HMS HOLDINGS CORP (Form: 10-Q, Received: 05/10/2016 16:14:33)

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	March 31, 2016			December 31, 2015
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	143,451		$	145,610
Accounts receivable, net of allowance for doubtful accounts of $5,157 and $4,849, and estimated allowance for appeals of $5,348 and $6,614, at March 31, 2016 and December 31, 2015, respectively		165,796			169,146
Prepaid expenses		13,623			11,261
Deferred tax assets		4,226			7,460
Other current assets		2,723			3,051
Total current assets		329,819			336,528
Property and equipment, net		91,841			96,551
Goodwill		361,468			361,468
Intangible assets, net		49,265			54,308
Deferred financing costs, net		4,352			4,873
Other assets		4,278			4,329
Total assets	$	841,023		$	858,057

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable, accrued expenses and other liabilities	$	34,402		$	51,661
Estimated liability for appeals		30,613			33,078
Income taxes payable		274			3,873
Total current liabilities		65,289			88,612
Long-term liabilities:
Revolving credit facility		197,796			197,796
Deferred tax liabilities		37,147			38,421
Deferred rent		5,901			6,006
Other liabilities		3,006			2,520
Total long-term liabilities		243,850			244,743
Total liabilities		309,139			333,355
Commitments and contingencies (Note 11)
Shareholders' equity:
Preferred stock -- $0.01 par value; 5,000,000 shares authorized; none issued		-			-
Common stock -- $0.01 par value; 175,000,000 shares authorized; 95,406,154 shares issued and 84,132,408 shares outstanding at March 31, 2016; 95,263,461 shares issued and 83,989,715 shares outstanding at December 31, 2015		954			952
Capital in excess of par value		332,910			330,290
Retained earnings		293,034			288,474
Treasury stock, at cost: 11,273,746 shares at March 31, 2016 and December 31, 2015		(95,014	)		(95,014	)

Total shareholders' equity		531,884			524,702

Total liabilities and shareholders' equity	$	841,023		$	858,057

See accompanying notes to unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2016			2015
Revenue	$	119,763		$	110,324
Cost of services:
Compensation		46,401			44,067
Data processing		9,624			10,045
Occupancy		3,627			4,007
Direct project expenses		14,483			10,478
Other operating expenses		5,776			6,738
Amortization of acquisition related software and intangible assets		7,013			7,047
Total cost of services		86,924			82,382
Selling, general and administrative expenses		22,930			19,961
Total operating expenses		109,854			102,343
Operating income		9,909			7,981
Interest expense		(2,091	)		(1,954	)
Interest income		47			11
Income before income taxes		7,865			6,038
Income taxes		3,305			2,516
Net income	$	4,560		$	3,522

Basic income per common share:
Net income per common share -- basic	$	0.05		$	0.04
Diluted income per common share:
Net income per common share -- diluted	$	0.05		$	0.04
Weighted average shares:
Basic		84,033			88,246
Diluted		84,479			88,624

See accompanying notes to unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)

	Common Stock									Treasury Stock

	# of Shares Issued		Par Value		Capital in Excess of Par Value			Retained Earnings		# of Shares		Amount			Total Shareholders' Equity
Balance at December 31, 2015		95,263,461	$	952	$	330,290		$	288,474		11,273,746	$	(95,014	)	$	524,702
Net income		-		-		-			4,560		-		-			4,560
Stock-based compensation expense		-		-		4,240			-		-		-			4,240
Exercise of stock options		9,975		-		26			-		-		-			26
Vesting of restricted stock units, net of shares withheld for employee tax		132,718		2		(1,004	)		-		-		-			(1,002	)
Excess tax benefit from exercise of stock options		-		-		10			-		-		-			10
Tax shortfall due to exercise of stock options and vesting of restricted stock units		-		-		(436	)		-		-		-			(436	)
Deferred tax asset reversal for unexercised stock options		-		-		(216	)		-		-		-			(216	)

Balance at March 31, 2016		95,406,154	$	954	$	332,910		$	293,034		11,273,746	$	(95,014	)	$	531,884

See accompanying notes to the unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2016			2015
Operating activities:
Net income	$	4,560		$	3,522
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment		6,577			8,163
Amortization of intangible assets		5,043			5,077
Amortization of deferred financing costs		521			521
Stock-based compensation expense		4,240			3,245
Excess tax benefit from exercised stock options		(10	)		(1,448	)
Deferred income taxes		1,308			(226	)
Loss on disposal of fixed assets		10			10
Changes in operating assets and liabilities:
Accounts receivable		3,350			(9,344	)
Prepaid expenses		(2,362	)		(983	)
Prepaid income taxes		-			2,049
Other current assets		328			51
Other assets		51			(147	)
Income taxes payable		(3,589	)		-
Accounts payable, accrued expenses and other liabilities		(16,963	)		(10,772	)
Estimated liability for appeals		(2,465	)		187
Net cash provided by (used in) operating activities		599			(95	)
Investing activities:
Purchases of land, property and equipment		(570	)		(2,513	)
Investment in capitalized software		(1,185	)		(721	)
Net cash used in investing activities		(1,755	)		(3,234	)
Financing activities:
Proceeds from exercise of stock options		26			3,273
Excess tax benefit from exercised stock options		10			1,448
Payments of tax withholdings on behalf of employees for net-share settlement for stock-based compensation		(1,002	)		(596	)
Payments on capital lease obligations		(37	)		(366	)
Net cash provided by (used in) financing activities		(1,003	)		3,759
Net increase (decrease) in cash and cash equivalents		(2,159	)		430
Cash and Cash Equivalents
Cash and cash equivalents at beginning of year		145,610			133,116
Cash and cash equivalents at end of year	$	143,451		$	133,546

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	5,052		$	656
Cash paid for interest	$	1,446		$	2,826

Supplemental disclosure of non-cash activities:
Accrued property and equipment purchases	$	122		$	959

See accompanying notes to the unaudited consolidated financial statements.

HMS HOLDINGS CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2016 and 2015

(unaudited)

Basis of Presentation

HMS Holdings Corp, (the “Company” or “HMS”) provides coordination of benefits services to government and private healthcare payers and sponsors to ensure that the responsible party pays healthcare claims. Additionally, the Company’s payment integrity services ensure that healthcare claims billed are accurate and appropriate. Together these various services help customers recover amounts from liable third parties; prevent future improper payments; reduce fraud, waste and abuse; and ensure regulatory compliance.

The consolidated financial statements and notes herein are unaudited. Accordingly, they do not include all of the information and notes required by United States Generally Accepted Accounting Principles (“U.S. GAAP”) for complete financial statements. These statements include all adjustments (consisting of normal recurring accruals) that management considers necessary to present a fair statement of the Company’s results of operations, financial position and cash flows. The results reported in these consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these consolidated financial statements be read in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2015 which were filed with the U.S. Securities and Exchange Commission (“SEC”) on February 29, 2016 as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Form 10-K”).

The preparation of the Company’s unaudited consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, primarily accounts receivable, intangible assets, accrued expenses, estimated allowance for appeals, estimated liability for appeals, the disclosure of contingent liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. The Company’s actual results could differ from those estimates.

These unaudited consolidated financial statements include HMS accounts and transactions and those of the Company’s wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

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

HMS is managed and operated as one business, with a single management team that reports to the Chief Executive Officer. HMS does not operate separate lines of business with respect to any of the Company’s product lines.

2.	Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies that are referenced in the 2015 Form 10-K.

Recently Adopted Accounting Pronouncements

The Company adopted Accounting Standards Updated (“ASU”) ASU 2015-03, “ Simplifying the Presentation of Debt Issuance Costs ” and ASU 2015-15, “ Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements ” (“ASU 2015-15”). The Company made a policy election to continue recording the deferred costs as an asset, as allowed for revolving credit agreements. As the Company only has a line-of-credit arrangement, the adoption of the ASU’s had no change in the Company’s accounting for debt issuance costs related to such line of credit and had no impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In addition to the recently issued accounting pronouncements disclosed in the 2015 Form 10-K, the following guidance has been issued since the annual filing. There have been no changes in the Company’s anticipated adoption of the previously disclosed pronouncements, except as noted above.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 requires the Company to recognize revenue in the gross amount of consideration to which it expects to be entitled in exchange for those goods or services it transfers to a customer. It also requires the agent to recognize revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging the specified goods or services to be provided to the customer. ASU 2016-08 is effective for annual reporting periods beginning after December 15, 2017 and for interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, as part of its Simplification Initiative, the FASB issued ASU No. 2016-09 , Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accountin g, (“ASU 2016-09”) which finalizes Proposed ASU No. 2015-270 of the same name, and seeks to reduce complexity in accounting standards. The areas for simplification in ASU No. 2016-09, involve several aspects of the accounting for share-based payment transactions, including (1) accounting for income taxes, (2) classification of excess tax benefits on the statement of cash flow, (3) forfeitures, (4) minimum statutory tax withholding requirements, (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax withholding purposes, (6) the practical expedient for estimating the expected term, and (7) intrinsic value. Application is effective for annual periods beginning after December 15, 2016, and for interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance.

In March 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing , which finalizes Proposed ASU No. 2015-250 of the same name, and suggests guidance for stakeholders on identifying performance obligations and licenses in customer contracts. The amendments in ASU No. 2016-10 impact entities with transactions that include contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration, and they require entities to recognize revenue by following certain steps, including: (1) identifying the contract(s) with a customer; (2) identifying the performance obligations in a contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. The amendments are effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those annual periods. The Company is currently evaluating the impact of adopting this guidance.

In May 2016, the FASB issued ASU No. 2016-12 , Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The amendments clarify the assessment of the likelihood that revenue will be collected from a contract, the guidance for presenting sales taxes and similar taxes, and the timing for measuring customer payments that are not in cash. The amendments provide a practical expedient for recognizing revenue from contracts that have been modified prior to the transition period to the new standard. ASU 2016-12 also states that a contract should be considered complete if all, or substantially all, of its revenue has been collected prior to making the transition to the new standard. In addition, the update clarifies the disclosure requirements for retrospective application of the standard. The amendments are effective for annual reporting periods beginning after December 15, 2017 and for interim reporting periods within such annual periods. The Company is currently evaluating the impact of adopting this guidance.

3.	Accounts Receivable and Allowance for Doubtful Accounts:

The Company’s accounts receivable, net, consist of the following as of March 31, 2016 and December 31, 2015 (in thousands) :

	March 31, 2016			December 31, 2015
Accounts receivable	$	170,953		$	173,995
Allowance for doubtful accounts		(5,157	)		(4,849	)
Accounts receivable, net	$	165,796		$	169,146

A summary of the activity in the allowance for doubtful accounts is as follows (in thousands) :

	Three Months Ended March 31,
	2016			2015
Balance--beginning of period	$	4,849		$	1,898
Provision--allowance for doubtful accounts		3,646			-
Charge-offs		(3,152	)		(420	)
Recoveries		(186	)		-
Balance--end of period	$	5,157		$	1,478

The Company’s accounts receivable are net of the estimated liability for appeals, which is presented in Note 7.

4. Intangible Assets

Intangible assets consisted of the following as of March 31, 2016 and December 31, 2015 ( in thousands ):

	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Useful Life (in years)
March 31, 2016
Customer relationships	$	101,806	$	(61,087	)	$	40,719		5	-	10
Restrictive covenants		16,800		(14,419	)		2,381		3	-	7
Trade name		17,000		(10,835	)		6,165		3	-	5
Total	$	135,606	$	(86,341	)	$	49,265

December 31, 2015
Customer relationships	$	101,806	$	(57,497	)	$	44,309		5	-	10
Restrictive covenants		16,800		(13,580	)		3,220		3	-	7
Trade name		17,000		(10,221	)		6,779		3	-	5
Total	$	135,606	$	(81,298	)	$	54,308

Amortization expense of intangible assets is expected to approximate the following (in thousands):

Year ending December 31,
Remainder of 2016	$	14,891
2017		16,613
2018		15,992
2019		1,582
2020		187
Thereafter		-

For the three months ended March 31, 2016 and 2015, amortization expense related to intangible assets was $5.0 million and $5.1 million, respectively.

Accounts Payable, Accrued Expenses and Other Liabilities

Accounts payable, accrued expenses and other liabilities as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands) :

	March 31, 2016		December 31, 2015

Accounts payable, trade	$	7,199	$	7,790
Accrued compensation and other		10,335		21,948
Accrued operating expenses		16,868		21,923
Total accounts payable, accrued expenses and other liabilities	$	34,402	$	51,661

Income Taxes

The Company’s effective tax rate increased to 42.0% for the three months ended March 31, 2016 from 41.7% for the three months ended March 31, 2015, primarily due to changes in interest on prior state unrecognized tax benefits and permanent differences.

During the three months ended March 31, 2016, the Company utilized an immaterial amount in tax deductions arising from stock-based compensation.

As of March 31, 2016 and 2015, the total amount of unrecognized tax benefits was approximately $1.9 million and $1.4 million, respectively (net of the federal benefit for state issues) that, if recognized, would favorably affect the Company’s future effective tax rate. As of March 31, 2016 and 2015, the accrued liability for interest expense and penalties related to unrecognized tax benefits was $0.6 million and $0.3 million, respectively. HMS includes interest expense and penalties in the provision for income taxes in the unaudited Consolidated Statements of Income. The amount of interest expense (net of federal and state income tax benefits) and penalties in the unaudited Consolidated Statements of Income for the three months ended March 31, 2016 and 2015 was $0.2 million and an immaterial amount, respectively. The Company believes it is reasonably possible that the amount of unrecognized tax benefits may decrease, by $1.6 million during 2016, due to the expiration of the statute of limitations in various state jurisdictions.

HMS files income tax returns with the U.S. Federal government and various state and local jurisdictions. HMS is no longer subject to U.S. Federal income tax examinations for years before 2012. HMS operates in a number of state and local jurisdictions, most of which have never audited the Company’s records. Accordingly, HMS is subject to state and local income tax examinations based upon the various statutes of limitations in each jurisdiction. HMS is currently being examined by the Internal Revenue Service and the State of New York.

Estimated Liability for Appeals and Estimated Allowance for Appeals

The Company provides services under contracts that contain various fee structures, including contingency fee and fixed fee arrangements. Revenue is recognized when a contract exists, services have been provided to the customer, the fee is fixed and determinable, and collectability is reasonably assured. In addition, the Company has contracts with the federal government which are generally cost-plus or time and material based. Revenue on cost-plus contracts is recognized based on costs incurred plus the negotiated fee earned. Revenue on time and materials contracts is recognized based on hours worked and expenses incurred.

Under the Company’s Medicare Recovery Audit Contractor (“RAC”) contract with the Centers for Medicare & Medicaid Services (“CMS”), (held by its wholly owned subsidiary HealthDataInsights, Inc.) and certain contracts for commercial health plan customers, HMS recognizes revenue when claims are sent to the customer for offset against future claims payments. Providers and health plan customers have the right to appeal a claim and may pursue additional appeals if the initial appeal is found in favor of the customer. HMS accrues an estimated liability for appeals based on the amount of revenue that is subject to appeals, closures or other adjustments and which HMS estimate are probable of being returned to providers following a successful appeal. The Company’s estimates are based on the Company’s historical experience with appeals. The estimated liability for appeals represents the Company’s estimate of the potential amount of repayments related to appeals of claims, closures and other adjustments for which revenue was previously collected.

A summary of the activity in the estimated liability for appeals and estimated allowance for appeals is as follows (in thousands) :

	Three Months Ended March 31,
	2016			2015
Balance--beginning of period ⁽¹⁾	$	39,692		$	41,623
Provision		998			2,321
Appeals found in providers favor		(4,729	)		(1,485	)
Balance--end of period ⁽²⁾	$	35,961		$	42,459

⁽¹⁾ For the three months ended December 31, 2015 and 2014 included within the estimated allowance for appeals found in favor of providers, $6,614 million and $4,824 million, respectively was activity associated with the Medicare RAC contract.

⁽²⁾ For the three months ended March 31, 2016 and 2015 included within the estimated allowance for appeals found in favor of providers, $5,348 million and $5,473 million, respectively was activity associated with the Medicare RAC contract.

8. Credit Agreement

In May 2013, HMS entered into a $500 million five-year, amended and restated revolving credit agreement (“Credit Agreement”) with certain financial institutions and Citibank, N.A. as Administrative Agent . No principal payments were made against the Company’s revolving credit facility during the three months ended March 31, 2016 and 2015. The $197.8 million principal balance of the Company’s revolving credit facility is due in May 2018.

The Credit Agreement provides for an initial $500 million revolving credit facility, and, under specified circumstances, the revolving credit facility can be increased or one or more incremental term loan facilities can be added, provided that the incremental credit facilities do not exceed in the aggregate the sum of (a) $75 million plus (b) an additional amount not less than $25 million, so long as the Company’s total secured leverage ratio, calculated giving pro forma effect to the requested incremental borrowing and other customary and appropriate pro forma adjustment events, including any permitted acquisitions, is no greater than 2.5:1.0. The amount available to borrow is based on certain borrowing base calculations found in the Company’s Credit Agreement. The Credit Agreement is collateralized by the Company’s assets.

The Credit Agreement contains certain customary representations and warranties, affirmative and negative covenants and events of default. The Credit Agreement requires HMS to comply, on a quarterly basis, with certain principal financial covenants, including a maximum consolidated leverage ratio of 3.25:1.00 and a minimum interest coverage ratio of 3.00:1.00. As of March 31, 2016, HMS was in compliance with all of the terms of the Credit Agreement.

The interest rates applicable to the revolving credit facility are, at the Company’s option, either (i) the LIBOR multiplied by the statutory reserve rate plus an interest margin ranging from 1.50% to 2.25% based on HMS’s consolidated leverage ratio, or (ii) a base rate (which is equal to the greatest of (a) Citibank’s prime rate, (b) the federal funds effective rate plus 0.50% and (iii) the one-month LIBOR plus 1.00% plus an interest margin ranging from 0.50% to 1.25% based on the Company’s consolidated leverage ratio). The applicable interest rate was 2.36% at March 31, 2016. HMS pays an unused commitment fee on the revolving credit facility during the term of the Credit Agreement ranging from 0.375% to 0.50% per annum based on the Company’s consolidated leverage ratio.

HMS’s obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default, which includes customary events of default including, without limitation, payment defaults, failures to perform affirmative covenants, failure to refrain from actions or omissions prohibited by negative covenants, the inaccuracy of representations or warranties, cross-defaults, bankruptcy and insolvency related defaults, defaults relating to judgments, defaults due to certain ERISA related events and a change of control default.

The interest expense and the commitment fees on the unused portion of the Company’s revolving credit facility are as follows (in thousands) :

	Three Months Ended March 31,
	2016		2015
Interest expense	$	1,178	$	1,027
Commitment fees	$	378	$	372

As of March 31, 2016 and December 31, 2015, the unamortized balance of deferred origination fees and debt issue costs were $4.4 million and $4.9 million, respectively. For both the three month periods ended March 31, 2016 and 2015, HMS amortized $0.5 million of interest expense related to the Company’s deferred origination fees and debt issue costs.

Although HMS expects that operating cash flows will continue to be a primary source of liquidity for the Company’s operating needs, the revolving credit facility may be used for general corporate purposes, including acquisitions, if necessary.

As part of the Company’s contractual agreement with a customer, HMS has an outstanding irrevocable letter of credit for $3.0 million, which HMS established against the revolving credit facility. The expiration date of the letter of credit is June 30, 2016.

9. Earnings Per Share

Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding during the period. The Company’s dilutive common share equivalents consist of stock options and restricted stock awards and units.

The following table reconciles the basic to diluted weighted average common shares outstanding using the treasury stock method (in thousands, except per share amounts) :

	Three Months Ended March 31,
	2016		2015
Net income	$	4,560	$	3,522

Weighted average common shares outstanding-basic		84,033		88,246
Plus: net effect of dilutive stock options		85		181
Plus: net effect of dilutive restricted stock awards and units		361		197
Weighted average common shares outstanding-diluted		84,479		88,624
Net income per common share-basic	$	0.05	$	0.04
Net income per common share-diluted	$	0.05	$	0.04

For the three months ended March 31, 2016 and 2015, 4,321,528 and 2,940,897 stock options, respectively, were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive.

10. Stock-Based Compensation

Total stock-based compensation expense in the Company’s unaudited Consolidated Statements of Income related to the Company’s long-term incentive award plans was as follows (in thousands) :

	Three Months Ended March 31,
	2016		2015
Cost of services-compensation	$	1,931	$	1,341
Selling, general and administrative		2,309		1,904
Total	$	4,240	$	3,245

Stock Options

The Company’s stock option activity for the three months ended March 31, 2016 (in thousands, except for weighted average exercise price and weighted average remaining contractual term) :

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Terms		Aggregate Intrinsic Value
Outstanding at December 31, 2015		5,030		$	17.37
Granted		983			13.90
Exercised		(10	)		2.85
Forfeitures		(27	)		18.88
Expired		(69	)		24.63
Outstanding at March 31, 2016		5,907			16.73		5.21		6,503

Expected to vest at March 31, 2016		3,830			15.77		6.21		2,508
Exercisable at March 31, 2016		1,990		$	18.59		3.23	$	3,944

For awards subject to service-based vesting conditions, HMS recognizes stock-based compensation expense, net of estimated forfeitures, equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. For awards subject to both performance and service-based vesting conditions, HMS recognizes stock-based compensation expense using the straight-line recognition method when it is probable that the performance condition will be achieved. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The fair value of each option grant with service-based vesting conditions was estimated using a Black-Scholes option-pricing valuation model. The performance share awards granted in 2016 and 2015 are market condition awards as attainment is based on the performance of the Company’s common stock for the relevant performance period. These awards were valued on the date of grant using a Monte Carlo simulation model.

Expected volatilities are calculated based on the historical volatility of the Company’s common stock. Management monitors stock option exercises 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 expected terms of options granted are based on the Company’s historical experience for similar types of stock option awards. The risk-free interest rate is based on U.S. Treasury Notes.

The weighted average grant-date fair value per share of the stock options granted during the three months ended March 31, 2016 and 2015 was $5.45 and $5.89, respectively. HMS estimated the fair value of each stock option grant on the date of grant using a Black-Scholes option-pricing model and the weighted-average assumptions set forth in the following table:

	Three Months Ended March 31,
	2016		2015
Expected dividend yield		0%		0%
Risk-free interest rate		1.20%		1.44%
Expected volatility		43.89%		38.29%
Expected life (in years)		4.90		4.88

During the three months ended March 31, 2016 and 2015, HMS issued 0.01 million shares and 0.4 million shares, respectively, of the Company’s common stock upon the exercise of outstanding stock options and received proceeds of $0.03 million and $3.3 million, respectively.

For the three months ended March 31, 2016 and 2015, stock-based compensation expense for stock options was $2.0 million and $1.4 million, respectively.

Excess tax benefit from the exercise of stock options for the three months ended March 31, 2016 was $0.01 million and for the year ended December 31, 2015 was $1.6 million, respectively.

The total intrinsic value of options exercised (the difference in the market price of the Company’s common stock on the exercise date and the price paid by the optionees to exercise the options) for the three months ended March 31, 2016 and 2015 was approximately $0.1 million and $5.4 million, respectively.

As of March 31, 2016, there was approximately $17.6 million of total unrecognized compensation cost, adjusted for estimated forfeitures, related to stock options outstanding, which is expected to be recognized over a weighted average period of 1.47 years.

Restricted Stock Units

HMS non-employee members of the Company’s Board of Directors and certain employees have received restricted stock units under the Fourth Amended and Restated 2006 Stock Plan (the “2006 Stock Plan”). The fair value of restricted stock units is estimated based on the closing sale price of the Company’s 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.

For the three months ended March 31, 2016, HMS granted 562,645 restricted stock units with an aggregate fair market value of $7.8 million.

For the three months ended March 31, 2016 and 2015, stock-based compensation expense for restricted stock units was $2.2 million and $1.8 million, respectively.

As of March 31, 2016, 1,348,340 restricted stock units remained unvested and there was approximately $18.7 million of unamortized compensation cost related to these restricted stock units, which is expected to be recognized over the remaining weighted-average vesting period of 1.51 years.

A summary of the status of the Company’s restricted stock units and of changes in restricted stock units outstanding under the 2006 Stock Plan for the three months ended March 31, 2016 is as follows (in thousands, except for weighted average grant date fair value per unit) :

	Number of Units			Weighted Average Grant Date Fair Value per Share		Aggregate Intrinsic Value
Outstanding balance at December 31, 2016		1,154		$	18.85
Granted		563			13.94
Vesting of restricted stock units, net of shares withheld for taxes		(133	)		19.23
Shares withheld for taxes		(73	)		19.23
Forfeitures		(22	)		18.68
Outstanding balance at March 31, 2016		1,489		$	16.92	$	21,366

11. Commitments and Contingencies

Kern Health Systems : In August 2011, in the Superior Court of the State of California, County of Los Angeles, Kern Health Systems (“KHS”) sought to recover in excess of $7.0 million exclusive of interest, attorneys’ fees and costs, against HMS’s wholly owned subsidiary Allied Management Group Special Investigation Unit, Inc. (“AMG”) and two of AMG’s former owners Dennis Demetre and Lori Lewis (collectively, the “Defendants”), jointly and severally, on causes of action for breach of contract, professional negligence, intentional misrepresentation, negligent misrepresentation and unfair business practices under the California Business and Professions Code. In June 2014, the jury issued its verdict in favor of all the Defendants on all causes of action except negligent misrepresentation. On that cause of action, due to an error in the special verdict form, the jury awarded damages to KHS in the sum of $1.38 million, while also finding that KHS failed to prove the required elements of the claim. However, the court denied the Defendants’ motion to vacate the jury’s verdict and resulting judgment. The court further awarded each side certain costs but denied AMG recovery of its attorneys’ fees sought in the sum of approximately $2.4 million. In August 2014, AMG filed a notice of appeal based on the award of damages to KHS on the negligent misrepresentation claim, and the denial of AMG’s request for attorneys’ fees. Following completion of briefing and oral argument on the appeal, on April 25, 2016, the California Court of Appeal reversed the judgment and remanded the matter to the trial court with directions to enter a new judgment in favor of the Defendants on all causes of action and to award the Defendants their reasonable attorneys’ fees. The decision is set to become final on May 25, 2016. Although there are risks and uncertainties related to any litigation, including appeals, HMS did not record an obligation as the Company believes it was probable that AMG would prevail on the appeal of this matter. Pending the appeal process, HMS was required to obtain a surety bond in the amount of 150% of the final judgment amount, or approximately $2.2 million, which was collateralized by a cash deposit and is reflected in other current assets on the Company’s Consolidated Balance Sheet as of March 31, 2016.

Dennis Demetre and Lori Lewis : In July 2012, Dennis Demetre and Lori Lewis (the “Plaintiffs”), filed an action in the Supreme Court of the State of New York against HMS Holdings Corp., claiming an undetermined amount of damages alleging that various actions unlawfully deprived the Plaintiffs of the acquisition earn-out portion of the purchase price of AMG under the applicable Stock Purchase Agreement (the “SPA”) and that HMS had breached certain contractual provisions under the SPA. The Plaintiffs filed a second amended complaint with two causes of action for breach of contract and one cause of action for breach of implied covenant of good faith and fair dealing. HMS asserts a counterclaim for breach of contract arising out of the Plaintiffs’ failure to indemnify the Company for costs, including attorneys’ fees arising out of the Company’s defense of the Kern Health Systems matter described above. In January 2016, HMS moved for summary judgment on (i) its remaining counterclaim for breach of contract against the Plaintiffs and (ii) the Plaintiffs’ breach of contract causes of action against HMS. Oral argument on the motions for summary judgement is set for June 22, 2016. A trial date has not been set. HMS believes it has a meritorious defense and will continue to defend this matter vigorously. As such, HMS has not accrued for any loss contingencies related to this matter because no assessment can been made as to the likely outcome of this lawsuit or whether the outcome will be material to the Company.

Restrictive Covenants, Trade Secret, Contract and other Causes of Action in Texas and New York : HMS was the plaintiff in lawsuits filed in August 2014, entitled HMS Holdings Corp., et al. v. Public Consulting Group, Inc., James Gambino and Jason Ramos , in the District Court of Dallas County, Texas, and HMS Holdings Corp., et al. v. Matthew Arendt, Sean Curtin and Danielle Lange , in the New York State Supreme Court, Albany County. In July 2015, HMS filed a third related lawsuit, entitled HMS Holdings Corp., et al. v. Elena Moiseenko and Joseph Flora , in the New York State Supreme Court, Albany County. These suits allege that, in violation of their respective contractual, statutory and common law obligations to the Company, defendants PCG, Flora and former HMS employees Gambino, Ramos, Arendt, Curtin, Lange and Moiseenko unlawfully misappropriated HMS’s confidential, proprietary and trade secret information and committed other wrongdoing. The lawsuits seek damages and injunctive relief and assert causes of action including breach of contract, breach of fiduciary duty and misappropriation of trade secrets. HMS has sought injunctions in all three lawsuits.

On April 27, 2016, the Company entered into settlement agreements with PCG and various individuals that fully resolve the matters in controversy in these lawsuits. Pursuant to terms of the settlement agreement between HMS and PCG, PCG agreed that for a period of seven years from the date of the settlement agreement, PCG will not develop, plan, market, provide, offer, advise with respect to, assist with, sell, or otherwise perform, directly or indirectly, any TPL services, including, but not limited to, coordination of benefits, credit balance audits and dependent eligibility audits. PCG further agreed to withdraw any pending TPL bids, bid protests or contract negotiations, which includes the withdrawal of its pending TPL bid with the New Jersey Department of Human Services. HMS and the New Jersey Department of Human Services have entered into an amendment to extend the current TPL contract through May 31, 2016. The settlements also result in the dismissal of all pending cases or appeals between the parties and includes full, mutual releases of PCG, HMS and their affiliates from any and all pending and future claims related to the lawsuits.

In addition, in August 2015, the New York State Office of Medicaid Inspector General (“OMIG”) awarded HMS the new Medicaid Third Party Liability Match and Recovery Services contract, which PCG challenged by filing a protest with the New York Office of the State Comptroller. In March 2016, OMIG denied PCG’s protest and HMS’s new contract was approved with an effective date of April 7, 2016.

From time to time, HMS may be subject to investigations, legal proceedings and other disputes arising in the ordinary course of the Company’s business, including but not limited to regulatory audits, billing and contractual disputes and employment-related matters. Due to the Company’s contractual relationships, including those with federal and state government entities, HMS’s operations, billing and business practices are subject to scrutiny and audit by those entities and other multiple agencies and levels of government, as well as to frequent transitions and changes in the personnel responsible for oversight of the Company’s contractual performance. HMS may have contractual disputes with its customers arising from differing interpretations of contractual provisions that define the Company’s rights, obligations, scope of work or terms of payment, and with associated claims of liability for inaccurate or improper billing for reimbursement of contract fees, or for sanctions or damages for alleged performance deficiencies. Resolution of such disputes may involve litigation or may require that HMS accept some amount of loss or liability in order to avoid customer abrasion, negative marketplace perceptions and other disadvantageous results that could affect the Company’s business, financial condition, results of operations and cash flows.

HMS records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, HMS does not establish an accrued liability.

12. Subsequent Events

In connection with the preparation of these unaudited Consolidated Financial Statements, an evaluation of subsequent events was performed through the date of issuance and there were no other events that have occurred that would require adjustments to the financial statements or disclosure.

Delaware		11-3656261
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

5615 High Point Drive, Irving, TX		75038
(Address of principal executive offices)		(Zip Code)

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o

		Page

PART I - Financial Information		4

Item 1.	Consolidated Financial Statements	4

	Consolidated Balance Sheets	4
	March 31, 2016 (unaudited) and December 31, 2015

	Consolidated Statements of Income	5
	Three Months Ended March 31, 2016 and 2015 (unaudited)

	Consolidated Statement of Shareholders’ Equity	6
	Three Months Ended March 31, 2016 (unaudited)

	Consolidated Statements of Cash Flows	7
	Three months ended March 31, 2016 and 2015 (unaudited)

	Notes to the Consolidated Financial Statements	8
	Three Months Ended March 31, 2016 and 2015 (unaudited)

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21

Item 4.	Controls and Procedures	21

PART II - Other Information		22

Item 1.	Legal Proceedings	22

Item 1A.	Risk Factors	22

Item 6.	Exhibits	22

Signatures		23

Exhibit Index		24

(In thousands)	March 31, 2016		December 31, 2015
Cash and cash equivalents	$	143,451	$	145,610
Working capital	$	264,530	$	247,916
Available borrowings under credit facility	$	169,929	$	121,204

Exhibit Number		Description
3.1		Amended and Restated Bylaws of HMS Holdings Corp., dated May 4, 2016. Incorporated by reference to Exhibit 3.2 to HMS Holdings Corp.’s Current Report on Form 8-K, file No. 000-50194, filed with the SEC on May 5, 2016.

10.1†*		Form of 2016 Executive and Senior Vice President Non-Qualified Stock Option Agreement under the 2006 Stock Plan.

10.2†*		Form of 2016 Executive and Senior Vice President Restricted Stock Unit Agreement under the 2006 Stock Plan.

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.

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document

Date:	May 10, 2016	HMS HOLDINGS CORP.


		By:	/s/ WILLIAM C. LUCIA
			William C. Lucia
			President and Chief Executive Officer and Duly
			Authorized Officer
			(Principal Executive Officer)


		By:	/s/ JEFFREY S. SHERMAN
			Jeffrey S. Sherman
			Executive Vice President, Chief Financial Officer and Treasurer
			(Principal Financial Officer)

Date of Grant	March 2, 2016
Option Shares	<Number of Shares Granted>
Exercise Price per Share	$_____
Exercisability	One-sixth of the Option Shares on each of the first, second and third anniversaries of the Date of Grant, with the remainder becoming exercisable as provided in Exhibit A to the Grant Agreement. Each of those dates is an “ Exercisability Date .”
Term Expiration Date	__________, ____

Option Exercisability	While your Option remains in effect under the Option Expiration section below, you may exercise any exercisable portions of the Option (and buy the Option Shares) under the timing rules of this section, provided that you may not exercise the Option for fewer than 100 full Shares at any particular time unless fewer than 100 remain unexercised.

	The Option will become exercisable according to the schedule provided in the Cover Letter to this Grant Agreement assuming that through each Exercisability Date, (i) if you received the Option in your capacity as an employee of the Company, you remain an employee or (ii) if you received the Option in your capacity as a member of the Company’s Board of Directors (the “ *Board* ”), you remain a member of the Company’s Board. Any fractional shares will be carried forward to the following Exercisability Date, unless the Compensation Committee (the “ *Committee* ”) selects a different treatment. For purposes of this Grant Agreement, employment with the Company will include employment with any Affiliate whose employees are then eligible to receive awards under the Plan. Unless the Committee determines otherwise, if an entity employing you ceases to be an Affiliate, your employment with the Company will be treated as ended even though you continue to be employed by that entity.

	Exercisability will accelerate fully on your disability or death, including with respect to the Performance Option Shares (as defined in Exhibit A to the Grant Agreement). For this purpose, “ *disability* ” means permanent and total disability as defined by Section 22(e)(3) of the Internal Revenue Code of 1986. Exercisability will continue and increase (until fully exercisable) over the two (2) years following your date of Retirement. “ *Retirement* ” for this purpose means cessation of service on or after attaining age 60 and completing five (5) years of service with the Company.

Change in Control	If a Change in Control occurs, your Option will be treated as provided in Section 11 of the Plan if, within twenty-four (24) months following the Change in Control, your employment or service ends on a termination without cause (as determined by the Committee or the Board), provided also that the Option will remain outstanding for twelve (12) months following such termination but not beyond the Term Expiration Date.

Option Expiration	The Option will expire no later than the close of business on the Term Expiration Date. Unexercisable portions of the Option expire immediately when you cease to be employed (unless you are concurrently remaining or becoming a member of the Board, or, for a Board member, concurrently remaining or becoming an employee of the Company). If the Company terminates your employment or service for cause, the Option will immediately expire without regard to whether it is then exercisable.

	Exercisable portions of the Option remain exercisable until the first to occur of the following (the “ *Final Exercise Date* ”), each as defined further in the Plan or the Grant Agreement:

	•	Three (3) months (measured to the corresponding date in the month) after your employment (or directorship) ends if you resign or if the Company terminates your employment or service without cause (as determined under the Plan), except as provided above under Change in Control;
	•	For death or Disability, the first anniversary of the date employment or service ends;

		•	For Retirement, the end of the second year following your date of Retirement; or
		•	The Term Expiration Date.

		The Committee can override the expiration provisions of this Grant Agreement.

Method of Exercise and Payment for Shares		Subject to this Grant Agreement and the Plan, you may exercise the Option only by providing a written notice (or notice through another previously approved method, which could include a voice- or web-based or e-mail system) to the Corporate Secretary of the Company or to whomever the Committee designates, received on or before the date the Option expires. Each such notice must satisfy whatever then-current procedures apply to that Option and must contain such representations (statements from you about your situation) as the Company requires. You must, at the same time, pay the Exercise Price using one or more of the following methods:

	Cash/Check		cash or check in the amount of the Exercise Price payable to the order of the Company;

	Cashless		an approved cashless exercise method, including directing the Company

	Exercise		to send the stock certificates (or other acceptable evidence of ownership) to be issued under the Option to a licensed broker acceptable to the Company as your agent in exchange for the broker’s tendering to the Company cash (or acceptable cash equivalents) equal to the Exercise Price and, if you so elect, any required tax withholdings;

	Net Exercise		by delivery of a notice of “net exercise” to or as directed by the Company, as a result of which you will receive (i) the number of shares underlying the portion of the Option being exercised less (ii) such number of shares as is equal to (x) the aggregate Exercise Price for the portion of the Option being exercised divided by (y) the Fair Market Value on the date of exercise;

	Stock		if permitted by the Committee, by delivery of Shares owned by you, valued at their Fair Market Value, provided (i) applicable law then permits such method of payment, (ii) you owned such Shares, if acquired directly from the Company, for such minimum period of time, if any, as the Committee may establish in its discretion, and (iii) the Shares are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar restrictions; or

			any combination of the above permitted forms for payment.

Withholding		Issuing the Option Shares is contingent on satisfaction of all obligations with respect to required tax or other required withholdings (for example, in the United States, any applicable Federal, state, and local taxes). The Company may take any action permitted under Section 14(c) of the Plan to satisfy such obligation, including satisfying the tax obligations by (i) reducing the number of Option Shares to be issued to you in connection with any exercise of such Option by the number of Option Shares (valued at their Fair Market Value on the date of exercise) that would equal all taxes required to be withheld (at their minimum withholding levels), (ii) accepting payment of the withholdings directly from you or from a broker in connection with a Cashless Exercise of the Option, or (iii) taking any other action under Section 14(c) of the Plan. If a fractional share remains after deduction for required withholding, the Company will pay you the value of the fraction in cash.

Compliance with Law	You may not exercise the Option if the Company’s issuing stock upon such exercise would violate any applicable Federal or state securities laws or other laws or regulations. You may not sell or otherwise dispose of the Option Shares in violation of applicable law. As part of this prohibition, you may not use the Cashless Exercise methods if the Company’s insider trading policy then prohibits you from selling to the market.

Additional Conditions to Exercise	The Company may postpone issuing and delivering any Option Shares for so long as the Company determines to be advisable to satisfy the following:

		its completing or amending any securities registration or qualification of the Option Shares or its or your satisfying any exemption from registration under any Federal or state law, rule, or regulation;

		its receiving proof it considers satisfactory that a person seeking to exercise the Option after your death is entitled to do so;

		your complying with any requests for representations under the Plan; and/or

		your complying with any Federal, state, or local tax withholding obligations.

Additional Representations from You	If you exercise the Option at a time when the Company does not have a current registration statement (generally on Form S-8) under the Securities Act of 1933 (the “Act”) that covers issuances of shares to you, you must comply with the following before the Company will issue the Option Shares to you. You must —

		represent to the Company, in a manner satisfactory to the Company’s counsel, that you are acquiring the Option Shares for your own account and not with a view to reselling or distributing the Option Shares; and

		agree that you will not sell, transfer, or otherwise dispose of the Option Shares unless:

			a registration statement under the Act is effective at the time of disposition with respect to the Option Shares you propose to sell, transfer, or otherwise dispose of; or

			the Company has received an opinion of counsel or other information and representations it considers satisfactory to the effect that, because of Rule 144 under the Act or otherwise, no registration under the Act is required.

No Effect on Employment or Other Relationship	Nothing in this Grant Agreement restricts the Company’s rights or those of any of its Affiliates to terminate your employment or other relationship at any time and for any or no reason. The termination of employment or other relationship, whether by the Company or any of its Affiliates or otherwise, and regardless of the reason for such termination, has the consequences provided for under the Plan and any applicable employment or severance agreement or plan.

Not a Shareholder	You understand and agree that the Company will not consider you a shareholder for any purpose with respect to any of the Option Shares until you have exercised the Option, paid for the shares, and received evidence of ownership.

No Effect on Running Business			You understand and agree that the existence of the Option will not affect in any way the right or power of the Company or its shareholders to make or authorize any adjustments, recapitalizations, reorganizations, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stock, with preference ahead of or convertible into, or otherwise affecting the Company’s common stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether or not of a similar character to those described above.


Governing Law			The laws of the State of Texas will govern all matters relating to the Option, without regard to the principles of conflict of laws.

Restrictive Covenants Clawback			If the Board or the Committee determines, in its sole discretion, that you violated or are violating any of the Restrictive Covenants set forth below under the section titled “ Restrictive Covenants ,” the Option will immediately terminate without regard to whether it has then become exercisable or “vested” in whole or in part. In addition, the Board or the Committee may, in its sole discretion, require from you payment or transfer to the Company of the Gain from the Option, where the “ *Gain* ” consists of the greatest of (i) the value of the Option Shares on the date, within the Recovery Measurement Period, on which you exercised the Option with respect to such Option Shares, (ii) the value of the Option Shares received upon exercise during the Recovery Measurement Period, as determined on the date of the request by the Committee to pay or transfer, (iii) the gross (before tax) proceeds you received from any sale of the Option Shares during the Recovery Measurement Period, and (iv) if transferred without sale during the Recovery Measurement Period, the value of the Option Shares when so transferred. The Board or the Committee may determine the recoupment method in its sole discretion for any portion of the Option transferred (where permitted) before being exercised. The “ *Recovery Measurement Period* ” means the twelve (12) months before the date of the determination of violation. The provisions in this section are essential economic conditions to the Company’s grant of the Option to you. By acknowledging receipt of the grant of the Option hereunder, you agree that the Company may deduct from any amounts it owes you from time to time (such as any severance or other payments owed following a termination of employment, as well as any other amounts owed to you by the Company, as permitted by applicable law) to the extent of any amounts you owe the Company under this Restrictive Covenants Clawback section.

			You acknowledge that you would not be receiving the Option described herein but for your agreement to comply with the Restrictive Covenants. Likewise, you acknowledge that you would be unjustly enriched if you violate the Restrictive Covenants, while being able to retain some or all of the Option Shares or the gain associated with them. Furthermore, you acknowledge and agree that the damages for your breach of the Restrictive Covenants are not subject to calculation and that the remedies set forth in this Restrictive Covenants Clawback section, therefore, will only reimburse the Company for a portion of the damage done. For this reason, the Company shall be entitled to recover from you any and all damages the Company has suffered and, in addition, the Company will be entitled to injunctive relief. The parties agree that the forfeiture of the Option and payments described in this section are expressly not the Company’s exclusive or sole remedy.

			This remedy is in addition to any other remedies that the Company may have available in law or equity with respect to breaches of the Restrictive Covenants below. It is also in addition to, and not in substitution for, any other clawback laws or policies that may be adopted from time to time, including any required by Federal law, such as under Section 304 of the Sarbanes-Oxley Act of 2002 or the Dodd-Frank Wall Street Reform and Consumer Protection Act.

		Payment is due in cash or cash equivalents within ten (10) days after the Board or the Committee provides notice to you that it is enforcing this clawback. Payment will be calculated on a gross basis, without reduction for taxes or commissions. The Company may, but is not required to, accept retransfer of shares in lieu of cash payments.

Restrictive Covenants		In consideration of the terms of this Option and your access to Proprietary Information (as defined below), you agree to the following Restrictive Covenants:

	Proprietary Information and Developments		You have or will be given access to and provided with sensitive, confidential, proprietary and/or trade secret information (collectively, “ *Proprietary Information* ”) in the course of your employment. Examples of Proprietary Information include inventions, new product or marketing plans, business strategies and plans, merger and acquisition targets, financial and pricing information, software of the Company in various stages of development, including computer programs in source code and binary code form, software designs, specifications, programming aids (including “library subroutines” and productivity tools), programming languages, interfaces, visual displays, technical documentation, user manuals, data files and databases of the Company, analytical models, customer/client lists and information, and supplier and vendor lists and information. You agree not to disclose or use Proprietary Information, either during or after your employment with the Company, except as necessary to perform your duties or as the Company may consent in writing. In addition, you agree that you will make full and prompt disclosure to the Company of all inventions, creations, improvements, ideas, discoveries, trade secrets, secret processes, technology, methods, developments, software and works of authorship or other creative works, whether patentable or not, that are created, made, conceived or reduced to practice by you or under your direction or jointly with others during you employment by the Company, whether or not during normal working hours or on the premises of the Company (collectively, “ *Developments* ”).

	Non-competition and Non-solicitation		You agree that while the Company employs you and for a period of twelve (12) months after your employment ends for any reason, you will not directly or indirectly (whether as an owner, partner, officer, employee, director, investor, lender, consultant, independent contractor or otherwise) do any of the following:

			(i) Compete. In the geographical area where the Company does business or, at the time your employment ends, plans to do business, you will not engage or assist others in engaging in any business or enterprise that competes with the Company’s business, including any business or enterprise that develops, designs, produces, manufactures, markets, licenses, sells, renders, or provides any product or service that competes with any product or service actually or planned to be developed, designed, produced, manufactured, marketed, licensed, sold, rendered, or provided by the Company while you are or were employed by the Company; provided that your passive ownership of not more than 1% of the outstanding stock of a publicly-held company will not, by itself, violate this provision. For purposes of this Grant Agreement, you agree that the Company does business throughout and plans to do business throughout the United States;

				(ii) Solicit Clients, Customers, or Accounts . You will not, either alone or in association with others, actually or attempt to solicit, divert, or take away the business or patronage of any of the Company’s clients, customers, or accounts, or prospective clients, customers, or accounts, that the Company contacted, solicited, or served while you were employed by the Company or about which you have Proprietary Information, provided that this provision does not prevent you from soliciting clients, customers, or accounts (if you are not using Proprietary Information to do so) for purposes that are not in actual or potential competition with the Company;

				(iii) Solicit Company Employees and Independent Contractors . You will not, either alone or in association with others, actually or attempt to (x) solicit, recruit or induce any Company employee or independent contractor who was employed or engaged by the Company at any time during the twelve (12) month period preceding the end of your employment, and who, at any time during the same twelve (12) month period, had knowledge of Proprietary Information and/or made Developments, to leave the Company’s service to engage in any business or enterprise that competes with the Company’s business or (y) solicit, recruit or engage as an employee or independent contractor in any business or enterprise that competes with the Company’s business any individual whom the Company employed or engaged at any time during the twelve (12) month period preceding the end of your employment, and who, at any time during the same twelve (12) month period, had knowledge of Proprietary Information and/or made Developments, except for an individual whose employment or other service relationship with the Company ended at least six (6) months before the date of your action; and/or

				(iv) Disclose or Utilize Product Development. You will not, either alone or in association with others, disclose to, or utilize for the benefit of, any entity other than the Company, any systems or product development ideas, concepts, or strategies that you or others in communication with you explored, generated, initiated, or discussed for potential implementation during your employment with the Company, even if the Company has not implemented such ideas, concepts, or strategies by the time your employment with the Company ends.

				For the purposes of subsection (ii) “ Solicit Clients, Customers, or Accounts” , the terms “customer,” “client,” or “account” as applied to governmental agencies will mean the agency or department for which any of the products or services of the Company are sold or performed during the applicable period, any related program office, and any agency, department, or office that succeeds to the functions of any agency, department, or office to which the Company then provides or within the preceding twelve (12) months provided goods or services (to the extent that the successor replaces part or all of the customer or client to which the Company provided goods or services).

	General		To the extent you and the Company agree at any time to enter into separate agreements containing restrictive covenants with different or inconsistent terms than those contained herein, you and the Company acknowledge and agree that such different or inconsistent terms shall not in any way affect or have relevance to the Restrictive Covenants contained herein, and that the terms of these Restrictive Covenants do not supersede or amend any others currently in place, or any such future terms, unless otherwise specified by the Company in writing. By accepting this Option grant, you agree the provisions of this Restrictive Covenants section (and the related Restrictive Covenants Clawback section) are reasonable and necessary to protect the legitimate interests of the Company.

Notices		Any notice you give to the Company must follow the procedures then in effect. If no other procedures apply, you must send your notice in writing by hand or by mail to the office of the Company’s Corporate Secretary (or to the Chair of the Committee if you are then serving as the sole Corporate Secretary). If mailed, you should address it to the Company’s Corporate Secretary (or the Chair of the Committee) at the Company’s then corporate headquarters, unless the Company directs optionees to send notices to another corporate department or to a third party administrator or specifies another method of transmitting notice. The Company and the Committee will address any notices to you using its standard electronic communications methods or at your office or home address as reflected on the Company’s personnel or other business records. You and the Company may change the address for notice by like notice to the other, and the Company can also change the address for notice by general announcements to optionees.

Amendment		Subject to any required action by the Committee or the shareholders of the Company, the Company may cancel the Option and provide a new award in its place, provided that the award so replaced will satisfy all of the requirements of the Plan as of the date such new award is made and no such action will adversely affect the Option to the extent then exercisable.

Plan Governs		Wherever a conflict may arise between the terms of this Grant Agreement and the terms of the Plan, the terms of the Plan will control. The Committee may adjust the number of Option Shares and the Exercise Price and other terms of the Option from time to time as the Plan provides.

Date of Grant	March 2, 2016
RSU Shares	<Number of Shares Granted>
Vesting	One-sixth of the RSU Shares shall vest on the first, second and third anniversaries of the Date of Grant, with the remainder vesting as provided in Exhibit A to the Grant Agreement. Each of those dates is a “ Vesting Date .”

Vesting Schedule			Your RSUs become nonforfeitable (“ *Vested* ”) as provided in the Cover Letter to this Grant Agreement, assuming that through each Vesting Date, (i) if you received the RSUs in your capacity as an employee of the Company, you continue in service as an employee or (ii) if you received the RSUs in your capacity as a member of the Company’s Board of Directors (the “Board”), you continue in service as a member of the Company’s Board. Any fractional shares will be carried forward to the following Vesting Date, unless the Compensation Committee (the “Committee”) selects a different treatment. For purposes of this Grant Agreement, employment with the Company will include employment with any Affiliate whose employees are then eligible to receive awards under the Plan. Unless the Committee determines otherwise, if an entity employing you ceases to be an Affiliate, your employment with the Company will be treated as ended even though you continue to be employed by that entity.

			Vesting will accelerate fully on your disability or death, including with respect to the Performance RSUs (as defined in Exhibit A to the Grant Agreement). For this purpose, “ *disability* ” means permanent and total disability as defined by Section 22(e)(3) of the Internal Revenue Code of 1986 (the “ *Code* ”).

			If your employment or service ends as a result of Retirement, you will be treated as continuing in service for vesting purposes until the earlier to occur of (x) the second anniversary of your Retirement and (y) the last of the applicable Vesting Dates. “ *Retirement* ” for this purpose means cessation of employment or service on or after attaining age 60 and completing five (5) years of service with the Company.

Change in Control			If a Change in Control occurs, your RSUs will be treated as provided in Section 11 of the Plan if, within twenty-four (24) months following the Change in Control, your employment or service ends on (i) a termination without cause (as determined by the Committee or the Board) or (ii) Retirement.

Termination for Cause			If the Company terminates your employment or service for cause, the RSUs will immediately terminate without regard to whether they are then Vested in whole or in part.

Distribution Date			Subject to any overriding provisions in the Plan, you will receive a distribution of the shares of common stock of the Company (“ *Shares* ”) equivalent to your Vested RSU Shares as soon as practicable following the date(s) on which they become Vested (with the actual date being the " *Distribution Date* ”) and, in any event, no later than thirty (30) days following an applicable Vesting Date, unless the Committee determines that you may make a timely deferral election to defer distribution to a later date and you have made such an election (in which case the deferred date will be the “ *Distribution Date* ”).

			Vesting that accelerates after a Change in Control will only accelerate the Distribution Date if and to the extent permitted under Section 409A of the Code.

Restrictions and Forfeiture			You may not sell, assign, pledge, encumber, or otherwise transfer any interest (“Transfer”) in the RSU Shares until the RSU Shares are distributed to you. Any attempted Transfer that precedes the Distribution Date is invalid.

	Unless the Committee determines otherwise or the Grant Agreement provides otherwise, if your employment or service with the Company terminates for any reason before your RSUs are Vested, then you will forfeit the unvested RSUs (and the Shares to which they relate) to the extent that the RSUs do not otherwise vest as a result of the termination, pursuant to the rules in the Vesting Schedule section above. The forfeited RSUs will then immediately revert to the Company. You will receive no payment for the RSUs if you forfeit them.

Taxes and Withholding	The RSUs provide tax deferral, meaning that the RSU Shares are not taxable until you actually receive the RSU Shares on or around the Distribution Date. You will then owe taxes at ordinary income tax rates as of the Distribution Date at the Shares' value. If you are an employee of the Company, you may owe FICA and HI (Social Security and Medicare) taxes before the Distribution Date.

	Issuing the Shares under the RSUs is contingent on satisfaction of all obligations with respect to required tax or other required withholdings (for example, in the United States, any applicable Federal, state, and local taxes). The Company may take any action permitted under Section 14(c) of the Plan to satisfy such obligation, including satisfying the tax obligations by (i) reducing the number of RSU Shares to be issued to you by that number of RSU Shares (valued at their Fair Market Value on the date of distribution) that would equal all taxes required to be withheld (at their minimum withholding levels), (ii) accepting payment of the withholdings directly from you or from a broker in connection with a sale of the RSU Shares, or (iii) taking any other action under Section 14(c) of the Plan. If a fractional share remains after deduction for required withholding, the Company will pay you the value of the fraction in cash.

Compliance with Law	The Company will not issue the RSU Shares if doing so would violate any applicable Federal or state securities laws or other laws or regulations. You may not sell or otherwise dispose of the RSU Shares in violation of applicable law.

Additional Conditions to Receipt	The Company may postpone issuing and delivering any RSU Shares for so long as the Company determines to be advisable to satisfy the following:

		its completing or amending any securities registration or qualification of the RSU Shares or its or your satisfying any exemption from registration under any Federal or state law, rule, or regulation;

		its receiving proof it considers satisfactory that a person seeking to receive the RSU Shares after your death is entitled to do so;

		your complying with any requests for representations under the Plan; and/or

		your complying with any Federal, state, or local tax withholding obligations.

Additional Representations from You	If the vesting provisions of the RSUs are satisfied and you are entitled to receive RSU Shares at a time when the Company does not have a current registration statement (generally on Form S-8) under the Securities Act of 1933 (the “Act”) that covers issuances of shares to you, you must comply with the following before the Company will issue the RSU Shares to you. You must —

		represent to the Company, in a manner satisfactory to the Company’s counsel, that you are acquiring the RSU Shares for your own account and not with a view to reselling or distributing the RSU Shares; and

Unsecured Creditor			The RSUs create a contractual obligation on the part of the Company to make a distribution of the RSU Shares at the time provided for in this Grant Agreement. Neither you nor any other party claiming an interest in deferred compensation hereunder shall have any interest whatsoever in any specific assets of the Company. Your right to receive distributions hereunder is that of an unsecured general creditor of Company.

Governing Law			The laws of the State of Texas will govern all matters relating to the RSUs, without regard to the principles of conflict of laws.

Restrictive Covenants Clawback			If the Board or the Committee determines, in its sole discretion, that you violated or are violating any of the Restrictive Covenants set forth below under the section titled “ Restrictive Covenants ,” the RSUs will immediately terminate without regard to whether they are then Vested in whole or in part. In addition, the Board or the Committee may, in its sole discretion, require from you payment or transfer to the Company of the Gain from the RSUs, where the “ *Gain* ” consists of the greatest of (i) the value of the RSU Shares on the applicable Distribution Date on which you received them within the Recovery Measurement Period, (ii) the value of the RSU Shares received during the Recovery Measurement Period, as determined on the date of the request by the Committee to pay or transfer, (iii) the gross (before tax) proceeds you received from any sale of the RSU Shares during the Recovery Measurement Period, and (iv) if transferred without sale during the Recovery Measurement Period, the value of the RSU Shares when so transferred. The “ *Recovery Measurement Period* ” means the twelve (12) months before the date of the determination of violation. The provisions in this section are essential economic conditions to the Company’s grant of RSUs to you. By receiving the grant of RSUs hereunder, you agree that the Company may deduct from any amounts it owes you from time to time (such as any severance or other payments owed following a termination of employment, as well as any other amounts owed to you by the Company, as permitted by applicable law) to the extent of any amounts you owe the Company under this Restrictive Covenants Clawback section.

Date: May 10, 2016	/s/ WILLIAM C. LUCIA
	William C. Lucia
	Chief Executive Officer
	(Principal Executive Officer)

	/s/ JEFFREY S. SHERMAN
	Jeffrey S. Sherman
	Chief Financial Officer
	(Principal Financial Officer)


	May 10, 2016