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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2003

OR

For the transition period from            to

Commission File Number: 0-50194

HMS HOLDINGS CORP.

(212) 725-7965
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]     No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [   ]     No [X]

     The number of shares common stock, $.01 par value, outstanding as of July 27, 2003 was 18,366,522.

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HMS HOLDINGS CORP. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

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HMS HOLDINGS CORP. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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HMS HOLDINGS CORP. AND SUBSIDIARIES

     See accompanying notes to condensed consolidated financial statements.

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HMS HOLDINGS CORP. AND SUBSIDIARIES

[Additional columns below]

[Continued from above table, first column(s) repeated]

												Note
				Treasury Stock								Receivable				Total
												from Sale				Shareholders’
				# of Shares				Amount				of Stock				Equity
Balance at December 31, 2002					1,609,116			($	9,184	)		($	361	)		$	47,768
	Comprehensive loss:
	Net loss				—				—				—				(1,297	)
	Change in net unrealized appreciation on short-term investments				—				—				—				(8	)
	Total comprehensive loss																(1,305	)
	Repayment of note receivable				—				—				361				361
	Shares issued under employee stock purchase plan				—				—				—				48
	Exercise of stock options																106
	Purchase of treasury stock				35,800				(105	)			—				(105	)
	Remeasurement of unearned stock compensation				—				—				—				—
	Stock compensation expense (credit)				—				—				—				(21	)
Balance at June 30, 2003					1,644,916			($	9,289	)		$	—			$	46,852

See accompanying notes to condensed consolidated financial statements.

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HMS HOLDINGS CORP. AND SUBSIDIARIES

See accompanying notes to condensed consolidated financial statements.

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HMS HOLDINGS CORP. AND SUBSIDIARIES

1.

Unaudited Interim Financial Information

     The management of HMS Holdings Corp. (the Company) is responsible for the accompanying unaudited interim condensed consolidated financial statements and the related information included in the notes to the condensed consolidated financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments necessary for the fair presentation of the Company’s financial position and results of operations and cash flows for the periods presented. Results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

     These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K for such year, as filed with the Securities and Exchange Commission (the SEC).

2.

Stock-Based Compensation

     The Company accounts for stock-based compensation under Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation.” As permitted by SFAS No. 123, the Company has elected to continue following the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and to adopt only the disclosure provision of SFAS No. 123. Accordingly, no employee compensation costs have been recognized for its stock purchase plan and stock option plans. Had compensation costs for the Company’s stock options been determined consistent with the fair value method prescribed by SFAS 123, the Company’s net loss and related per share amounts would have been adjusted to the pro forma amounts indicated below:

     The effect presented above by applying the disclosure-only provisions of SFAS 123 may not be representative of the pro forma effect in future years.

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HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

3.

Basis of Presentation and Principles of Consolidation

(a)

Organization and Business

     At a special meeting held on February 27, 2003, the shareholders of Health Management Systems, Inc. approved the creation of a holding company structure. Following that meeting, all the outstanding shares of Health Management Systems, Inc. common stock were exchanged on a one-for-one basis for the shares of common stock of HMS Holdings Corp., the new parent company. The adoption of the holding company structure, pursuant to an Agreement and Plan of Merger approved at the shareholders’ meeting, constituted a reorganization with no change in ownership interests or accounting basis and no dilutive impact to the former shareholders of Health Management Systems, Inc.

     The Company furnishes revenue recovery, business process and business office outsourcing services to healthcare payors and providers. The Company helps clients increase revenue, accelerate collections, and reduce operating and administrative costs. The Company operates two businesses through its wholly-owned subsidiaries, Health Management Systems, Inc. (formerly the Payor Services Division) and Accordis Inc. (formerly the Provider Services Division).

(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.

(c)

Discontinued Operations of Business Segment

     During the year ended December 31, 2001, the Company implemented a formal plan to proceed with an orderly closure of the Payor Systems Group (PSG) business unit. In prior periods, PSG had been a separate reportable segment. The current and historical operating results of PSG have been reported as discontinued operations on the accompanying Condensed Consolidated Statements of Operations.

(d)

Reclassifications

     Certain reclassifications were made to prior period amounts to conform to the current period presentation.

4.

Income Taxes

     For the three months and six months ended June 30, 2003, the Company generated additional gross deferred tax assets of $360,000 and $520,000 resulting from the Company’s net operating losses of $902,000 and $1,297,000, respectively. Correspondingly, the Company recognized an increase in the valuation allowance related to the realizability of its deferred tax assets in the amount of $360,000 and $520,000 for the three-month and six month periods ended June 30, 2003. The net deferred tax asset balance was therefore $8.9 million at June 30, 2003 and December 31, 2002. The increase in the valuation allowance was specifically associated with the Company’s net operating loss carryforwards (NOLs), which account for the majority of the Company’s deferred tax assets. The Company believes the available objective evidence, principally its recent taxable losses, creates sufficient uncertainty

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HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

regarding the realizability of its NOLs that it is more likely than not that some of the NOLs are not realizable. The Company determined the amount of the valuation allowance based on its assessment of the recoverability of the deferred tax assets by projecting future taxable income. The realizability of the Company’s deferred tax assets and the corresponding valuation allowance will be adjusted in the future based on the Company’s actual taxable income results and updated estimates of future taxable income. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowance, based on its projection of future operating results.

5.

Earnings Per Share

     Basic earnings per share is calculated as net income divided by the weighted average common shares outstanding. Diluted earnings per share is calculated as net income divided by the weighted average common shares outstanding including the dilutive effects of potential common shares, which include the Company’s stock options. For the three months ended June 30, 2003 and 2002, the common stock equivalents are excluded from the weighted average shares as it would be antidilutive to the per share calculation. The diluted weighted average number of shares outstanding for the three months ended June 30, 2003 and 2002 were 19,692,061 and 19,820,111, respectively. The diluted weighted average number of shares outstanding for the six months ended June 30, 2003 and 2002 were 19,804,179 and 20,609,370, respectively.

6.

Discontinued Operations

     On July 31, 2001, the Company implemented a formal plan to proceed with an orderly closing of PSG. As of July 31, 2001 the Company estimated a pre-tax loss on disposal of $1.6 million but as a result of its success in exiting various business obligations, the Company reduced its estimated loss to $200,000 as of December 31, 2001. In the quarterly period ended June 30, 2002, the Company received a $2.7 million contract termination fee, which was not included in the disposal estimate. In addition, during the quarterly period ended June 30, 2002, the Company reduced the estimated loss on disposal by $200,000, based on actual operating results through that period. Consequently, the Company recognized income from discontinued operations, in the accompanying condensed consolidated financial statements, of $2.9 million during the quarterly period ended June 30, 2002.

7.

Commitments – Legal Proceedings

(a)

HHL Financial Services

     On June 28, 1998, eight holders of promissory notes (the Notes) of HHL Financial Services, Inc. (HHL) commenced a lawsuit against the Company and others in the Supreme Court of the State of New York, County of Nassau, alleging various breaches of fiduciary duty between 1990 and 1996 against HHL (the first cause of action) and that defendants intentionally caused HHL’s default under the Notes (the second cause of action). The complaint alleges that the defendants caused HHL to make substantial unjustified payments to the Company which, ultimately, led to defaults on the Notes and to HHL’s filing for Chapter 11 bankruptcy protection in 1997. The plaintiffs are seeking damages in the amount of $2.3 million (for the unpaid notes) plus interest. As a result of motion practice before the Bankruptcy Court, the breach of fiduciary duty claim was dismissed. A motion to dismiss the remaining cause of action, for

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HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

tortious interference with contract, was denied by the New York Supreme Court, and an appeal was taken. On March 3, 2003, the Appellate Division Second Department affirmed the lower Court’s decision holding that the Complaint pleaded a cognizable cause of action for tortious interference. The Company will now answer the Complaint, and both sides will engage in discovery. The Company intends to continue its vigorous defense of this lawsuit. Management believes the risk of loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company’s financial position or cash flows, although it could be material to its operating results in any one accounting period.

(b)

Subpoena from the United States Attorney’s Office

     On January 31, 2003, the Company announced that it had received a subpoena issued under the Health Insurance Portability and Accountability Act of 1996 from the United States Attorney’s Office for the Southern District of New York in connection with an investigation relating to possible federal health care offenses. The subpoena seeks the production of certain documents from January 1982 to present relating to medical reimbursement claims submitted by the Company to Medicare, Medicaid, and other federal healthcare programs, particularly on behalf of a significant client of Accordis. At this point in the investigation, the United States Attorney’s Office has not filed any complaint asserting any violations of law.

     The Company’s board of directors has appointed a special committee to oversee the Company’s response to the investigation. The Company continues to cooperate fully with the investigation.

     The Company is not able to give any assurances as to the duration or outcome of the investigation or as to the effect that any proceedings that may be brought by the government may have on the Company’s financial condition or results of operations. The initiation of proceedings against the Company, even if the Company is ultimately successful in defending itself, could have a material adverse effect on the Company’s business. Since the receipt of the subpoena, the Company’s revenue and expense levels have been adversely affected as management undertook to comply with the demands of document production and to review the matters covered by the subpoena. The Company anticipates that it will continue to incur significant legal expenses while the investigation is still ongoing.

     Other legal proceedings to which the Company is a party, in the opinion of the Company’s management, are not expected to have a material adverse effect on the Company’s financial position, results of operations, or liquidity.

8.

Segment Information

     Accordis offers hospitals and other healthcare providers a comprehensive array of technology-based revenue cycle services. These services include identifying third-party resources, submitting timely and accurate bills to third-party payors and patients, recovering and properly accounting for the amounts due, and securing the appropriate cost-based reimbursement from entitlement programs. Clients may use one or more services, or outsource the entirety of their business office operations to the Company. Health Management Systems offers state Medicaid and other government agencies that administer health care entitlement programs a broad range of services that are designed to identify and recover amounts that should have been the responsibility of a third party, or that were paid inappropriately. Further, by assisting these agencies in properly accounting for the services that they deliver, the Company also helps to ensure that they receive the full amount of entitlement program funding to which they are entitled. The Company

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HMS HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

measures the performance of its operating segments through “Operating Income” as defined in the accompanying Condensed Consolidated Statements of Operations.

     Assets, including prepaid expenses, property and equipment and goodwill have been allocated to identified segments based upon actual usage, occupancy or other correlations with operating metrics. Other corporate assets, including cash, short-term investments and deferred tax assets, are shown in the corporate category. Prior years amounts include reclassifications to conform to the Company’s current methodology.

9.

Impact of Recently Issued Accounting Standards

     In June 2002, the Financial Accounting Standards Board issued Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 supercedes Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and requires that a liability for the cost associated with an exit or disposal activity be recognized when the liability is incurred, as opposed to the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. SFAS 146 will affect the types and timing of costs included in future restructuring programs, if any.

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Special Note Regarding Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. These statements involve unknown risks, uncertainties and other factors, which may cause our actual results to differ materially, from those implied by the forward looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include those risks identified in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other risks identified in our Form 10-K for the year ended December 31, 2002 and presented elsewhere by management from time to time. Such forward-looking statements represent management’s current expectations and are inherently uncertain. Investors are warned that actual results may differ from management’s expectations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

     For information regarding our critical accounting policies, please refer to our Annual Report on Form 10-K for the year ended December 31, 2002.

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

     The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Operations expressed as a percentage of revenue:

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     Revenue for the quarter ended June 30, 2003 was $17.0 million, an increase of $272,000 or 1.6% compared to revenue of $16.7 million in the prior year quarter ended June 30, 2002.

     Health Management Systems, which provides third party liability identification and recovery services to state Medicaid agencies, generated revenue of $9.3 million for the three months ended June 30, 2003, a $780,000 or 9.2% increase over revenue for the three months ended June 30, 2002 of $8.5 million. This increase primarily reflects a $1.0 million increase in revenue during the current quarter from two state customers resulting from an expansion in the scope of services provided. This increase was partially offset by a $200,000 reduction across the comparable client base reflecting non-recurring revenue opportunities, timing differences, and changes in the volume, yields and scope of client projects.

     Accordis, which provides outsourced business office services for hospitals, generated revenue of $7.7 million for the three months ended June 30, 2003, a decrease of $508,000 from $8.2 million for the three months ended June 30, 2002. Revenue for the current year quarter included $800,000 of revenue from a new customer and a $1.4 million increase with four customers resulting from an expansion in the scope of services provided. Revenue for the current year quarter decreased by $1.8 million across the comparable client base reflecting specific non-recurring revenue opportunities with certain clients based on their particular needs, differences in the timing of when client projects were completed in the current year compared with the prior year, and changes in the volume and yields of client projects including an estimated revenue loss of $1.2 million attributable to processing delays and other impacts of the redirection of operational resources to regulatory matters. See Part II-Item 1. There was also a decrease in the current year quarter in revenue of $900,000 associated with 10 terminated or inactive customer relationships.

     Compensation expense as a percentage of revenue was 56.5% for the three months ended June 30, 2003 compared to 56.4% for the three months ended June 30, 2002 and for the current quarter was $9.6 million, an increase of $170,000, or 1.8% from the prior year quarter expense of $9.4 million. This increase resulted from an increase in headcount from the comparable prior year period, a general increase in compensation rates and increased costs of fringe benefits. At June 30, 2003, we had 490 employees, compared to 443 employees at June 30, 2002. The current year headcount and related compensation expenses reflect a shift to service center employees for the provision of business outsourcing services from higher paid information technology employees engaged in service development initiatives and system enhancement and reconfiguration activities during the prior year.

     Data processing expense as a percentage of revenue was 7.0% for the three months ended June 30, 2003 compared to 13.0% for the three months ended June 30, 2002 and for the current quarter was $1.2 million, a decrease of $1.0 million or 45.4% compared to the prior year quarter expense of $2.2 million. The prior year costs included costs associated with service development and system enhancement and reconfiguration activities that were terminated in the second quarter of 2002.

     Occupancy expense as a percentage of revenue was 8.0% for the three months ended June 30, 2003 compared to 9.2% for the three months ended June 30, 2002 and for the current quarter was $1.4 million, a decrease of $173,000 or 11.2% from the prior year quarter expense of $1.5 million. The reduction in occupancy costs is due to subletting one floor at our New York City headquarters.

     In fiscal years 2002 and 2001, direct project costs as a percentage of revenue were approximately 15% to 16%. The Company has experienced quarterly variations of as much as 2% in that percentage range based on the particular mix of client business in the period. In fiscal year 2003 the Company has attempted to more precisely identify as direct project costs, expenses that were previously classified as other operating costs. As a consequence, the Company expects that in fiscal 2003 direct project costs as a percentage of revenue will be approximately 17% to 18%, subject to quarterly variations comparable to past experience.

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     Direct project costs as a percentage of revenue were 17.4% for the three months ended June 30, 2003 compared to 14.6% for the three months ended June 30, 2002 and for the current quarter were $3.0 million, an increase of $518,000 or 21.2% from the prior year quarter expense of $2.4 million. In addition to the discussion above, during the current quarter, the increase related to Accordis was principally due to a change in revenue mix between the two periods to engagements with a higher subcontractor and other outside vendor content and the increase related to Health Management Systems was consistent with the increase in revenue.

     Other operating costs as a percentage of revenue were 16.7% for the three months ended June 30, 2003 compared to 18.1% for the three months ended June 30, 2002 and for the current quarter were $2.8 million, a decrease of $182,000 or 6.0% compared to the prior year quarter expense of $3.0 million. This decrease: (1) reflects a decrease of $800,000 primarily for consulting and professional service fees associated with a service development initiative and a system reconfiguration effort, both of which were terminated in the second quarter of 2002; (2) reflects a decrease of $400,000 in the expense related to certain stock option grants to members of the Board of Directors; (3) the more strict identification of some expenses as direct project costs, as discussed above; and (4) was partially offset by $1.1 million in expenses during the current period primarily for legal fees associated with our response to the subpoena from the United States Attorney’s office.

     Operating loss for the three months ended June 30, 2003 was $961,000 compared to $1.9 million for the three months ended June 30, 2002. The Accordis operating loss was $2.9 million for the quarter ended June 30, 2003 compared to an operating loss of $3.3 million in the prior year quarter. Health Management Systems had an operating profit of $1.9 million for the quarter ended June 30, 2003 compared to an operating profit of $1.5 million for the quarter ended June 30, 2002. The Accordis operating loss in the current year quarter includes $1.1 million for legal fees associated with our response to the subpoena from the United States Attorney’s office.

     Net interest income of $59,000 for the three months ended June 30, 2003, compared with $130,000 for the three months ended June 30, 2002, reflects a shift to shorter-term investments, a reduction in market interest rates and the maturing of certain investments with higher rates of return.

     In 2003 and 2002, we did not recognize any income tax benefit against our net losses. We have incurred significant taxable losses the last several years. Most of our deferred income tax assets are in the form of net operating loss carryforwards. A recoverability analysis was performed based on our recent taxable loss history and projections of future taxable operating results.

     Loss from continuing operations was $902,000 in the current year three-month period compared to a loss of $1.8 million during the prior year period. This reduction in operating loss results from the decreases in costs of operations, as discussed above.

     As more fully discussed in Note 6 of the Notes to the Condensed Consolidated Financial Statements, we reported the results of PSG as a discontinued operation for all periods presented. During the prior year three-month period income from discontinued operations of $2.9 million principally resulted from a termination fee received from a former customer of the PSG, which was not included in the prior disposal estimate.

     Net loss was $902,000 in the current year quarter compared with a net income of $1.1 million in the prior year quarter. This reduction in income is principally due to the prior year period including income from discontinued operations of $2.9 million.

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Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002

     The following table sets forth, for the periods indicated, certain items in our Condensed Consolidated Statements of Operations expressed as a percentage of revenue: