e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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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 June 30, 2008
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
(Registrants 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
The
number of shares common stock, $.01 par value, outstanding as of
August 8, 2008 was
25,054,622.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
2
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
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June 30, |
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December 31, |
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2008 |
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2007 |
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Assets |
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|
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Current assets: |
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|
|
|
|
|
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Cash and cash equivalents |
|
$ |
24,886 |
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$ |
21,275 |
|
Accounts receivable, net of allowance of $662 at June 30, 2008
and December 31, 2007 |
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|
44,853 |
|
|
|
39,704 |
|
Prepaid expenses |
|
|
2,093 |
|
|
|
3,266 |
|
Other current assets, including deferred tax assets of $767 and
$657 at June 30, 2008 and December 31, 2007, respectively |
|
|
805 |
|
|
|
704 |
|
|
|
|
|
|
|
|
|
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|
72,637 |
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|
64,949 |
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|
|
|
|
|
|
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Property and equipment, net |
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16,998 |
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|
16,496 |
|
Goodwill, net |
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80,242 |
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|
80,242 |
|
Deferred income taxes, net |
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2,831 |
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|
3,111 |
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Intangible assets, net |
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20,475 |
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|
22,495 |
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Other assets |
|
|
731 |
|
|
|
807 |
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|
|
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Total assets |
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$ |
193,914 |
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|
$ |
188,100 |
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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 |
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$ |
16,641 |
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$ |
21,539 |
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Current portion of long-term debt |
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6,300 |
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|
6,300 |
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Total current liabilities |
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22,941 |
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27,839 |
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Long-term liabilities: |
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Long-term debt |
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14,175 |
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17,325 |
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Accrued deferred rent |
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3,404 |
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3,378 |
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Other liabilities |
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|
798 |
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|
809 |
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Total long-term liabilities |
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18,377 |
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21,512 |
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Total liabilities |
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41,318 |
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49,351 |
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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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Common stock $.01 par value; 45,000,000 shares authorized;
26,676,468 shares issued and 25,013,622 shares outstanding at June 30, 2008;
26,409,035 shares issued and 24,746,189 shares outstanding at December 31, 2007 |
|
|
267 |
|
|
|
264 |
|
Capital in excess of par value |
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133,555 |
|
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|
127,887 |
|
Retained earnings |
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|
28,361 |
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|
20,187 |
|
Treasury stock, at cost; 1,662,846 shares at June 30, 2008
and December 31, 2007 |
|
|
(9,397 |
) |
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|
(9,397 |
) |
Accumulated other comprehensive loss |
|
|
(190 |
) |
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|
(192 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total shareholders equity |
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152,596 |
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|
138,749 |
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|
|
|
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|
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|
|
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Total liabilities and shareholders equity |
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$ |
193,914 |
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$ |
188,100 |
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|
|
|
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|
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See accompanying notes to consolidated financial statements.
3
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six-Month Periods Ended June 30, 2008 and 2007
(in thousands, except per share amounts)
(unaudited)
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Three months ended June 30, |
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Six months ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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Revenue |
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$ |
44,183 |
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$ |
35,061 |
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$ |
83,126 |
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$ |
67,299 |
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Cost of services: |
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|
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Compensation |
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17,269 |
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13,387 |
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33,825 |
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26,460 |
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Data processing |
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2,771 |
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2,335 |
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5,737 |
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4,482 |
|
Occupancy |
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2,634 |
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|
2,293 |
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5,224 |
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4,274 |
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Direct project costs |
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6,395 |
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|
5,369 |
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12,439 |
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10,657 |
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Other operating costs |
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|
5,110 |
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|
|
3,333 |
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|
9,045 |
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|
6,045 |
|
Amortization of acquisition related software and intangibles |
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1,162 |
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|
1,163 |
|
|
|
2,325 |
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|
|
2,326 |
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|
|
|
|
|
|
|
|
|
|
|
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Total cost of services |
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35,341 |
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|
27,880 |
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|
68,595 |
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|
54,244 |
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|
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|
|
|
|
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Operating income |
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8,842 |
|
|
|
7,181 |
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|
|
14,531 |
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|
13,055 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense |
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|
(351 |
) |
|
|
(542 |
) |
|
|
(766 |
) |
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|
(1,251 |
) |
Interest income |
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|
132 |
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|
|
111 |
|
|
|
329 |
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|
|
216 |
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Income before income taxes |
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8,623 |
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|
|
6,750 |
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|
14,094 |
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|
|
12,020 |
|
Income taxes |
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|
3,622 |
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|
|
2,943 |
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|
|
5,920 |
|
|
|
5,241 |
|
|
|
|
|
|
|
|
|
|
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Net income |
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$ |
5,001 |
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$ |
3,807 |
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|
$ |
8,174 |
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$ |
6,779 |
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Basic income per share data: |
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Net income per basic share |
|
$ |
0.20 |
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$ |
0.16 |
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$ |
0.33 |
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$ |
0.29 |
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Weighted average common shares outstanding, basic |
|
|
24,985 |
|
|
|
23,667 |
|
|
|
24,906 |
|
|
|
23,552 |
|
|
|
|
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|
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Diluted income per share data: |
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Net income per diluted share |
|
$ |
0.19 |
|
|
$ |
0.15 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Weighted average common shares, diluted |
|
|
26,712 |
|
|
|
26,068 |
|
|
|
26,782 |
|
|
|
25,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share amounts)
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Retained |
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Accumulated |
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Common Stock |
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Capital In |
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Earnings/ |
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Other |
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Total |
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# of Shares |
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|
Par |
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Excess Of |
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Accumulated |
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Comprehensive |
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Treasury Stock |
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Shareholders |
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Issued |
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Value |
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Par Value |
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Deficit |
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Income/(Loss) |
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# of Shares |
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Amount |
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Equity |
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|
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|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Balance at December 31, 2007 |
|
|
26,409,035 |
|
|
$ |
264 |
|
|
$ |
127,887 |
|
|
$ |
20,187 |
|
|
$ |
(192 |
) |
|
|
1,662,846 |
|
|
$ |
(9,397 |
) |
|
$ |
138,749 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
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|
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|
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|
|
|
|
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Comprehensive income: |
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,174 |
|
Unrealized loss on derivative instrument,
net of tax of $1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation cost |
|
|
|
|
|
|
|
|
|
|
1,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,518 |
|
Exercise of stock options |
|
|
267,433 |
|
|
|
3 |
|
|
|
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,020 |
|
Disqualifying dispositions |
|
|
|
|
|
|
|
|
|
|
3,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
26,676,468 |
|
|
$ |
267 |
|
|
$ |
133,555 |
|
|
$ |
28,361 |
|
|
$ |
(190 |
) |
|
|
1,662,846 |
|
|
$ |
(9,397 |
) |
|
$ |
152,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six-Month Periods Ended June 30, 2008 and 2007
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,174 |
|
|
$ |
6,779 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets |
|
|
8 |
|
|
|
79 |
|
Depreciation and amortization |
|
|
5,771 |
|
|
|
5,058 |
|
Decrease in deferred tax asset |
|
|
390 |
|
|
|
2,699 |
|
Share-based compensation expense |
|
|
1,518 |
|
|
|
1,003 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in accounts receivable |
|
|
(5,149 |
) |
|
|
(1,361 |
) |
Decrease in prepaid expenses and
other current assets |
|
|
962 |
|
|
|
364 |
|
Increase in other assets |
|
|
(18 |
) |
|
|
(88 |
) |
Decrease in accounts payable, accrued expenses
and other liabilities |
|
|
(4,881 |
) |
|
|
(663 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
6,775 |
|
|
|
13,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,690 |
) |
|
|
(3,940 |
) |
Investment in software |
|
|
(477 |
) |
|
|
(328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(4,167 |
) |
|
|
(4,268 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,020 |
|
|
|
1,743 |
|
Tax benefit of disqualifying dispositions |
|
|
3,133 |
|
|
|
1,948 |
|
Repayment of long-term debt |
|
|
(3,150 |
) |
|
|
(4,725 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities |
|
|
1,003 |
|
|
|
(1,034 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
3,611 |
|
|
|
8,568 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
21,275 |
|
|
|
12,527 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
24,886 |
|
|
$ |
21,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
388 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
690 |
|
|
$ |
1,104 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
1. Unaudited Interim Financial Information
The management of HMS Holdings Corp. (Holdings or the Company) is responsible for the
accompanying unaudited interim financial statements and the related information included in the
notes to the financial statements. In the opinion of management, the unaudited interim financial
statements reflect all adjustments, including normal recurring adjustments necessary for the fair
presentation of the Companys financial position and results of operations and cash flows for the
periods presented. Results of operations for interim periods are not necessarily indicative of the
results to be expected for the entire year.
The Company is managed and operated as one business, with a single management team that
reports to the chief executive officer. The Company does not operate separate lines of business
with respect to any of its product lines. Accordingly, the Company does not prepare discrete
financial information with respect to separate product lines or by location and does not have
separately reportable segments.
These unaudited interim 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, 2007
included in the Companys Annual Report on Form 10-K for such year, as filed with the Securities
and Exchange Commission (SEC).
2. Basis of Presentation and Principles of Consolidation
|
(a) |
|
Organization and Business |
The Company provides a variety of cost containment and payment accuracy services relating to
government healthcare programs. These services are in general designed to help our clients recover
amounts due from liable third parties, reduce costs, and ensure regulatory compliance.
|
(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.
|
(b) |
|
Recent Accounting Pronouncement |
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 does not require any new fair value measurements, but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007, with the exception of the
application of the statement to the determination of fair value of nonfinancial assets and
liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for fiscal
years beginning after November 15, 2008.
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for
similar assets and liabilities in active markets or inputs that are observable for the asset
or liability, either directly or indirectly through market corroboration, for substantially the
full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own
assumptions used to measure assets and liabilities at
7
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
fair value. A financial asset or liabilitys
classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
Effective January 1, 2008, we partially adopted SFAS No. 157 and have applied its provisions
to financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis (at least annually). We have not yet adopted SFAS 157 for non-financial assets and
liabilities, in accordance with FASB staff position 157-2, which is effective for fiscal years
beginning after November 15, 2008.
At June 30, 2008, our interest rate swap contract (see note 7) was being carried at fair value
and measured on a recurring basis. Fair value is determined through the use of models that consider
various assumptions, including time value, yield curves, as well as other relevant economic
measures, which are inputs that are classified as Level 2 in the valuation hierarchy.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. This statement permits entities to
choose to measure many financial instruments and certain other items at fair value. This statement
also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. Unrealized gains and losses on items for which the fair value option is elected would
be reported in earnings. We have adopted SFAS 159 and have elected not to measure any additional
financial instruments and other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141, Business Combinations. SFAS 141(R) retains the underlying
concepts of SFAS 141 in that all business combinations are still required to be accounted for at
fair value under the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that
adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is prohibited. Therefore, the impact of the
implementation of this pronouncement cannot be determined until the transactions occur.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement is intended
to improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
well as related hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must
provide more robust qualitative disclosures and expanded quantitative
disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008 with early application permitted. The
Company is evaluating this guidance but does not expect it to have a significant impact on its
financial position or results of operations.
8
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142). The objective of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other
generally accepted accounting principles (GAAP). This FSP applies prospectively to all intangible
assets acquired after the effective date in fiscal 2009, whether acquired in a business combination
or otherwise. Early adoption is prohibited. The Company is evaluating this guidance but does not
expect it to have a significant impact on its financial position or results of operations.
The preparation of the consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reported period.
The actual results could differ from those estimates.
Certain reclassifications were made to prior year and prior quarter amounts to conform to the
current presentation. Non-material reclassifications were made between other operating cost and
direct project cost to properly classify temporary staffing-related expenses. In conjunction with
these reclassifications, there was no impact on total cost of services, operating income and net
income for the periods adjusted.
3. Stock-based Compensation
Presented below is a summary of the Companys option activity for the six months ended June
30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted |
|
|
average |
|
|
intrinsic |
|
|
|
Options |
|
|
average |
|
|
remaining |
|
|
value |
|
|
|
(in |
|
|
exercise |
|
|
contractual |
|
|
(in |
|
Options (in thousands) |
|
thousands) |
|
|
price |
|
|
terms (in years) |
|
|
thousands) |
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 |
|
|
4,246 |
|
|
$ |
9.23 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
4 |
|
|
|
28.43 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(267 |
) |
|
|
3.81 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
3,983 |
|
|
$ |
9.61 |
|
|
|
5.57 |
|
|
$ |
50,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest
at June 30, 2008 |
|
|
3,874 |
|
|
$ |
9.35 |
|
|
|
0.51 |
|
|
$ |
49,978 |
|
|
9
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
The fair value of each option grant was estimated using the Black-Scholes option pricing
model. Expected volatilities are calculated based on the historical volatility of the Companys
stock. Management monitors share option exercise and employee termination patterns to estimate
forfeiture rates within the valuation model. Separate groups of employees that have similar
historical exercise behavior are considered separately for valuation purposes. The expected
holding period of options represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate for periods within the contractual life of the option is
based on the interest rate of a 5-year U.S. Treasury note in effect on the date of the grant. There
were no stock option grants during the three months ended June 30, 2008. There were 4,000 options
granted in the six months ended June 30, 2008. The fair value of options granted was $10.54 for
the six months ended June 30, 2008.
As of June 30, 2008, there was approximately $7.5 million of total unrecognized compensation
cost related to stock options outstanding. That cost is expected to be recognized over a
weighted-average period of 1.6 years. No compensation cost related to stock options was
capitalized for the six months ended June 30, 2008.
The following table summarizes the weighted average assumptions utilized in developing the
Black-Scholes pricing model:
|
|
|
|
|
Six months ended |
|
|
June 30, 2008 |
|
|
|
Expected dividend yield |
|
0.00% |
Risk-free interest rate |
|
2.48% |
Expected volatility |
|
38.0% |
Expected life |
|
5.0 years |
4. Income Taxes
The Company and its subsidiaries file income tax returns with the U.S. Federal government and
various state jurisdictions. The Company is no longer subject to U.S. Federal income tax
examinations by tax authorities for years before 2005. The Company operates in a number of state
and local jurisdictions, substantially all of which have never audited the Company. Accordingly,
the Company is subject to state and local income tax examinations based upon the various statutes
of limitations in each jurisdiction.
At June 30, 2008, the Company had approximately $0.5 million of tax positions for which there
is uncertainty about the allocation and apportionment of state tax deductions. If recognized, all
of this balance would impact the effective tax rate; however the Company does not expect any
significant change in unrecognized tax benefits during the next twelve months. The Company
recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties
in operating expense. At June 30, 2008, the Company had accrued liabilities related to uncertain
tax provisions of approximately $92,000.
At
June 30, 2008, the Company had a Federal net operating loss
(NOLs) carry forward of $18.7 million from disqualifying dispositions. These tax benefits reduce the Companys income tax payable and will be included in
additional paid-in capital
when recognized. The amount by which these tax benefits will reduce income tax payable and
increase additional paid-in capital when recognized is approximately $8.3 million. The principal difference
between the statutory rate and the Companys effective rate is
state income taxes.
10
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
At June 30, 2008, the Company had a valuation allowance of $2.7 million. The sale of the
Companys Accordis Inc. (Accordis) subsidiary in 2005 resulted in a capital loss of $6.0 million,
which can be carried forward for five years and produced a deferred tax asset of $2.5 million. The
Company believes the available objective evidence, principally the capital loss carryforward being
utilizable to offset only future capital gains, creates sufficient uncertainty regarding the
realizability of its capital loss carryforward that it is more likely than not, that substantially
all of the capital loss carryforward is not realizable. The remaining valuation allowance of $0.2
million relates to certain state NOLs where the Company doesnt currently operate and there is
sufficient doubt about the Companys ability to utilize these NOLs that it is more likely than not
that this portion of the state NOLs are not realizable. The Company does not anticipate any change
in its valuation allowance during 2008.
5. 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 June 30, 2008 and 2007, of 26,712,494 and
26,068,177, respectively. For the three months ended June 30, 2008 and 2007, the Company had
weighted average common shares outstanding of 24,984,875 and 23,666,766, respectively. The Company
had weighted average common shares and common share equivalents outstanding during the six months
ended June 30, 2008 and 2007 of 26,781,525 and 25,986,426, respectively. For the six months ended
June 30, 2007 and 2006, the Company had weighted average common shares outstanding of 24,906,018
and 23,552,001, respectively. The Companys common share equivalents consist of stock options.
6. Debt
The Company has a credit agreement (the Credit Agreement) among the Company, the several banks
and other financial institutions or entities from time to time parties thereto, and JPMorgan Chase
Bank, N.A. (JPMCB), as administrative agent, which was utilized to fund a portion of the purchase
price for the Companys 2006 acquisition of the Benefits Solutions Practice Area (BSPA) assets from
Public Consulting Group, Inc. The Credit Agreement provides for a term loan of $40 million
(the Term Loan) and revolving credit loans of up to $25 million (the Revolving Loan). Borrowings
under the Credit Agreement mature on September 13, 2011. The loans are secured by a security
interest in favor of the lenders covering the assets of the Company and its subsidiaries. Interest
on borrowings under the Credit Agreement is calculated, at the Companys option, at either (i)
LIBOR, including statutory reserves, plus a variable margin based on the Companys leverage ratio,
or (ii) the higher of (a) the prime lending rate of JPMCB, and (b) the Federal Funds Effective Rate
plus 0.50%, in each case plus a variable margin based on the Companys leverage ratio. In
connection with the Revolving Loan, the Company agreed to pay a commitment fee, payable quarterly
in arrears, at a variable rate based on the Companys leverage ratio, on the unused portion of the
Revolving Loan.
Commitments under the Credit Agreement will be reduced and borrowings are required to be
repaid with the net proceeds of, among other things, sales or issuances of equity (excluding equity
issued under employee benefit plans and equity issued to sellers as consideration in acquisitions), sales
of assets by the Company and any incurrence of indebtedness by the Company, subject, in each case,
to limited exceptions. The obligations of the Company under the Credit Agreement may be accelerated
upon the occurrence of an event of default under the Credit Agreement, which encompasses customary
events of default including, without
11
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
limitation, payment defaults, defaults in the performance of
affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and
insolvency related defaults, defaults relating to such matters as ERISA, uninsured judgments and
the failure to pay certain indebtedness, and a change of control default.
In addition, the Credit Agreement contains affirmative, negative and financial covenants
customary for financings of this type. The negative covenants include restrictions on indebtedness,
liens, fundamental changes, dispositions of property, investments, dividends and other restricted
payments. The financial covenants include a consolidated fixed charge coverage ratio, as defined,
of not less than 1.75 to 1.0 and a consolidated leverage ratio as defined not to exceed 3.0 to 1.0,
through June 30, 2008. The Company is in full compliance with these covenants.
The Term Loan requires quarterly repayments of $1.575 million, which amount is adjusted each
time the Company makes an additional repayment. There have been no borrowings under the Revolving
Loan, however, we had outstanding a $4.6 million irrevocable standby letter of credit which relates
to contingent, default payment obligations required by a contractual arrangement with a client. As
a result of the letter of credit issued, the amount available under the Revolving Loan was reduced
by $4.6 million at June 30, 2008. Fees and expenses related to the Credit Agreement of $0.9
million have been recorded as Deferred Financing Costs (included in other assets, non-current) and
are amortized to interest expense over the five-year life of the credit facilities using the
effective interest method.
Long-term debt consists of the following at June 30, 2008:
|
|
|
|
|
|
|
June 30, |
|
(in thousands except percentages) |
|
2008 |
|
|
Borrowings under the Credit Agreement: |
|
|
|
|
$40 million Term Loan, interest at 3.75% |
|
$ |
20,475 |
|
$25 million Revolving Loan |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
20,475 |
|
Less current portion of long-term debt |
|
|
6,300 |
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
14,175 |
|
|
|
|
|
7. Derivative Contract
The Company has an interest rate swap agreement to hedge the fluctuations in variable interest
rates and does not use derivative instruments for speculative purposes.
In December 2006, the Company entered into a three-year interest rate swap agreement, which is
accounted for as a cash flow hedge. This agreement effectively converted $12.0 million of the
Companys variable rate debt to fixed-rate debt, reducing the Companys exposure to changes in
interest rates. Under this swap agreement, the Company received an average LIBOR variable rate of
5.295% and paid an average LIBOR fixed rate of 4.75% for the period from December 31, 2007 to June
30, 2008. The LIBOR interest rates exclude the Companys applicable interest rate spread under the
Companys Credit Agreement. The Company has
recognized, net of tax, an unrealized loss of $0.2 million related to the change in the
instruments fair value through June 30, 2008. This amount has been included in accumulated other
comprehensive income.
12
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(unaudited)
The variable to fixed interest rate swap is designated as and is effective as a cash-flow
hedge. The fair value of this swap, a liability of $316,000 at June 30, 2008, is recorded on the
Consolidated Balance Sheets as an Other Current Liability, with changes in its fair value included
in accumulated other comprehensive income (OCI). Derivative gains and losses included in OCI are
reclassified into earnings at the time the related interest expense is recognized or the settlement
of the related commitment occurs.
8. Commitments and Contingencies
During the quarter ended June 30, 2008, the Compensation Committee of the Board of Directors
approved certain changes to the Companys employment agreements with Robet M. Holster its Chief
Executive Officer and William C. Lucia, its Chief Operating Officer, as contemplated by those
agreements, by approving increases in base salary and in the percentage of base salary as a bonus
opportunity under the Companys bonus plan.
Effective July 1, 2008, Mr. Holsters annual base salary has been raised from
$440,000 to $500,000 and Mr. Lucias annual base salary has been raised from
$330,000 to $360,000. In addition, Mr. Holsters and Mr. Lucias full-year 2008
short term incentive compensation target percentages have been increased from 50% of
salary to 65% of their annual base salary.
13
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 1A-Risk Factors and other risks identified in our Form 10-K for the year ended December
31, 2007 and presented elsewhere by management from time to time. There have been no material
changes from the risk factors previously disclosed in our Form 10-K for the year ended December 31,
2007. Such forward-looking statements represent managements current expectations and are
inherently uncertain. Readers are cautioned that actual results may differ from managements
expectations.
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based on
our consolidated financial statements, which have been prepared in accordance with United States
generally accepted accounting principles, or U.S. GAAP.
In addition to the information provided below, you should refer to the items disclosed as our
critical accounting policies in the Part II, Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the
year ended December 31, 2007.
Expense Classifications: The Companys cost of services in its statement of operations
is presented in the six categories noted below. All revenue and cost are reported under one
operating segment. A description of the primary costs included in each category being presented is
provided in the table below:
|
|
|
Line item Caption |
|
Description of Costs |
Compensation
|
|
Salary, fringe benefit, bonus and stock based
compensation cost |
|
Data processing
|
|
Hardware, software and data communication cost |
|
Occupancy
|
|
Rent, utilities, depreciation, office
equipment, repair and maintenance cost |
|
Direct project costs
|
|
Variable cost incurred from third party
providers that are directly associated with
specific revenue generating projects |
|
Other operating costs
|
|
Professional fees, temporary staffing, travel
and entertainment, insurance and local and
property tax costs |
|
Amortization of intangibles
|
|
Amortization cost of intangibles |
Current Overview
14
We provide a variety of cost management services for government-sponsored health and human
services programs. These services help customers recover amounts due from third parties, avoid and
reduce costs, and ensure regulatory compliance.
Our customers are State Medicaid agencies, government-sponsored managed care plans, child
support agencies, the Veterans Health Administration, the Centers for Medicare & Medicaid Services
and other public programs. We help these programs contain healthcare costs by identifying third
party insurance coverage and recovering expenditures that were the responsibility of the third
party, or that were paid in error. The identification of other insurance coverage also helps these
programs avoid future expenditures.
Our non-acquisition related revenue has grown at an average rate of approximately 17% per year
for the last five years. We anticipate that in 2008 our revenue will approximate $175 million. Our
growth has been partly attributable to the growth in Medicaid costs, which has historically
averaged approximately 7% annually. State governments also have increased their use of vendors for
coordination of benefits and other cost containment functions, and we have been able to increase
our revenue through these initiatives. Leveraging our work on behalf of state Medicaid fee for
service programs, we have begun to penetrate the Medicaid managed care market, into which more
Medicaid lives are being shifted. As of June 30, 2008, we counted 80 Medicaid managed care plans
including many of the largest in the nation as our clients. Additionally, we have leveraged
our client relationships to grow program integrity related revenue a product area which focuses
on payment accuracy services.
It should be noted that the nature of our business sometimes leads to significant variations
in revenue flow. For example, since we receive contingency fees for a significant portion of our
services, we recognize revenue only after our clients have received payment from a third party. In
addition, much of our work occurs on an annual or project-specific basis, and does not necessarily
recur monthly or quarterly, as do our operating expenses.
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
The following table sets forth, for the periods indicated, certain items in our consolidated
statements of operations expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services: |
|
|
|
|
|
|
|
|
Compensation |
|
|
39.1 |
% |
|
|
38.2 |
% |
Data processing |
|
|
6.3 |
% |
|
|
6.7 |
% |
Occupancy |
|
|
6.0 |
% |
|
|
6.5 |
% |
Direct project costs |
|
|
14.5 |
% |
|
|
15.3 |
% |
Other operating costs |
|
|
11.5 |
% |
|
|
9.5 |
% |
Amortization of acquisition related intangibles |
|
|
2.6 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
Total cost of services |
|
|
80.0 |
% |
|
|
79.5 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
20.0 |
% |
|
|
20.5 |
% |
Interest expense |
|
|
-0.8 |
% |
|
|
-1.5 |
% |
Interest income |
|
|
0.3 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
Income before income taxes |
|
|
19.5 |
% |
|
|
19.3 |
% |
Income taxes |
|
|
8.2 |
% |
|
|
8.4 |
% |
|
|
|
|
|
|
|
Net income |
|
|
11.3 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
15
Revenue for the three months ended June 30, 2008 was $44.2 million, an increase of $9.1
million or 26.0% compared to revenue of $35.1 million in the prior year quarter. The revenue
increase reflects the addition of new clients, changes in the yields and scope of client projects
and differences in the timing of when client projects were completed in the current year compared
to the prior year.
Compensation expense as a percentage of revenue was 39.1% for the three months ended June 30,
2008 compared to 38.2% for the three months ended June 30, 2007 and for the current quarter was
$17.3 million, a $3.9 million or 29.0% increase over the prior year quarter expense of $13.4
million. During the quarter ended June 30, 2008, we averaged 821 employees, a 28.5% increase over
our average of 639 employees during the quarter ended June 30, 2007. Increases in compensation
expense are partially a result of our acquisition of the business of Peer Review Systems, Inc., doing business
as Permedion (Permedion), during the fourth quarter of 2007 and added staff in the areas of
customer support, operations, marketing, government relations and administration.
Data processing expense as a percentage of revenue was 6.3% for the three months ended June
30, 2008 compared to 6.7% for the three months ended June 30, 2007 and for the current quarter was
$2.8 million, an increase of $0.5 million or 18.7% over the prior year quarter expense of $2.3
million. Expenses associated with mainframe and network upgrades increased by $0.2 million for
software costs, $0.1 million for hardware costs, and $0.2 million for network communication
expenses resulting from our increased number of field offices.
Occupancy expense as a percentage of revenue was 6.0% for the three months ended June 30, 2008
compared to 6.5% for the three months ended June 30, 2007 and for the current quarter was $2.6
million, a $0.3 million or 14.9% increase compared to the prior year quarter expense of $2.3
million. This increase reflected approximately $0.2 million of additional depreciation of leasehold
improvements, furniture and fixtures and telephone systems and $0.1 million of additional rent.
Direct project expense as a percentage of revenue was 14.5% for the three months ended June
30, 2008 compared to 15.3% for the three months ended June 30, 2007 and for the current quarter was
$6.4 million, a $1.0 million or 19.1% increase compared to prior year quarter expense of $5.4
million. This increase resulted from higher transaction volumes during the current quarter.
Other operating costs as a percentage of revenue were 11.5% for the three months ended June
30, 2008 compared to 9.5% for the three months ended June 30, 2007 and for the current quarter were
$5.1 million, an increase of $1.8 million or 53.3% compared to the prior year quarter expense of
$3.3 million. This increase resulted primarily from increases of $0.6 million for additional
temporary help and consulting fees, $0.3 million for travel expenses, $0.3 million for supplies and
related expenses, $0.2 million for legal expenses, $0.2 million for staff relocation expenses, and
$0.1 million each for marketing and staff training expenses.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.6% for the three months ended June 30, 2008 compared to 3.3% for the three months ended June 30,
2007 and for the current quarter was $1.2 million, equivalent to prior year quarter expense of $1.2
million.
Operating income for the three months ended June 30, 2008 was $8.8 million, an increase of
$1.6 million or 23.1%, compared to $7.2 million for the three months ended June 30, 2007 primarily
due to increased revenue partially offset by incremental operating cost incurred during the quarter
ended June 30, 2008.
16
Interest expense was $0.4 million for the three months ended June 30, 2008 compared to $0.5
million for the prior year quarter. In both periods, interest expense was attributable to
borrowings under the Term Loan and amortization of deferred financing costs. The decrease in
interest expense is due to both a lower variable interest rate and a reduction in the principal
balance in the current period compared to the prior period. Interest income was $0.1 million for
the three months ended June 30, 2008, equivalent to that reported for the three months ended June
30, 2007.
Income tax expense of $3.6 million was recorded in the quarter ended June 30, 2008 compared to
$2.9 million for the three months ended June 30, 2007, an increase of $0.7 million. Our effective
tax rate decreased to 42.0% in 2008 from 43.7% for the year ended December 31, 2007 primarily due
to a change in state apportionments. The Companys tax provision in 2008 is principally a deferred
provision as Federal income taxes payable have been offset by the
benefit of net operating loss carryforward from disqualifying
dispositions recognized in additional paid in capital. Additionally, the amortization of intangible
assets has reduced current taxable income. The principal difference between the statutory rate and
the Companys effective rate is state taxes.
Net income of $5.0 million in the current quarter represents an increase of $1.2 million, or 31.4%,
compared to net income of $3.8 million in the prior year quarter.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
The following table sets forth, for the periods indicated, certain items in our consolidated
statements of operations expressed as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of services: |
|
|
|
|
|
|
|
|
Compensation |
|
|
40.7 |
% |
|
|
39.3 |
% |
Data processing |
|
|
6.9 |
% |
|
|
6.7 |
% |
Occupancy |
|
|
6.3 |
% |
|
|
6.4 |
% |
Direct project costs |
|
|
14.9 |
% |
|
|
15.7 |
% |
Other operating costs |
|
|
10.9 |
% |
|
|
9.0 |
% |
Amortization of acquisition related intangibles |
|
|
2.8 |
% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
Total cost of services |
|
|
82.5 |
% |
|
|
80.6 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
17.5 |
% |
|
|
19.4 |
% |
Interest expense |
|
|
-0.9 |
% |
|
|
-1.8 |
% |
Interest income |
|
|
0.4 |
% |
|
|
0.3 |
% |
|
|
|
|
|
|
|
Income before income taxes |
|
|
17.0 |
% |
|
|
17.9 |
% |
Income taxes |
|
|
7.2 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
Net income |
|
|
9.8 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
Revenue for the six months ended June 30, 2008 was $83.1 million, an increase of $15.8 million
or 23.5% compared to revenue of $67.3 million in the prior year period. The revenue increase
reflects organic growth in existing client accounts, the addition of new clients, changes in the
yields and scope of client projects and differences in the timing of when client projects were
completed in the current year compared to the prior year.
17
Compensation expense as a percentage of revenue was 40.7% for the six months ended June 30,
2008 compared to 39.3% for the six months ended June 30, 2007 and for the current period was $33.8
million, a $7.4 million or 27.8% increase over the prior year period expense of $26.5 million.
During the six-month period ended June 30, 2008, we averaged 804 employees, a 28.8% increase over
our average of 624 employees during the period ended June 30, 2007. Increases in compensation
expense are partially a result of our acquisition of Permedion during the fourth quarter of 2007 and added
staff in the areas of customer support, operations, marketing, government relations and
administration.
Data processing expense as a percentage of revenue was 6.9% for the six months ended June 30,
2008 compared to 6.7% for the six-months ended June 30, 2007 and for the current period was $5.7
million, an increase of $1.2 million or 28.0% over the prior year period expense of $4.5 million.
Expenses associated with mainframe and network upgrades increased by $0.6 million for software
costs, $0.4 million for hardware costs, and $0.2 million for network communication expenses
resulting from our increased number of field offices.
Occupancy expense as a percentage of revenue was 6.3% for the six months ended June 30, 2008
compared to 6.4% for the six months ended June 30, 2007 and for the current period was $5.2
million, a $0.9 million or 22.2% increase compared to the prior year period expense of $4.3
million. This increase reflected approximately $0.4 million of additional depreciation of leasehold
improvements, furniture and fixtures and telephone systems, $0.3 million of additional rent, and
$0.1 million each of higher utility costs and moving expenses.
Direct project expense as a percentage of revenue was 14.9% for the six months ended June 30,
2008 compared to 15.7% for the six months ended June 30, 2007 and for the current period was $12.4
million, a $1.7 million or 16.7% increase compared to prior year period expense of $10.7 million.
This increase resulted from higher transaction volumes during the current period.
Other operating costs as a percentage of revenue were 10.9% for the six months ended June 30,
2008 compared to 9.0% for the six months ended June 30, 2007 and for the current period were $9.0
million, an increase of $3.0 million or 49.6% compared to the prior year period expense of $6.0
million. This increase resulted primarily from increases of $1.3 million for additional temporary
help and consulting fees, $0.5 million for travel expenses, $0.3 million for staff relocation
expenses, $0.2 million for legal expenses, $0.4 million for supplies and other expenses, $0.2
million for marketing expenses, and $0.1 million each for local taxes and training expenditures.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.8% for the six months ended June 30, 2008 compared to 3.5% for the six months ended June 30, 2007
and for the current period was $2.3 million, equivalent to prior year period expense of $2.3
million.
Operating income for the six months ended June 30, 2008 was $14.5 million, an increase of $1.4
million or 11.3%, compared to $13.1 million for the six months ended June 30, 2007 primarily due to
increased revenue partially offset by incremental operating cost incurred during the quarter ended
June 30, 2008.
Interest expense was $0.8 million for the six months ended June 30, 2008 compared to $1.3
million for the prior year period. In both periods, interest expense was attributable to
borrowings under the Term Loan and amortization of deferred financing costs. The decrease in
interest expense is due to both a lower variable interest rate and a reduction in the principal
balance in the current period compared to the prior period. Interest income was $0.3 million for
the six months ended June 30, 2008 compared to interest income of $0.2 million for the six months
ended June 30, 2007, principally due to higher cash balances partially offset by lower interest
rates.
Income tax expense of $5.9 million was recorded in the period ended June 30, 2008 compared to
$5.2 million for the period ended June 30, 2007, an increase of $0.7 million. Our effective tax
rate
18
decreased to 42.0% in 2008 from 43.7% for the year ended December 31, 2007 primarily due to a
change in state apportionments. The Companys tax provision in 2008 is principally a deferred
provision as Federal income taxes payable have been offset by the
benefit of net operating loss carryforward from disqualifying
dispositions recognized in additional paid in capital. Additionally, the amortization of intangible
assets has reduced current taxable income. The principal difference between the statutory rate and
the Companys effective rate is state taxes.
Net income of $8.2 million in the current period represents an increase of $1.4 million, or
20.6%, compared to net income of $6.8 million in the prior year period.
Off-Balance Sheet Financing Arrangements
We do not have any off-balance sheet financing arrangements, other than our irrevocable
standby letter of credit previously discussed, and the operating leases discussed below.
Liquidity and Capital Resources
Historically, our principal source of funds has been operations and we have had cash, cash
equivalents and short-term investments significantly in excess of our operating needs. At June 30,
2008, our cash and cash equivalents and net working capital were $25.0 million and $49.7 million,
respectively. Although we expect that operating cash flows will continue to be a primary source of
liquidity for our operating needs, we also have a $25.0 million Revolving Credit facility available
for future cash flow needs. There have been no borrowings under the Revolving Loan, however, we
have outstanding a $4.6 million irrevocable standby letter of credit which relates to contingent,
default payment obligations required by a contractual arrangement with a client. In addition, at
June 30, 2008, we had $20.5 million of debt outstanding from the $40.0 million Term Loan originally
borrowed to fund the acquisition of BSPA in September 2006. The Term Loan requires us to make
quarterly repayments of $1.575 million.
Operating cash flows could be adversely affected by a decrease in demand for our services.
The majority of our client relationships have been in place for several years, and as a result, we
do not expect any decrease in the demand for our services in the near term.
For the six months ended June 30, 2008, cash provided by operations was $6.8 million compared
to $13.9 million in the prior year period. The current year periods difference between net income
of $8.2 million and cash provided by operations of $6.8 million was principally due to an increase
in accounts receivable of $5.1 million and a decrease in accounts payable, accrued expenses and
other liabilities of $4.9 million. These were partially offset by non-cash charges, including
depreciation and amortization expense of $5.8 million, share-based compensation expense of $1.5
million, and decreases in prepaid expenses of $0.9 million and our deferred tax asset of $0.4
million. During the current year period, cash used in investing activities was $4.2 million,
reflecting investments in property, equipment and software development. Cash used in financing
activities of $1.0 million consisted of $3.2 million of principal payments on the Term Loan,
partially offset by a $3.1 million tax benefit from disqualifying dispositions and $1.0 million
received from stock option exercises. We anticipate that our existing cash balances and funds
generated by operations will be sufficient for all our 2008 cash needs.
The number of days sales outstanding (DSO) at June 30, 2008 decreased to 91 days compared to
97 days at March 31, 2008. A substantial portion of the decrease in the current quarters DSO
levels resulted from the timing of the monthly distribution of revenue during the quarter.
19
At June 30, 2008, our primary contractual obligations, which consist principally of amounts
due under future lease payments and payments of principal and interest on long-term debt, are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Contractual Payments due by period |
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
Contractual obligations |
|
Total |
|
1 year |
|
2-3 years |
|
4-5 years |
|
5 years |
|
Operating leases |
|
$ |
28,605 |
|
|
$ |
6,445 |
|
|
$ |
12,067 |
|
|
$ |
9,016 |
|
|
$ |
1,077 |
|
Long-term debt |
|
|
20,475 |
|
|
|
6,300 |
|
|
|
12,600 |
|
|
|
1,575 |
|
|
|
|
|
Interest expense (1) |
|
|
1,775 |
|
|
|
895 |
|
|
|
811 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Total |
|
$ |
50,855 |
|
|
$ |
13,640 |
|
|
$ |
25,478 |
|
|
$ |
10,660 |
|
|
$ |
1,077 |
|
|
|
|
|
|
|
(1) |
|
Future interest payments are estimates of amounts due on our long-term debt and
credit facility at current interest rates and is based on scheduled repayments of principal. |
We have entered into sublease arrangements for some of our facility obligations and expect to
receive the following rental receipts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
Total |
|
1 Year |
|
2-3 Years |
|
4-5 Years |
|
5 years |
|
$2,953
|
|
$ |
592 |
|
|
$ |
1,178 |
|
|
$ |
1,052 |
|
|
$ |
131 |
|
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. On February
24, 2006, the Board of Directors increased the authorized aggregate purchase price by $10 million
to an amount not to exceed $20 million. During the six months ended June 30, 2008, we made no
repurchases. Cumulatively since the inception of the repurchase program, we have repurchased
1,662,846 shares having an aggregate purchase price of $9.4 million.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 does not require any new fair value measurements, but rather
eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157
is effective for fiscal years beginning after November 15, 2007, with the exception of the
application of the statement to the determination of fair value of non-financial assets and
liabilities that are recognized or disclosed on a nonrecurring basis, which is effective for fiscal
years beginning after November 15, 2008.
20
SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs
that are observable for the asset or liability, either directly or indirectly through market
corroboration, for substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on our own assumptions used to measure assets and liabilities at fair
value. A financial asset or liabilitys classification within the hierarchy is determined based on
the lowest level input that is significant to the fair value measurement.
Effective January 1, 2008, we partially adopted SFAS No. 157 and have applied its provisions
to financial assets and liabilities that are recognized or disclosed at fair value on a recurring
basis (at least annually). We have not yet adopted SFAS 157 for non-financial assets and
liabilities, in accordance with FASB staff position 157-2, which is effective for fiscal years
beginning after November 15, 2008.
At June 30, 2008, our interest rate swap contract (see note 7 of the Notes to Consolidated
Financial Statements) was being carried at fair value and measured on a recurring basis. Fair value
is determined through the use of models that consider various assumptions, including time value,
yield curves, as well as other relevant economic measures, which are inputs that are classified as
Level 2 in the valuation hierarchy.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159), which is
effective for fiscal years beginning after November 15, 2007. This statement permits entities to
choose to measure many financial instruments and certain other items at fair value. This statement
also establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar types of assets and
liabilities. Unrealized gains and losses on items for which the fair value option is elected would
be reported in earnings. We have adopted SFAS 159 and have elected not to measure any additional
financial instruments and other items at fair value.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), which replaces SFAS No. 141, Business Combinations. SFAS 141(R) retains the underlying
concepts of SFAS 141 in that all business combinations are still required to be accounted for at
fair value under the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition costs will
generally be expensed as incurred; noncontrolling interests will be valued at fair value at the
acquisition date; in-process research and development will be recorded at fair value as an
indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a
business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date
generally will affect income tax expense. SFAS 141(R) is effective on a prospective basis for all
business combinations for which the acquisition date is on or after the beginning of the first
annual period subsequent to December 15, 2008, with the exception of the accounting for valuation
allowances on deferred taxes and acquired tax contingencies. SFAS 141(R) amends SFAS 109 such that
adjustments made to valuation allowances on deferred taxes and acquired tax contingencies
associated with acquisitions that closed prior to the effective date of SFAS 141(R) would also
apply the provisions of SFAS 141(R). Early adoption is prohibited. Therefore, the impact of the
implementation of this pronouncement cannot be determined until the transactions occur.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). This statement is intended
to improve transparency in financial reporting by requiring enhanced disclosures of an entitys
derivative instruments and hedging activities and their effects on the entitys financial position,
financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) as
well as related hedged items, bifurcated derivatives, and nonderivative instruments that are
designated and qualify as
21
hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust
qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively
for financial statements issued for fiscal years and interim periods beginning after November 15,
2008 with early application permitted. The Company is evaluating this guidance but does not expect
it to have a significant impact on its financial position or results of operations.
In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets. This FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS 142). The objective of this FSP is to improve
the consistency between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and
other GAAP. This FSP applies prospectively to all intangible assets acquired after the effective
date in fiscal 2009, whether acquired in a business combination or otherwise. Early adoption is
prohibited. The Company is evaluating this guidance but does not expect it to have a significant
impact on its financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We are exposed to changes in interest rates, primarily from our Term Loan, and use an interest
rate swap agreement to fix the interest rate on a portion of this variable debt and reduce certain
exposures to interest rate fluctuations. Since entering into this swap agreement, interest rates
have declined and the required payments exceed those based on current market rates on the long-term
debt. Our risk management objective in entering into such contracts and agreements is only to
reduce our exposure to the effects of interest rate fluctuations and not for speculative
investment. At June 30, 2008, we had total bank debt of $20.5 million. Our interest rate swap
effectively converted $12.0 million of this variable rate debt to fixed rate debt, leaving
approximately $8.5 million of the total long-term debt exposed to interest rate risk. If the
effective interest rate for all of our variable rate debt were to increase by 100 basis points
(1%), our annual interest expense would increase by a maximum of $85,000 based on the balances
outstanding at June 30, 2008.
Item 4. Controls and Procedures
Based on managements evaluation (with the participation of our Chief Executive Officer (CEO)
and Chief Financial Officer (CFO)), as of the end of the period covered by this report, our CEO and
CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are
effective to provide reasonable assurance that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms
and is accumulated and communicated to management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
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.
22
PART II OTHER INFORMATION
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the
risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2007, which could materially affect our business, financial condition or
future results. The risks described in our Annual Report on Form 10-K, are not the only risks
facing our Company. Additional risks and uncertainties not currently known to us, or that we
currently deem to be immaterial, may also materially adversely affect our business, financial
condition and/or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on May 30, 2008. The 23,137,171 shares of common
stock (Common Stock) present at the meeting out of a then total 24,969,189 shares outstanding and
entitled to vote, acted as follows with respect to the following proposals:
Approved, by a vote of: 22,014,865 shares of common stock for and 1,122,306 shares withheld,
the election of Robert M. Holster as a director; 22,347,842 shares of common stock for and 789,329
shares withheld, the election of James T. Kelly as a director; 21,579,030 shares of common stock
for and 1,558,141 shares withheld, the election of William C. Lucia as a director; 20,837,884
shares of common stock for and 2,299,287 shares withheld, the election of William S. Mosakowski as
a director and 20,719,730 shares of common stock for and 2,417,441 shares withheld, the election of
Galen D. Powers as a director. The votes of 777,429 shares of common stock were withheld with
respect to the election of all of the nominees.
Ratified, by a vote of: 16,634,245 shares of Common Stock for, 3,486,803 shares against, and
54,025 shares abstained, the amendment of our Amended 2006 Stock Plan to increase the maximum
number of shares that may be issued under the Plan from 1,500,000 shares to 2,150,000 shares.
Ratified, by a vote of 22,784,693 shares of Common Stock for, 317,675 shares against, and
34,803 shares abstained, the selection of KPMG LLP as our independent registered public accounting
firm for the fiscal year ending December 31, 2008.
Item 6. Exhibits
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|
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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 Walter D. Hosp, 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 Walter
D. Hosp, Chief Financial Officer of HMS Holdings Corp. |
23
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.
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|
|
|
|
Date: August 11, 2008 |
HMS HOLDINGS CORP.
(Registrant)
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|
|
By: |
/s/ Robert M. Holster
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|
Robert M. Holster |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ Walter D. Hosp
|
|
|
|
Walter D. Hosp |
|
|
|
Chief Financial Officer (Principal
Financial Officer and Accounting Officer) |
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24
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 Walter D. Hosp,
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 Walter D. Hosp, Chief Financial
Officer of HMS Holdings Corp. |
25