenue |
|
$ |
17,435 |
|
|
$ |
12,383 |
|
|
$ |
42,796 |
|
|
$ |
36,105 |
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Cost of services: |
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|
|
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|
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|
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Compensation |
|
|
6,974 |
|
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|
5,490 |
|
|
|
19,096 |
|
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|
17,097 |
|
Data processing |
|
|
1,273 |
|
|
|
1,003 |
|
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3,375 |
|
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|
2,958 |
|
Occupancy |
|
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1,215 |
|
|
|
1,076 |
|
|
|
3,347 |
|
|
|
3,093 |
|
Direct project costs |
|
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2,822 |
|
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|
2,219 |
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|
|
7,187 |
|
|
|
6,402 |
|
Other operating costs |
|
|
1,472 |
|
|
|
1,542 |
|
|
|
4,620 |
|
|
|
4,145 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total cost of services |
|
|
13,756 |
|
|
|
11,330 |
|
|
|
37,625 |
|
|
|
33,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating income |
|
|
3,679 |
|
|
|
1,053 |
|
|
|
5,171 |
|
|
|
2,410 |
|
Net interest income |
|
|
328 |
|
|
|
83 |
|
|
|
776 |
|
|
|
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
4,007 |
|
|
|
1,136 |
|
|
|
5,947 |
|
|
|
2,611 |
|
Income taxes |
|
|
200 |
|
|
|
39 |
|
|
|
255 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,807 |
|
|
|
1,097 |
|
|
|
5,692 |
|
|
|
2,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Discontinued operations: |
|
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|
|
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|
|
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Income (loss) from operations |
|
|
948 |
|
|
|
371 |
|
|
|
803 |
|
|
|
(213 |
) |
Loss on sale of discontinued operations |
|
|
(1,157 |
) |
|
|
— |
|
|
|
(1,157 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
(209 |
) |
|
|
371 |
|
|
|
(354 |
) |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,598 |
|
|
$ |
1,468 |
|
|
$ |
5,338 |
|
|
$ |
2,337 |
|
|
|
|
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Basic income per share data: |
|
|
|
|
|
|
|
|
|
|
|
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|
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Income per share from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.06 |
|
|
$ |
0.29 |
|
|
$ |
0.13 |
|
Income (loss) per share from discontinued operations |
|
|
(0.01 |
) |
|
|
0.02 |
|
|
|
(0.02 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Net income per basic share |
|
$ |
0.18 |
|
|
$ |
0.08 |
|
|
$ |
0.27 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic |
|
|
19,948 |
|
|
|
19,213 |
|
|
|
19,770 |
|
|
|
19,003 |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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|
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Diluted income per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per share from continuing operations |
|
$ |
0.17 |
|
|
$ |
0.05 |
|
|
$ |
0.25 |
|
|
$ |
0.12 |
|
Income (loss) per share from discontinued operations |
|
|
(0.01 |
) |
|
|
0.02 |
|
|
|
(0.02 |
) |
|
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share |
|
$ |
0.16 |
|
|
$ |
0.07 |
|
|
$ |
0.23 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares, diluted |
|
|
22,933 |
|
|
|
22,265 |
|
|
|
22,827 |
|
|
|
22,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Nine Month Period Ended September 30, 2005
(In thousands, except share amounts)
(unaudited)
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Common Stock |
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Capital In |
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Total |
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| |
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# of Shares |
|
|
Par |
|
|
Excess Of |
|
|
Accumulated |
|
|
Treasury Stock |
|
|
Shareholders' |
|
| |
|
Issued |
|
|
Value |
|
|
Par Value |
|
|
Deficit |
|
|
# of Shares |
|
|
Amount |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
20,980,331 |
|
|
$ |
210 |
|
|
$ |
77,237 |
|
|
|
($7,761 |
) |
|
|
1,644,916 |
|
|
|
($9,288 |
) |
|
$ |
60,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net and comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,338 |
|
|
|
— |
|
|
|
— |
|
|
|
5,338 |
|
Purchases of treasury stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
17,930 |
|
|
|
(109 |
) |
|
|
(109 |
) |
Exercise of stock options |
|
|
717,994 |
|
|
|
7 |
|
|
|
2,193 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
21,698,325 |
|
|
$ |
217 |
|
|
$ |
79,430 |
|
|
|
($2,423 |
) |
|
|
1,662,846 |
|
|
|
($9,397 |
) |
|
$ |
67,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Month Periods ended September 30, 2005 and 2004
(in thousands)
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,338 |
|
|
$ |
2,337 |
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
354 |
|
|
|
213 |
|
Loss on disposal of fixed assets |
|
|
32 |
|
|
|
20 |
|
Depreciation and amortization |
|
|
1,724 |
|
|
|
1,276 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
(4,765 |
) |
|
|
(4,454 |
) |
(Increase) decrease in prepaid expenses and other current assets |
|
|
(60 |
) |
|
|
865 |
|
Increase in other assets |
|
|
12 |
|
|
|
(837 |
) |
Increase in accounts payable, accrued expenses and
other liabilities |
|
|
(1,057 |
) |
|
|
595 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,578 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(60,250 |
) |
|
|
— |
|
Sales of short-term investments |
|
|
50,700 |
|
|
|
— |
|
Proceeds from sale of Accordis |
|
|
2,000 |
|
|
|
— |
|
Purchases of property and equipment |
|
|
(2,138 |
) |
|
|
(1,463 |
) |
Investment in software |
|
|
(441 |
) |
|
|
(295 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(10,129 |
) |
|
|
(1,758 |
) |
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
2,200 |
|
|
|
1,778 |
|
Purchases of treasury stock |
|
|
(109 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,091 |
|
|
|
1,778 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(6,460 |
) |
|
|
35 |
|
Cash provided by (used in) discontinued operations |
|
|
3,125 |
|
|
|
(893 |
) |
Cash and cash equivalents at beginning of period |
|
|
9,196 |
|
|
|
26,615 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
5,861 |
|
|
$ |
25,757 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
234 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
|
Note receivable from the sale of Accordis |
|
$ |
5,535 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of HMS Holdings Corp. (the Company) is responsible for the accompanying
unaudited interim condensed consolidated financial statements and the related information included
in the notes to the condensed consolidated financial statements. In the opinion of management, the
unaudited interim condensed consolidated financial statements reflect all adjustments, including
normal recurring adjustments necessary for the fair presentation of the Company’s financial
position and results of operations and cash flows for the periods presented. Results of operations
for interim periods are not necessarily indicative of the results to be expected for the entire
year.
These unaudited interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the Company as of and for the
year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K for such year, as
filed with the Securities and Exchange Commission (SEC).
2. Stock-Based Compensation
The Company accounts for stock-based compensation under Statement of Financial Accounting
Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 123,
the Company has elected to continue following the provisions of Accounting Principles Board (APB)
Opinion No. 25, “Accounting for Stock Issued to Employees,” and to adopt only the disclosure
provisions of SFAS No. 123. Accordingly, no employee compensation costs have been recognized for
the Company’s stock option plans. Had compensation costs for the Company’s stock options been
determined consistent with the fair value method prescribed by SFAS 123, the Company’s net income
and related per share amounts would have been adjusted to the pro forma amounts indicated below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three Months Ended Sept 30, |
|
|
Nine Months Ended Sept 30, |
|
| (in thousands, except per share amounts) |
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net income, as reported |
|
|
|
$ |
3,598 |
|
|
$ |
1,468 |
|
|
$ |
5,338 |
|
|
$ |
2,337 |
|
| Stock-based employee compensation expense
included in reported net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects |
|
|
(358 |
) |
|
|
(332 |
) |
|
|
(1,832 |
) |
|
|
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
|
|
$ |
3,240 |
|
|
$ |
1,136 |
|
|
$ |
3,506 |
|
|
$ |
1,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
basic share |
|
As reported |
|
$ |
0.18 |
|
|
$ |
0.08 |
|
|
$ |
0.27 |
|
|
$ |
0.12 |
|
|
|
Pro forma |
|
$ |
0.16 |
|
|
$ |
0.06 |
|
|
$ |
0.18 |
|
|
$ |
0.07 |
|
Net income per
diluted share |
|
As reported |
|
$ |
0.16 |
|
|
$ |
0.07 |
|
|
$ |
0.23 |
|
|
$ |
0.11 |
|
|
|
Pro forma |
|
$ |
0.14 |
|
|
$ |
0.05 |
|
|
$ |
0.15 |
|
|
$ |
0.06 |
|
7
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The effect presented above by applying the disclosure-only provisions of SFAS 123 may not be
representative of the pro forma effect in future years.
On December 16, 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised
2004), “Share-Based Payment” (SFAS No. 123R), which is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation.” SFAS No. 123R supercedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. Generally, the approach
in SFAS No. 123R is similar to the approach described in SFAS 123. However, SFAS No. 123R requires
all share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. Pro forma disclosure is no longer an
alternative. SFAS No. 123R must be adopted no later than the first annual period beginning after
June 15, 2005.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to
employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123R’s fair
value method will have a significant impact on the Company’s results of operations. The impact of
the adoption of SFAS No. 123R cannot be determined at this time because it will depend upon levels
of share-based payments granted in the future.
3. Basis of Presentation and Principles of Consolidation
| |
(a) |
|
Organization and Business |
HMS Holdings Corp. furnishes revenue recovery and cost containment services to healthcare
providers and government health care payors. The Company helps clients increase revenue,
accelerate collections, and reduce operating and administrative costs. The Company operates two
businesses through its wholly-owned subsidiaries, Health Management Systems, Inc. and Reimbursement
Services Group Inc.
| |
(b) |
|
Principles of Consolidation |
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in
consolidation.
Certain reclassifications were made to prior period amounts to conform to the current period
presentation.
4. Discontinued Operation
On August 31, 2005, the Company sold the stock of its Accordis Inc. (Accordis) subsidiary to
Accordis Holding Corp. (AHC), an unrelated New York based private company, for $8 million,
consisting of cash of $2 million and an interest bearing five year promissory note of $6 million.
The note bears interest at 6% per annum and requires semi-annual principal payments of $100,000,
with the balance of $5.1 million due in a balloon payment on August 31, 2010. Management has
discounted this
8
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
note by $465,000 using an effective rate of 8%, resulting in the note having a net present
value at August 31, 2005 of $5.5 million and is included as a component of other Noncurrent Assets.
The Stock Purchase Agreement (SPA) provided for purchase price adjustments based upon
differences between the Tangible Net Worth (TNW) and Net Accounts Receivable (NAR), as defined and
specified in the SPA, from March 31, 2005 and the final closing of August 31, 2005. Accordis’ NAR
at August 31, 2005 was approximately $0.6 million less than the target in the SPA, resulting in a
negative purchase price adjustment. This reduction in NAR was principally the result of cash
collections exceeding revenue during the period from March 31, 2005 through August 31, 2005. There
was no additional adjustment for TNW. The SPA provides AHC an opportunity to challenge the
computation of NAR and TNW and includes dispute resolution procedures, including binding
arbitration. Any adjustments to TNW or NAR are not expected to be material.
The SPA contains indemnification provisions pursuant to which the Company agreed to indemnify
AHC for liabilities in connection with Accordis that arose prior to the sale of Accordis to AHC on
August 31, 2005. AHC agreed to indemnify the Company for liabilities in connection with Accordis
that arise after the sale. There is a minimum indemnification claim threshold of $250,000 that is
computed after taking into account any insurance proceeds. The Company’s liability under the
indemnification provisions of the SPA is capped at the purchase price. The Company is not aware of
any potential claims under the indemnification provisions of the SPA.
At August 31, 2005, the Company recorded a loss on the sale of the stock of its Accordis
business of $1.2 million, as follows:
| |
|
|
|
|
Gross Purchase Price |
|
$ |
8,000,000 |
|
Less: Discount on Note |
|
|
(465,000 |
) |
Less: Net Accounts Receivable adjustment |
|
|
(565,000 |
) |
|
|
|
|
Adjusted net proceeds |
|
|
6,970,000 |
|
Less: Net assets sold |
|
|
(8,016,000 |
) |
|
|
|
|
Loss on sale before transaction costs |
|
|
(1,046,000 |
) |
Transaction costs |
|
|
(131,000 |
) |
|
|
|
|
Loss on sale |
|
|
(1,177,000 |
) |
Income tax benefit |
|
|
20,000 |
|
|
|
|
|
Net loss on sale |
|
$ |
(1,157,000 |
) |
|
|
|
|
The net assets of Accordis sold exclude certain liabilities retained by the Company of
approximately $0.6 million, consisting principally of liabilities associated with Accordis
customers and former employees.
A major client of Accordis has asserted a claim against Accordis
for certain alleged processing errors in submitting healthcare claims on behalf of the client. In
connection with the sale of Accordis, the Company agreed to indemnify Accordis and its buyer with
respect to this claim. The Company believes that the range of loss on
this claim is between $.7 million and $3.5 million and that a significant portion of the claim may be covered
by insurance. The Company has had discussions with the client regarding the claim, but
the parties have not yet been able to reach a satisfactory resolution and the client has recently
threatened litigation. There can be no assurances that the claim will be settled without material
liability to the Company or that insurance will be available to cover the Company’s losses. The Company
has recorded $.7 million as a liability for this claim.
9
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company entered into a three year Data Services Agreement (DSA) to provide data processing
services to AHC for $2.7 million per annum, which will be reported as revenue in the Company’s
financial statements. The DSA contains certain specified service levels consistent with prior
history and provides for revenue increases in the event AHC exceeds certain transaction levels.
The Company has also entered into a Sublease Agreement with AHC for the portion of one floor at its
headquarters previously occupied by the Accordis business. The sublease is for 18 months at an
annual rent of $0.2 million that will be reported as a reduction of occupancy costs in the
Company’s financial statements. Additionally, the Company entered into a short-term Transition
Services Agreement with AHC to provide accounting and human resource support services through no
later than December 31, 2005. This service will be provided at cost and will be reported as
reductions of expense, principally compensation expense, in the Company’s financial statements.
Results of operations from the Accordis discontinued operations for the two months and eight
months ended August 31, 2005 and the three month and nine months ended September 2004 were as
follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Two Months |
|
|
Three Months |
|
| |
|
Ended August 31, |
|
|
Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
4,558 |
|
|
$ |
8,909 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
968 |
|
|
|
368 |
|
Income tax (expense) benefit |
|
|
(20 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
948 |
|
|
$ |
372 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Eight Months |
|
|
Nine Months |
|
| |
|
Ended August 31, |
|
|
Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Revenue |
|
$ |
17,716 |
|
|
$ |
25,840 |
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
826 |
|
|
|
(239 |
) |
Income tax (expense) benefit |
|
|
(23 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
803 |
|
|
|
($213 |
) |
|
|
|
|
|
|
|
10
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Assets and liabilities of the Accordis discontinued operations at December 31, 2004 were as
follows (in thousands):
| |
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
Current assets |
|
$ |
10,605 |
|
Current liabilities |
|
|
(3,666 |
) |
|
|
|
|
Net current assets |
|
$ |
6,939 |
|
|
|
|
|
Property and equipment |
|
$ |
740 |
|
Goodwill |
|
|
3,297 |
|
Other assets |
|
|
44 |
|
|
|
|
|
Net noncurrent assets |
|
$ |
4,081 |
|
|
|
|
|
5. Income Taxes
The current income tax expense for continuing operations was comprised of the following (in
thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Federal tax expense |
|
$ |
60 |
|
|
$ |
30 |
|
State tax expense |
|
|
140 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Total tax expense |
|
$ |
200 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Nine months ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Federal tax expense |
|
$ |
91 |
|
|
$ |
45 |
|
State tax expense |
|
|
164 |
|
|
|
16 |
|
|
|
|
|
|
|
|
Total tax expense |
|
$ |
255 |
|
|
$ |
61 |
|
|
|
|
|
|
|
|
The current income tax expense in 2005 and 2004 principally arises from alternative minimum
tax requirements.
At September 30, 2005, the Company has recognized a valuation allowance of $2,133,000 against
$11,053,000 of the net deferred tax assets of its continuing operations. The valuation allowance
balance of $2,133,000 is specifically associated with the Company’s net operating losses (NOLs),
which account for the majority of the Company’s deferred tax assets. The Company also expects that
by December 31, 2005, it will have substantially reduced its valuation allowance through income
generated in 2005 and the Accordis purchase price allocation process such that in 2006, the Company
will begin to provide for income tax expense in its results of operations, at an effective rate of
approximately 40%. It is expected that the 2006 provision for income taxes will be primarily a
deferred tax provision as the Company’s
11
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
utilization of available NOL will result in the Company continuing to make payments under the
alternative minimum tax system during 2006.
6. Earnings Per Share
Basic income per share is calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted income per share is calculated by dividing
net income by the weighted average number of common shares and dilutive common share equivalents
outstanding during the period. The Company had weighted average common shares and common share
equivalents outstanding during the three months ended September 30, 2005 and 2004 of 22,933,392 and
22,264,621, respectively. For the three months ended September 30, 2005 and 2004, the Company had
weighted average common shares of 19,948,078 and 19,213,304, respectively. The Company had weighted
average common shares and common share equivalents outstanding during the nine months ended
September 30, 2005 and 2004 of 22,827,368 and 22,179,082, respectively. For the nine months ended
September 30, 2005 and 2004, the Company had weighted average common shares of 19,769,927 and
19,002,879, respectively. The Company’s common share equivalents consist of stock options.
7. Segment Information
Health Management Systems works on behalf of government healthcare programs to contain costs
by recovering expenditures that were the responsibility of a third-party, or that were paid
inappropriately. Health Management Systems’ clients include state Medicaid programs, their managed
care plans, state prescription drug programs, child support enforcement agencies, and other public
programs. The Company’s Reimbursement Services Group (RSG) ensures that healthcare providers
correctly document services that qualify for special reimbursement through the Medicare Cost Report
and other governmental payment mechanisms.
The Company measures the performance of its operating segments through “Operating Income” as
defined in the accompanying unaudited interim condensed consolidated statements of income.
Consistent with how the Company manages these businesses, segment operating margin is reported as
operating contribution prior to corporate overheads. Corporate overheads, consisting of data
processing costs and general and administrative expenses are managed as cost centers servicing
multiple operating businesses. Prior year presentations have been reclassified to be consistent
with the current year presentation.
12
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
|
|
|
|
Health |
|
|
|
|
| |
|
HMS |
|
|
|
|
|
|
Management |
|
|
|
|
| (in thousands) |
|
Holdings |
|
|
RSG |
|
|
Systems |
|
|
Corporate |
|
| |
As of and for the three months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
17,435 |
|
|
$ |
3,868 |
|
|
$ |
13,342 |
|
|
$ |
225 |
|
Operating income (loss) |
|
|
3,679 |
|
|
|
2,542 |
|
|
|
5,339 |
|
|
|
(4,202 |
) |
Total assets |
|
|
79,370 |
|
|
|
5,926 |
|
|
|
19,366 |
|
|
|
54,078 |
|
Goodwill |
|
|
2,382 |
|
|
|
1,299 |
|
|
|
1,083 |
|
|
|
— |
|
Depreciation and amortization |
|
|
621 |
|
|
|
11 |
|
|
|
188 |
|
|
|
422 |
|
Capital expenditures, including investment in software |
|
|
348 |
|
|
|
77 |
|
|
|
679 |
|
|
|
(408 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the three months ended September 30,
2004 (Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
12,383 |
|
|
$ |
1,447 |
|
|
$ |
10,936 |
|
|
$ |
— |
|
Operating income (loss) |
|
|
1,053 |
|
|
|
444 |
|
|
|
4,601 |
|
|
|
(3,992 |
) |
Total assets |
|
|
55,373 |
|
|
|
3,110 |
|
|
|
16,110 |
|
|
|
36,153 |
|
Goodwill |
|
|
2,382 |
|
|
|
1,299 |
|
|
|
1,083 |
|
|
|
— |
|
Depreciation and amortization |
|
|
438 |
|
|
|
1 |
|
|
|
139 |
|
|
|
298 |
|
Capital expenditures, including investment in software |
|
|
511 |
|
|
|
2 |
|
|
|
291 |
|
|
|
218 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the nine months ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
42,796 |
|
|
$ |
5,714 |
|
|
$ |
36,857 |
|
|
$ |
225 |
|
Operating income (loss) |
|
|
5,171 |
|
|
|
2,162 |
|
|
|
14,610 |
|
|
|
(11,601 |
) |
Total assets |
|
|
79,370 |
|
|
|
5,926 |
|
|
|
19,366 |
|
|
|
54,078 |
|
Goodwill |
|
|
2,382 |
|
|
|
1,299 |
|
|
|
1,083 |
|
|
|
— |
|
Depreciation and amortization |
|
|
1,724 |
|
|
|
21 |
|
|
|
477 |
|
|
|
1,226 |
|
Capital expenditures, including investment in software |
|
|
2,579 |
|
|
|
102 |
|
|
|
1,365 |
|
|
|
1,112 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the nine months ended September 30, 2004
(Restated) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
36,105 |
|
|
$ |
4,788 |
|
|
$ |
31,317 |
|
|
$ |
— |
|
Operating income (loss) |
|
|
2,410 |
|
|
|
1,861 |
|
|
|
12,792 |
|
|
|
(12,243 |
) |
Total assets |
|
|
55,373 |
|
|
|
3,110 |
|
|
|
16,110 |
|
|
|
36,153 |
|
Goodwill |
|
|
2,382 |
|
|
|
1,299 |
|
|
|
1,083 |
|
|
|
— |
|
Depreciation and amortization |
|
|
1,276 |
|
|
|
2 |
|
|
|
392 |
|
|
|
882 |
|
Capital expenditures, including investment in software |
|
|
1,759 |
|
|
|
23 |
|
|
|
777 |
|
|
|
959 |
|
| |
Other corporate assets, including cash and cash equivalents, short-term investments, deferred
tax assets and corporate data processing assets are shown in the corporate category and do not
include the assets of discontinued operations. Prior years amounts include reclassifications to
conform to the Company’s current segmentation. Corporate revenue results from services provided
under the DSA with AHC.
13
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Restructuring
The following table presents a summary of the activity in accrued liabilities for
restructuring charges (in thousands):
| |
|
|
|
|
| |
|
New York Leased |
|
| |
|
Space Reduction |
|
Balance at December 31, 2004 |
|
$ |
1,337 |
|
Cash payments |
|
|
(127 |
) |
Provision for restructuring |
|
|
— |
|
|
|
|
|
Balance at September 30, 2005 |
|
$ |
1,210 |
|
|
|
|
|
14
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. For this purpose any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing,
the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to
identify forward-looking statements. These statements involve unknown risks, uncertainties and
other factors, which may cause our actual results to differ materially from those implied by the
forward looking statements. Among the important factors that could cause actual results to differ
materially from those indicated by such forward-looking statements include those risks identified
in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and other risks identified in our Form 10-K for the year ended December 31, 2004 and
presented elsewhere by management from time to time. Such forward-looking statements represent
management’s current expectations and are inherently uncertain. Investors are cautioned that
actual results may differ from management’s expectations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
As there were no changes to our critical accounting policies during the nine months ended
September 30, 2005, please refer to our Annual Report on Form 10-K for the year ended December 31,
2004 for a summary of our policies.
Discontinued Operation
On August 31, 2005, we sold the stock of our Accordis Inc. (Accordis) subsidiary to Accordis
Holding Corp. (AHC), an unrelated New York based private company, for $8 million, consisting of
cash of $2 million and an interest bearing five year promissory note of $6 million. The note bears
interest at 6% per annum and requires semi-annual principal payments of $100,000, with the balance
of $5.1 million due in a balloon payment on August 31, 2010. Management has discounted this note
by $465,000 using an effective rate of 8%, resulting in the note having a net present value at
August 31, 2005 of $5.5 million.
The Stock Purchase Agreement (SPA) provided for purchase price adjustments based upon
differences between the Tangible Net Worth (TNW) and Net Accounts Receivable (NAR), as defined and
specified in the SPA, from March 31, 2005 and the final closing of August 31, 2005. Accordis’ NAR
at August 31, 2005 was approximately $0.6 million less than the target in the SPA, resulting in a
negative purchase price adjustment. This reduction in NAR was principally the result of cash
collections exceeding revenue during the period from March 31, 2005 through August 31, 2005. There
was no additional purchase price adjustment for TNW. The SPA provides AHC an opportunity to
challenge the computation of NAR and TNW and SPA includes dispute
resolution procedures, including binding arbitration. Any adjustments
to TNW or NAR are not expected to be material.
The SPA contains indemnification provisions pursuant to which we agreed to indemnify AHC for
liabilities in connection with Accordis that arose prior to the sale of Accordis to AHC on August
31, 2005. AHC agreed to indemnify us for liabilities in connection with Accordis that arise after
the sale. There is a minimum indemnification claim threshold of $250,000 that is computed after
taking into account any insurance proceeds. Our liability under the indemnification provisions of
the SPA is capped at the purchase price. We are not aware of any potential claims under the
indemnification provisions of the SPA.
15
At August 31, 2005, we recorded a loss on the sale of the stock of our Accordis business of
$1.2 million.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” we have presented the results of operations of Accordis prior to disposal on August 31,
2005, as a discontinued operation. Corporate overheads directly attributable to the Accordis
operation are classified as a component of discontinued operations for all periods prior to August
31, 2005. Effective September 1, 2005, we entered into the Data Services Agreement with AHC to
provide data processing services for $225,000 per month. Accordingly, approximately $216,000 of
costs that previously would have been attributable to Accordis have been classified as corporate
overhead attributable to continuing operations.
In preparing our segment disclosures, we have determined that continuing operations consists
of two segments, Heath Management Systems and RSG. Consistent with how we manage these businesses,
segment operating margin is reported as operating contribution prior to corporate overheads.
Corporate overheads, consisting of data processing costs and general and administrative expenses
are managed as cost centers servicing multiple operating businesses. Prior year presentations have
been restated to conform to the current year presentation. The overview section that follows will
address continuing operations only and the historical relationships of revenues and costs will
reflect that the discontinued Accordis operations are no longer part of continuing operations.
Current Overview
In general, our business is driven by the steadily rising costs of Medicaid and Medicare, the
major entitlement programs that make up the healthcare safety net in the United States. Medicaid,
which is jointly administered by the states and Federal government, funds health and long-term care
services to more than 50 million low-income, elderly and disabled individuals. Medicare, the
national health insurance program for people aged 65 and older and certain disabled individuals,
covers more than 40 million Americans. The cost of these programs is expected to total more than
$600 billion in 2005, and has increased more than 50% since 2000. The healthcare payors and
providers who bear the cost of these programs create the demand for the cost containment services
we offer through our two distinct operating subsidiaries, Health Management Systems and
Reimbursement Services Group.
Our work is highly customized to the needs of each client, and to the specifications of
individual projects. Each client engagement is unique, and requires significant up-front
investment, sometimes well before the engagement generates revenue.
Ultimately, each project results in revenues and costs that must be carefully controlled. We
accomplish this by striving to minimize the lead-time between project start-up and revenue
generation, and by adapting common core processes to the particular needs of our clients as
efficiently as possible. We also establish very specific operational metrics and profitability
targets at the project level, which in turn roll up to create measurable financial objectives at
the business-unit level.
Revenue Considerations
Revenue from our Health Management Systems business, most of which is in the form of
contingent fees derived from providing coordination of benefits services to state Medicaid
agencies, has grown in tandem with the rise of Medicaid expenditures. Medicaid costs have grown
by an average of approximately 10% annually over the past several years, and similar growth is
expected for years to come. In an effort to restrict the growth of these costs, state governments
have increasingly engaged vendors to provide coordination of benefits and other cost containment
services.
Medicare reimburses hospitals for the costs associated with providing services to Medicare
patients, but only if those costs can be accurately captured and reported. Given the complexity of
16
reimbursement regulations and the practical limitations of patient accounting systems,
securing from Medicare all of the cost reimbursement to which they are entitled is an enormous
challenge for hospitals. RSG’s technology offers hospitals a cost-effective mechanism for
aggregating and reporting reimbursable costs to Medicare, and as Medicare costs increase, more and
more hospitals reach a level of Medicare activity that makes it worthwhile for them to utilize
RSG’s services.
It should be noted that our business, even though it is conducted for the most part under
long-term contracts, is nonetheless subject to significant quarter-to-quarter variation in the
timing of revenue. In the most common example, a government entity may slow down reimbursement to
or recoupment from providers for reasons related to the availability of fiscal-year specific
appropriations, with the result that our contingent fee revenue may move from one quarter to
another even though all of our work relating to a project may be complete. In addition, while most
of our work is recurring, it may take place on an annual or project-specific basis, rather than
monthly or quarterly, as our operating expenses do. For a more detailed discussion of risks
affecting our business, please refer to our Annual Report on Form 10-K for the year ended December
31, 2004.
Operating Expenses
As a service company, 44% to 48% of our operating expenses are compensation. We adjust our
employee headcount based on known business needs and expectations about the near-term future.
Compensation expense does tend to grow with increases in revenue — although not on a proportional
basis, since many employee functions do not require additional staff as revenue increases.
Our revenue growth over the past several years has not resulted in significant changes in
occupancy and data processing expenses. These expenses are largely infrastructure costs, which
typically would be affected only by extraordinary growth or decline in the business, or a dramatic
change in our operational delivery model.
Direct project expenses are incurred based on the requirements of each client engagement. On
average, these expenses have amounted to approximately 14% to 17% of revenues annually.
Other operating expenses reflect the customary costs of doing business, such as insurance,
legal fees, accounting and tax fees, and costs associated with the requirements of being a publicly
traded company. Significant components of this expense category are costs of necessary external
professional services, travel and entertainment, employee recruiting, training, and office
materials.
17
Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004
The following table sets forth, for the periods indicated, certain items in our condensed
consolidated statements of income expressed as a percentage of revenue:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended September 30, |
|
| |
|
2005 |
|
|
2004 |
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services: |
|
|
|
|
|
|
|
|
Compensation |
|
|
40.0 |
% |
|
|
44.3 |
% |
Data processing |
|
|
7.3 |
% |
|
|
8.1 |
% |
Occupancy |
|
|
7.0 |
% |
|
|
8.7 |
% |
Direct project costs |
|
|
16.2 |
% |
|
|
17.9 |
% |
Other operating costs |
|
|
8.4 |
% |
|
|
12.5 |
% |
|
|
|
|
|
|
|
Total cost of services |
|
|
78.9 |
% |
|
|
91.5 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
21.1 |
% |
|
|
8.5 |
% |
Net interest income |
|
|
1.9 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
23.0 |
% |
|
|
9.2 |
% |
Income tax expense |
|
|
1.2 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
21.8 |
% |
|
|
8.9 |
% |
Income (loss) from discontinued operations |
|
|
(1.2 |
%) |
|
|
3.0 |
% |
|
|
|
|
|
|
|
Net income |
|
|
20.6 |
% |
|
|
11.9 |
% |
|
|
|
|
|
|
|
Revenue for the quarter ended September 30, 2005 was $17,435,000, an increase of $5,052,000 or
41% compared to revenue of $12,383,000 in the prior year quarter.
Health Management Systems, which provides third party liability identification and recovery
services to state Medicaid agencies and managed care organizations, generated revenue of
$13,342,000 for the three months ended September 30, 2005, a $2,406,000 or 22% increase over
revenue for the three months ended September 30, 2004 of $10,936,000. This growth primarily
reflected an increase of $1,738,000 across the comparable client base resulting from specific
non-recurring revenue opportunities with certain clients based on their particular needs,
differences in the timing of when client projects were completed in the current year compared to
the prior year, and changes in the volume, yields and scope of client projects. Non-recurring
revenue opportunities are generally situations where we have an opportunity to earn additional
revenue from a client, which we do not expect will recur in the current year or that did not exist
in the prior year. Included in revenue generated from the comparable client base was $1,896,000 of
revenue for a client whose contract has expired. Revenue from this client is expected to continue
through the second quarter of 2006 and combined with revenue from new state contract wins in 2005,
is expected to more than offset this revenue reduction in 2006. Additionally, revenue for the
current year quarter included a $476,000 increase with one client resulting from expansions in the
scope of services provided. During the current quarter revenue from new clients totaled $337,000,
primarily consisting of six new managed care plan clients providing $283,000, together with one new
state client.
18
RSG, which provides reimbursement services for hospitals, generated revenue of $3,868,000 for
the three months ended September 30, 2005, a $2,421,000 or 167.3% increase from $1,447,000 for the
three months ended September 30, 2004. This growth primarily reflected an increase of $1,803,000
across the comparable client base resulting from the cost report adjudication timetable of the
Medicare intermediaries. Additional revenue for the current year quarter included a $400,000
increase with one client resulting from an expansion in scope of service provided. During the
current quarter, revenue from two new clients generated $594,000, which was partially offset by a
decrease of $376,000 related to a contract termination. We anticipate that for the full year RSG
revenue growth will be approximately 15% above 2004 revenue.
Additionally, $225,000 in revenue resulted from the provision of data processing services to
Accordis Holding Corp. (AHC) in the month of September.
Compensation expense as a percentage of revenue was 40% for the three months ended September
30, 2005 compared to 44.3% for the three months ended September 30, 2004 and for the current
quarter was $6,974,000, an increase of $1,484,000, or 27% from the prior year quarter expense of
$5,490,000. This increase resulted from an increase in headcount, a general increase in
compensation rates, increased bonus expense due to the higher quarterly operating margin, and
increased costs of fringe benefits. At September 30, 2005, we had 294 employees compared to 245
employees at September 30, 2004.
Data processing expense as a percentage of revenue was 7.3% for the three months ended
September 30, 2005 compared to 8.1% for the three months ended September 30, 2004 and for the
current quarter was $1,273,000, an increase of $270,000 or 26.9% from the prior year quarter
expense of $1,003,000. The increase was related to increased depreciation expense and software
licensing fees associated with the capacity upgrade put into service in the first quarter of this
year partially offset by reductions in supplies, maintenance and data communication costs.
Occupancy expense as a percentage of revenue was 7.0% for the three months ended September 30,
2005 compared to 8.7% for the three months ended September 30, 2004 and for the current quarter was
$1,215,000, an increase of $139,000 or 12.9% compared to the prior year quarter expense of
$1,076,000. This increase primarily reflected increased equipment operating costs including
depreciation of a new telephone system, increased rental expense associated with new office space,
increases in utilities expenses, and increases in office equipment rental and maintenance.
Direct project expense as a percentage of revenue was 16.2% for the three months ended
September 30, 2005 compared to 17.9% for the three months ended September 30, 2004 and for the
current quarter was $2,822,000, an increase of $603,000 or 27.2% from the prior year quarter
expense of $2,219,000. This increase primarily related to the increase in revenue in the current
quarter. The decrease in direct project expense as a percentage of revenue resulted from the
increased RSG revenue, which generally has a lower direct project expense content than HMS revenue.
Other operating costs as a percentage of revenue were 8.4% for the three months ended
September 30, 2005 compared to 12.5% for the three months ended September 30, 2004 and for the
current quarter were $1,472,000, a decrease of $70,000 or 4.5% compared to the prior year quarter
expense of $1,542,000. This decrease primarily represented savings related to reduced insurance
expense.
19
Operating income for the three months ended September 30, 2005 was $3,679,000 compared to
$1,053,000 for the three months ended September 30, 2004. Health Management Systems had operating
income of $5,339,000 for the quarter ended September 30, 2005 compared to $4,601,000 for the
quarter ended September 30, 2004. The increase in Health Management Systems operating income
resulted from incremental margin on revenue growth. RSG had operating income of $2,542,000 for the
quarter ended September 30, 2005 compared to operating income of $444,000 for the prior year
quarter. The increase in RSG operating income was attributable to the $2,421,000 revenue growth
due to the timing of Medicare cost report adjudication by fiscal intermediaries, partially offset
by increases in non-recurring direct project legal fees of $82,000 and increased compensation and
occupancy costs. Costs associated with data processing and general and administrative expenses of
$4,202,000 increased by $210,000 in the current quarter from $3,992,000 in the prior year quarter.
This increase was principally due to costs associated with providing data services to AHC that were
previously attributable to discontinued operations.
Net interest income was $328,000 for the three months ended September 30, 2005 compared to net
interest income of $83,000 for the three months ended September 30, 2004 and reflected a shift to
municipal auction rate securities, an increase in market interest rates and an overall increase in
cash, cash equivalents and short-term investments.
In 2005 and 2004, our income tax expense principally consisted of an alternative minimum tax
liability resulting from our utilization of existing net operating loss carryforwards to offset
current taxable income and state taxes. Most of our deferred income tax assets are in the form of
net operating loss carryforwards. The uncertainty regarding the realizability of our deferred tax
assets principally resulted from the operating losses of the Accordis business. The SPA allows AHC
to elect to account for its acquisition of Accordis under Internal Revenue Code Section 338(h)(10),
which allows the purchaser to account for the stock purchase of Accordis as an asset purchase. We
anticipate that the purchase price allocation process will be completed prior to December 31, 2005
and will likely result in a reduction to our available NOL carryforwards. Based on AHC’s purchase
price and the tangible net assets acquired, this is not expected to materially reduce our NOL
carryforwards. We also expect that by December 31, 2005, we will have substantially reduced our
valuation allowance through income generated in 2005 and the Accordis purchase price allocation
process such that in 2006, we will begin to provide tax expense in our results of operations, at an
effective rate of approximately 40%. The 2006 provision for income taxes will be primarily a
deferred tax provision (a non-cash charge) as our utilization of available NOL will result in our
continuing to make payments under the alternative minimum tax system during 2006.
Income from continuing operations was $3,807,000 in the current year quarter compared to
income of $1,097,000 in the prior year quarter.
As more fully discussed in the Discontinued Operation section above, we reported the results
of Accordis as a discontinued operation for all periods presented. Loss from discontinued
operations was $209,000 for the three months ended September 30, 2005 compared to income of
$371,000 for the three months ended September 30, 2004. Included in the loss from discontinued
operations in the current quarter was $948,000 in income from operations offset by a $1,157,000
loss on the sale of Accordis.
20
Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2004
The following table sets forth, for the periods indicated, certain items in our condensed
consolidated statements of income expressed as a percentage of revenue:
| |
|
|
|
|
|
|
|
|
| |
|
Nine Months Ended September 30 |
|
| |
|
2005 |
|
|
2004 |
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services: |
|
|
|
|
|
|
|
|
Compensation |
|
|
44.6 |
% |
|
|
47.3 |
% |
Data processing |
|
|
7.9 |
% |
|
|
8.2 |
% |
Occupancy |
|
|
7.8 |
% |
|
|
8.6 |
% |
Direct project costs |
|
|
16.8 |
% |
|
|
17.7 |
% |
Other operating costs |
|
|
10.8 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
Total cost of services |
|
|
87.9 |
% |
|
|
93.3 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
12.1 |
% |
|
|
6.7 |
% |
Net interest income |
|
|
1.8 |
% |
|
|
0.6 |
% |
|
|
|
|
|
|
|
Income from continuing operations before taxes |
|
|
13.9 |
% |
|
|
7.3 |
% |
Income tax expense |
|
|
0.6 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
Income from continuing operations |
|
|
13.3 |
% |
|
|
7.1 |
% |
Loss from discontinued operations |
|
|
(0.8 |
%) |
|
|
(0.6 |
%) |
|
|
|
|
|
|
|
Net income |
|
|
12.5 |
% |
|
|
6.5 |
% |
|
|
|
|
|
|
|
Revenue for the nine months ended September 30, 2005 was $42,796,000, an increase of
$6,691,000 or 18.5% compared to revenue of $36,105,000 in the prior year period.
Health Management Systems, which provides third party liability identification and recovery
services to state Medicaid agencies and managed care organizations, generated revenue of
$36,857,000 for the nine months ended September 30, 2005, a $5,540,000 or 17.7% increase over
revenue for the nine months ended September 30, 2004 of $31,317,000. This increase primarily
reflected an increase of $4,298,000 across the comparable client base resulting from specific
non-recurring revenue opportunities with certain clients based on their particular needs,
differences in the timing of when client projects were completed in the current year compared with
the prior year, and changes in the volume, yields and scope of client projects. Non-recurring
revenue opportunities are generally situations where we have an opportunity to earn additional
revenue from a client, which we do not expect will recur in the current year or which did not exist
in the prior year. Included in revenue generated from the comparable client base was $6,490,000 of
revenue from a client whose contract has expired. Revenue from this client is expected to continue
through the second quarter of 2006 and revenue from new state contract wins in 2005 is expected to
substantially offset this revenue reduction in 2006. Additionally, revenue for the current year
period included a $695,000 increase with one client resulting from expansions in the scope of
services provided. During the current year period, revenue from new clients totaled $547,000,
primarily consisting of six new managed care plan clients providing $449,000, together with one new
state client.
21
RSG, which provides reimbursement services for hospitals, generated revenue of $5,714,000 for
the nine months ended September 30, 2005, a $926,000 or 19.3% increase from $4,788,000 for the nine
months ended September 30, 2004. This growth primarily reflected an increase of $1,096,000 across
the comparable client base resulting from the cost report adjudication timetable of the Medicare
intermediaries. Additional revenue for the current year period included a $497,000 increase with
one client resulting from an expansion in scope of service provided. During the current year
period revenue decreased by $1,528,000 related to two contract terminations, which was partially
offset by revenue from two new clients of $861,000. We anticipate that for the full year RSG
revenue growth will be approximately 15% above 2004 revenue.
Additionally, $225,000 in revenue resulted from the provision of data processing services to
AHC in the month of September 2005.
Compensation expense as a percentage of revenue was 44.6% for the nine months ended September
30, 2005 compared to 47.4% for the nine months ended September 30, 2004 and for the current period
was $19,096,000, an increase of $1,999,000, or 11.7% from the prior year period expense of
$17,097,000. This increase resulted from an increase in headcount, a general increase in
compensation rates, increased bonus expense due to increased operating margin, and increased costs
of fringe benefits. At September 30, 2005, we had 294 employees compared to 245 employees at
September 30, 2004.
Data processing expense as a percentage of revenue was 7.9% for the nine months ended
September 30, 2005 compared to 8.2% for the nine months ended September 30, 2004 and for the
current period was $3,375,000, an increase of $417,000 or 14.1% from prior year period expense of
$2,958,000. The increase was related to increased depreciation expense and software licensing fees
associated with the capacity upgrade put into service in the first quarter of this year partially
offset by reductions in supplies, maintenance and data communication costs.
Occupancy expense as a percentage of revenue was 7.8% for the nine months ended September 30,
2005 compared to 8.6% for the nine months ended September 30, 2004 and for the current period was
$3,347,000, an increase of $254,000 or 8.2% from prior year period expense of $3,093,000. This
increase primarily reflected increased equipment operating costs including depreciation of a new
telephone system, increased rental expense associated with new office space, increases in utilities
expenses, and increases in office equipment rental and maintenance.
Direct project expense as a percentage of revenue was 16.8% for the nine months ended
September 30, 2005 compared to 17.7% for the nine months ended September 30, 2004 and for the
current period was $7,187,000, an increase or $785,000 or 12.3% from prior year period expense of
$6,402,000. This increase primarily related to the increase in revenue in the current quarter.
Other operating costs as a percentage of revenue were 10.8% for the nine months ended
September 30, 2005 compared to 11.5% for the nine months ended September 30, 2004 and for the
current period were $4,620,000, an increase of $475,000 or 11.5% compared to the prior year period
expense of $4,145,000. This increase was primarily related to increased legal expense and the cost
of an SAS 70 audit.
22
Operating income for the nine months ended September 30, 2005 was $5,171,000 compared to
$2,410,000 for the nine months ended September 30, 2004. Health Management Systems had operating
income of $14,610,000 for the period ended September 30, 2005 compared to $12,792,000 for the
period ended September 30, 2004. The increase in Health Management Systems operating income
resulted from incremental margin on revenue growth; operating margin as a percentage of revenue was
consistent with the prior year. RSG had operating income of $2,162,000 for the period ended
September 30, 2005 compared to operating income of $1,861,000 for the prior year period operating
margin as a percentage of revenue was consistent with the prior year. Costs associated with data
processing and general and administrative expenses decreased by $415,000 to $11,826,000 in the
current period from $12,241,000 in the prior year period. This reduction was principally due to
reductions in general and administrative compensation expenses partially offset by an increase in
data processing expense associated with hardware and software expenses associated with the capacity
upgrades
Net interest income was $776,000 for the nine months ended September 30, 2005 compared to net
interest income of $201,000 for the nine months ended September 30, 2004 and reflected a shift to
municipal auction rate securities, an increase in market interest rates and an overall increase in
cash, cash equivalents and short-term investments.
In 2005 and 2004, our income tax expense principally consisted of an alternative minimum tax
liability resulting from our utilization of existing net operating loss carryforwards to offset
current taxable income. Most of our deferred income tax assets are in the form of net operating
loss carryforwards. The uncertainty regarding the realizability of our deferred tax assets
principally resulted from the operating losses of the Accordis business. The SPA allows AHC to
elect to account for its acquisition of Accordis under Internal Revenue Code Section 338(h)(10),
which allows the purchaser to account for the stock purchase of Accordis as an asset purchase. We
anticipate that the purchase price allocation process will be completed prior to December 31, 2005
and will likely result in a reduction to our available NOL carryforwards. Based on AHC’s purchase
price and the tangible net assets acquired, this is not expected to materially reduce our NOL
carryforwards. We also expect that by December 31, 2005, we will have substantially reduced our
valuation allowance through income generated in 2005 and the Accordis purchase price allocation
process such that in 2006, we will begin to provide tax expense in our results of operations, at an
effective rate of approximately 40%. It is expected that the 2006 provision for income taxes will
be primarily a deferred tax provision (a non-cash charge) as our utilization of available NOL will
result in our continuing to make payments under the alternative minimum tax system during 2006.
Income from continuing operations was $5,692,000 in the current year period compared with
income of $2,550,000 in the prior year period.
As more fully discussed in the Discontinued Operation section above, we reported the results
of Accordis as a discontinued operation for all periods presented. The loss from discontinued
operations was $354,000 for the nine months ended September 30, 2005 compared with a loss of
$213,000 for the nine months ended September 30, 2004. Included in the loss from discontinued
operations was $803,000 in income from operations offset by a $1,157,000 loss on the sale of
Accordis.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements, other than operating leases
discussed below.
Liquidity and Capital Resources
Historically, our principal sources of funds are operations. At September 30, 2005, our cash
and cash equivalents and short-term investments and net working capital were $37.9 million and
$49.8 million, respectively. The increase in cash and cash equivalents and short-term investments
from $33.7 million at June 30, 2005 is partially due to the timing of accounts receivable payments
from certain of our
23
municipal customers following their June 30 fiscal year-end and proceeds from the sale of
Accordis. Although we expect that operating cash flows will be a primary source of liquidity, the
current significant cash and short-term investment balances and working capital position are also
fundamental sources of liquidity and capital resources. The current cash and short term investment
balances are more than sufficient to meet our short-term funding needs that are not met by
operating cash flows. Operating cash flows could be adversely affected by a decrease in demand for
our services. Our typical client relationship, however, usually has a duration of several years,
and as a result we do not expect any current decrease in demand. We estimate that we will purchase
approximately $3.6 million of property and equipment during 2005. The payments due by period for
our contractual obligations, consisting principally of facility lease obligations and equipment
rental and software license obligations, are as follows (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
1 Year |
|
|
2-3 Years |
|
|
4-5 Years |
|
|
After 5 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
$ |
34,012 |
|
|
$ |
5,663 |
|
|
$ |
8,781 |
|
|
$ |
6,982 |
|
|
$ |
12,586 |
|
We have entered into sublease arrangements for some of our facility obligations and expect to
receive the following rental receipts (in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
| |
Total |
|
1 Year |
|
|
2-3 Years |
|
|
4-5 Years |
|
|
After 5 years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
$7,935 |
|
$ |
2,273 |
|
|
$ |
2,429 |
|
|
$ |
1,153 |
|
|
$ |
2,080 |
|
For the nine-month period ended September 30, 2005, net cash provided by operations was
$1,579,000 compared to cash used by operations of $5,000 for the prior year period. The current
year period’s difference between the $1,579,000 of cash provided by in operations and net income of
$5,338,000 includes an increase in accounts receivable of $4,765,000 and other assets of $1,057,000
partially offset by depreciation and amortization expense of $1,724,000. During the current year
period, net cash used in investing activities was $12,079,000, reflecting net purchases of
$9,550,000 of auction rate municipal securities in the current period, purchases of property and
equipment of $2,088,000 and investment in software of $441,000. Cash provided by financing
activities of $2,138,000 consisted of proceeds received from employee stock option exercises of
$2,199,000 reduced by $109,000 of treasury stock purchases.
On May 28, 1997, the Board of Directors authorized us to repurchase such number of shares
of our common stock that have an aggregate purchase price not in excess of $10 million. During the
nine months ended September 30, 2005, we purchased 17,930 shares of common stock for an aggregate
purchase price of approximately $109,000. Cumulatively since the inception of the repurchase
program, we have repurchased 1,662,846 shares having an aggregate purchase price of $9.4 million.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Our holdings of financial instruments consist of municipal auction rate securities at
September 30, 2005 and are classified as short-term investments, which have contractual maturities
between 2025 through 2044. We do not invest in portfolio equity securities or commodities or use
financial derivatives for trading purposes. Our investment portfolio represents funds held
temporarily, pending use in our business and operations. We manage these funds accordingly. We seek
reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed
income securities while, at the same time, seeking to achieve a favorable rate of return. Our
market risk exposure consists principally of exposure to changes in interest rates. Our holdings
are also exposed to the risks of changes in the credit quality of issuers.
The table below presents the historic cost basis, and the fair value for our investment
portfolio as of September 30, 2005, and the related weighted average interest rates by year of
maturity (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
Total |
|
|
Total |
|
| |
|
Historical Cost |
|
|
Fair value |
|
| |
Municipal auction rate securities |
|
$ |
32,050,000 |
|
|
$ |
32,050,000 |
|
Average interest rate |
|
|
3.80 |
% |
|
|
|
|
| |
Item 4. Controls and Procedures
As of September 30, 2005, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon our
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective in enabling us to record, process, summarize and report
information required to be included in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
There were no shares of common stock repurchased by the Company during the quarter ended
September 30, 2005. As of September 30, 2005, the Company has repurchased 1,662,846 shares having
an aggregate price of $9.4 million as part of the May 28, 1997 plan that was authorized by the
Company’s Board of Directors for a maximum of $10 million in common shares.
25
Item 6. Exhibits
| |
|
|
31.1
|
|
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by
Robert M. Holster, Chief Executive Officer of HMS Holdings Corp. |
|
|
|
31.2
|
|
Certification pursuant to Item 601(b)(31) of Regulation S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by
Thomas G. Archbold, Chief Financial Officer of HMS Holdings Corp. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Robert M.
Holster, Chief Executive Officer of HMS Holdings Corp. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Thomas G.
Archbold, Chief Financial Officer of HMS Holdings Corp. |
26
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: November 9, 2005 |
HMS HOLDINGS CORP.
(Registrant)
|
|
| |
By: |
/s/ Robert M. Holster
|
|
| |
|
Robert M. Holster |
|
| |
|
Chief Executive Officer
(Principal Executive Officer) |
|
| |
| |
|
|
| |
By: |
/s/ Thomas G. Archbold
|
|
| |
|
Thomas G. Archbold |
|
| |
|
Chief Financial Officer (Principal
Financial Officer and Accounting Officer) |
|
| |
27
Exhibit Index
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
|
|
|
31.1
|
|
Certification pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by Robert M.
Holster, Chief Executive Officer of HMS Holdings Corp. |
|
|
|
31.2
|
|
Certification pursuant to Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, executed by Thomas G.
Archbold, Chief Financial Officer of HMS Holdings Corp. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, executed by Robert M. Holster, Chief
Executive Officer of HMS Holdings Corp. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, executed by Thomas G. Archbold, Chief
Financial Officer of HMS Holdings Corp. |
28