10-Q
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 March 31, 2010
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 000-50194
HMS HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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New York
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11-3656261 |
(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.) |
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401 Park Avenue South, New York, NY
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10016 |
(Address of principal executive offices)
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(Zip Code) |
(Registrants Telephone Number, Including Area Code)
(212) 725-7965
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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for shorter period that the registrant was required to submit and post such files).
Yes o 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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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
As
of April 30, 2010 there were approximately 27,151,521 million shares of the registrants
common stock (par value $0.01 per share) outstanding.
HMS HOLDINGS CORP. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2010
INDEX
2
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995. From time to time, we also provide
forward-looking statements in other materials we release to the public, as well as oral
forward-looking statements. Such statements give our expectations or forecasts of future events;
they do not relate strictly to historical or current facts.
We have tried, wherever possible, to identify such statements by using words such as anticipate,
estimate, expect, project, intend, plan, believe, will, target, seek, forecast
and similar expressions. In particular, these include statements relating to future actions,
business plans, objects and prospects, future operating or financial performance or results of
current and anticipated services, acquisitions and the performance of companies we have acquired,
sales efforts, expenses, interest rates, and the outcome of contingencies, such as financial
results.
We cannot guarantee that any forward-looking statement will be realized. Forward-looking
statements are based on our current expectations and assumptions regarding our business, the
economy and other future conditions. Should known or unknown risks or uncertainties materialize,
or should underlying assumptions prove inaccurate, actual results could differ materially from past
results and those anticipated, estimated or projected. We caution you, therefore, against relying
on any of these forward-looking statements. They are neither statements of historical fact nor
guarantees or assurances of future performance.
Factors that could cause or contribute to such differences include, but are not limited to, those
discussed in our Annual Report, and in particular, the risks discussed under the heading Risk
Factors in Part I, Item 1A of our Annual Report, Part II of this 10-Q and those discussed in other
documents we file with the Securities and Exchange Commission.
Any forward-looking statements made by us in this Report on Form 10-Q speak only as of the date on
which they are made. Factors or events that could cause actual results to differ may emerge from
time to time and it is not possible for us to predict all of them. We undertake no obligation to
publicly update forward-looking statements, whether as a result of new information, future events
or otherwise, except as may be required by law. You are advised, however, to consult any further
disclosures we make on related subjects in our 10-K and 8-K reports to the Securities and Exchange
Commission.
3
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
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March 31, |
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December 31, |
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2010 |
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2009 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
75,398 |
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$ |
64,863 |
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Accounts receivable, net of allowance of $602 and $614 at March 31, 2010 and December 31, 2009 |
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62,359 |
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64,750 |
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Prepaid expenses |
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5,505 |
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9,956 |
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Other current assets, including net deferred tax assets of $778 and $804 at March 31, 2010 and
December 31, 2009 |
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874 |
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872 |
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Total current assets |
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144,136 |
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140,441 |
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Property and equipment, net |
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21,442 |
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20,902 |
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Goodwill, net |
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88,220 |
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91,520 |
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Deferred income taxes, net |
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229 |
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Intangible assets, net |
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18,473 |
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16,798 |
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Other assets |
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905 |
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983 |
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Total assets |
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$ |
273,405 |
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$ |
270,644 |
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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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$ |
17,675 |
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$ |
26,474 |
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Total current liabilities |
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17,675 |
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26,474 |
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Long-term liabilities: |
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Accrued deferred rent |
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3,555 |
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3,675 |
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Other liabilities |
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1,978 |
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2,202 |
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Total long-term liabilities |
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5,533 |
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5,877 |
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Total liabilities |
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23,208 |
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32,351 |
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Shareholders equity: |
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Preferred stock $0.01 par value; 5,000,000 shares authorized; none issued |
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Common Stock $0.01 par value; 45,000,000 shares authorized; |
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28,655,502 issued and 26,992,656 shares outstanding at
March 31, 2010 |
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28,533,406 shares issued and 26,870,560 shares outstanding at December 31, 2009 |
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287 |
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285 |
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Capital in excess of par value |
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180,118 |
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175,795 |
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Retained earnings |
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79,189 |
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71,610 |
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Treasury stock, at cost; 1,662,846 shares at March 31, 2010 and
December 31, 2009 |
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(9,397 |
) |
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(9,397 |
) |
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Total shareholders equity |
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250,197 |
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238,293 |
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Total liabilities and shareholders equity |
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$ |
273,405 |
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$ |
270,644 |
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See accompanying notes to unaudited consolidated financial statements.
4
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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Three months ended |
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March 31, |
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2010 |
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2009 |
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Revenue |
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$ |
64,952 |
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$ |
49,941 |
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Cost of services: |
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Compensation |
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24,530 |
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17,531 |
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Data processing |
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3,834 |
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3,146 |
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Occupancy |
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3,432 |
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2,734 |
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Direct project costs |
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7,574 |
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6,325 |
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Other operating costs |
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3,374 |
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2,998 |
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Amortization of acquisition related software and intangibles |
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1,503 |
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1,216 |
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Total cost of services |
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44,247 |
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33,950 |
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Selling, general and administrative expenses |
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7,989 |
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6,131 |
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Total operating expenses |
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52,236 |
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40,081 |
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Operating income |
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12,716 |
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9,860 |
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Interest expense |
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(23 |
) |
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(287 |
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Interest income |
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17 |
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97 |
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Income before income taxes |
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12,710 |
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|
9,670 |
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Income taxes |
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5,131 |
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3,965 |
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Net income |
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$ |
7,579 |
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$ |
5,705 |
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Basic income per common share |
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Net income per share basic |
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$ |
0.28 |
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$ |
0.22 |
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Diluted income per share |
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Net income per share diluted |
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$ |
0.27 |
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$ |
0.21 |
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Weighted average shares: |
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Basic |
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26,919 |
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|
25,614 |
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|
|
|
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Diluted |
|
|
28,177 |
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|
|
27,205 |
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|
|
|
|
|
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|
See accompanying notes to unaudited consolidated financial statements.
5
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 2010
(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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# of Shares |
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Excess of Par |
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Retained |
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Treasury Stock |
|
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Shareholders |
|
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Issued |
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Par Value |
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Value |
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Earnings |
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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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Balance at December 31, 2009 |
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28,533,406 |
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$ |
285 |
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|
$ |
175,795 |
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|
$ |
71,610 |
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|
1,662,846 |
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$ |
(9,397 |
) |
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$ |
238,293 |
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Comprehensive income: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income |
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|
|
|
|
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|
|
|
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7,579 |
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7,579 |
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Total comprehensive income |
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|
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7,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Share-based compensation cost |
|
|
|
|
|
|
|
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,761 |
|
Exercise of stock options |
|
|
122,096 |
|
|
|
2 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,180 |
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
|
|
|
|
1,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,384 |
|
|
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|
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|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
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|
Balance at March 31, 2010 |
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|
28,655,502 |
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|
$ |
287 |
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|
$ |
180,118 |
|
|
$ |
79,189 |
|
|
|
1,662,846 |
|
|
$ |
(9,397 |
) |
|
$ |
250,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to unaudited consolidated financial statements.
6
HMS HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
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|
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For the three months ended |
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March 31, |
|
|
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,579 |
|
|
$ |
5,705 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets |
|
|
|
|
|
|
1 |
|
Depreciation and amortization |
|
|
3,680 |
|
|
|
3,359 |
|
Share-based compensation expense |
|
|
1,761 |
|
|
|
1,308 |
|
(Increase)/decrease in deferred tax asset |
|
|
(529 |
) |
|
|
271 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease/(increase) in accounts receivable |
|
|
2,391 |
|
|
|
(1,392 |
) |
Decrease in prepaid expenses and other current
assets |
|
|
4,423 |
|
|
|
751 |
|
Decrease in other assets |
|
|
78 |
|
|
|
1 |
|
Decrease in accounts payable, accrued expenses and other liabilities |
|
|
(7,749 |
) |
|
|
(5,845 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
11,634 |
|
|
|
4,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(3,122 |
) |
|
|
(3,005 |
) |
Investment in capitalized software |
|
|
(541 |
) |
|
|
(355 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(3,663 |
) |
|
|
(3,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
1,180 |
|
|
|
1,586 |
|
Repayment of long-term debt |
|
|
|
|
|
|
(1,575 |
) |
Excess tax benefit from exercised stock options |
|
|
1,384 |
|
|
|
3,108 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
2,564 |
|
|
|
3,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
10,535 |
|
|
|
3,918 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
64,863 |
|
|
|
49,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
75,398 |
|
|
$ |
53,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
572 |
|
|
$ |
75 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
|
Accrued property and equipment purchases |
|
$ |
183 |
|
|
$ |
534 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
7
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
1. Basis of Presentation
The financial information in this report has not been audited, but in the opinion of
management all adjustments (consisting only of normal recurring adjustments) considered necessary
to present fairly such information have been included. The operating results for the three months
ended March 31, 2010 and 2009 are not necessarily indicative of results to be expected for the full
year. The financial statements included herein should be read in conjunction with the financial
statements and notes included in our Annual Report on Form 10-K for the year ended December 31,
2009, which we refer to as our Annual Report.
We are managed and operated as one business, with a single management team that reports to the
chief executive officer. We do not operate separate lines of business with respect to any of our
product lines. Accordingly, we do not prepare discrete financial information with respect to
separate product lines or location and do not have separately reportable segments.
We provide a variety of cost containment, coordination of benefits and program integrity
services for government-sponsored health and human services programs. These services are designed
to help our clients recover amounts due from liable third parties, reduce costs, ensure regulatory
compliance, and increase operational efficiencies. In December 2009, with the acquisition of Verify
Solutions, we moved into the employer-based market with valuable new services that ensure that
dependents covered by employees are eligible to receive healthcare benefits.
These consolidated financial statements include our accounts and transactions and those of our
wholly owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles, or GAAP, requires management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
The carrying amounts for our cash equivalents, accounts receivable, accounts payable and
accrued expenses approximate fair value due to their short-term nature.
We evaluated all subsequent events through the date and time our financial statements were
issued. No subsequent events occurred during this reporting period that require recognition or
disclosure in this filing.
In October 2009, the Financial Accounting Standards Board, FASB, issued Accounting Standards
Update 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force, to provide amendments to the criteria in Subtopic 609-24 of the Accounting
Standards Codification, which we refer to as ASU 2009-13, for separating consideration into
multiple-deliverable revenue arrangements. ASU 2009-13 establishes a selling price hierarchy for
determining the selling price of each specific deliverable, which includes vendor-specific
objective evidence, or VSOE, if available, third party evidence if VSOE is not available or
estimated selling price if neither VSOE nor third party evidence is available. ASU 2009-13 also
eliminates the residual method for allocating revenue between the elements of an arrangement and
requires that arrangement consideration be allocated at the
inception of the arrangement to all
deliverables using the relative selling price method, which allocates any discount in the
arrangement proportionally to each deliverable on the basis of each deliverables selling price.
This update expands the disclosure requirements regarding a vendors multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of ASU 2009-13 on our consolidated financial
statements.
8
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
2. Acquisitions
IntegriGuard LLC
In September 2009, we acquired IntegriGuard LLC, or IntegriGuard, for $5.1 million in cash.
This acquisition was accounted for under the purchase method of accounting and did not have a
material effect on our revenue, earnings and earnings per share or liquidity for the three months
ended March 31, 2010. IntegriGuard, which is based in Omaha, Nebraska, provides services for the
prevention and detection of fraud, waste and abuse in the healthcare
system, and operates as our
wholly owned subsidiary. With this acquisition, we further expanded our portfolio of program
integrity service offerings for government healthcare programs, particularly in the Medicare and
Medicaid programs.
The allocation of the purchase price for IntegriGuard was based upon the fair value estimate
of its assets and liabilities. The acquisition of IntegriGuard was based on managements
consideration of past and expected future performance as well as the potential strategic fit with
our long-term goals. The expected long-term growth, market position and expected synergies to be
generated by IntegriGuard were the primary factors that gave rise to an acquisition price that
resulted in the recognition of unidentified intangible assets.
The allocation of the aggregate purchase price of the IntegriGuard acquisition is as follows
(in thousands):
|
|
|
|
|
Goodwill |
|
$ |
1,777 |
|
Net assets acquired |
|
|
1,712 |
|
Identifiable intangible assets |
|
|
1,405 |
|
Capitalized software |
|
|
240 |
|
|
|
|
|
Total purchase price |
|
$ |
5,134 |
|
|
|
|
|
Identifiable intangible assets principally include client relationships and IntegriGuards
trade name, and approximately $0.1 million has been amortized as of March 31, 2010.
As part of the IntegriGuard acquisition, we entered into a twelve month Intercompany Services
Agreement (ISA) with the seller, Lumetra, to allow each party to perform contractual transition
services. Services performed under the ISA are billed at pre-determined rates that are specified in
the ISA. For the three months ended March 31, 2010, we incurred expenses of $0.1 million for
services rendered by Lumetra under the ISA.
Verify Solutions, LLC
In December 2009, we acquired the assets of Verify Solutions, LLC, or Verify Solutions, an
Alpharetta, Georgia-based company specializing in dependent eligibility audit services for
employer-sponsored healthcare plans. With this acquisition, we moved into the employer-based
market, providing services which include Dependent Eligibility Reviews for large and mid-market
employers.
9
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
The purchase price for Verify Solutions was $8.1 million, with additional future payments
contingent upon Verify Solutions achievement of financial performance milestones. The additional
future payments of up to $5.5 million ($2.7 million and $2.8 million for the years ended December
31, 2010 and 2011, respectively) are being recorded to compensation expense in the year in which
the milestones are achieved. For the three months ended March 31, 2010, $0.3 million of future
contingent expense has been recorded.
The acquisition of Verify Solutions did not have a material effect on our revenue, earnings,
earnings per share or liquidity for the three months ended March 31, 2010, and was accounted for
under the purchase method of accounting.
Since the acquisition of Verify Solutions was completed on December 31, 2009, we have not
finalized the purchase price allocation. Therefore, the aggregate purchase price allocation of this
acquisition is subject to adjustment.
The preliminary allocation of the aggregate purchase price of the Verify Solutions acquisition
is as follows (in thousands):
|
|
|
|
|
Goodwill |
|
$ |
4,101 |
|
Net assets acquired |
|
|
446 |
|
Identifiable intangible assets |
|
|
3,000 |
|
Capitalized software |
|
|
601 |
|
|
|
|
|
Total purchase price |
|
$ |
8,148 |
|
|
|
|
|
Identifiable
intangible assets principally include covenants not to compete and Verify Solutions
trade name, and approximately $0.2 million has been amortized as of March 31, 2010.
Results subsequent to the dates of acquisitions were included in the unaudited consolidated
financial statements included herein. Had the results of the acquisitions been included in the
unaudited consolidated financial statements for the same periods in 2009, the effect would not have
been material.
3. Income Taxes
We file income tax returns with the U.S. federal government and various state jurisdictions.
We are no longer subject to U.S. federal income tax examinations for years before 2006. We operate
in a number of state and local jurisdictions, most of which have never audited our records.
Accordingly, we are subject to state and local income tax examinations based upon the various
statutes of limitations in each jurisdiction.
During the periods ended March 31, 2010 and 2009, we recorded a tax benefit of $1.4 million
and $3.1 million, respectively, related to the utilization of the income tax benefit from stock
transactions by reducing income tax payable and crediting capital.
At March 31, 2010 and 2009, we had approximately $1.1 million and $0.5 million of net
unrecognized tax benefits, respectively, for which there is uncertainty about the allocation and
apportionment impacting state taxable income. If recognized, this amount would impact our
effective tax rate. We have recognized interest accrued related to unrecognized tax benefits in
interest expense and penalties in tax expense. The accrued liabilities related to uncertain tax
positions were $0.5 million and $0.2 at March 31, 2010 and 2009, respectively.
10
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
4. Debt
We have a credit agreement with several banks and other financial institutions with JPMorgan
Chase Bank, N.A. (JPMCB), as administrative agent, which we refer to as the Credit Agreement. The
Credit Agreement, which expires in September 2011, provided for a term loan of $40 million, which
we refer to as the Term Loan, and revolving credit loans of up to $25 million, which we refer to as
the Revolving Loan. During the year ended December 31, 2009, we repaid in full the $17.3 million
of debt outstanding under the Term Loan; however, we continue to have an irrevocable standby Letter
of Credit for $4.6 million against the Revolving Loan, which we refer to as the Letter of Credit,
as required by a contractual arrangement with a client.
We secured the Term and Revolving Loans with the grant of a security interest, covering our
assets and subsidiaries, in favor of the lenders. Interest on borrowings under the Credit
Agreement is calculated, at our option, at either (i) LIBOR, including statutory reserves, plus a
variable margin based on our 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 our leverage ratio. In connection with the Revolving Loan, we agreed to pay a commitment
fee on the unused portion of the Revolving Loan, payable quarterly in arrears, at a variable rate
based on our leverage ratio.
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 and any incurrence of indebtedness by us, subject, in each case, to limited
exceptions. Our obligations 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 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 March 31, 2010. We are currently in full compliance with these covenants.
There have been no borrowings under the Revolving Loan; however, as a result of the Letter of
Credit, the amount available under the Revolving Loan as of March 31, 2010 is $20.4 million.
On March 30, 2010, we entered into an amendment to the Credit Agreement, which we refer to as
the First Amendment, to increase the total amount we could spend on acquisitions in any one year
from $10.0 million to $30.0 million. In connection with entering into the First Amendment, the
lenders agreed to waive any default that may have occurred and be continuing as a result of the
Verify Solutions acquisition, which closed on December 31, 2009,
as a result of which we exceeded the aggregate
acquisition amount in 2009. This default did not have a material impact on our 2009 financial
statements since we had no outstanding debt and only a Letter of Credit outstanding.
11
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
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. Our common share equivalents consist of stock options and
restricted stock awards and units.
The following table reconciles the basic to diluted weighted average shares outstanding using
the treasury stock method (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Weighted average shares outstanding basic |
|
|
26,919 |
|
|
|
25,614 |
|
Dilutive effect of stock options |
|
|
1,228 |
|
|
|
1,587 |
|
Dilutive effect of restricted stock |
|
|
30 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
28,177 |
|
|
|
27,205 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2010 and 2009, 321,100 and 41,028 stock options,
respectively, were not included in the diluted earnings per share calculation because the effect
would have been antidilutive.
6. Stock-Based Compensation
Presented below is a summary of our stock option activity for the three months ended March 31,
2010 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Terms |
|
|
Value |
|
Outstanding at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
3,036 |
|
|
$ |
17.39 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(122 |
) |
|
|
9.66 |
|
|
|
|
|
|
|
|
|
Forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010 |
|
|
2,914 |
|
|
|
17.71 |
|
|
|
4.69 |
|
|
$ |
98,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at March 31, 2010 |
|
|
2,825 |
|
|
|
17.36 |
|
|
|
0.59 |
|
|
$ |
96,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2010 |
|
|
1,424 |
|
|
$ |
9.90 |
|
|
|
4.01 |
|
|
$ |
59,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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.
12
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
As
of March 31, 2010, there was approximately $9.1 million of total unrecognized compensation
expense related to stock options outstanding. That expense is expected to be recognized over a
weighted-average period of 1.2 years. No compensation expense related to stock options was
capitalized for the three months ended March 31, 2010.
The total intrinsic value of options exercised during the periods ended March 31, 2010 and
2009 was $4.4 million and $7.7 million, respectively.
Total compensation expense for share-based payment arrangements charged against income was
$1.8 million and $1.3 million for the three months ended March 31, 2010 and 2009, respectively.
These expenses were categorized as selling, general and administration costs for each of those
periods. The total income tax benefit recognized in the income statement for share-based
arrangements was $1.0 million and $0.5 million for the three months ended March 31, 2010 and 2009,
respectively.
We estimated the fair value of options granted using a Black-Scholes option pricing model with
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2010 |
|
|
2009 |
|
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Risk-free interest rate |
|
|
2.32 |
% |
|
|
2.48 |
% |
Expected volatility |
|
|
45.8 |
% |
|
|
38.0 |
% |
Expected life |
|
|
4.0 years |
|
|
|
5.0 years |
|
No stock options were granted during the three-month period ended March 31, 2010.
Restricted Stock Units
In October 2009, certain employees received restricted stock units under the Third Amended and
Restated 2006 Stock Plan, which we refer to as our 2006 Plan. The fair value of restricted stock
units is estimated based on the closing sale price of our common stock on the NASDAQ Global Select
Market on the date of issuance. The total number of restricted stock units expected to vest is
adjusted by estimated forfeiture rates. As of March 31, 2010, there was approximately $0.8 million
of unamortized compensation expense related to restricted stock units which is expected to be
recognized over the remaining weighted-average vesting period of 2.3 years. For the three months
ended March 31, 2010, share-based compensation expense related to restricted stock units was $0.1
million. The total intrinsic value of restricted stock units outstanding at March 31, 2010 was
$0.3 million based on our closing sale price on that date.
13
HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 2010 and 2009
A summary of the status of our restricted stock units as of March 31, 2010 and of changes in
restricted stock units outstanding under the 2006 Plan for the three months ended March 31, 2010 is
as follows (in thousands, except for weighted average grant date fair value per unit):
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted Average |
|
|
|
of |
|
|
Grant Date Fair |
|
|
|
Units |
|
|
Value per Unit |
|
Restricted stock units outstanding at December 31, 2009 |
|
|
25,272 |
|
|
$ |
37.85 |
|
Restricted stock units granted |
|
|
|
|
|
|
|
|
Restricted stock units cancelled |
|
|
|
|
|
|
|
|
Restricted stock units converted into common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding at March 31, 2010 |
|
|
25,272 |
|
|
$ |
37.85 |
|
|
|
|
|
|
|
|
Restricted Stock Awards
In February 2009, our executive officers were granted restricted stock awards under the 2006
Plan. The vesting of restricted stock awards is subject to the executive officers continued
employment with us. Recipients of restricted stock awards are not required to provide us with any
consideration other than rendering service. Holders of restricted stock awards are permitted to
vote and to receive dividends on shares of restricted stock.
The stock-based compensation expense for restricted stock awards is determined based on the
closing market price of our common stock on the grant date of the awards applied to the total
number of awards that are anticipated to fully vest. At March 31, 2010, there was unrecognized
stock-based compensation expense of $3.1 million related to restricted stock awards, which is
expected to be recognized over the weighted-average period of 4.0 years for these restricted stock
awards.
A summary of the status of our restricted stock awards as of March 31, 2010 and of changes in
restricted stock awards outstanding under the 2006 Plan for the three months ended March 31, 2010
is as follows (in thousands, except for weighted average grant date fair value per unit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value per Share |
|
Unvested shares under restricted stock awards at December 31, 2009 |
|
|
127,918 |
|
|
$ |
31.27 |
|
Restricted stock awards granted |
|
|
|
|
|
|
|
|
Restricted stock awards vested |
|
|
|
|
|
|
|
|
Restricted stock awards forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares under restricted stock awards at March 31, 2010 |
|
|
127,918 |
|
|
$ |
31.27 |
|
|
|
|
|
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Revenue Recognition. A majority of our contracts are contingency fee based. We recognize
revenue on contingency fee based contracts when third party payors remit payment to our clients
and, consequently, the contingency is deemed to have been satisfied. For certain contracts, this
may result in revenue being recognized in irregular increments. We recognize revenue on our
general service agreements as work is performed and amounts are earned. We consider amounts to be
earned once evidence of an arrangement has been obtained, services are delivered, fees are fixed or
determinable and collectability is reasonably assured. Our contracts with the federal government
generally are cost-plus or time and material based. Revenue on cost-plus contracts is recognized
based on costs incurred plus an estimate of the negotiated fee earned. Revenue on time and
materials contracts is recognized based on hours worked and expenses incurred.
14
Where contracts have multiple deliverables, we evaluate these deliverables at the
inception of each contract and as each item is delivered. As part of this evaluation, we consider
whether (i) a delivered item has value to a client on a stand-alone basis; (ii) there is objective
and reliable evidence of the fair market value of the undelivered items; and (iii) whether the
delivery of the undelivered items is considered probable and substantially within our control, if a
general right of return exists. Where deliverables, or groups of deliverables, have all three of
these characteristics, we treat each deliverable item as a separate unit of accounting and apply
the relevant revenue recognition guidance to each deliverable. Arrangements, including
implementation and transaction related revenue, are accounted for as a single unit of accounting.
Since implementation services do not carry a standalone value, the revenue relating to these
services is recognized over the term of the client contract to which it relates.
Expense Classifications: Cost of services in the statement of income is presented in the seven
categories set forth below. Each category of cost excludes costs relating to selling, general and
administrative functions which are presented separately as a component of total operating expenses.
All revenue and expenses are reported under one operating segment. A description of the primary
costs included in each category is provided below:
|
|
|
Compensation: Salary, fringe benefit, bonus and stock based compensation costs. |
|
|
|
|
Data processing: Hardware, software and data communication costs. |
|
|
|
|
Occupancy: Rent, utilities, depreciation, office equipment, repair and maintenance
costs. |
|
|
|
|
Direct project costs: Variable costs 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 acquisition-related software and
intangible assets. |
|
|
|
|
Selling, general and administrative: Costs related to general management, marketing and
administrative activities. |
Since the date of the Annual Report for the year ended December 31, 2009, there have been no
material changes to our critical accounting policies.
Overview
We provide a variety of cost containment, coordination of benefits and program integrity
services for government-sponsored health and human services programs. These services are designed
to help our clients recover amounts due from liable third parties, reduce costs, ensure regulatory
compliance and increase operational efficiencies.
Our clients are state Medicaid agencies, government-sponsored managed care plans,
Pharmacy Benefit Managers, child support agencies, Veterans Health Administration, Medicare and
Medicaid Services, commercial plans, employer-sponsored health care plans and other healthcare
payors. We help
these payors 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. In
December 2009, with the acquisition of Verify Solutions, we moved into the employer-based market
with valuable new services that ensure that dependents covered by employees are eligible to receive
healthcare benefits.
15
At March 31, 2010, we had cash and cash equivalents of $75.4 million, and net working capital
of $126.5 million. We have a credit agreement with several banks and other financial institutions
with JPMorgan Chase Bank, N.A. (JPMCB), as administrative agent, which we refer to as the Credit
Agreement. The Credit Agreement provided for a term loan of $40 million, which we refer to as the
Term Loan, and revolving credit loans of up to $25 million, which we refer to as the Revolving
Loan. During the year ended December 31, 2009, we repaid in full the $17.3 million of debt
outstanding under the Term Loan; however, we continue to have an irrevocable standby Letter of
Credit for $4.6 million against the Revolving Loan, which we refer to as the Letter of Credit, as
required by a contractual arrangement with a client. Although we expect that operating cash flows
will continue to be a primary source of liquidity for our operating needs, we also have the
remaining balance of the Revolving Loan available for future cash flow needs, if necessary.
Our revenue, most of which is derived from contingency fees, has increased at an average
compounded rate of approximately 35.4% per year for the last five years. Our growth has been
attributable to our expansion of existing product offerings and acquisitions, as well as an overall
increase in Medicaid costs, which has historically averaged approximately 8% annually. In
addition, state governments have increased their use of vendors for the 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
penetrated the Medicaid managed care market, into which more Medicaid lives are being shifted. As
of March 31, 2010, we served 40 state Medicaid programs and 116 Medicaid health plans under 49
contracts.
To date, we have grown our business through the internal development of new services and
through acquisitions of businesses whose core services strengthen our overall mission to help our
clients control healthcare costs. In addition, we leverage our expertise to acquire new clients at
the state, federal and employer levels and to expand our current contracts to provide new services
to current clients.
In addition to the information provided below, you should refer to the items disclosed as our
Critical Accounting Policies in Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations of our Annual Report.
16
SUMMARY OF OPERATING RESULTS
Three Months Ended March 31, 2010 and 2009
The following table sets forth, for the periods indicated, certain items in our Consolidated
Statements of Income expressed as a percentage of revenue:
|
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|
|
|
|
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|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Revenue |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
Cost of service |
|
|
|
|
|
|
|
|
Compensation |
|
|
37.8 |
% |
|
|
35.1 |
% |
Data processing |
|
|
5.9 |
% |
|
|
6.3 |
% |
Occupancy |
|
|
5.2 |
% |
|
|
5.5 |
% |
Direct project costs |
|
|
11.7 |
% |
|
|
12.7 |
% |
Other operating costs |
|
|
5.2 |
% |
|
|
6.0 |
% |
Amortization of intangibles |
|
|
2.3 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
Total cost of services |
|
|
68.1 |
% |
|
|
68.0 |
% |
Selling, general, and administrative expenses |
|
|
12.3 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
|
Total operating expenses |
|
|
80.4 |
% |
|
|
80.3 |
% |
|
|
|
|
|
|
|
Operating income |
|
|
19.6 |
% |
|
|
19.7 |
% |
Interest expense |
|
|
(0.0 |
%) |
|
|
(0.6 |
%) |
Net interest income |
|
|
0.0 |
% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
Income before income taxes |
|
|
19.6 |
% |
|
|
19.3 |
% |
Income taxes |
|
|
(7.9 |
%) |
|
|
(7.9 |
%) |
|
|
|
|
|
|
|
Net income |
|
|
11.7 |
% |
|
|
11.4 |
% |
|
|
|
|
|
|
|
Revenue for the three months ended March 31, 2010 was $64.9 million, an increase of $15.0
million or 30.1% compared to revenue of $49.9 million in the same quarter for the prior year. The
revenue increase reflects the organic growth in existing client accounts, the addition of new
clients, including those gained through the acquisition of other companies, 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 comparable quarter in the prior year.
Compensation expense as a percentage of revenue was 37.8% for the three months ended March 31,
2010 compared to 35.1% for the three months ended March 31, 2009. Compensation expense for the
current quarter was $24.5 million, a $7.0 million or 39.9% increase over the same quarter for the
prior year expense of $17.5 million. During the quarter ended March 31, 2010, we averaged 1,278
employees, a 46.1% increase over our average of 875 employees during the quarter ended March 31,
2009. The increase in compensation expense reflects $5.7 million in additional salary expense
related to headcount additions and annual salary increases, $0.9 million for fringe benefits, and
$0.4 million related to variable compensation.
Data processing expense as a percentage of revenue was 5.9% for the three months ended March
31, 2010 compared to 6.3% for the three months ended March 31, 2009. Data processing expense for
the current quarter was $3.8 million, an increase of $0.7 million or 21.9% over the same quarter
for the prior year expense of $3.1 million. The increase reflects $0.5 million in software expense
associated with mainframe and network upgrades, $0.1 million for data communication costs related
to a number of line and capacity upgrades, and $0.1 million in hardware maintenance and related
costs.
Occupancy expense as a percentage of revenue was 5.2% for the three months ended March 31,
2010 compared to 5.5% for the three months ended March 31, 2009. Occupancy expense for the current
quarter was $3.4 million, an increase of $0.7 million or 25.5% over the same quarter for the prior
year expense of $2.7 million. Occupancy expense increased as a result of our IntegriGuard and
Verify Solutions acquisitions, and was partially offset by savings associated with migrating
operations to our Irving, Texas location, which enabled us to vacate and sublease one of the floors
in our New York City corporate headquarters.
17
Direct project expense as a percentage of revenue was 11.7% for the three months ended March
31, 2010 compared to 12.7% for the three months ended March 31, 2009. Direct project expense for
the current quarter was $7.5 million, a $1.2 million or 19.7% increase compared to same quarter for
the prior year expense of $6.3 million. This increase reflects additional expenses of $0.5 million
for professional
fees, $0.3 million for lockbox, postage and delivery charges, $0.2 million for subcontractor
expense, and $0.2 million for other costs related to the growth of the business. Direct project
expenses increased at a rate lower than revenue growth due to our efforts to reduce subcontractor
utilization by bringing work in-house, savings related to efficiencies and economies of scale, and
the content of revenue earned during the quarter.
Other operating costs as a percentage of revenue were 5.2% for the three months ended March
31, 2010 compared to 6.0% for the three months ended March 31, 2009. Other operating costs for the
current quarter were $3.4 million, an increase of $0.4 million or 12.5% compared to the same
quarter for the prior year expense of $3.0 million. This increase reflects additional expenses of
$0.2 million for office related expenses such as supplies, postage and delivery, $0.1 million for
travel expenses, and $0.1 million for professional fees, primarily temporary help.
Amortization of acquisition-related software and intangibles as a percentage of revenue was
2.3% for the three months ended March 31, 2010 compared to 2.4% for the three months ended March
31, 2009. Amortization of acquisition-related software and intangibles for the current quarter was
$1.5 million, a $0.3 million or 23.6% increase compared to the same quarter for the prior year
expense of $1.2 million. The increase was due to amortization of intangibles resulting from the
IntegriGuard and Verify Solutions acquisitions in September 2009 and December 2009, respectively.
Selling, general, and administrative expense as a percentage of revenue was 12.3% for the
three months ended March 31, 2010 compared to 12.3% for the three months ended March 31, 2009.
Selling, general, and administrative expense for the current quarter was $8.0 million, a $1.9
million or 30.3% increase compared to the same quarter for the prior year expense of $6.1 million.
Compensation expense increased by $1.5 million due to a $0.6 million increase in salary expense, a
$0.5 million increase in stock compensation expense, a $0.2 million increase in payroll taxes, and
a $0.2 million increase in variable compensation. During the quarter ended March 31, 2010, we
averaged 88 employees, a 27.5% increase over our average of 69 employees during the quarter ended
March 31, 2009. Other operating expenses increased by $0.5 million as a result of a $0.3 million
increase in professional fees, a $0.1 million increase in office related expenses such as supplies,
postage and delivery, and $0.1 million increase in employee related expense such as recruiting and
training. Occupancy expense decreased by $0.1 million, primarily
due to our vacating and subleasing of
one floor of office space at our corporate headquarters.
Operating income for the three months ended March 31, 2010 was $12.7 million, an increase of
$2.8 million or 29.0%, compared to $9.9 million for the three months ended March 31, 2009. This
increase was primarily the result of increased revenue, which was partially offset by incremental
operating costs incurred during the quarter ended March 31, 2010.
Interest expense was $23,000 for the three months ended March 31, 2010 compared to $287,000
for the same quarter for the prior year. In the current period, interest expense represents
commitment fees for our Credit Agreement and issuance fees for our Letter of Credit, as our loan
was repaid in October 2009. In the prior period, interest expense was attributable to borrowings
under the Term Loan, amortization of deferred financing costs, commitment fees for our Credit
Agreement and issuance fees for our Letter of Credit. Interest income was $17,000 for the three
months ended March 31, 2010 compared to interest income of $97,000 for the three months ended March
31, 2009, principally due to lower interest rates.
18
Income tax expense of $5.1 million was recorded in the quarter ended March 31, 2010 compared
to $4.0 million for the three months ended March 31, 2009, an increase of $1.1 million. Our
effective tax rate decreased to 40.4% for the quarter ended March 31, 2010 from 41.0% for the
quarter ended March
31, 2009 primarily due to a change in state apportionments. The principal difference between
the statutory rate and our effective rate is state taxes.
Net income of $7.6 million in the current quarter represents an increase of $1.9 million, or
32.8%, compared to net income of $5.7 million in the same quarter of the prior year.
Off-Balance Sheet Arrangements
Other than our Letter of Credit, we do not have any off-balance sheet arrangements. See
Footnote 4 of the Notes to Unaudited Consolidated Financial Statements.
Liquidity and Capital Resources
Our principal source of funds has been operations and we believe that we have sufficient cash
and cash equivalents to support our operating needs through at least the next 12 months. At March
31, 2010, our cash and cash equivalents and net working capital were $75.4 million and $126.5
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 $20.4 million available under our
Revolving Loan for future cash flow needs. There are currently no loans outstanding under the
Revolving Loan; however, we have a $4.6 million Letter of Credit that reduces the availability
under the Revolving Loan.
Net cash provided by operating activities for the three months ended March 31, 2010 was $11.6
million compared to $4.2 million for the same period in 2009. The increase in cash provided by
operating activities resulted from a $1.9 million increase in net income, combined with decreases
in accounts receivable and prepaid assets, and increases in share-based compensation, depreciation
and amortization. These sources of cash were partially offset by decreases in accounts payable,
accrued expenses and other liabilities.
Net cash used in investing activities for the three months ended March 31, 2010 was $3.7
million compared to $3.4 million for the same period in 2009. Cash used in investing activities for
the three months ended March 31, 2010 included investments in property, equipment and purchased
software of $3.1 million compared to $3.0 million in the prior period. Investment in capitalized
software for the three months ended March 31, 2010 was
$0.6 million compared to $0.4 million for the same period
in 2009.
Net cash provided by financing activities for the three months ended March 31, 2010 was $2.6
million compared to $3.1 million for the same period in 2009. Proceeds from stock option exercises
in 2010 and 2009 were $1.2 million and $1.6 million, respectively. The excess tax benefits from
stock option exercises for the three months ended March 31, 2010 and 2009 were $1.4 million and
$3.1 million, respectively. Repayment of debt for the three months ended March 31, 2009 was $1.6
million. We had no debt outstanding at March 31, 2010.
The net increase in cash and cash equivalents for the three months ended March 31, 2010 was
$10.5 million compared to $3.9 million for the same period in 2009.
19
The number of days sales outstanding for the three months ended March 31, 2010 increased to 86
days compared to 84 days at March 31, 2009 due to delays in payment from several customers.
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.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board, FASB, issued Accounting Standards
Update 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging
Issues Task Force, to provide amendments to the criteria in Subtopic 609-24 of the Accounting
Standards Codification, which we refer to as ASU 2009-13, for separating consideration into
multiple-deliverable revenue arrangements. ASU 2009-13 establishes a selling price hierarchy for
determining the selling price of each specific deliverable, which includes vendor-specific
objective evidence, or VSOE, if available, third party evidence if VSOE is not available or
estimated selling price if neither VSOE nor third party evidence is available. ASU 2009-13 also
eliminates the residual method for allocating revenue between the elements of an arrangement and
requires that arrangement consideration be allocated at the
inception of the arrangement to all
deliverables using the relative selling price method, which allocates any discount in the
arrangement proportionally to each deliverable on the basis of each deliverables selling price.
This update expands the disclosure requirements regarding a vendors multiple-deliverable revenue
arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with early adoption
permitted. We are currently evaluating the impact of ASU 2009-13 on our consolidated financial
statements.
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Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
None.
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|
|
Item 4. |
|
Controls and Procedures |
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act) that are designed to ensure that information required to be disclosed by us in
reports that we file under the Exchange Act is recorded, processed, summarized and reported as
specified in the SECs rules and forms, and that such information required to be disclosed by us in
reports that we file under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions
regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, management, with the participation of
our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the
effectiveness of our disclosure controls and procedures as of March 31, 2010. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this quarterly
report.
There have been no changes in our internal control over financial reporting identified in
connection with the evaluation of our controls performed during the quarter ended March 31, 2010
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
20
PART II OTHER INFORMATION
Risks that could have a negative impact on our business, results of operations and financial
condition include without limitation (i) the development by competitors of new or superior services
or
products or the entry into the market of new competitors; (ii) all the risks inherent in the
development, introduction, and implementation of new products and services; (iii) the loss of a
major customer, customer dissatisfaction or early termination of customer contracts triggering
significant costs or liabilities; (iv) variations in our results of operations; (v) negative
results of government reviews, audits or investigations to verify our compliance with contracts and
applicable laws and regulations; (vi) changing conditions in the healthcare industry which could
simplify the reimbursement process and reduce the need for and price of our services; (vii)
government regulatory, political and budgetary pressures that could affect the procurement
practices and operations of healthcare organizations, reducing the demand for our services; and
(viii) our failure to comply with laws and regulations governing health data or to protect such
data from theft and misuse. A more detailed description of each of these and other risk factors can
be found under the caption Risk Factors in our most recent Annual Report on Form 10-K, filed with
the SEC on February 26, 2010. There have been no material changes to the risk factors described in
our most recent Annual Report on Form 10-K.
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed on the
Exhibit Index immediately following the Signatures.
21
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: May 7, 2010 |
HMS HOLDINGS CORP.
|
|
|
By: |
/s/ William C. Lucia
|
|
|
|
William C. Lucia |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer and Duly
Authorized Officer) |
|
|
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|
|
By: |
/s/ Walter D. Hosp
|
|
|
|
Walter D. Hosp |
|
|
|
Chief Financial Officer (Principal
Financial Officer and Accounting Officer) |
|
22
Exhibit Index
|
|
|
|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
10.1 |
|
|
Amendment No. 1 and Waiver Agreement dated March 30,
2010 to the Credit Agreement, dated as of September 13,
2006, among HMS Holdings Corp., the Guarantors named
therein, the Lenders named therein, JP Morgan Chase Bank,
N.A., as administrative agent, J.P. Morgan Securities,
Inc., as sole lead arranger and sole bookrunner, Bank of
America, N.A., as syndication agent and Citizens Bank of
Massachusetts, as documentation agent. |
|
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|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal
Executive Officer of HMS Holdings Corp., as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal
Financial Officer of HMS Holdings Corp., as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of the Principal Executive
Officer of HMS Holdings Corp., as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of the Principal Financial
Officer of HMS Holdings Corp., as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 |
23