<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 29, 1996
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016
212-685-4545
<TABLE>
<S> <C> <C>
Incorporated under the laws of Commission File Number I.R.S. Employer Identification Number
State of New York 0-20946 13-2770433
</TABLE>
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective as of April 29, 1996 (the "CDR Effective Time"), Health
Management Systems, Inc. (the "Company") consummated a merger with CDR
Associates, Inc. ("CDR"), in accordance with an Agreement and Plan of Merger,
(the "CDR Merger Agreement") among the Company, CDR Acquisition Corp. ("CDR
Sub"), a wholly-owned subsidiary of the Company, CDR, and all Shareholders of
CDR (the "CDR Principals"). CDR is a supplier of third-party liability recovery
services to the health care industry.
Pursuant to the CDR Merger Agreement, CDR merged (the "CDR Merger") with
CDR Sub, with the result that CDR became a wholly-owned subsidiary of the
Company. Each share of CDR capital stock issued and outstanding immediately
prior to the CDR Effective Time of the CDR Merger was converted into 460 shares
of common stock, $.01 par value per share (the "CDR Merger Shares"), of the
Company, or an aggregate of 460,000 CDR Merger Shares. The CDR Merger Shares
were issued to the CDR Principals as follows:
<TABLE>
<CAPTION>
Name of Principal Number of Merger Shares
- - ----------------- -----------------------
<S> <C>
Joseph H. Czajkowski 230,000
Jeffrey R. Donnelley 230,000
</TABLE>
The CDR Merger Agreement provides that the Company will undertake to
register the CDR Merger Shares with the Securities and Exchange Commission for
resale under the Securities Act of 1933, as amended.
The CDR Merger Agreement contains not-to-compete provisions which prohibit
the CDR Principals from competing with the businesses of CDR and the Company
during the period of their employment and for a period of three years
thereafter.
The CDR Merger will be treated as a tax free reorganization for federal
income tax purposes, and is being accounted for using the pooling of interests
method of accounting.
The foregoing description of the CDR Merger Agreement is qualified in its
entirety by reference to the full text of the CDR Merger Agreement, a copy of
which is included as Exhibit 10.1 to this Current Report on Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Financial Statements of CDR Associates, Inc. for the year ended
October 31, 1995.
(B) PRO FORMA FINANCIAL INFORMATION.
Supplemental consolidated financial statements of Health Management
Systems, Inc. and CDR Associates, Inc.
1
<PAGE> 3
(C) EXHIBITS.
10.1 Agreement and Plan of Merger dated as of April 29, 1996 among
Health Management Systems, Inc., CDR Acquisition Corp., CDR
Associates, Inc., and all the shareholders of CDR Associates,
Inc.
23.1 Consents of KPMG Peat Marwick LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand LLP, Independent Accountants
23.3 Report of Independent Accountants on the financial statements
of Health Care microsystems, Inc. as of December 31, 1994 and
1993 and for the years then ended
23.4 Consent of Ernst & Young LLP, Independent Auditors
23.5 Report of Independent Auditors on the financial statements of
Health Information Systems Corporation as of and for the period
ended October 31, 1995
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for informational
purposes only and not filed
99 Press Release of Health Management Systems, Inc. relating to the
consummation of the merger with CDR Associates, Inc.
2
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH MANAGEMENT SYSTEMS, INC.
By: /s/ Gregory K. Schraer
----------------------------------------
Gregory K. Schraer
Controller and Principal Accounting Officer
Date: May 13, 1996
3
<PAGE> 5
CDR ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Contents Number
- - -------- ------
<S> <C>
Report of Independent Auditors............................................................................. F-1
Balance Sheet at October 31,1995........................................................................... F-2
Statement of Operations and Accumulated Deficit for the Year Ended October 31, 1995....................... F-3
Statement of Cash Flows for the Year Ended October 31, 1995................................................ F-4
Notes to Financial Statements.............................................................................. F-5
</TABLE>
F
<PAGE> 6
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CDR Associates, Inc.:
We have audited the accompanying balance sheet of CDR Associates, Inc. as of
October 31, 1995, and the related statements of operations and accumulated
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CDR Associates, Inc. as of
October 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
---------------------
March 29, 1996
F-1
<PAGE> 7
CDR ASSOCIATES, INC.
Balance Sheet
October 31, 1995
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 898,770
Accounts receivable, net of allowance for doubtful
accounts of $58,690 940,465
Other current assets 49,374
-----------
$ 1,888,609
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses 1,452,959
Due to insurance companies 621,092
-----------
Total current liabilities 2,074,051
Stockholders' deficit:
Common stock, $1.00 par value. Authorized 5,000 shares;
issued and outstanding 1,000 shares 1,000
Accumulated deficit (186,442)
-----------
Total stockholders' deficit (185,442)
-----------
$ 1,888,609
===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 8
CDR ASSOCIATES, INC.
Statement of Operations and Accumulated Deficit
Year ended October 31, 1995
<TABLE>
<S> <C>
Revenue:
Contract fees $ 3,045,904
-----------
Cost of services:
Compensation:
Officers 2,454,306
Office salaries 326,498
Occupancy 12,144
Other (includes provision for doubtful accounts
of $58,690) 395,556
-----------
3,188,504
-----------
Operating loss (142,600)
Interest income 27,485
-----------
Net loss (115,115)
Accumulated deficit at beginning of year (71,327)
-----------
Accumulated deficit at end of year $ (186,442)
===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 9
CDR ASSOCIATES, INC.
Statement of Cash Flows
Year ended October 31, 1995
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss $ (115,115)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Changes in assets and liabilities:
Increase in accounts receivable (905,262)
Increase in other current assets (27,000)
Increase in accounts payable and accrued expenses 1,110,490
Decrease in due to insurance companies (44,697)
-----------
Net cash provided by operating activities 18,416
Cash and cash equivalents at beginning of year 880,354
-----------
Cash and cash equivalents at end of year $ 898,770
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 10
CDR ASSOCIATES, INC.
Notes to Financial Statements
October 31, 1995
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Founded in 1991, CDR Associates, Inc. (CDR or the Company) provides
consulting services to the insurance industry in the area of claim
payment recoveries. The Company's clients consist primarily of commercial
insurance companies with a significant concentration of their business
with various Blue Cross entities around the United States. The Company is
an S corporation.
(a) CASH AND CASH EQUIVALENTS
For the purpose of financial reporting, the Company considers all
highly liquid investments purchased with an original maturity of
three months or less (including money market instruments of
$77,750 at October 31, 1995) to be cash equivalents.
(b) REVENUE RECOGNITION
The Company generally recognizes revenue for financial reporting
purposes when billings are submitted to the insurance company as a
consequence of services performed for that particular insurance
company. The Company earns revenue for all contracts on a full
contingency basis, usually a negotiated percentage of actual
overpayment recoveries.
(c) DEPRECIATION AND AMORTIZATION OF PROPERTY AND EQUIPMENT
The Company expenses all individual property and equipment
purchases of less than $1,000. At October 31, 1995, the Company
has not recorded any property and equipment amounts as such
amounts consist of individual purchases of less than $1,000.
(d) INCOME TAXES
The Company is an S corporation and, accordingly, the Company's
taxable income passes through to the Company's stockholders.
Accordingly, the Company records no tax liability since such
liability belongs to the individual stockholders. The Company
files its tax returns on the cash basis of accounting.
(2) DUE TO INSURANCE COMPANIES
Amounts due to insurance companies represent remittances collected on
behalf of such organizations. Such amounts are remitted to the insurance
companies, generally within sixty to ninety days after receipt.
(Continued)
F-5
<PAGE> 11
2
CDR ASSOCIATES, INC.
Notes to Financial Statements
(3) PROFIT SHARING PLAN
The Company has a discretionary defined contribution pension plan. For
the year ended October 31, 1995, profit sharing expense was $66,228.
(4) COMMITMENTS
The Company leases office space under an operating lease which expires on
April 30, 1996. The amounts owed under this lease total $6,813. At this
date, the Company expects to renew the existing lease on a month-to-month
basis. Total rent expense for the year ended October 31, 1995 was
$12,144.
(5) SIGNIFICANT CUSTOMERS
For the year ended October 31, 1995, the Company's largest customer
accounted for 34% of the Company's revenue. The Company's next four
largest customers account for 53% of the Company's revenue.
(6) RELATED PARTY TRANSACTIONS
At October 31, 1995, the Company advanced its two stockholders $49,374.
Such amounts will be repaid in April of 1996.
(7) SUBSEQUENT EVENTS
In February 1996, the Company and its stockholders entered into a letter
of intent to be acquired by Health Management Systems, Inc., a NASDQ
listed company who furnishes proprietary data processing and information
management services and software to providers of health care, public and
commercial payers of health care expenses and other companies serving the
health care industry.
F-6
<PAGE> 12
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Contents Number
- - -------- ------
<S> <C>
Report of Independent Auditors............................................................................. F-8
Supplemental Consolidated Statements of Operations for the Years Ended October 31, 1995,
1994, and 1993 and the three months ended January 31, 1996 and 1995 (unaudited).......................... F-9
Supplemental Consolidated Balance Sheets at October 31, 1995 and 1994 and
January 31, 1996 (unaudited).............................................................................. F-10
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1995, 1994, and 1993 and the three months ended January 31, 1996
(unaudited)............................................................................................... F-11
Supplemental Consolidated Statements of Cash Flows for the Years Ended October 31, 1995,
1994, and 1993 and the three months ended January 31, 1996 and 1995 (unaudited)........................... F-12
Notes to Supplemental Consolidated Financial Statements..................................................... F-13
SCHEDULE:
Schedule II - Valuation and Qualifying Accounts............................................................. F-29
</TABLE>
F - 7
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Health Management Systems, Inc.:
We have audited the accompanying supplemental consolidated financial statements
of Health Management Systems, Inc. and subsidiaries as listed in the
accompanying index. In connection with our audits of the supplemental
consolidated financial statements, we also have audited the supplemental
financial statement schedule as listed in the accompanying index. These
supplemental consolidated financial statements and supplemental financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements and supplemental financial statement schedule based on our
audits. We did not audit the financial statements of Health Care microsystems,
Inc. (HCm), a wholly owned consolidated subsidiary, for the years ended October
31, 1994 and 1993 and Health Information Systems Corporation (HISCo), a 43%
owned investee company, for the year ended October 31, 1995. The financial
statements of HCm reflect total assets constituting 13% in 1994 and total
revenue constituting 17% and 22% in 1994 and 1993, respectively, of the related
supplemental consolidated totals. The Company's investment in HISCo at October
31, 1995 was $6,746,000 and its equity in earnings of HISCo was $-0- for the
period from June 19, 1995 through October 31, 1995. The financial statements of
HCm and HISCo for the aforementioned periods were audited by other auditors
whose reports were furnished to us, and our opinion, insofar as it relates to
the amounts included for HCm and HISCo, is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements and supplemental financial
statement schedule give retroactive effect to the merger of Health Management
Systems, Inc. and CDR Associates, Inc. on April 29, 1996, which has been
accounted for as a pooling of interests as described in note 1(f) to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of Health Management Systems, Inc. and
subsidiaries after financial statements covering the date of consummation of the
business combination are issued.
In our opinion, based on our audits and the reports of the other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Health Management Systems,
Inc. and subsidiaries as of October 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 1995 in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination. Also, in our
opinion, based on our audits and the reports of the other auditors, the related
supplemental financial statement schedule, when considered in relation to the
basic supplemental consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
New York, New York
November 21, 1995, except as to note 17,
which is as of December 15, 1995 and
note 1(f) which is as of May 13, 1996.
F-8
<PAGE> 14
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarters Ended January 31, Years Ended October 31,
-------------------------- -----------------------------------
1996 1995 1995 1994 1993
------------ ---------- ----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Trade $ 23,238 18,770 80,305 63,275 53,938
Affiliate 2,152 2,215 9,422 9,901 6,011
------------------------ -----------------------------------
25,390 20,985 89,727 73,176 59,949
Cost of services:
Compensation 11,559 9,977 43,373 35,355 31,179
Data processing 2,155 1,713 8,144 6,872 4,361
Occupancy 1,670 1,621 6,529 5,911 5,196
Other 4,174 3,160 13,581 11,161 8,053
------------------------ -----------------------------------
19,558 16,471 71,627 59,314 48,989
------------------------ -----------------------------------
Operating margin before
amortization of intangibles 5,832 4,514 18,100 13,862 10,960
Amortization of intangibles 55 80 243 190 303
------------------------ -----------------------------------
Operating income 5,777 4,434 17,857 13,672 10,657
Other income (expense) :
Interest income (expense),net 251 191 942 464 (114)
Merger related expense 0 (968) (1,045) (59) 0
Equity in earnings of affiliate 123 0 0 0 0
------------------------ -----------------------------------
374 (777) (103) 405 (114)
Income before income tax
expense and extraordinary item 6,151 3,657 17,754 14,077 10,543
Income tax expense (2,408) (1,850) (8,152) (6,353) (4,766)
------------------------ -----------------------------------
Income before extraordinary item 3,743 1,807 9,602 7,724 5,777
Extraordinary loss, net of income tax benefit 0 0 0 0 (306)
------------------------ -----------------------------------
Net income 3,743 1,807 9,602 7,724 5,471
Accretion of preferred stock redemption value 0 0 0 0 (33)
------------------------ -----------------------------------
Net income attributable to
common shareholders $ 3,743 1,807 9,602 7,724 5,438
======================== ===================================
Net income per common share:
Income before extraordinary item $ 0.21 0.11 0.55 0.46 0.37
Extraordinary item 0.00 0.00 0 0.00 (0.02)
------------------------ -----------------------------------
Net income $ 0.21 0.11 0.55 0.46 0.35
======================== ===================================
Weighted average shares outstanding 18,008 17,065 17,407 16,674 15,508
======================== ===================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-9
<PAGE> 15
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 31, October 31, October 31,
1996 1995 1994
----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,843 10,801 14,962
Short-term investments 19,587 19,287 12,798
Accounts receivable, net 36,765 31,630 24,023
Other current assets 5,393 4,328 2,511
------- ------ -------
Total current assets 73,588 66,046 54,294
Property and equipment, net 5,822 5,874 6,611
Intangible assets, net 5,406 5,461 6,004
Capitalized software costs, net 1,031 865 721
Investments in affiliates 7,796 7,673 405
Other assets 865 1,465 1,742
------- ------ -------
Total assets $94,508 87,384 69,777
======= ====== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $12,722 14,842 10,413
Deferred revenue 5,184 3,941 4,733
Deferred income taxes 6,195 5,620 3,206
------- ------ -------
Total current liabilities 24,101 24,403 18,352
Other liabilities 1,907 1,739 1,048
Deferred income taxes 1,988 2,018 3,334
------- ------ -------
Total liabilities 27,996 28,160 22,734
------- ------ -------
Shareholders' equity:
Preferred stock - $.01 par value; 5,015,000 shares authorized;
none issued and outstanding 0 0 0
Common stock - $.01 par value; 20,000,000 shares authorized; 16,777,138
shares issued and outstanding at January 31, 1996; 16,390,762 shares issued
and outstanding at October 31, 1995;
15,976,423 shares issued and outstanding at October 31, 1994; 168 164 160
Capital in excess of par value 51,966 48,481 45,710
Retained earnings 13,858 10,115 1,185
Unrealized appreciation (depreciation) on short-term investments 520 464 (12)
------- ------ -------
Total shareholders' equity 66,512 59,224 47,043
------- ------ -------
Commitments and contingencies
Total liabilities and shareholders' equity $94,508 87,384 69,777
======= ====== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-10
<PAGE> 16
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock Capital In Retained (Depreciation) Total
-----------------------
Par Excess Of Earnings on Short-term Shareholders'
Shares Value Par Value (Deficit) Investments Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1992, as
originally reported 9,660,944 $97 12,029 (11,909) 0 217
Adjustments for CDR Associates, Inc.
pooling of interests 460,000 5 (4) 14 0 15
----------------------------------------------------------------------------
Balance at October 31, 1992,
as restated 10,120,944 102 12,025 (11,895) 0 232
Net income 0 0 0 5,471 0 5,471
Stock option activity 39,528 0 61 0 0 61
Unearned compensation 0 0 57 0 0 57
Effect of change in accounting
for short-term investments 0 0 0 0 170 170
Issuance of common stock 5,175,000 52 31,098 0 0 31,150
Exchange of redeemable preferred stock
for common stock 225,000 2 1,165 0 0 1,167
Common stock surrendered and retired (48,641) 0 (12) (82) 0 (94)
Accretion of preferred stock
redemption value 0 0 0 (33) 0 (33)
----------------------------------------------------------------------------
Balance at October 31, 1993 15,511,831 156 44,394 (6,539) 170 38,181
Net income 0 0 0 7,724 0 7,724
Stock option activity 348,659 3 480 0 0 483
Employee Stock Purchase Plan activity 115,933 1 801 0 0 802
Unearned compensation 0 0 35 0 0 35
Depreciation on
short-term investments 0 0 0 0 (182) (182)
----------------------------------------------------------------------------
Balance at October 31, 1994 15,976,423 160 45,710 1,185 (12) 47,043
Net income 0 0 0 9,602 0 9,602
Stock option activity 272,595 3 1,485 0 0 1,488
Employee Stock Purchase Plan activity 141,744 1 1,272 0 0 1,273
Unearned compensation 0 0 14 0 0 14
Appreciation on
short-term investments 0 0 0 0 476 476
Adjustment to reflect change in Health
Care microsystems, Inc. fiscal year 0 0 0 (672) 0 (672)
----------------------------------------------------------------------------
Balance at October 31, 1995 16,390,762 164 48,481 10,115 464 59,224
Net income (unaudited) 0 0 0 3,743 0 3,743
Stock option activity (unaudited) 259,211 3 1,913 0 0 1,916
Employee Stock Purchase Plan
activity (unaudited) 127,165 1 1,572 0 0 1,573
Appreciation on
short-term investments (unaudited) 0 0 0 0 56 56
============================================================================
Balance at January 31, 1996 (unaudited) 16,777,138 $168 51,966 13,858 520 66,512
============================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-11
<PAGE> 17
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Quarters Ended January 31, Years Ended October 31,
-------------------------- --------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ---------- ----------
Operating activities: (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income $ 3,743 1,807 9,602 7,724 5,471
Adjustments to reconcile net income to net cash
(used in) provided by
operating activities:
Depreciation and amortization 720 692 2,750 2,524 1,809
Amortization of intangibles 55 80 243 190 303
Write-down of software development costs 0 0 0 332 0
Accretion of debt discounts 0 0 0 0 10
Amortization of unearned compensation 0 3 14 35 57
Amortization of deferred financing costs 0 0 0 0 110
(Gain) loss on disposal of assets 0 (19) (19) 0 5
Deferred tax expense 545 222 1,203 1,007 1,684
Equity in earnings of affiliate (123) 0 0 0 0
Unrealized appreciation on short-term investments 0 8 8 0 0
Extraordinary loss, net of income tax benefit 0 0 0 0 306
Other 0 (3) (3) 40 19
Changes in assets and liabilities:
Increase in accounts receivable (5,135) (3,773) (9,106) (7,031) (3,678)
(Increase) decrease in other current assets (1,065) 453 (1,046) (159) (119)
(Decrease) increase in accounts payable and
accrued expenses (2,120) (516) 5,165 1,266 3,084
Increase (decrease) in deferred revenue 1,243 (294) (728) (755) 1,334
Increase (decrease) in other assets and
liabilities, net 768 733 636 (386) 877
------- ------- ------- ------- --------
Total adjustments (5,112) (2,414) (883) (2,937) 5,801
------- ------- ------- ------- --------
Net cash (used in) provided by
operating activities (1,369) (607) 8,719 4,787 11,272
------- ------- ------- ------- --------
Investing activities:
Capital asset expenditures (555) (300) (1,503) (2,827) (3,845)
Software capitalization (279) (254) (840) (721) (527)
Investments in affiliates 0 (522) (7,268) 0 0
Intangibles resulting from acquisitions 0 0 0 (550) 0
Purchase of short-term investments (244) (4,958) (7,252) (9,025) (1,763)
Proceeds from sale of short-term investments 0 685 1,788 0 0
------- ------- ------- ------- --------
Net cash used in investing activities (1,078) (5,349) (15,075) (13,123) (6,135)
------- ------- ------- ------- --------
Financing activities:
Proceeds from issuance of common stock, net 1,916 846 1,201 802 31,129
Proceeds from exercise of stock options 1,573 326 1,083 483 61
Proceeds from bank borrowings 0 0 0 0 500
Repayment of notes payable 0 (342) (342) (479) (6,097)
Decrease in deferred financing costs 0 0 0 0 449
Repayment of long-term obligations:
Deferred payment notes 0 0 0 0 (8,100)
Subordinated debentures 0 0 0 0 (6,000)
Other 0 0 0 0 (87)
------- ------- ------- ------- --------
Net cash provided by financing activities 3,489 830 1,942 806 11,855
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash equivalents 1,042 (5,126) (4,414) (7,530) 16,992
Cash and cash equivalents at beginning of period 10,801 14,082 14,962 22,492 5,500
Adjustment to cash to reflect change in Health Care
microsystems, Inc. fiscal year 0 253 253 0 0
======= ======= ======= ======= ========
Cash and cash equivalents at end of period $ 11,843 9,209 10,801 14,962 22,492
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
F-12
<PAGE> 18
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Founded in 1974, Health Management Systems, Inc. ("HMSY" or the "Company")
furnishes proprietary data processing and information management services and
software to providers of health care, public and commercial payors of health
care expenses, and other companies serving the health care industry.
(a) Recapitalization
On March 23, 1989, HMSY underwent a recapitalization in which its
outstanding capital stock was acquired by HMS Holdings Corporation ("HMS
Holdings"). Subsequently, HMS Holdings was merged with and into HMSY.
(b) Acquisition of Quality Medi-Cal Adjudication, Inc.
On February 6, 1990, HMSY acquired all of the outstanding capital stock of
Quality Medi-Cal Adjudication, Incorporated ("QMA") from National Medical
Enterprises, Inc. ("NME"). QMA provides hospitals, principally in California,
with electronic billing and follow-up services for claims submitted to Medi-Cal
and various commercial insurance carriers.
In connection with the acquisition of QMA, the Company entered into an
agreement that granted a service credit of 50% of all charges incurred by health
care facilities owned by NME ("service credits"). This agreement obligated HMSY
to provide a total of up to $1,600,000 in service credits for the period
February 6, 1990 to May 6, 1995. As of October 31, 1995, the service credit
obligation was satisfied in full. The service credit obligation was recorded at
its estimated net present value of $1,266,000, utilizing a discount rate of 11%.
Service credits issued in connection with this obligation for the years ended
October 31, 1995, 1994, and 1993 were $234,000, $307,000, and $317,000,
respectively.
(c) Initial Public Offering
In December 1992, the Company completed the sale of 5,175,000 shares of
common stock as part of an underwritten initial public offering. The offering
price of the stock was $6.67 per share. The Company realized net proceeds from
the offering of $31,150,000 after deducting the underwriters' discount and other
costs of the offering. Also in connection with the initial public offering, the
Company: (i) issued 225,000 shares of common stock in exchange for all of the
redeemable preferred stock then outstanding and held by affiliates, (ii) issued
393,750 stock options to certain members of management with an exercise price
equal to the initial public offering price, and (iii) renegotiated the terms of
the unredeemed deferred payment notes held by certain members of management to
reduce the rate of interest on such notes.
(d) Merger with Health Care microsystems, Inc.
On January 18, 1995, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") among the Company; HCM Acquisition Corp.
("Sub"), a wholly owned subsidiary of the Company; Health Care microsystems,
Inc. ("HCm"); and all shareholders of HCm (the "Principals"). HCm is a provider
of microcomputer-based decision support software and services to the health care
industry. Effective as of February 14, 1995 (the "Effective Time"), the Company
consummated the merger with HCm in accordance with the Merger Agreement, as
amended.
Pursuant to the Merger Agreement, HCm merged with Sub (the "Merger"), with
the result that HCm became a wholly-owned subsidiary of the Company. Each share
of HCm capital stock issued and outstanding immediately prior to the Effective
Time of the Merger was converted into 156.9039 shares of the Company's common
stock, or an aggregate of 2,250,002 shares.
F-13
<PAGE> 19
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Merger Agreement provided that the Company would undertake to register
the common stock issued to effect the Merger with the Securities and Exchange
Commission ("the Commission") for resale under the Securities Act of 1933, as
amended. Pursuant thereto, the Company filed a Registration Statement on Form
S-3 (File No. 33-91518) with the Commission, which Registration Statement became
effective on July 7, 1995. Moreover, pursuant to the Merger Agreement, one of
the Principals was elected as a director of the Company.
As of the Effective Time, each of the four Principals entered into
employment agreements (each, an "Employment Agreement") with HCm. The term of
each Employment Agreement continues until December 31, 1996, subject to earlier
termination as provided therein.
The Merger has been accounted for using the pooling of interests method of
accounting. Accordingly, the accompanying consolidated financial statements have
been retroactively restated for all periods presented to include the financial
position, results of operations, and cash flows of HCm. In addition, the
accompanying consolidated financial statements reflect certain adjustments to
conform the accounting policies of the two companies, and to reflect the
adoption of Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
"Accounting for Certain Investments in Debt and Equity Securities."
HCm previously used the fiscal year ended December 31 for its financial
reporting. To conform to the Company's October 31 fiscal year end, HCm's
operating results for the period November 1, 1994 through December 31, 1994 have
been included in the operating results of the Company for the fiscal years ended
October 31, 1995 and 1994. The resulting duplication of revenue and net income
of HCm for the period November 1, 1994 through December 31, 1994 amounted to
$2,842,000 and $672,000, respectively, which has been adjusted by a $672,000
charge to retained earnings during the year ended October 31, 1995.
(e) Formation of Health Information Systems Corporation
At October 31, 1995, the Company had a $6,746,000 investment, which
represented approximately a 43% ownership interest, in Health Information
Systems Corporation ("HISCo"), a privately owned Delaware corporation. The
investment in HISCo has been accounted for using the equity method of
accounting. Under the equity method, the Company recognizes in earnings its
proportionate share of net income or loss of HISCo. During June 1995, the
Company, together with Welsh, Carson, Anderson & Stowe VI, L.P. ("WCAS VI"), a
Delaware limited partnership affiliated with Welsh, Carson, Anderson & Stowe
("WCAS"), affiliates of WCAS, and certain of their respective executive officers
and partners (collectively, the "Original Purchasers"), formed the predecessor
of HISCo for the purpose of investing in health care information management
companies that require significant additional investment and maturation. At such
time, the Company and certain of its executive officers purchased 1,250,000
shares of HISCo common stock ("HISCo Stock") for an aggregate purchase price of
$12,500. WCAS VI and its affiliates subscribed for an additional 1,250,000
shares of HISCo Stock on identical terms. As used below, the term "HISCo" refers
both to HISCo and its predecessor.
In connection with HISCo's initial acquisition, effective June 30, 1995,
the Company subscribed for 560,000 shares of HISCo Stock with an aggregate
subscription price of $5,600,000 and WCAS VI subscribed for 650,000 shares of
HISCo Stock with aggregate subscription price of $6,500,000.
F-14
<PAGE> 20
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
To finance additional proposed acquisitions, effective October 31, 1995
(the "Closing Date") the Original Purchasers, affiliates of several of the
original purchasers; several independent investors (collectively with the
Original Purchasers, "the Purchasers"), and HISCo entered into a subscription
agreement (the "Subscription Agreement") which superseded in its entirety an
earlier subscription agreement between the Original Purchasers and HISCo dated
as of June 19, 1995. Pursuant to the Subscription Agreement, the Company,
certain of its executive officers, affiliates, and the independent investors
purchased 142,798 shares of HISCo Stock as of the Closing Date for an aggregate
purchase price of $1,428,000, and WCAS VI and its affiliates purchased 47,199
shares of HISCo Stock for an aggregate purchase price of $472,000. The
Subscription Agreement contemplated that, for a period of three years commencing
on the Closing Date, HISCo may require the Purchasers to purchase, on a pro rata
basis, up to an aggregate additional 8,597,503 shares of HISCo common stock
("Additional Shares") for a per share purchase price of $10.00, or an aggregate
purchase price of $85,975,000. With respect to each acquisition, the
Subscription Agreement requires HISCo to deliver written notice to the
Purchasers specifying, among other information, the terms of the proposed
acquisition and the aggregate number of Additional Shares that HISCo proposes to
sell to the Purchasers. Purchasers other than the Company and WCAS VI may decide
not to purchase all or any portion of their respective pro rata amount of
Additional Shares, in which event the Company and WCAS VIare required to
purchase the Additional Shares so declined. Neither the Company nor WCAS VI may
decline to purchase their respective pro rata portions of Additional Shares. The
Company and WCAS VI have committed to purchase Additional Shares having an
aggregate purchase price of $41,367,000 and $40,560,000, respectively.
The Company and HISCo entered into an agreement, dated as of October 31,
1995 (the "HISCo Agreement"), pursuant to which the Company will provide HISCo
with certain services ("Basic Services"), including executive, acquisition
support, and corporate support services. For these Basic Services, the Company
is entitled to receive a fee, payable monthly, calculated at the Company's then
current standard hourly rates plus 20%. The Company, in addition, may provide to
subsidiaries ("Subsidiaries") of HISCo, and such Subsidiaries may provide to the
Company, additional services on such terms as the parties may mutually agree.
The term of the HISCo Agreement continues until the later of (i) June 30, 2000
or (ii) the expiration of any outstanding work order related to additional
services. The Company believes that the terms of the HISCo Agreement are fair
and reasonable and are no less favorable to the Company than those that could
have been obtained with respect to comparable engagements with independent third
parties. In fiscal year 1995, the Company received approximately $545,000 in
fees from HISCo for services provided pursuant to the HISCo Agreement.
F-15
<PAGE> 21
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Condensed financial information of HISCo as of and for the period from June
19, 1995 through October 31, 1995 is summarized below:
<TABLE>
<CAPTION>
As of October 31 1995
- - --------------------------------------------------------------------------------
<S> <C> <C>
HISCo Consolidated Balance Sheet:
Current assets $ 6,318,000
- - --------------------------------------------------------------------------------
Total assets $ 15,833,000
- - --------------------------------------------------------------------------------
Current liabilities $ 1,807,000
- - --------------------------------------------------------------------------------
Stockholders' equity $ 14,026,000
- - --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 15,833,000
- - --------------------------------------------------------------------------------
Four Months Ended October 31 1995
- - --------------------------------------------------------------------------------
HISCo Consolidated Statement of Operations:
Revenue $ 5,284,000
- - --------------------------------------------------------------------------------
Operating margin $ 550,000
- - --------------------------------------------------------------------------------
Net income $ 1,000
- - --------------------------------------------------------------------------------
</TABLE>
(f) Merger with CDR Associates, Inc.
Effective as of April 29, 1996 (the "CDR Effective Time"), the Company
consummated a merger with CDR Associates, Inc. ("CDR"), in accordance with an
Agreement and Plan of Merger, (the "CDR Merger Agreement") among the Company,
CDR Acquisition Corp. ("CDR Sub"), a wholly-owned subsidiary of the Company,
CDR, and all Shareholders of CDR (the "CDR Principals"). CDR is a supplier of
third-party liability recovery services to the health care industry.
Pursuant to the CDR Merger Agreement, CDR merged with CDR Sub (the "CDR
Merger"), with the result that CDR became a wholly-owned subsidiary of the
Company. Each share of CDR capital stock issued and outstanding immediately
prior to the CDR Effective Time of the CDR Merger was converted into 460 shares
of the Company's common stock, or an aggregate of 460,000 shares.
The CDR Merger Agreement provides that the Company will undertake to
register the common stock issued to effect the merger with the Commission for
resale under the Securities Act of 1933. Moreover, the CDR Merger Agreement
contains not-to-compete provisions which prohibit the CDR Principals from
competing with the businesses of CDR and the Company during the period of their
employment and for a period of three years thereafter.
The merger with CDR has been accounted for using the pooling of interests
method of accounting. Accordingly, the accompanying supplemental consolidated
financial statements have been retroactively restated for all periods presented
to include the financial position, results of operations, and cash flows of CDR.
These restated supplemental consolidated financial statements will become the
historical consolidated financial statements of the Company upon issuance of its
unaudited interim financial statements for the quarter ended April 30, 1996.
F-16
<PAGE> 22
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(g) Principles of Consolidation
The consolidated financial statements include the accounts of HMSY and its
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(h) Cash and Cash Equivalents
For purposes of financial reporting, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
(including money market instruments of $2,741,000 and $13,975,000 at October 31,
1995 and 1994, respectively) to be cash equivalents.
(i) Short-Term Investments
As of October 31, 1993, the Company adopted SFAS 115. Under SFAS 115, debt
securities that the Company has both the intent and ability to hold to maturity
are carried at amortized cost. Debt securities that the Company does not have
the intent and ability to hold to maturity are classified either as "available
for sale" or as "trading" and are carried at fair value. Unrealized gains and
losses on securities classified as available for sale are carried as a separate
component of shareholders' equity. Unrealized gains and losses on securities
classified as trading are reported in earnings. Management determines the
appropriate classification of its investments in debt and equity securities at
the time of purchase and reevaluates such determination at each balance sheet
date.
Included in short-term investments at October 31, 1994 is a trading
security which is stated at fair value, determined by reference to closing
quoted market prices at the balance sheet date. Realized and unrealized gains
and losses for the trading security are charged or credited to operations and
are determined using the first-in, first-out method. For the years ended October
31, 1995 and 1994, the Company recognized $39,000 in unrealized gains and
$293,000 in unrealized losses, respectively.
Also included in short-term investments are investments classified as
available for sale and carried at fair value. Unrealized gains and losses on
these assets are reported as a separate component of shareholders' equity. At
October 31, 1995 and 1994, the Company recorded unrealized appreciation of
$464,000 and unrealized depreciation of $12,000, respectively, on these
short-term investments.
(j) Depreciation and Amortization of Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the property and equipment utilizing the
straight-line method. Amortization of leasehold improvements is provided over
the estimated useful lives of the assets or the terms of the leases, whichever
is shorter, utilizing the straight-line method. The estimated useful lives are
as follows:
Equipment 3-5 years
Leasehold improvements 5-8 years
Furniture and fixtures 5-7 years
(k) Intangible Assets
Intangible assets have been recorded primarily as a result of the
recapitalization of the Company in 1989 and the acquisition of QMA in 1990.
Intangible assets consist of software, non-compete agreements, and goodwill,
which are being amortized on a straight-line basis over three years, 43 months,
and between 10 and 40 years, respectively.
The Company assesses the recoverability of the carrying amount of
intangible assets through consideration of the estimated future cash flows to be
derived from the use of such assets. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of." The impact of the adoption of SFAS 121 was not material to the Company's
consolidated financial statements.
F-17
<PAGE> 23
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(l) Revenue Recognition
The Company generally recognizes revenue for financial reporting purposes
when billings are submitted to the third-party payors as a consequence of
services performed by the Company for a client. Several client contracts contain
periodic fee limitations that the Company believes will be exceeded in the
normal course of business. As a result, the fees allowable under these contracts
are recognized on a straight-line basis over the fee limitation period as
services are performed, and amounts billed in excess of revenue recognized are
deferred. Other contracts have sliding fee scales for which revenue is fairly
predictable. For these, the Company recognizes revenue, at the estimated
effective fee rate, ratably over the client's contract year. Finally, certain
contracts are subject to fixed-fee arrangements covering specified periods,
which the Company realizes on a straight-line basis over the corresponding
periods.
The Company recognizes revenue from consulting services as the services are
provided. Revenue from software products sold to customers under license
agreements is deferred and recognized as revenue upon software installation and
satisfaction of significant Company obligations, if any. Revenue from ongoing
maintenance agreements is deferred and recognized as revenue on a straight-line
basis over the periods of the respective maintenance agreements.
Trade accounts receivable are reflected net of an allowance for doubtful
accounts of $296,000 and $269,000 at October 31, 1995 and 1994, respectively.
(m) Software Development Costs
Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed"
requires that certain software development costs be capitalized. In accordance
with SFAS 86, the Company capitalizes software development costs (related to
software developed for resale) incurred subsequent to the establishment of
technological feasibility of the product, including costs incurred to develop
upgrades subsequent to the commercial release of the product. Amortization of
software development costs is determined on a product-by-product basis to be the
greater of the amount computed on a straight-line basis over the expected
economic life of the product, generally estimated to be 36-60 months, or using
the ratio of current gross revenue to total current and anticipated future gross
revenue, whichever is greater. Software development costs are stated at original
cost of $3,929,000 and $3,061,000 less accumulated amortization of $3,064,000
and $2,340,000 at October 31, 1995 and 1994, respectively. Amortization expense
for the years ended October 31, 1995, 1994, and 1993 was $587,000, $486,000, and
$408,000, respectively. During 1994, software development costs were written
down by $332,000 to reflect the related net realizable value.
(n) Income Taxes
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
the asset and liability method of SFAS 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The cumulative effect of this accounting change was not material
to the Company's consolidated financial statements.
F-18
<PAGE> 24
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Pursuant to the asset and liability method under SFAS 96, which was applied
in 1993 and 1992, deferred tax assets and liabilities were recognized for all
events that had been recognized in the financial statements. Under SFAS96, the
future tax consequences of recovering assets or settling liabilities at their
financial statement carrying amounts were considered in calculating deferred
taxes. Generally, SFAS96 prohibited consideration of any other future events in
calculating deferred taxes.
(o) Net Income Per Common Share
Net income per common share has been computed by dividing net income
attributable to common shareholders by the weighted average number of common
shares outstanding during each year. Common stock equivalents utilizing the
treasury stock method are included in the computation of weighted average number
of shares outstanding for the years ended October 31, 1995, 1994, and 1993. (See
Note 17 of Notes to Consolidated Financial Statements.)
(p) Reclassifications
Certain reclassifications were made to prior year amounts to conform to the
1995 presentation.
(q) Stock Dividend
On February 28, 1995, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% stock dividend, payable on or
about March 31, 1995, to holders of record of the Company's common stock as of
March 17, 1995. The effect of the stock dividend has been retroactively recorded
in the accompanying consolidated financial statements. (See Note 17 of Notes to
Consolidated Financial Statements.)
(r) Interim Unaudited Financial Information
The accompanying supplemental consolidated balance sheet at January 31,
1996, the supplemental consolidated statements of operations and cash flows for
the three month periods ended January 31, 1996 and 1995, and the supplemental
consolidated statement of shareholders' equity for the three month period ended
January 31, 1996 of Health Management Systems, Inc. and the related information
included in these notes to the supplemental consolidated financial statements
are unaudited. In the opinion of management, the supplemental consolidated
financial statements reflect all 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 of interim periods are not
necessarily indicative of the results to be expected for the entire year.
2. ACCOUNTS RECEIVABLE
Accounts receivable as of October 31, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------------------
<S> <C> <C>
Trade $ 31,517,000 23,187,000
Affiliates 113,000 836,000
- - --------------------------------------------------------------------------------
$ 31,630,000 24,023,000
- - --------------------------------------------------------------------------------
</TABLE>
F-19
<PAGE> 25
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
3. FEES HELD IN ESCROW
The Company is obligated to maintain a portion of fees received from two
clients in escrow accounts. The Company's obligation to maintain such fees in
escrow generally terminates at either: (a) the earlier of six years from the
dates of service associated with fees generated and settlement of the client's
Medicaid and/or Medicare audits for each applicable year, and/or (b) the
termination of contract. Due to the 1994 renewal of one client contract that
eliminated future escrow requirements and the Company's fulfillment of its
maximum escrow deposit for the second client, the Company completed its
obligation to make escrow deposits as of October 31, 1994. For the years ended
October 31, 1995, 1994, and 1993, revenue subject to such escrow requirements
approximated $0, $1,202,000, and $4,312,000, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment as of October 31, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 9,697,000 8,721,000
Leasehold improvements 3,438,000 3,259,000
Furniture and fixtures 2,034,000 1,920,000
- - ---------------------------------------------------------------------------------------------------------
15,169,000 13,900,000
Less accumulated depreciation and amortization (9,295,000) (7,289,000)
- - ---------------------------------------------------------------------------------------------------------
$ 5,874,000 6,611,000
- - ---------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense related to property and equipment
charged to operations for the years ended October 31, 1995, 1994, and 1993 was
$2,205,000, $2,038,000, and $1,401,000, respectively.
5. INTANGIBLE ASSETS
Intangible assets as of October 31, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
Accumulated
Cost Amortization Balance
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1995
Software costs $ 10,356,000 (10,312,000) 44,000
Non-compete agreements 4,500,000 (4,500,000) 0
Goodwill 6,487,000 (1,070,000) 5,417,000
- - --------------------------------------------------------------------------------------------------------
$ 21,343,000 (15,882,000) 5,461,000
- - --------------------------------------------------------------------------------------------------------
1994
Software costs $ 10,656,000 (10,238,000) 418,000
Non-compete agreements 4,500,000 (4,500,000) 0
Goodwill 6,487,000 (901,000) 5,586,000
- - --------------------------------------------------------------------------------------------------------
$ 21,643,000 (15,639,000) 6,004,000
- - --------------------------------------------------------------------------------------------------------
</TABLE>
Amortization expense related to intangible assets charged to operations for
the years ended October 31, 1995, 1994, and 1993, was $243,000, $190,000, and
$303,000, respectively.
F-20
<PAGE> 26
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of October 31, 1995 and 1994
consisted of the following:
<TABLE>
<CAPTION>
1995 1994
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation $ 8,324,000 4,694,000
Accrued computer-related costs 1,479,000 1,065,000
Accrued professional fees 1,371,000 1,223,000
Accounts payable and other accrued expenses 3,668,000 3,431,000
- - --------------------------------------------------------------------------------------------------------
$ 14,842,000 10,413,000
- - --------------------------------------------------------------------------------------------------------
</TABLE>
7. CREDIT FACILITIES
On April 26, 1993, the Company entered into a $10,000,000 unsecured
revolving credit facility with a major money center financial institution. The
credit facility has a term of three years, carries an unused commitment fee of
50 basis points, and bears interest at the institution's prime lending rate, or
LIBOR plus 150 basis points, at the Company's option. The revolving credit
facility contains, among other things, restrictions on additional borrowings,
capital expenditures, leases, sales of assets, and payments of dividends. The
revolving credit facility also contains covenants that require the Company to
maintain minimum tangible consolidated shareholders' equity and limit
debt-to-equity and debt-to-asset relationships as defined in the agreement. As
of October 31, 1995 and 1994, no amounts were outstanding under this credit
facility. As of October 31, 1995, the Company had a $50,000 letter of credit
included under this credit facility. In December 1992, the Company utilized
$6,000,000 of the proceeds of the initial public offering to repay the
$3,000,000 outstanding revolving credit loan and $3,000,000 term loan related to
its prior credit agreement.
The Company had a note payable to a bank at October 31, 1993 in the amount
of $403,000. The note was payable in monthly principal installments plus
interest at the bank's prime lending rate plus 1%. The note carried an original
maturity date of December 30, 1993, but was subsequently renewed by the bank
until December 31, 1994. This note payable was paid in full during the year
ended October 31, 1994.
In December 1992, the Company also utilized $9,100,000 of the proceeds of
its initial public offering to repay a portion of the outstanding debt to
affiliates. The indebtedness repaid included: (a) $3,100,000 of deferred payment
notes, and (b) $6,000,000 principal amount of subordinated debentures. In June
1993, the Company repaid the remaining $5,000,000 of the deferred payment notes.
Concurrent with the prepayment of the subordinated debentures, the Company
recorded an extraordinary loss of $306,000, net of $251,000 income tax benefit,
representing the write-off of the unamortized discount related to the
subordinated debentures.
Cash interest payments including bank charges attributable to the
aforementioned debt for the years ended October 31, 1995, 1994, and 1993 were
$60,000, $88,000, and $1,008,000, respectively. Cash interest payments,
including bank charges, attributable to the aforementioned debt for the three
months ended January 31, 1996 and 1995 were $13,000 and $13,000, respectively.
F-21
<PAGE> 27
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
8. INCOME TAXES
Income tax expense for the years ended October 31, 1995, 1994, and 1993 was
comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ (4,677,000) (3,286,000) (2,459,000)
State and local (2,272,000) (2,060,000) (623,000)
- - -------------------------------------------------------------------------------------------------------
(6,949,000) (5,346,000) (3,082,000)
- - -------------------------------------------------------------------------------------------------------
Deferred tax (expense) benefit:
Federal (1,285,000) (578,000) (916,000)
State and local 82,000 (429,000) (768,000)
- - -------------------------------------------------------------------------------------------------------
(1,203,000) (1,007,000) (1,684,000)
- - -------------------------------------------------------------------------------------------------------
Income tax expense, net $ (8,152,000) (6,353,000) (4,766,000)
- - -------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the income tax expense to the federal statutory rate of
34% follows:
<TABLE>
<CAPTION>
1995 1994 1993
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
computed at Federal
statutory rate $ (6,036,000) (34.0)% (4,786,000) (34.0)% (3,585,000) (34.0)%
State and local tax expense,
net of federal benefit (1,445,000) (8.1) (1,643,000) (11.7) (918,000) (8.7)
Amortization of goodwill (55,000) (0.3) (55,000) (0.4) (55,000) (0.5)
Merger related costs (355,000) (2.0) 0 0.0 0 0.0
Other, net (261,000) (1.5) 131,000 0.9 (208,000) (2.0)
- - -----------------------------------------------------------------------------------------------------
Total income tax expense $ (8,152,000) (45.9)% (6,353,000) (45.1)% (4,766,000) (45.2)%
- - -----------------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE> 28
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
8. INCOME TAXES, CONTINUED
Deferred income taxes are recognized for the future tax consequences of
temporary differences between the financial statement and tax bases of assets
and liabilities. The types of temporary differences that give rise to the
deferred tax liability, and the effect on the deferred income tax expense of
changes in those temporary differences, are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $ (1,609,000) (1,263,000) (2,737,000)
Amortization of software costs (186,000) 168,000 (48,000)
Fees held in escrow 117,000 107,000 (553,000)
Depreciable assets (214,000) 288,000 391,000
Unbilled costs (6,000) 17,000 (80,000)
Non-compete agreements, net 0 (224,000) (127,000)
Accrued expenses 403,000 81,000 206,000
Deferred revenue (543,000) (723,000) 864,000
Deferred rent 72,000 352,000 0
Contract termination contingency 0 0 529,000
Other 763,000 190,000 (129,000)
- - -------------------------------------------------------------------------------------------------------
Deferred income tax expense $ (1,203,000) (1,007,000) (1,684,000)
- - -------------------------------------------------------------------------------------------------------
</TABLE>
Temporary differences that give rise to a significant portion of the
deferred tax assets and deferred tax liabilities at October 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Deferred tax assets Deferred tax liabilities
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable/deferred items $ 509,000 6,793,000
Property and equipment 915,000 437,000
Accrued expenses 878,000 0
Contract termination contingency 0 3,260,000
Other 1,243,000 693,000
- - --------------------------------------------------------------------------------------------------------
Subtotal 3,545,000 11,183,000
Valuation allowance 0 --
- - --------------------------------------------------------------------------------------------------------
Total deferred taxes 3,545,000 11,183,000
- - --------------------------------------------------------------------------------------------------------
Net deferred tax liability $ 0 7,638,000
- - --------------------------------------------------------------------------------------------------------
</TABLE>
Based on the Company's financial history and current situation, management
believes it is more likely than not that the Company will realize the benefits
of the deferred tax assets as shown above. Accordingly, no valuation allowance
has been provided.
Cash payments attributable to income taxes for the years ended October 31,
1995, 1994, and 1993 were $6,355,000, $4,917,000, and $4,185,000, respectively.
Cash payments attributable to income taxes for the three months ended January
31, 1996 and 1995 were $1,896,000 and $723,000, respectively.
F-23
<PAGE> 29
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
9. PROFIT SHARING AND 401(K) PLAN
The Company has a discretionary defined contribution profit sharing plan in
which a substantial number of its employees participate. For the years ended
October 31, 1995, 1994, and 1993, profit sharing expense was $800,000, $582,000,
and $657,000, respectively.
Effective January 1, 1992, the Company amended its profit sharing plan to
include for its employees a 401(k) plan, which permits an employee to contribute
a portion of the employee's compensation, subject to certain limitations. At its
discretion, the Company may make annual contributions to the 401(k) plan for the
benefit of participating employees. For the years ended October 31, 1995, 1994,
and 1993, 401(k) plan expense was $543,000, $368,000, and $315,000,
respectively.
10. EMPLOYEE STOCK PURCHASE PLAN
On May 28, 1993, the Board of Directors adopted the Health Management
Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently
approved by shareholders at the annual meeting of Shareholders held on February
28, 1994. The Company has reserved for issuance up to 1,125,000 shares of common
stock pursuant to the ESPP, which is intended to qualify as an "employee stock
purchase plan" within the meaning of Section 423 of the Internal Revenue Code of
1986. Originally, all full-time employees of the Company and its subsidiaries
could elect to participate in the ESPP if they had been employed at least six
months prior to January 1 of the year in which they desired to commence
participation and if their customary employment was a minimum of 20 hours per
week. On November 30, 1994, the Board of Directors amended the eligibility
requirements of the ESPP, which action was subsequently approved by shareholders
at the Annual Meeting of Shareholders held on March 7, 1995. The amendment
provides that all full-time employees of the Company and its subsidiaries may
elect to participate in the ESPP without regard to length of service if their
customary employment is a minimum of 20 hours per week.
For the year ended October 31, 1995, the Company had sold 141,744 shares of
common stock pursuant to the ESPP for aggregate consideration of $1,273,000,
which activity is reflected in the accompanying financial statements.
11. STOCK OPTION PLAN AND RESTRICTED STOCK PURCHASE PLAN
Effective May 31, 1989, the Company adopted the Health Management Systems,
Inc. Stock Option and Restricted Stock Purchase Plan (the "Plan") under which:
(a) options can be granted to purchase shares of the Company's common stock at
an exercise price equal to (incentive stock options) or less than (non-qualified
stock options) the estimated fair market value of the Company's common stock, or
(b) rights can be granted in the form of an award to purchase shares of the
Company's common stock at a price equal to, more than, or less than the
estimated fair market value of the Company's common stock. Subsequent amendments
to the Plan, which have been approved by shareholders, have increased the number
of shares allowed to be issued under the Plan to 3,690,000 shares.
Stock option activity for the years ended October 31, 1995, 1994, and 1993
was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding, beginning of period 2,143,641 1,921,679 987,228
Options granted 906,042 626,120 975,452
Options surrendered (22,945) (55,499) (1,473)
Options exercised (272,595) (348,659) (39,528)
- - --------------------------------------------------------------------------------------------------------
Options outstanding, end of period 2,754,143 2,143,641 1,921,679
- - --------------------------------------------------------------------------------------------------------
Options exercisable, end of period 1,774,925 1,425,509 1,250,370
- - --------------------------------------------------------------------------------------------------------
Average exercise price of options granted $ 16.97 9.99 7.49
- - --------------------------------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE> 30
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
11. STOCK OPTION PLAN AND RESTRICTED STOCK PURCHASE PLAN, CONTINUED
The stock options become exercisable on various dates through December 1998
and expire at various dates through October 2005. As of October 31, 1995, no
stock appreciation rights or stock purchase awards had been granted.
For financial reporting purposes, the majority of the stock options granted
during 1992 and 1991 have been accounted for as having been issued with an
exercise price below fair market value at the time of grant. The amount computed
by multiplying the number of shares covered by the stock options granted by the
difference between the exercise price per share ($4.04 and $1.30 in 1992 and
1991, respectively) and the deemed fair market value per share at the time of
grant ($4.89 and $2.01 in 1992 and 1991, respectively), or $325,000 and
$486,000, is reflected at the date of grant as unearned compensation and capital
in excess of par value in the stockholders' equity section of the balance sheet.
Compensation expense of $14,000, $35,000, and $57,000 was recognized in 1995,
1994, and 1993, respectively, with respect to options that vested during the
respective years, resulting in a corresponding reduction in the initially
recorded unearned compensation amount.
12. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP") was
adopted by the Board of Directors on November 30, 1994, which action was
subsequently approved by shareholders at the Annual Meeting of Shareholders held
on March 7, 1995. The purpose of the NEDP is to provide compensation in the form
of equity participation in the Company, in consideration of the services
provided by directors not employed by the Company. Under the NEDP, directors of
the Company who are not employees of the Company or its subsidiaries will be
granted options to purchase common stock of the Company. Options for the
purchase of up to 112,500 shares of common stock may be granted under the NEDP
and the Company will reserve the same number of shares for issuance. The options
available for grant will be increased to the extent any granted options expire
or terminate unexercised.
The NEDP provides that a grant of options to purchase 1,500 shares of
common stock will be made to each non-employee director during the fourth fiscal
quarter of each fiscal year commencing with fiscal year 1995. The exercise price
of options issued under the NEDP will be the fair market value of the common
stock as of the date of grant, and must be paid in cash at the time of exercise.
Options granted under the NEDP will have a term of ten years, with 25% of the
options exercisable immediately upon grant and an additional 25% exercisable at
the end of each of the three subsequent fiscal years. In the event that the
holder of options granted under the NEDP ceases to be a director for any reason,
all outstanding vested options will be exercisable for one year following the
date the director's service on the Board of Directors of the Company terminates,
or until their expiration date, whichever period is shorter. Unvested options
will lapse immediately upon cessation of the director's service on the Board of
Directors. No options may be granted under the NEDP after October 31, 2004.
The NEDP is administered by the Compensation Committee of the Company's
Board of Directors. The Compensation Committee may amend the NEDP, except that
shareholder approval is required to increase the number of shares available
under the NEDP other than for anti-dilution purposes, to change the class of
participants eligible to participate in the NEDP, or to increase materially the
benefits to such participants. The provisions of the NEDP relating to the number
of options to be awarded to directors, the exercise price of such options, and
the timing of awards may not be amended more than once every six months, other
than to conform to changes in certain statutes.
F-25
<PAGE> 31
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
12. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN, CONTINUED
NEDP stock option activity for the year ended October 31, 1995 was as
follows:
<TABLE>
<CAPTION>
1995
- - --------------------------------------------------------------------------------------------------------
<S> <C>
Options outstanding, beginning of period 0
Options granted 11,250
Options surrendered 0
Options exercised 0
- - --------------------------------------------------------------------------------------------------------
Options outstanding, end of period 11,250
- - --------------------------------------------------------------------------------------------------------
Options exercisable, end of period 2,813
- - --------------------------------------------------------------------------------------------------------
Average exercise price of options granted $ 17.50
- - --------------------------------------------------------------------------------------------------------
</TABLE>
13. COMMITMENTS
The Company leases office space and equipment under operating leases which
expire at various dates through May 31, 2003. The lease agreements provide for
rent escalations resulting from increases in real estate taxes and other
operating expenses. Total rent expense for the years ended October 31, 1995,
1994, and 1993, including escalations, was $5,193,000, $4,037,000, and
$3,133,000, respectively.
Minimum annual lease payments for each of the next five years ending
October 31 and thereafter are as follows:
<TABLE>
<CAPTION>
Year Payments
---------------------------------------------------------
<S> <C>
1996 $ 4,113,000
1997 3,277,000
1998 2,555,000
1999 2,071,000
2000 1,556,000
Thereafter 3,413,000
---------------------------------------------------------
Total $ 16,985,000
---------------------------------------------------------
</TABLE>
14. SIGNIFICANT CONTRACTS
For the years ended October 31, 1995, 1994, and 1993, the Company's largest
client accounted for 16%, 17%, and 18%, respectively, of the Company's
consolidated revenue. The next largest client accounted for approximately 11%,
6%, and 7%, respectively, of the Company's consolidated revenue for the same
periods.
F-26
<PAGE> 32
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
15. RELATED PARTY TRANSACTIONS
Effective January 31, 1992, the Company entered into a management and data
processing services agreement ("Management Agreement") with HHL Financial
Services, Inc. ("HHL"). Under the Management Agreement, the Company provides HHL
with executive management, data processing, and technical support services
through June 30, 1996, subject to certain termination and renewal provisions.
For services provided under the Management Agreement, the Company is entitled to
compensation in the form of: (a) contingent fees based on HHL's revenue and
pre-tax operating income each year (as defined), and (b) a warrant, exercisable
at any time during its five-year term, to purchase shares of HHL's common stock
constituting approximately 8% of HHL's fully diluted common stock as of March
15, 1992. The aggregate exercise price of the warrant was approximately
$556,000. The warrant was valued at $405,000. For financial reporting purposes,
the value of the warrant has been offset against the costs associated with the
termination of the proposed merger of HHL and the Company due to its
non-recurring nature and is separately reflected on the balance sheet. This
investment in HHL was accounted for utilizing the cost method of accounting.
Effective July 1, 1993, the Management Agreement was amended ("Outsourcing
Amendment") to include the Company's provision of comprehensive data processing
and information management services to HHL. The five-year term of the
Outsourcing Amendment calls for fixed annual fees that range from $6,700,000 to
$9,500,000 subject to upward adjustment in the event of material changes in the
scope of service and/or growth in HHL revenue in excess of 7% annually. The
Company assumed the financial responsibility for all personnel, equipment, and
software costs required to provide such services effective July 1, 1993, and the
former HHL employees retained to provide services under the Outsourcing
Amendment became employees of the Company on January 1, 1994.
During the years ended October 31, 1995, 1994, and 1993, the Company
received approximately $8,877,000, $9,548,000, and $5,831,000 in fees from HHL
related to these agreements, and, in connection with jointly executed client
projects, HHL has charged the Company expenses for services totaling $1,337,000,
$1,091,000, and $478,000 in 1995, 1994, and 1993, respectively.
The Company also earned revenue from other related parties of $545,000,
$353,000, and $180,000 in 1995, 1994, and 1993, respectively. In fiscal year
1995, the Company's related party revenue of $545,000 resulted from fees from
HISCo for services provided pursuant to the HISCo Agreement.
During the year ended October 31, 1995, the Company made an additional
investment in HHL. The investment of $522,000 represented the purchase of 522
shares of HHL Convertible Preferred Stock. This additional investment is
reflected in the accompanying consolidated financial statements.
F-27
<PAGE> 33
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIOD AS OF AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1996)
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below summarizes the Company's unaudited quarterly operating
results for its last three fiscal years.
<TABLE>
<CAPTION>
(In Thousands, Except Earnings Per Common Share) First QuarterSecond QuarterThird QuarterFourth Quarter
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995:
Revenue $ 20,985 21,041 23,020 24,681
Cost of services 16,471 16,752 18,786 19,618
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 4,514 4,289 4,234 5,063
Operating income 4,434 4,234 4,180 5,009
Income before extraordinary item 1,807 2,417 2,413 2,965
Income per common share before extraordinary item $ 0.11 0.14 0.14 0.17
- - ------------------------------------------------------------------------------------------------------------
1994:
Revenue $ 17,091 17,620 18,742 19,723
Cost of services 14,093 14,481 14,966 15,774
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 2,998 3,139 3,776 3,949
Operating income 2,958 3,099 3,734 3,881
Income before extraordinary item 1,647 1,706 2,238 2,133
Income per common share before extraordinary item $ 0.10 0.10 0.13 0.13
- - ------------------------------------------------------------------------------------------------------------
1993:
Revenue $ 13,312 14,021 14,957 17,659
Cost of services 11,078 11,600 11,715 14,596
- - ------------------------------------------------------------------------------------------------------------
Operating margin before amortization of intangibles 2,234 2,421 3,242 3,063
Operating income 2,051 2,381 3,202 3,023
Income before extraordinary item 881 1,402 1,947 1,547
Income per common share before extraordinary item $ 0.06 0.09 0.12 0.09
- - ------------------------------------------------------------------------------------------------------------
</TABLE>
17. SUBSEQUENT EVENTS
On November 28, 1995, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% stock dividend payable on
December 29, 1995, to holders of record of the Company's common stock as of
December 15, 1995. The effect of the stock split has been retroactively
reflected in the accompanying consolidated financial statements and Notes to
Consolidated Financial Statements.
F-28
<PAGE> 34
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Allowance for doubtful Accounts:
<S> <C>
Balance, October 31, 1992 $ 141,000
Provision 31,000
Recoveries 0
Charge-offs (18,000)
------------
Balance, October 31, 1993 154,000
Provision 190,000
Recoveries 0
Charge-offs (75,000)
------------
Balance, October 31, 1994 269,000
Provision 111,000
Recoveries 0
Charge-offs (84,000)
------------
Balance, October 31, 1995 $ 296,000
------------
</TABLE>
F - 29
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
10.1 Agreement and Plan of Merger dated as of April 29, 1996 among
Health Management Systems, Inc., CDR Acquisition Corp., CDR
Associates, Inc., and all the shareholders of CDR Associates,
Inc.
23.1 Consents of KPMG Peat Marwick LLP, Independent Auditors
23.2 Consent of Coopers & Lybrand LLP, Independent Accountants
23.3 Report of Independent Accountants on the financial
statements of Health Care microsystems, Inc. as of
December 31, 1994 and 1993 and for the years then ended
23.4 Consent of Ernst and Young LLP, Independent Auditors
23.5 Report of Independent Auditors on the financial statements
of Health Information Systems Corporation as of and for
the period ended October 31, 1995
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for informational
purposes only and not filed
99 Press Release of Health Management Systems, Inc. relating to
the consummation of the acquisition of CDR Associates, Inc.
</TABLE>
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
Among
HEALTH MANAGEMENT SYSTEMS, INC.,
CDR ACQUISITION CORP.
And
CDR ASSOCIATES, INC.
AND ITS PRINCIPAL SHAREHOLDERS
<PAGE> 2
TABLE OF CONTENTS
Page
RECITALS .....................................................................1
ARTICLE 1.
DEFINITIONS..........................................................1
1.1 Certain Definitions................................1
1.2 Other Definitions..................................3
ARTICLE 2.
THE MERGER...........................................................3
2.1 Effective Time of the Merger.......................3
2.2 Effects of the Merger..............................3
2.3 Effect on Capital Stock............................4
2.4 Exchange of Certificates...........................5
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF CDR................................6
3.1 Organization and Standing..........................6
3.2 Capital Structure..................................7
3.3 Equity Investments.................................7
3.4 Authority..........................................7
3.5 Governmental Consents..............................8
3.6 Financial Statements...............................8
3.7 Accounting Matters.................................9
3.8 Absence of Changes.................................9
3.9 Properties........................................11
3.10 Taxes.............................................12
3.11 Compliance with Law...............................12
3.12 Litigation........................................12
3.13 Material Agreements...............................13
3.14 Proprietary Rights................................14
3.15 Insurance.........................................15
3.16 No Conflict.......................................15
3.17 No Default........................................16
3.18 Brokers or Finders................................16
3.19 Certain Advances..................................16
3.20 Related Parties...................................16
3.21 Information Supplied..............................17
3.22 Employee Benefit Plans............................17
3.23 Labor Relations; Employees........................19
3.24 Compensation......................................20
3.25 Customers and Suppliers...........................20
i
<PAGE> 3
Page
3.26 Bank Accounts..................................20
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF HMS AND SUB....................20
4.1 Organization...................................20
4.2 Capital Structure..............................20
4.3 Authority......................................21
4.4 Governmental Consents..........................21
4.5 SEC Documents..................................22
4.6 Information Supplied...........................22
4.7 No Conflict....................................23
4.8 Shares of Common Stock.........................23
4.9 Accounting Matters.............................24
4.10 No Prior Activities............................24
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS........................24
5.1 Ordinary Course................................24
5.2 Dividends; Changes in Stock....................24
5.3 Issuance of Securities.........................25
5.4 Governing Documents............................25
5.5 No Acquisitions................................25
5.6 No Dispositions................................25
5.7 Indebtedness...................................25
5.8 Benefit Plans, Etc.............................26
5.9 Accounting Practices...........................26
5.10 No Solicitation; Competing Transactions........26
5.11 Other Agreements...............................26
ARTICLE 6.
REGISTRATION RIGHTS..............................................26
6.1 Certain Definitions............................26
6.2 HMS to Register Shares.........................27
6.3 Associated Obligations of HMS..................27
6.4 Expenses.......................................29
6.5 Indemnification................................30
ARTICLE 7.
ADDITIONAL AGREEMENTS............................................32
7.1 Access to Information..........................32
7.2 Legal Conditions to the Merger.................32
7.3 Affiliates.....................................33
ii
<PAGE> 4
Page
7.4 CDR Shareholders' Approval.......................34
7.5 Dissenting Shares................................34
7.6 Blue Sky Laws....................................34
7.7 Non-Competition Agreements.......................34
7.8 Employee Benefits................................34
7.9 Stock Options at Closing.........................34
7.10 Communications...................................35
7.11 Delivery of Stock Certificates...................35
7.12 Parachute Payments...............................35
7.13 Notification of Certain Matters..................35
7.14 Tax Treatment....................................36
7.15 Wallingford Fee..................................36
7.16 Confirmation as to Accounting Treatment..........36
7.17 Nasdaq Listing...................................36
7.18 Sub Sole Stockholder's Approval..................36
7.19 CDR Minimum Net Cash.............................37
ARTICLE 8.
CONDITIONS PRECEDENT...............................................37
8.1 Conditions to Each Party's Obligations to
Effect the Merger.......................37
8.2 Conditions to Obligations of HMS and Sub.........38
8.3 Conditions to Obligations of CDR.................39
ARTICLE 9.
INVESTMENT REPRESENTATIONS OF THE PRINCIPALS.......................40
ARTICLE 10.
CLOSING............................................................40
10.1 Closing Date.....................................40
10.2 Filing Date......................................41
ARTICLE 11.
NON-COMPETITION AND NON-SOLICITATION...............................41
11.1 Statement of Intent..............................41
11.2 Definitions......................................41
11.3 Non-Competition..................................42
11.4 Non-Solicitation.................................43
11.5 Confidential Information.........................43
11.6 Remedies.........................................44
iii
<PAGE> 5
Page
ARTICLE 12.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS............44
ARTICLE 13.
PAYMENT OF EXPENSES..............................................44
ARTICLE 14.
TERMINATION, AMENDMENT AND WAIVER................................45
14.1 Termination....................................45
14.2 Effect of Termination..........................46
14.3 Amendment......................................46
14.4 Extension; Waiver..............................46
ARTICLE 15.
INDEMNIFICATION..................................................47
15.1 Indemnity by Principals........................47
15.2 Conditions of Indemnification..................47
15.3 Limitations on Liability of Principals.........48
ARTICLE 16.
GENERAL..........................................................48
16.1 Notices........................................48
16.2 Headings.......................................49
16.3 Counterparts...................................49
16.4 Binding Nature.................................49
16.5 Other Agreements...............................49
16.6 Good Faith.....................................49
16.7 Applicable Law.................................49
iv
<PAGE> 6
Exhibit A - Articles of Incorporation of Surviving Corporation
Exhibit B - By-laws of Surviving Corporation
Exhibit C - List of Directors and Officers of Surviving
Corporation
Exhibit D - Form of Non-Competition Agreement
Exhibit E - Form of Opinion of Miles & Stockbridge
Exhibit F - Form of Opinion of Coleman & Rhine LLP
v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is made and entered into as of the 29th day of April,
1996, by and among HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation
("HMS"), CDR ACQUISITION CORP., a Maryland corporation and wholly-owned
subsidiary of HMS ("Sub"), CDR Associates, Inc., a Maryland corporation ("CDR"),
and the principal shareholders of CDR, whose names appear on the signature page
hereof (the "Principals").
RECITALS
A. The parties wish to provide for the merger (the "Merger") of Sub into CDR,
whereby it is contemplated that all shares of capital stock, $1.00 par value, of
CDR issued and outstanding ("CDR Capital Stock"), other than Dissenting Shares,
if any, as defined, will be converted into an aggregate of 460,000 shares of
common stock, par value $.01 per share, of HMS ("HMS Common") in accordance with
the Exchange Ratio set forth in Section 2.3(b) of this Agreement.
B. The parties hereto desire to set forth certain representations, warranties
and covenants made by HMS and Sub to CDR, and by CDR to HMS and Sub, and the
conditions precedent to the consummation of the Merger.
C. The Boards of Directors of HMS, Sub and CDR, respectively, have approved and
adopted this Agreement and the Merger as a plan of reorganization under the
provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code");
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, HMS, Sub, CDR and the
Principals hereby agree as follows:
ARTICLE 1.
DEFINITIONS
1.1 Certain Definitions. The terms defined in this Section 1.1
shall, for all purposes of this Agreement, have the meanings herein specified,
unless the context expressly or by necessary implication otherwise requires:
(a) "CDR Shareholders" shall mean all holders of CDR Capital
Stock immediately prior to the Effective Time of the Merger.
(b) "CDR Shareholders' Meeting" shall mean the meeting, and
any adjournments thereof, of the holders of CDR Capital Stock called and
convened for the purpose of their consideration of and voting upon the
transactions contemplated by this Agreement and the
<PAGE> 8
Merger (the parties hereto agreeing that approval of this Agreement and the
Merger may instead be obtained by means of written consents in accordance with
Section 2-505 of the Corporations and Associations Article of the Annotated Code
of Maryland ("Maryland General Corporation Law").
(c) "Dissenting Shares" shall mean shares of CDR Capital Stock
which shall be owned by shareholders who shall duly perfect and pursue the
rights of objecting stockholders with respect to such shares in accordance with
Section 3-203 of the Maryland General Corporation Law.
(d) "Dissenting Shareholders" shall mean those shareholders of
CDR who are holders of and are entitled to Dissenting Shares.
(e) "Form S-3" shall mean the registration statement of HMS on
Form S-3 to be filed with the SEC immediately following the Closing Date, as
defined in Section 10.1 of this Agreement.
(f) "Material Adverse Effect" on any entity (or group of
entities taken as a whole) shall mean an effect that is materially adverse to
the consolidated financial condition, assets, liabilities, business or results
of operations of such entity (or, if with respect thereto, of such group of
entities taken as a whole).
(g) "Material Agreements," as used in relation to CDR, shall
have the meaning ascribed to such term in Section 3.12.
(h) "SEC" shall mean the Securities and Exchange Commission.
(i) "Subsidiary" means a corporation whose voting securities
are owned directly or indirectly by a "parent" corporation in such amounts as
are sufficient to elect at least a majority of the Board of Directors of the
Subsidiary.
(j) "Taxes" shall mean all taxes, charges, fees, levies or
other assessments including, without limitation, income, gross receipts, excise,
property, sales, withholding, social security, occupation, use, service,
license, payroll, franchise, transfer and recording taxes, fees and charges,
imposed by the United States, or any state, local or foreign government or
subdivision or agency thereof whether computed on a separate, consolidated,
unitary, combined or any other basis; and such term shall include any interest,
fines, penalties or additional amounts attributable or imposed with respect to
any taxes, charges, fees, levies or other assessments.
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(k) "To the knowledge of CDR" shall mean the collective
knowledge of the Principals. "Knowledge" when used in this context shall mean,
as to the facts or circumstances represented: (i) actual knowledge of any one of
the Principals; and (ii) knowledge that any one of the Principals should
reasonably be expected to possess after due inquiry.
(l) "To the knowledge of HMS" shall mean the collective
knowledge of Paul J. Kerz and Gregory K. Schraer (collectively, the "HMS
Officers"), the President and Chief Executive Officer and the Principal
Accounting Officer, respectively, of HMS. "Knowledge" when used in this context
shall mean, as to the facts or circumstances represented: (i) actual knowledge
of any one of the HMS Officers; and (ii) knowledge that any one of the HMS
Officers should reasonably be expected to possess after due inquiry.
1.2 Other Definitions. In addition to the terms defined in
Section 1.1, certain other terms are defined elsewhere in this Agreement;
whenever such terms are used in this Agreement they shall have their respective
defined meanings, unless the context expressly or by necessary implication
otherwise requires.
ARTICLE 2.
THE MERGER
2.1 Effective Time of the Merger. Subject to the provisions of
this Agreement, a Certificate of Merger, together with all other required
certificates, shall be filed in accordance with the requirements of Section
3-107 of the Maryland General Corporation Law as soon as practicable on or after
the Closing Date. The Merger shall become effective upon the filing of such
certificate with the Maryland Department of Assessments and Taxation (the
"Effective Time of the Merger").
2.2 Effects of the Merger. At the Effective Time of the
Merger:
(a) the separate existence of Sub shall cease and Sub shall be
merged with and into CDR as the surviving corporation (the "Surviving
Corporation");
(b) the Articles of Incorporation and By-laws of the Surviving
Corporation shall be in the form attached to this Agreement as Exhibit A and
Exhibit B, respectively; and
(c) the persons listed on Exhibit C shall be the directors and
officers of the Surviving Corporation, and such officers shall
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continue to act as such and hold such offices in the Surviving Corporation,
until their respective successors are duly elected and qualified.
2.3 Effect on Capital Stock. As of the Effective Time of the
Merger, by virtue of the Merger and without any action on the part of the holder
of any shares of the issued and outstanding shares of CDR Capital Stock:
(a) Cancellation of CDR Stock Owned by HMS or CDR. All shares
of CDR Capital Stock, if any, that are owned directly or indirectly by HMS, CDR
or any Subsidiary of HMS or CDR, shall be canceled, and no stock of HMS or other
consideration shall be delivered in exchange therefor.
(b) Conversion of CDR Capital Stock. Other than shares to be
canceled pursuant to Section 2.3(a), Dissenting Shares and fractional shares as
provided in Section , each share of CDR Capital Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall be converted,
without any action on the part of the holders thereof, into 460 shares
(hereinafter, the "Exchange Ratio") of issued and outstanding HMS Common. An
aggregate of 460,000 shares of HMS Common will be issued in the Merger if all
1,000 shares of CDR Capital Stock outstanding prior to the Effective Time of the
Merger are converted into shares of HMS Common.
(c) Adjustments of Exchange Ratio. If, after the date of this
Agreement, (i) the outstanding shares of HMS Common shall have been changed into
a different number of shares or a different class by reason of any
reclassification, recapitalization, split-up, combination, exchange of shares or
readjustment or (ii) HMS shall declare or pay any dividend or make any
distribution of cash or property (including but not limited to securities,
rights, etc.) in respect of its shares of capital stock, in either case with a
record date of such transaction or event, or other circumstances, such that the
persons who receive HMS Common issued in the Merger do not participate equally
and ratably in such change, split-up, exchange, dividend, distribution, etc.,
the Exchange Ratio shall be correspondingly adjusted so as to preserve, as
nearly as may be, the economic consequences of the Merger.
(d) Dissenters' Rights of CDR Shareholders. Any Dissenting
Shares shall not be converted into HMS Common but shall be converted into the
right to receive such consideration as may be determined to be due with respect
to such Dissenting Shares pursuant to the Maryland General Corporation Law. CDR
shall give HMS prompt notice of any demand received by CDR for the right to
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<PAGE> 11
receive payment of the fair market value for the CDR shares, and HMS shall have
the right to participate in all negotiations and proceedings with respect to
such demand. CDR agrees that, except with the prior written consent of HMS, or
as required under the Maryland General Corporation Law, CDR will not voluntarily
make any payment with respect to, or settle or offer to settle, any such demand
for appraisal. Each Dissenting Shareholder who, pursuant to Section 3-203 of the
Maryland General Corporation Law, becomes entitled to payment of the value of
shares of CDR Capital Stock shall receive payment therefor (but only after the
value therefor shall have been agreed upon or finally determined pursuant to
such provisions). In the event of the legal obligation, after the Effective Time
of the Merger, to deliver shares of HMS Common to any Dissenting Shareholder who
shall have failed to make an effective demand for appraisal or shall have lost
his status as a Dissenting Shareholder, HMS shall issue and deliver, upon
surrender by such Dissenting Shareholder of his certificate or certificates
representing shares of CDR Capital Stock, the shares of HMS Common to which such
Dissenting Shareholder is then entitled under this Section , and Section 3-206
of the Maryland General Corporation Law.
(e) Fractional Shares. No fractional shares of HMS Common
shall be issued, and the number of shares of such stock to which each holder of
shares of CDR Capital Stock shall be entitled by reason of the Merger shall be
rounded up or down to the nearest whole share.
(f) Conversion of Sub Capital Stock. Each share of Sub capital
stock issued and outstanding immediately prior to the Effective Time of the
Merger shall be converted, without any action on the part of the holder thereof,
into one share of issued and outstanding capital stock of the Surviving
Corporation.
2.4 Exchange of Certificates.
(a) Exchange Procedures. HMS shall use its best effort to
deliver at the Closing Date, but in any event no later than three (3) business
days thereafter, to each holder of record of a certificate or certificates
representing outstanding shares of CDR Capital Stock (the "Certificates"), a
Letter of Transmittal or similar instrument for use in effecting the surrender
of the Certificates in exchange for HMS Common pursuant to Section 2.3
hereunder. Upon surrender to HMS of a Certificate for cancellation after the
Effective Time of the Merger, the holder of such Certificate shall be entitled
to receive in exchange therefor the number of shares of HMS Common to which the
holder of CDR Capital Stock is entitled pursuant to Section of this Agreement
and is
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<PAGE> 12
represented by the Certificate so surrendered. The Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of CDR
Capital Stock which is not registered in the transfer records of CDR, the
appropriate number of shares of HMS Common may be delivered to a transferee if
the Certificate representing the right to receive such HMS Common is presented
to HMS and accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.4, each Certificate
shall be deemed at any time after the Effective Time of the Merger to represent
the right to receive upon such surrender the number of shares of HMS Common as
provided by Section and the provisions of the Maryland General Corporation Law.
(b) No Further Ownership Rights in CDR Capital Stock. All HMS
Common delivered upon the surrender for exchange of shares of CDR Capital Stock
in accordance with the terms hereof shall be deemed to have been delivered in
full satisfaction of all rights pertaining to such shares of CDR Capital Stock.
There shall be no further registration of transfers on the stock transfer books
of the Surviving Corporation of the shares of CDR Capital Stock which were
outstanding immediately prior to the Effective Time of the Merger. If, after the
Effective Time of the Merger, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article 2.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF CDR
CDR represents and warrants to HMS and Sub as of the date
hereof and as of the Closing Date as follows:
3.1 Organization and Standing. CDR is a corporation duly
organized, validly existing, and in good standing under the laws of the
jurisdiction of its incorporation, and has the full power and authority
(corporate and otherwise) to carry on its business in the places and as it is
now being conducted and to own and lease the properties and assets which it now
owns or leases. CDR is now, and will at Closing be, duly qualified and/or
licensed to transact business and in good standing as a foreign corporation in
all jurisdictions listed on Schedule 3.1 attached hereto, and the character of
the property owned or leased by CDR and the nature of the business conducted by
it do not require such qualification and/or licensing in any other jurisdiction
where the failure to do so would have a Material Adverse Effect on CDR.
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<PAGE> 13
3.2 Capital Structure. The authorized capital stock of CDR
consists of 5,000 shares of CDR Capital Stock, of which 1,000 shares (consisting
of 500 shares of Class A common stock and 500 shares of Class B common stock)
are issued and outstanding. All of the issued and outstanding CDR Capital Stock
is owned of record and beneficially by the Principals as set forth on Schedule
3.2 attached hereto. All of the outstanding shares of CDR Capital Stock were
issued in compliance with applicable federal and state securities laws, and no
further registration, qualification or other compliance under such securities
laws is required. All of the outstanding shares of CDR Capital Stock are validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, CDR's Articles of Incorporation or By-laws or any agreement
to which CDR or any Principal is a party or is bound. Except for the foregoing,
there are no equity securities of any class of CDR or any security exchangeable
or convertible into or exercisable for such equity securities, issued, reserved
for issuance or outstanding. There are no options, warrants, calls, rights,
commitments or agreements of any character to which CDR is a party or by which
it is bound obligating CDR to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of CDR or obligating CDR
to grant, extend or enter into any such option, warrant, call, right, commitment
or agreement. Except as set forth in Schedule 3.2 attached hereto, there are no
voting trusts or other agreements or understandings with respect to the shares
of capital stock of CDR.
3.3 Equity Investments. Except as set forth on Schedule 3.3
attached hereto, CDR does not own directly or indirectly, any equity interest in
any corporation, partnership, joint venture, trust or other business entity.
3.4 Authority. CDR has all requisite corporate power and
authority to enter into this Agreement and, subject to approval of this
Agreement by the shareholders of CDR, to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of CDR, subject to such approval by the shareholders
of CDR. This Agreement has been duly executed and delivered by CDR and, subject
to such approval by the shareholders of CDR, constitutes a valid and binding
obligation of CDR, enforceable against CDR in accordance with its terms, except
as such terms may be (i) limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
(including fraudulent transfer laws), and (ii) subject to general principles of
equity, including without limitation, concepts of materiality, reasonableness,
good faith and fair
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<PAGE> 14
dealing (regardless of whether such enforceability is considered in a proceeding
in equity or at law). Subject to satisfaction of the conditions set forth in
Sections and , the execution and delivery of this Agreement do not, and the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under (i) any
provision of the Articles of Incorporation or By-laws of CDR or (ii) any
Material Agreement or permit, license, judgment, order, statute, rule or
regulation applicable to CDR or its properties or assets, other than any such
conflicts, violations, defaults, terminations, cancellations or accelerations
which individually or in the aggregate would not have a Material Adverse Effect
on CDR.
3.5 Governmental Consents. No consent, approval, order or
authorization of, or registration, declaration or filing with, any court,
administrative agency or commission or other governmental authority or
instrumentality (a "Governmental Entity"), is required by or with respect to CDR
in connection with the execution and delivery of this Agreement by CDR or the
consummation by CDR of the transactions contemplated hereby, except for (i) the
filing of a Certificate of Merger with the Maryland Department of Assessments
and Taxation, and appropriate documents with the relevant authorities of other
states in which CDR is qualified to do business, (ii) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable state securities laws and the laws of any foreign
country and (iii) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a Material Adverse
Effect on CDR.
3.6 Financial Statements. CDR has furnished to HMS: (i) the
balance sheet of CDR as of October 31, 1995 (the "1995 Balance Sheet") and the
related statements of earnings, shareholders' equity and statements of cash
flows for the year then ended (together with the 1995 Balance Sheet, the "1995
Financial Statements"), certified by KPMG Peat Marwick LLP, (ii) the unaudited
balance sheets of CDR as of October 31, 1993 and 1994, and the related
statements of earnings for the years then ended, certified by the Chief
Financial Officer of CDR (together, the "Prior Financial Statements") and (iii)
the unaudited balance sheet of CDR as of January 31, 1996 (the "January Balance
Sheet"), and the related statement of earnings for the three months then ended,
certified by the Chief Financial Officer of CDR (together with the January
Balance Sheet, the "Interim Financial Statements"). The 1995 Financial
Statements (including any related schedules and/or
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<PAGE> 15
notes, if any) and the Interim Financial Statements are complete and correct in
all material respects and have been prepared in accordance with generally
accepted accounting principles, consistently applied ("GAAP") and, in the case
of the Interim Financial Statements, subject to normal year-end adjustments. The
1995 Balance Sheet fairly presents the financial position of CDR as of its date,
and the 1995 Financial Statements fairly present the consolidated results of
operations of CDR for the period then ended. Except as described in Schedule 3.6
hereto, the Prior Financial Statements and the Interim Financial Statements are
complete and correct in all material respects, fairly present the financial
position and earnings of CDR at the dates and for the periods presented, and
have been compiled in accordance with GAAP (except that the Interim Financial
Statements are subject to normal year-end adjustments which, both individually
and in the aggregate, will not differ materially and adversely from the Interim
Financial Statements). Except as described in Schedule 3.6 hereto, there has
been no material adverse change in the operations or condition (financial or
other) of CDR since January 31, 1996. Except as reflected in the 1995 Financial
Statements, the Prior Financial Statements or the Interim Financial Statements,
CDR had no obligations or liabilities, absolute, accrued or contingent, as of
October 31, 1995, October 31, 1993, October 31, 1994 and January 31, 1996,
respectively, that are material to the business or assets of CDR taken as a
whole other than performance obligations under contracts or agreements listed in
Schedule 3.13 attached hereto.
3.7 Accounting Matters. (i) Neither CDR nor any of its
affiliates has through the date of this Agreement taken or agreed to take any
action (without giving effect to any action taken or agreed to be taken by HMS
or Sub), and (ii) no facts or circumstances exist with regard to CDR or any of
its affiliates, which in each case could reasonably be expected to prevent HMS
from accounting for the business combination to be effected by the Merger as a
pooling of interests.
3.8 Absence of Changes. Since January 31, 1996, CDR has not,
except as disclosed on Schedule 3.8 attached hereto:
(a) suffered any changes in its condition (financial or
otherwise), net worth, assets, properties, obligations or liabilities which, in
the aggregate, have a Material Adverse Effect on CDR or become aware of any
event which may result in any such Material Adverse Effect;
(b) issued, or authorized for issuance, or entered into any
commitment to issue, any equity security, bond, note or other security of CDR;
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(c) incurred additional debt for borrowed money, except in the
ordinary and usual course of business;
(d) paid any obligation or liability, or discharged, settled
or satisfied any claim, lien or encumbrance, except for current liabilities in
the ordinary and usual course of business;
(e) declared, promised, or paid any dividend, payment or other
distribution on or with respect to any share of CDR Capital Stock, other than
quarterly distributions to its shareholders in a manner consistent with past
practices;
(f) purchased, redeemed or otherwise acquired or committed
itself to acquire, directly or indirectly, any share or shares of CDR Capital
Stock;
(g) mortgaged, pledged, or otherwise, voluntarily or
involuntarily encumbered any of its assets or properties, except for liens for
current taxes which are not yet due and payable and purchase-money liens arising
out of the purchase or sale of products or services made in the ordinary and
usual course of business consistent with past practices;
(h) transferred, assigned, licensed, conveyed or liquidated
any of its assets or entered into any transaction or incurred any liability or
obligation which affected its assets, other than transactions occurring in the
ordinary and usual course of business consistent with past practices;
(i) suffered any material destruction, damage or loss relating
to its assets whether or not covered by insurance;
(j) committed, suffered, permitted or incurred any default in
any liability or obligation which, in the aggregate, has had or will have any
adverse effect upon CDR;
(k) made any expenditure or commitment for the purchase,
acquisition, construction or improvement of a capital asset, except in the
ordinary and usual course of business consistent with past practices;
(l) sold, assigned, transferred or conveyed, or committed
itself to sell, assign, transfer or convey, any Proprietary Rights (as defined
in Section 3.14), except in the ordinary course of business consistent with past
practices (including non-exclusive licensing in connection with the sale of
equipment);
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(m) effected or agreed to effect any amendment or supplement
to any employee benefit plan or arrangement or paid, agreed to pay or incurred
any obligation for any payment for, any contribution or other amount to or with
respect to, any employee benefit plan, or paid any bonus to, or granted any
increase in the compensation of, its officers, agents or employees, or made any
increase in the pension, retirement or other benefits of its directors,
officers, agents or other employees;
(n) paid or committed itself to pay to or for the benefit of
any of its directors, officers, employees or shareholders any compensation of
any kind other than wages, salaries and benefits at times and rates in effect
prior to January 31, 1996, except for increases and bonuses to employees other
than the Principals in the ordinary course of business consistent with past
practices;
(o) effected or committed itself to effect any amendment or
modification in its Articles of Incorporation or By-laws, except as contemplated
in this Agreement, or to any change in the terms of any contract or instrument
to which it is a party which may have a Material Adverse Effect on CDR;
(p) waived, canceled, sold or otherwise disposed of, for less
than the face amount thereof, any claim or right which it has against others;
(q) committed, suffered, permitted or incurred any transaction
or event which would materially increase its tax liability for any prior taxable
year;
(r) incurred any other material liability or obligation or
entered into any transaction other than in the ordinary course of business
consistent with past practices; or
(s) received any notices, or has reason to believe, that any
supplier or customer of CDR has taken or contemplates any steps which could
disrupt the business relationship of CDR with said supplier or customer or could
result in the diminution in the value of CDR as a going concern.
3.9 Properties. CDR owns no fee interest in real property. The
1995 Financial Statements, the Prior Financial Statements and the Interim
Financial Statements reflect all of the personal property used by CDR in its
business or otherwise held by CDR, as of their respective dates, except for (i)
property acquired or disposed of in the ordinary and usual course of the
business of CDR since the date of the January Balance Sheet, and (ii) property
not required under generally accepted accounting principles to be
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reflected thereon. CDR has good and marketable title to all assets and
properties listed on the 1995 Balance Sheet, the Prior Financial Statements and
the January Balance Sheet and thereafter acquired, free and clear of any
imperfections of title, security interests, liens, pledges, claims, charges,
escrows, encumbrances, options, rights of first refusal, mortgages, indentures,
easements, licenses, security agreements or other agreements, arrangements,
contracts, commitments, understandings or obligations (collectively, the
"Encumbrances"), except (i) liens for current taxes not yet due and payable or
(ii) Encumbrances referred to in the January Balance Sheet or in Schedule 3.9
attached hereto (provided that the foregoing representation does not extend to
Proprietary Rights as to which Section 3.14 applies).
3.10 Taxes. CDR has duly filed with the appropriate United
States, state, local and foreign governmental agencies all tax returns and
reports required to be filed, and all such reports are true, correct and
complete in all material respects. CDR has paid all Taxes shown thereon as
owing. All Taxes due through the date of the Closing will have been fully paid
by that date or provided for by adequate reserves. The 1995 Financial
Statements, the Prior Financial Statements and the Interim Financial Statements
reflect all Taxes accrued through the period indicated thereon. Except as
described in Schedule 3.10 hereto, CDR is not a party to any pending action or
proceeding, nor to the knowledge of CDR is any such action or proceeding
threatened by any governmental authority for the assessment or collection of
Taxes, and no claim for assessment or collection of Taxes has been asserted
against CDR. For purposes of this Agreement, an action shall be deemed pending,
and a claim shall be deemed to have been asserted, only after service of summons
or other notice has been made upon CDR.
3.11 Compliance with Law. Except for possible minor
exceptions, the curing or non-curing of which would not have a Material Adverse
Effect on CDR, the business of CDR has been conducted in accordance with all
applicable laws, regulations, orders and other requirements of governmental
authorities.
3.12 Litigation. Except as otherwise set forth on Schedule
3.12 attached hereto, there is no claim, dispute, action, proceeding, suit or
appeal, or investigation, at law or in equity, pending against CDR or affecting
any of its assets or properties (including the Proprietary Rights), before any
court, agency, authority, arbitration panel or other tribunal and, to the
knowledge of CDR, none has been threatened against CDR. To the knowledge of CDR,
there are no facts which, if known to shareholders, customers, governmental
authorities or other persons, would be a basis for any such claim, dispute,
action, proceeding,
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suit or appeal or investigation which would have a Material Adverse Effect on
CDR. CDR is not subject to any order, writ, injunction or decree of any court,
agency, authority, arbitration panel or other tribunal. None of the items
described on Schedule 3.12, singly or in the aggregate, would have a Material
Adverse Effect on CDR or the right of CDR to consummate the transactions
contemplated hereby.
3.13 Material Agreements. Schedule 3.13 attached hereto
consists of a true and complete list of all Material Agreements relating to CDR,
and not listed on another schedule hereto, to which CDR is a party. Schedule
3.13 further identifies each of the Material Agreements which contain change of
control provisions. Prior to the execution of this Agreement, CDR has delivered
or made available to HMS a true and complete copy of each such Material
Agreement. Except as set forth on Schedule 3.13 attached hereto or any other
schedule to this Agreement, CDR is not a party or subject to any other Material
Agreements.
For purposes of this Agreement, "Material Agreements" means
the following written and oral agreements, contracts, or arrangements:
(a) each partnership, joint venture or similar agreement of
CDR with a third person;
(b) each contract or agreement under which CDR has created,
incurred, assumed or guaranteed (or may create, incur, assume or guarantee)
indebtedness of more than $25,000 in principal amount or under which CDR has
imposed (or may impose) a security interest or lien on any of its assets,
whether tangible or intangible, securing indebtedness in excess of $25,000;
(c) each contract or agreement which involves an aggregate
payment or commitment per contract or agreement on the part of CDR of more than
$25,000;
(d) each of the ten (10) contracts or agreements which (i)
accounted for the largest percentage of CDR's net revenues for the twelve (12)
months ended October 31, 1995, and (ii) is projected to account for the largest
percentage of CDR's net revenues for the twelve (12) months ended October 31,
1996;
(e) each contract or agreement relating to employment or
consulting, and each severance or indemnification agreement or arrangement with
any of the directors, officers, consultants or employees of CDR, without regard
to the value thereof;
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(f) all leases and subleases from any third person to CDR;
(g) each contract or agreement to which CDR or its affiliates
is a party limiting, in any material respect, the right of CDR prior to the
Effective Date of the Merger, or the Surviving Corporation or any of its
subsidiaries or affiliates at or after the Effective Time of the Merger (i) to
engage in, or to compete with any person in, any business, including each
contract or agreement containing exclusivity provisions restricting the
geographical area in which, or the method by which, any business may be
conducted by CDR or any of its affiliates prior to the Effective Time of the
Merger, or the Surviving Corporation or any of its subsidiaries or affiliates
after the Effective Date or (iii) to solicit any customer or client;
(h) fire, casualty, liability, title, worker's compensation
and all other insurance policies and binders maintained by CDR;
(i) all material licenses, licensing agreements and other
agreements pertaining to any Proprietary Rights;
(j) all distribution and development agreements; and
(k) all other contracts or agreements which are material to
CDR or the conduct of its business, other than those made in the ordinary and
usual course of business or those which are terminable by CDR upon no greater
than sixty (60) days prior notice and without penalty or other adverse
consequences.
Except for those matters which, individually or in the
aggregate, do not and will not have a Material Adverse Effect on CDR, no third
party has made or raised any claim, dispute or controversy with respect to any
of the Material Agreements nor has CDR received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by CDR with respect to
its obligations under any of the Material Agreements, nor to the knowledge of
CDR are there any facts which exist indicating that any of the Material
Agreements may be totally or partially terminated or suspended by the other
parties thereto.
3.14 Proprietary Rights. Schedule 3.14 constitutes a full and
complete list of all material computer software, software programs, patents and
applications for patents, trademarks, trade names, service marks, and registered
copyrights, and applications therefor, owned or used by CDR or in which it has
any material rights or licenses (including, as to each such license, the name of
the licensee and licensor, the termination date or notice requirement with
respect to termination, basis of royalties
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calculation and renewal options). CDR owns or possesses adequate licenses or
other rights to use all computer software, software programs, patents, patent
applications, trademarks, trademark applications, trade secrets, service marks,
trade names, copyrights, inventions, drawings, designs, customer lists,
proprietary know-how or information, or other rights with respect thereto
(collectively referred to as "Proprietary Rights"), used in the business of CDR,
and the same are sufficient to conduct CDR's business as it has been and is now
being conducted or as it may foreseeably be conducted in the future. All of such
licenses are in full force and effect and constitute legal, valid and binding
obligations of the respective parties thereto; there have not been and there
currently are not any material defaults thereunder by any party; and no event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a material default
thereunder. The validity, continuation and effectiveness of all of such licenses
under the current material terms thereof will in no way be affected by the
transactions contemplated in this Agreement or, if any would be affected, CDR
and HMS shall use all necessary and reasonable means at their disposal to cause
an appropriate consent to such transaction to be delivered to HMS prior to the
Closing Date at no cost or other adverse consequences to HMS. The operations of
CDR do not conflict with or infringe, and no one has asserted to CDR that such
operations conflict with or infringe, any Proprietary Rights owned, possessed or
used by any third party.
3.15 Insurance. CDR maintains policies of fire and casualty,
liability and other forms of insurance in such amounts, with such deductibles
and against such risks and losses as are, in CDR's judgment, reasonable for the
business and assets of CDR. All such policies are in full force and effect, all
premiums due and payable thereon have been paid (other than retroactive or
retrospective premium adjustments that are not yet, but may be, required to be
paid with respect to any period ending prior to the Effective Time of the Merger
under comprehensive general liability and workmen compensation insurance
policies), and no notice of cancellation or termination has been received with
respect to any such policy which has not been replaced on substantially similar
terms prior to the date of such cancellation.
3.16 No Conflict. The execution and delivery of this Agreement
by CDR, and the performance of its obligations hereunder, (i) are not in
violation or breach of, and will not conflict with or constitute a default
under, any of the terms of the Articles of Incorporation or By-laws of CDR or
any Material Agreement; (ii) will not give rise to a right by any party to
terminate its obligations under any Material Agreement; (iii) will not result in
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the creation or imposition of any lien, encumbrance, equity or restriction in
favor of any third party upon any of the material assets or properties of CDR;
and (iv) will not conflict with or violate any applicable law, rule, regulation,
judgment, order or decree of any government, governmental instrumentality or
court having jurisdiction over CDR or any of its assets or properties. Schedule
3.16 attached hereto contains a full and complete list of all necessary
consents, waivers and approvals required from parties to Material Agreements or
from Governmental Entities in connection with the execution and delivery of this
Agreement by CDR and the performance of CDR's obligations hereunder.
3.17 No Default. CDR has in all material respects performed,
or is now performing, the obligations of, and it is not in default (nor would by
the lapse of time and/or the giving of notice be in default) in respect of, any
Material Agreements. Each of the Material Agreements is a legal, binding and
enforceable obligation by or against CDR, assuming in the case of any such
agreement, that it is a legal, binding and enforceable obligation of the other
party(ies) thereto, enforceable in accordance with its terms, except as such
terms may be (i) limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally (including
fraudulent transfer laws), and (ii) subject to general principles of equity,
including without limitation, concepts of materiality, reasonableness, good
faith and fair dealing (regardless of whether such enforceability is considered
in a proceeding in equity or at law).
3.18 Brokers or Finders. Except with respect to Wallingford
Capital Corporation ("Wallingford"), CDR and the Principals have not incurred,
and shall not incur, directly or indirectly, any liability for any brokerage or
finders' fees or agents' commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby. CDR and the Principals
shall jointly and severally indemnify and hold HMS harmless from and against any
and all claims, liabilities or obligations with respect to any other brokerage
or finders fees, commissions or expenses asserted by any person.
3.19 Certain Advances. There are no receivables of CDR owing
by directors, officers, or shareholders of CDR or owing by any affiliate of any
director or officer of CDR, other than advances in the ordinary and usual course
of business to officers for reimbursable business expenses. A list of such
advances is set forth in Schedule 3.19 attached hereto.
3.20 Related Parties. Except as disclosed in Schedule 3.20
attached hereto, none of the Principals or any affiliate of any
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such person, has, either directly or indirectly: (i) an interest in any
corporation, partnership, firm or other person or entity which furnishes or
sells services or products which are similar to those furnished or sold by CDR;
or (ii) a beneficial interest in any contract or agreement to which CDR is party
or by which CDR is be bound. For purposes of this Section 3.20, there shall be
disregarded any interest which arose solely from the ownership of less than a
five (5) percent equity interest in a corporation whose stock is regularly
traded on any national securities exchange or in the over-the-counter market.
3.21 Information Supplied. None of the information provided or
to be provided by CDR and the Principals to HMS in writing in connection with
the transactions contemplated by this Agreement (other than the CDR projections
addressed in the next succeeding sentence) contains or will contain, at the time
such information was or is provided, any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. In the case of CDR projections
provided to HMS, such projections were prepared in good faith and, when
presented to HMS as well as on the date hereof, CDR had and continues to have a
reasonable basis for the future operating results presented therein. In
addition, any such information provided in writing by CDR and the Principals for
the specific purpose of inclusion in the Form S-3 will contain all material
statements which are required to be stated therein in accordance with the
Securities Act of 1933, as amended (the "Act") and the rules and regulations
thereunder (the "Regulations"), and will in all material respects conform to the
requirements of the Act and the Regulations. To the extent facts or
circumstances occur subsequent to the provision by CDR of any written
information to HMS which causes such information to become materially
misleading, CDR will update such information in order to make the statements
made, in light of the circumstances under which they were made, not misleading.
CDR's obligation to update hereunder shall commence as of the date of this
Agreement and shall continue thereafter until the later to occur of (i) the
Closing Date, (ii) the date on which the Form S-3 relating to the HMS Common to
be issued in connection with the Merger is filed with the SEC or (iii) the date
on which the Form S-3 is declared effective by the SEC.
3.22 Employee Benefit Plans.
(a) A complete list of each employee benefit plan, including,
without limitation, any "employee benefit plan" as defined in Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
(collectively, "ERISA Plans"), and any bonus, pension, profit sharing, deferred
compensation,
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incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, insurance or other plan, arrangement or understanding
maintained or contributed to by CDR or any of its subsidiaries, excluding
"multiemployer plans" within the meaning of Section 3(37) of ERISA (all of the
foregoing, collectively the "Benefit Plans") is set forth on Schedule 3.22.
Except as set forth on Schedule 3.22, CDR has made available to HMS, a true and
correct copy of (i) the documents comprising each such Benefit Plan; (ii) the
most recent annual report (Form 5500) filed by CDR or any of its subsidiaries
with the Internal Revenue Service ("IRS") for each such Benefit Plan for which
such report is required; (iii) each trust agreement or insurance contract, if
any, to which CDR or any of its subsidiaries is a party relating to such Benefit
Plan; and (iv) the current summary plan description for each ERISA Plan.
(b) With respect to the CDR Benefit Plans, individually and in
the aggregate, no event has occurred, and to the knowledge of CDR there exists
no condition or set of circumstances in connection with which CDR could be
subject to any liability that could reasonably be expected to have a Material
Adverse Effect on CDR (except liability for benefits, claims and funding
obligations payable in the ordinary course), under ERISA, the Code or any other
applicable law.
(c) With respect to the CDR Benefit Plans, individually and in
the aggregate, there are no benefit obligations for which contributions have not
been made or properly accrued, or which have not been accounted for by reserve,
or otherwise properly footnoted in accordance with generally accepted accounting
principles, on the Financial Statements, which obligations could reasonably be
expected to have a Material Adverse Effect on CDR. CDR does not maintain a
"welfare benefit fund", as defined in Code Section 419(e).
(d) The sole CDR Benefit Plan that is an employee pension
benefit plan within the meaning of Section 3(2) of ERISA is the CDR Associates,
Inc. Target Benefits Pension Plan (the "CDR Plan"). Except as set forth on
Schedule 3.22, (i) the CDR Plan complies in all material respects with the
applicable requirements of ERISA and the Code; (ii) the CDR Plan was established
by the adoption of an approved prototype standardized plan sponsored by SRC &
Associates, Inc., and the opinion letter issued by the IRS with respect to such
prototype plan applies to the CDR Plan; and (iii) nothing has occurred to the
knowledge of CDR that may cause the CDR Plan to cease to be qualified.
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(e) With respect to any CDR Benefit Plan that provides for
major medical coverage for retirees, such coverage for retirees may be amended
in any manner or eliminated entirely without liability to CDR, any of its
affiliates or HMS.
(f) With respect to any multiemployer plan within the meaning
of Section 3(37) of ERISA to which CDR contributes (or has at any time
contributed or had an obligation to contribute): (i) CDR has or will have, as of
the Effective Time of the Merger, made all contributions to each such
multiemployer plan required by the terms of such multiemployer plan or any
collective bargaining agreement; (ii) neither CDR nor HMS would be subject to
any withdrawal liability under Part 1 of Subtitle E of Title IV of ERISA that
could reasonably be expected to have a Material Adverse Effect on CDR, if, as of
the Effective Time of the Merger, CDR were to engage in a complete withdrawal
(as defined in ERISA Section 4203) or partial withdrawal (as defined in ERISA
Section 4205) from any such multiemployer plan; and (iii) CDR has delivered (or
will prior to the Effective Time of the Merger deliver) to HMS current, accurate
and complete copies of all such multiemployer plans to which CDR contributes and
all collective bargaining agreements requiring contributions to be made to any
such multiemployer plan or plans.
3.23 Labor Relations; Employees. CDR has generally enjoyed a
good employer-employee relationship with its employees and except as listed on
Schedule 3.23 attached hereto, no past or current CDR employee has made a claim
before any government agency or in any court against CDR or any of the
Principals or threatened to make such a claim. CDR will pay in full to the
extent possible or, if not, accrue by adequate reserves, all wages, salaries,
bonuses, sick pay, vacation pay and other direct and indirect compensation
earned by all employees of CDR through the Closing Date (whether or not payable
by such date). Upon termination of the employment of any CDR employee by HMS,
HMS will not incur any liability for any severance or termination pay or other
similar payment except as expressly provided in agreements with labor unions
listed on Schedule 3.23 or employment agreements listed on Schedule 3.25. CDR is
in compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. Except as listed on Schedule 3.23, there is no
unfair labor practice complaint against CDR pending before the National Labor
Relations Board or strike, dispute, slowdown or stoppage pending or, to the
knowledge of CDR, threatened against or involving CDR, and none has occurred
since December 31, 1995. No representation question exists respecting the
employees of CDR and no collective bargaining agreement is currently being
negotiated by CDR. Except
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as listed on Schedule 3.23, no grievance procedure or arbitration proceeding is
pending under any collective bargaining agreements.
3.24 Compensation. Schedule 3.24 contains a list of all
officers, employees (both full time and part time) and consultants of CDR during
calendar year 1995 and the first quarter of calendar year 1996, together with
their current job title (if currently employed) and aggregate remuneration rate
(salary, bonus and commission) for each such person for each respective period.
3.25 Customers and Suppliers. Schedule 3.25 is a true and
complete list of CDR's 10 largest customers and suppliers (measured by dollar
volume in each case) during calendar years 1994 and 1995 and the first quarter
of calendar year 1996 showing, with respect to each, the name and address,
dollar volume involved and nature of the relationship (including the principal
categories of products or services bought and sold).
3.26 Bank Accounts. Schedule 3.26 is a list of all bank and
investment accounts and safe deposit boxes in the name of or controlled by CDR
and a listing of the persons having signature authority or access thereto.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF HMS AND SUB
HMS represents and warrants to CDR as of the date hereof and as of the
Closing Date as follows:
4.1 Organization. Each of HMS and Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has the full power and authority
(corporate or otherwise) to carry on its business in the places and as it is now
being conducted and to own and lease the properties which it now owns and
leases.
4.2 Capital Structure. The authorized capital stock of HMS
consists of 45,000,000 shares of HMS Common, of which 16,490,825 shares were
issued and outstanding as of March 31, 1996, and 5,000,000 shares of preferred
stock, $.01 par value, of which no shares were issued and outstanding. All of
the outstanding shares of HMS Common were issued in compliance with applicable
federal and state securities laws, and no further registration, qualification or
other compliance under such securities laws is required. All of the outstanding
shares of HMS Common are validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, HMS's Certificate of
Incorporation or By-laws or any
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agreement to which HMS is a party or is bound. The authorized capital stock of
Sub consists of 200 shares of Common Stock, $.01 par value ("Sub Common"). Upon
the execution of this Agreement, 200 shares of Sub Common were validly issued
and outstanding and were and, as of the Effective Time of the Merger will be,
held by HMS of record and beneficially. An additional 2,234,444 shares of HMS
Common (the "Option Shares") are reserved for issuance upon the exercise of
options outstanding under HMS's Stock Option and Restricted Stock Purchase Plan
and HMS's Non-Employee Director Stock Option Plan as of March 31, 1996. The
Option Shares, when issued and paid for, will constitute validly issued, fully
paid and nonassessable shares of HMS Common.
4.3 Authority. HMS and Sub have all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of HMS and Sub. This Agreement has been duly executed
and delivered by HMS and Sub and constitutes valid and binding obligations of
HMS and Sub, enforceable against them in accordance with its terms , except as
such terms may be (i) limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
(including fraudulent transfer laws), and (ii) subject to general principles of
equity, including without limitation, concepts of materiality, reasonableness,
good faith and fair dealing (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Subject to satisfaction of the
conditions set forth in Sections 8.1 and 8.2, the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under (i) any provision of the Certificate of Incorporation or
Bylaws of HMS, (ii) any provision of the Articles of Incorporation or By-laws of
Sub, or (iii) any material agreement, permit, license, judgment, order, statute,
rule or regulation applicable to HMS, Sub or any Subsidiary of HMS or their
respective properties or assets, other than any such conflicts, violations,
defaults, terminations, cancellations or accelerations which individually or in
the aggregate would not have a Material Adverse Effect on HMS, Sub and HMS's
Subsidiaries.
4.4 Governmental Consents. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required by or with respect to HMS or Sub in
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connection with the execution and delivery of this Agreement by HMS and Sub or
the consummation by HMS and Sub of the transactions contemplated hereby, except
for (i) the filing of a Certificate of Merger with the Maryland Department of
Assessments and Taxation and appropriate documents with the relevant authorities
of other states in which HMS or Sub is qualified to do business, (ii) such
consents, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable state securities laws and the laws
of any foreign country, (iii) the filing of such reports under Section 13 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be
required in connection with this Agreement and the transactions contemplated
hereby, and (iv) such other consents, authorizations, filings, approvals and
registrations which if not obtained or made would not have a Material Adverse
Effect on HMS, Sub and Subsidiaries.
4.5 SEC Documents. HMS has furnished, or made available to
counsel for CDR, a true and complete copy of each report, registration statement
and definitive proxy statement filed by HMS with the SEC since December 17, 1992
(the "HMS SEC Documents"), which are all the documents (other than preliminary
material) that HMS was required to file with the SEC since December 17, 1992. As
of their respective filing dates, the HMS SEC Documents (excluding (i) any
information (including financial information) contained or incorporated by
reference into any HMS SEC Document with respect CDR and (ii) any pro forma
financial information included in any HMS SEC Document, as to which no
representations are made by HMS), complied in all material respects with the
requirements of the Exchange Act or the Act, and none of the HMS SEC Documents
(excluding (i) any information (including financial information) contained or
incorporated by reference into any HMS SEC Document with respect CDR and (ii)
any pro forma financial information or projections included in any HMS SEC
Document, as to which no representations are made by HMS) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading, except to
the extent corrected by a subsequently filed HMS SEC Document. In addition, HMS
has furnished CDR copies of its Stock Option and Restricted Stock Purchase Plan
and its Employee Stock Purchase Plan, as such Plans are in effect as of the date
of this Agreement.
4.6 Information Supplied. None of the information provided or
to be provided by HMS to CDR in writing in connection with the transactions
contemplated by this Agreement contains or will contain any untrue statement of
a material fact or omits or will omit to state any material fact required to be
stated therein or
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necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. In addition, any such information
provided in writing for the specific purpose of inclusion in the Form S-3 will
contain all material statements which are required to be stated therein in
accordance with the Act and the Regulations, and will in all material respects
conform to the requirements of the Act and the Regulations (excluding (i) any
information (including financial information) contained or incorporated by
reference into the Form S-3 with respect CDR and (ii) any pro forma financial
information included in the Form S-3, as to which no representations are made by
HMS). To the extent facts or circumstances occur subsequent to the provision by
HMS of any written information to CDR which causes such information to become
materially misleading, HMS will update such information in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. HMS's obligation to update hereunder shall commence as of the date
of this Agreement and shall continue thereafter until the later to occur of (i)
the Closing Date, (ii) the date on which the Form S-3 relating to the HMS Common
to be issued in connection with the Merger is filed with the SEC or (iii) the
date on which the Form S- 3 is declared effective by the SEC.
4.7 No Conflict. The execution and delivery of this Agree-
ment and the Merger Agreement by HMS, and the performance of its obligations
hereunder or thereunder, (i) are not in violation or breach of, and will not
conflict with or constitute a default under, any of the terms of the Certificate
of Incorporation or Bylaws of HMS or any of its Subsidiaries, or any material
contract, agreement or commitment binding upon HMS or any of its Subsidiaries or
any of their assets or properties; (ii) will not give rise to a right by any
party to terminate its obligations under any HMS material agreement; (iii) will
not result in the creation or imposition of any lien, encumbrance, equity or
restriction in favor of any third party upon any of the material assets or
properties of HMS or any of its Subsidiaries; and (iv) will not conflict with or
violate any applicable law, rule, regulation, judgment, order or decree of any
government, governmental instrumentality or court having jurisdiction over HMS
or any of its Subsidiaries or any of their assets or properties.
4.8 Shares of Common Stock. The shares of HMS Common will,
when issued and delivered to the shareholders of CDR in accordance with this
Agreement, be duly authorized, validly issued, fully paid and nonassessable,
free from all liens and encumbrances and not subject to pre-emptive rights or
restrictions on transfer, except as provided in this Agreement and under the
federal and state securities laws.
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4.9 Accounting Matters. (i) Neither HMS nor any of its
Subsidiaries has through the date of this Agreement taken or agreed to take any
action (without giving effect to any action taken or agreed to be taken by CDR),
and (ii) no facts or circumstances exist with regard to HMS or any of its
Subsidiaries, which in each case could reasonably be expected to prevent HMS
from accounting for the business combination to be effected by the Merger as a
pooling of interests.
4.10 No Prior Activities. Sub has not incurred any liabilities
or obligations, except those incurred in connection with its incorporation or
with the negotiation and consummation of this Agreement and the transactions
contemplated hereby. Sub has not engaged in any business or activities of any
type or kind whatsoever, or entered into any agreements or arrangements with any
person or entity, and is not subject to or bound by any obligation or
undertaking which are not contemplated by this Agreement or incurred in
connection with its incorporation.
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continu-
ing until the Effective Time of the Merger, CDR agrees (except as expressly
contemplated by this Agreement or to the extent that HMS shall otherwise consent
in writing) that:
5.1 Ordinary Course. CDR will use all reasonable efforts,
consistent with its past practice and policy to: (i) carry on its business in
the usual, regular and ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent with such business; (ii) to
preserve intact its present business organization; (iii) keep available the
services of its present officers and key employees and preserve its relationship
with customers, suppliers and others having business dealings with it; and (iv)
maintain continuously insurance coverage substantially equivalent to the
insurance coverage in existence on the date of this Agreement. In addition, CDR
will not engage in any transaction not in the ordinary course consistent with
its past practices, nor will CDR enter into any new Material Agreement or amend
any existing Material Agreement (other than minor modifications) without the
prior written consent of HMS.
5.2 Dividends; Changes in Stock. CDR shall not: (i) declare,
pay or promise to pay any dividends on or make other distributions in respect of
any of its capital stock, (ii) split, combine or reclassify any of its capital
stock or issue or
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authorize the issuance of any other securities in respect of, in lieu of or in
substitution for shares of capital stock of CDR or (iii) repurchase or otherwise
acquire any shares of its capital stock. Notwithstanding the foregoing, CDR may,
as a corporation qualified under Subchapter S of the Code, continue to make
quarterly distributions (in addition to usual and customary salary payments) to
its shareholders in a manner consistent with past practices, provided that CDR
shall establish a reserve sufficient to offset the expenses incurred by it in
connection with the transactions contemplated by this Agreement prior to making
any such distributions for the quarter ended March 31, 1996, and after the
minimum net cash required by Section 7.19 has been set aside and reserved.
5.3 Issuance of Securities. CDR shall not issue, deliver or
sell or authorize, promise or propose the issuance, delivery or sale of, or
purchase or promise or propose the purchase of, any shares of its capital stock
or any class of securities exercisable or convertible into or exchangeable for,
or rights, warrants or options to acquire, any such shares or other convertible
securities.
5.4 Governing Documents. CDR shall not amend its Articles of
Incorporation or By-laws, except as contemplated in this Agreement.
5.5 No Acquisitions. CDR shall not acquire or agree to acquire
by merging or consolidating with, or by purchasing a substantial portion of the
assets of, or by any other manner, any business of any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to acquire any assets which are material, individually or in
the aggregate, to CDR taken as a whole, except with the prior written consent of
HMS.
5.6 No Dispositions. CDR shall not sell, lease or otherwise
dispose of any of its assets, which are material, individually or in the
aggregate, to CDR, except in the ordinary course of business consistent with
prior practice, provided, however, that any such sale, lease or other
disposition of assets for a sales price in excess of $25,000 shall require the
prior written consent of HMS.
5.7 Indebtedness. CDR shall not incur any indebtedness for
borrowed money, or guarantee any such indebtedness or issue or sell or promise
to issue or sell, any debt securities of CDR or guarantee any debt securities of
others.
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5.8 Benefit Plans, Etc. CDR shall not adopt or amend in any
material respect any agreement with employees, other than as provided in this
Agreement.
5.9 Accounting Practices. CDR shall not alter the manner of
keeping its books, accounts or records, or change in any manner the accounting
practices therein reflected.
5.10 No Solicitation; Competing Transactions. CDR shall not,
nor shall it permit any of its directors, officers, employees or agents,
directly or indirectly, to (a) solicit, initiate, encourage or participate in
any discussions or negotiations with respect to, or to take any other action to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any offer or proposal to directly or
indirectly acquire outside the ordinary course of business any of the business,
properties or the CDR Capital Stock, whether by merger, consolidation, proxy
solicitation, tender or exchange offer, business combination, purchase of assets
or otherwise, other than the transactions contemplated by this Agreement (a
"Competing Transaction"), or (b) except as required by law, to furnish or
disclose to any person, other than HMS or its agents, any information not
customarily disclosed concerning the business, assets, liabilities, properties
and personnel of CDR, or afford to any person other than HMS and its agents
access to the properties, books or records of CDR. If CDR receives any offer or
proposal, written or otherwise, of the type referred to above, CDR promptly
shall inform HMS of such offer or proposal and furnish HMS with a copy thereof
if such offer or proposal is in writing.
5.11 Other Agreements. CDR shall not agree, in writing or
otherwise, to do any of the foregoing.
ARTICLE 6.
REGISTRATION RIGHTS
6.1 Certain Definitions. For purposes of this Article 6, the
following definitions shall apply:
(a) "Registrable Securities" means the shares of HMS Common
that will be issued to the Principals pursuant to the Merger and any shares or
other securities received in exchange for, or as dividends or distributions on
or with respect to, such shares of HMS Common or other securities.
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(b) "Holders" means and includes (a) each Principal, while he
continues to own any of the Registrable Securities and (b) each person who
purchases or otherwise receives ownership of any of the Registrable Securities
in a transaction or chain of transactions not involving any public offering,
while such person continues to own any such securities.
6.2 HMS to Register Shares.
(a) Preparation and Filing of Registration Statement. Promptly
after the execution of this Agreement, HMS shall prepare a suitable registration
statement on Form S-3 for registration of the Registrable Securities under the
Act and Rule 415 thereunder for resale by the Holders or any of them (as filed,
and as it may be amended or superseded from time to time, the "Registration
Statement"). HMS shall file the Registration Statement with the SEC as soon as
is practicable after the execution of this Agreement and shall use all diligent
best efforts to achieve the effectiveness of the Registration Statement so as to
permit the public sale of such Registrable Securities by the Holders or any of
them.
(b) Information to be Supplied by Holders. To permit such
registration, each Holder shall provide to HMS in writing such information
regarding such Holder as HMS may reasonably request as necessary for preparation
of the Registration Statement and to permit HMS to comply with the applicable
requirements of the SEC, to obtain any desired acceleration of the effective
date of the Registration Statement, and/or to keep the Registration Statement
current and effective. Each Holder shall keep HMS advised from time to time of
any material changes to the information previously supplied and reflected in the
Registration Statement.
(c) Restrictions on Resale. During the period of two years
from the Closing Date, each Holder shall not, directly or indirectly, sell,
pledge, create a security interest in or lien upon, or otherwise voluntarily,
encumber or dispose of, in excess of (i) 50% of the Registrable Securities owned
by such Holder during the first twelve months following the Closing Date and
(ii) an additional 20% (or an aggregate of 70%) of the originally issued
Registrable Securities owned by such holder during the second twelve months
following the Closing Date.
6.3 Associated Obligations of HMS. As to the offering of
Registrable Securities covered by a Registration Statement, HMS shall:
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(a) promptly notify each Holder and confirm such advice in
writing (i) when such Registration Statement has become effective and (ii) of
any request by the SEC for any amendment or supplement to such Registration
Statement or any prospectus relating thereto (any such prospectus being referred
to herein as the "Prospectus") or for additional information;
(b) furnish to each Holder a reasonable number of copies of
any Prospectus in conformity with the requirements of the Act and, in general,
cooperate with the Holder(s) and any underwriters with respect to the
satisfaction of all requirements of the securities laws for the proposed
offering and sale;
(c) use all diligent best efforts to qualify, not later than
the effective date of such Registration Statement, the Registrable Securities of
the Holders for sale under the "Blue Sky" laws of such states as the Holders may
reasonably request (except to the extent that such shares are exempt from such
qualification);
(d) until the earlier of (a) three years after the Effective
Time of the Merger and (b) such times as all of the Registrable Securities have
been publicly sold by their respective Holders, keep the Registration Statement
and state qualifications in effect and current and from time to time supplement
or amend the Registration Statement and the prospectus in compliance with the
Act and the rules and regulations thereunder (including Rule 415) and comparable
provisions of state securities law and regulations (or, if necessary, promptly
file a new or superseding Registration Statement and/or application(s) for state
qualification(s) or exemption(s) and promptly cause them to become effective) so
as to permit the sale and distribution of the Registrable Securities. If at any
time the SEC or any state should institute or threaten to institute any
proceedings for the purpose of issuing, or should issue, a stop order suspending
the effectiveness of any such Registration Statement or state qualification or
registration, HMS will promptly notify each Holder and will use its best efforts
to prevent the issuance of any such stop order or to obtain the withdrawal
thereof as soon as possible; and
(e) promptly (i) give written notice to each Holder if, at any
time, it has reason to believe that different or additional disclosure is
required in the Prospectus and/or Registration Statement, including a specific
description of any inadequacies or inaccuracies in the then current disclosures
and a specific statement of the reasons for and circumstances relating to such
inadequacy or inaccuracy, provided that, in the case of material
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non-public information or trade secrets, if HMS immediately requests each Holder
to provide a written pledge from such Holder that such information will be
treated confidentially, HMS may delay disclosing such reasons and circumstances
to any Holder until it receives such a written pledge from him, and (ii) prepare
and file any supplements or amendments to the prospectus and/or Registration
Statement as may be necessary or appropriate to reflect such additional or
amended disclosures as may be required to permit continued public sales, or the
prompt resumption of public sales, of the Registrable Securities.
HMS acknowledges, with respect to the above commitments, its
obligation promptly to provide all necessary information and disclosures, make
all filings, and comply with all regulations and requirements of regulatory
authorities in order to obtain and maintain the effectiveness of the
registrations provided for herein.
6.4 Expenses. The out-of-pocket costs and expenses incurred in
connection with the above described federal and state registrations and
qualifications shall be borne by HMS. Such costs and expenses shall include,
without limitation, the fees and expenses of HMS's counsel and its accountants
and other out-of-pocket costs and expenses of HMS incident to the preparation
and filing under the Act of the Registration Statement and all amendments and
supplements thereto and the cost of furnishing a reasonable number of copies of
each final prospectus and each amendment or supplement thereto to underwriters,
dealers and other purchasers of the securities so registered, the costs and
expenses incurred in connection with the qualification of such securities so
registered under the "blue sky" laws of various jurisdictions, and any other
costs and expenses of complying with the foregoing provisions of this Article 6
with respect to such registration (the "Registration Expenses"). The foregoing
notwithstanding, (i) each Holder shall be responsible for any underwriting
discounts and commissions with respect to sales of his Registrable and Remaining
Securities and (ii) to the extent that any of the out-of-pocket costs referred
to above in this Section 6.4 are occasioned, or increased, because of the
engagement of an underwriter or underwriters by one or more of the Holders
and/or by the use of any underwriter in the offering of Registrable or Remaining
Securities by one or more of the Holders, such costs shall be the responsibility
of the respective Holder(s).
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6.5 Indemnification.
(a) Indemnification by HMS. HMS hereby indemnifies and agrees
to hold harmless the Holders, any underwriter (as defined in the Act) of shares
offered by the Holders, and each person, if any, who controls the Holders or any
such Underwriter within the meaning of Section 15 of the Act against any losses,
claims, damages or liabilities (collectively, "Losses"), to which any such
persons may be subject, under the Act or otherwise, and to reimburse any of such
persons for any legal or other expenses reasonably incurred by them in
connection with investigating any claims or defending against any actions,
insofar as such Losses arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement under which such Registrable Securities were registered under the Act
pursuant to this Article 6, any prospectus contained therein (if used during the
period appropriate for such prospectus) or any amendment or supplement thereto,
or on the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, except insofar as
such Losses arise out of or are based upon any such untrue statement or omission
or alleged untrue statement or omission made in reliance upon and in conformity
with (i) information furnished in writing to HMS by the Holders or any
underwriter for the Holders expressly and specifically for use therein or (ii)
the CDR Financial Statements or any other financial statements or related
financial information of CDR provided to HMS in writing by any of the
Principals.
(b) Indemnification by the Holders. Each Principal hereby
agrees, and each Holder and underwriter, by agreeing to participate in such
offering, shall agree, in the same manner and to the same extent as set forth in
the preceding paragraph, to indemnify and to hold harmless HMS and its directors
and officers and each person, if any, who controls HMS within the meaning of the
Act against any Losses to which any of such persons may be subject under the Act
or otherwise, and to reimburse any of such persons for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending against any such Losses, but only to the extent such Losses arise out
of or are based upon an untrue statement or alleged untrue statement or omission
or alleged omission of a material fact in any Registration Statement under which
the Registrable Securities were registered under the Act pursuant to this
Article 6, any prospectus contained therein, or any amendment or supplement
thereto, which was based upon and made in conformity with (i)
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information furnished in writing to HMS by the Holders or such underwriter
expressly and specifically for use therein or (ii) the CDR Financial Statements
or any other financial statements or related financial information of CDR
provided to HMS in writing by any of the Principals; provided that the maximum
aggregate amount of such indemnification for which any Holder shall be
responsible (for all indemnified parties) shall not exceed the net proceeds of
the offering received by such Holder; and the maximum aggregate amount of such
indemnification for which any such underwriter shall be responsible (for all
indemnified parties) shall not exceed the aggregate commissions or discounts
received by such underwriter in connection with the offering.
(c) Notification. Each party indemnified under Section 6.5(a)
or (b) shall, promptly after receipt of notice of the commencement of any action
against such indemnified party in respect of which indemnity may be sought,
notify the indemnifying party in writing of the commencement thereof. The
failure or omission of any indemnified party so to notify an indemnifying party
of any such action shall relieve the indemnifying party from liability in
respect of such action which it may have to such indemnified party on account of
the indemnity agreement contained in this Section 6.5 only to the extent, if
any, that the indemnifying party was prejudiced by such omission. In case any
such action shall be brought against any indemnified party and it shall notify
an indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and,
after notice from the indemnifying party to such indemnified party under this
Section 6.5 of its election to assume the defense thereof, the indemnifying
party shall not be liable to the indemnified party pursuant to the provisions of
this Section 6.5 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than the
reasonable costs of investigation; provided, however, that the indemnifying
party shall remain liable for the reasonable costs of separate counsel for the
indemnified party if and to the extent that the indemnified party reasonably
determines that it requires separate counsel in view of a conflict of interest
affecting the counsel designated by the indemnifying party; and provided,
further, that no indemnifying party shall be required to pay the costs of
separate counsel for each of the indemnified parties individually by reason of
the above proviso but only an amount equal to the costs of a single separate
counsel for all of them as a group.
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ARTICLE 7.
ADDITIONAL AGREEMENTS
7.1 Access to Information. CDR shall afford to HMS and to
HMS's accountants, counsel and other representatives, reasonable access during
normal business hours during the period prior to the Effective Time of the
Merger to all of CDR's properties, books, contracts, commitments and records
and, during such period, CDR shall use all reasonable efforts to furnish
promptly to HMS all other information concerning the business, properties and
personnel of CDR as HMS may reasonably request, provided that CDR shall not be
required to disclose any information which it is legally required to keep
confidential. CDR shall request a waiver of any such confidentiality
requirement. All such information will be considered as confidential and subject
to the terms of that Confidentiality Agreement between HMS and Wallingford dated
January 16, 1996. HMS will not use such information for purposes other than this
Agreement and will otherwise hold such information in confidence (and will cause
its consultants and advisors also to hold such information in confidence) until
such time as such information otherwise becomes publicly available, and in the
event of termination of this Agreement for any reason, HMS shall promptly
return, or cause to be returned, to CDR all nonpublic documents obtained from
CDR which it would not otherwise have been entitled to obtain, and any copies
made of such documents, extracts and copies thereof, as well as schedules,
exhibits or other documents contained in or derived from such information.
Notwithstanding the foregoing, HMS shall be permitted to disclose such
information in its filings with the SEC as and to the extent required under
applicable federal securities laws.
7.2 Legal Conditions to the Merger. Each party will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on such party with respect to the Merger and will promptly
cooperate with and furnish information to the other party in connection with any
such requirements imposed upon such other party in connection with the Merger.
Each party will take all reasonable actions to obtain, and to cooperate with the
other party with respect to, any consent, authorization, order or approval of,
or any exemption by, any Governmental Entity, or other third party, required to
be obtained or made by such party or its Subsidiaries in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement.
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7.3 Affiliates. Schedule 7.3 sets forth a list of names and
addresses of those persons, who may be deemed "affiliates" of CDR within the
meaning of Rule 145 under the Securities Act ("Rule 145") or from whom a letter
in the form of Exhibit D hereto (the "Affiliate Letter") may be necessary in
order for the Merger to qualify as a pooling of interests transaction (each such
person, together with the persons identified below, an "Affiliate"). CDR shall
provide HMS such information and documents as HMS shall reasonably request for
purposes of reviewing such list. There shall be added to such list the names and
addresses of any other person who becomes an Affiliate of CDR at any time after
the date hereof up to and including the time of the CDR shareholder meeting
called to consider and approve this Agreement and the Merger or who HMS
reasonably identifies (by written notice to CDR) as being a person who may be
deemed to be an Affiliate of CDR. CDR shall use its best efforts to deliver or
cause to be delivered to HMS, concurrent herewith, or as promptly as practicable
after the date hereof, from each of the Affiliates identified on Schedule 7.3
(as the same may be supplemented as aforesaid), the Affiliate Letter.
If any Affiliate of CDR refuses to provide an Affiliate
Letter, HMS shall in lieu of receipt of such letter be entitled to place
appropriate legends on the certificates evidencing HMS Common to be received by
such Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stock transfer instructions to the transfer agent for HMS Common, to
the effect that the shares of HMS Common received or to be received by such
Affiliate pursuant to the terms of this Agreement may only be sold, transferred
or otherwise conveyed, and the holder thereof may only reduce his interest in or
risks relating to such shares of HMS Common, pursuant to an effective
registration statement under the Act or in accordance with the provisions of
Paragraph (d) of Rule 145 and, in any event, only after financial results
covering at least 30 days of combined operations of HMS and CDR after the
Effective Time of the Merger shall have been published. The foregoing
restrictions on the transferability of HMS Common shall apply to all purported
sales, transfers and other conveyances of the shares of HMS Common received or
to be received by such Affiliate pursuant to this Agreement and to all purported
reductions in the interest in or risks relating to such shares of HMS Common
whether or not such Affiliate has exchanged the certificates previously
evidencing such Affiliate's shares of CDR Capital Stock for certificates
evidencing the shares of HMS Common into which such shares of CDR Capital Stock
were converted.
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7.4 CDR Shareholders' Approval. CDR agrees to submit this
Agreement and any related matters to its shareholders for approval, as provided
by law and its Articles of Incorporation and By-laws, immediately following the
execution of this Agreement. The Board of Directors of CDR will unanimously
recommend to the CDR shareholders that such shareholders approve the
transactions contemplated by this Agreement. In consideration for the execution
of this Agreement by HMS and Sub, each of the Principals agrees to vote all
shares of CDR Capital Stock held by such Principal entitled to vote at the CDR
Shareholders' Meeting (and at any adjournment thereof) in favor of this
Agreement (or to provide appropriate written consents with respect thereto).
7.5 Dissenting Shares. As promptly as practicable after the
date of the CDR Shareholders' Meeting and prior to the Closing Date, CDR shall
furnish HMS with the name, address and number of Dissenting Shares owned by each
Dissenting Shareholder.
7.6 Blue Sky Laws. HMS shall take such steps as may be
necessary to comply with the securities and Blue Sky laws of all jurisdictions
which are applicable in connection with the Merger. CDR shall use its reasonable
efforts to assist HMS as may be necessary to comply with such laws.
7.7 Non-Competition Agreements. CDR and each of the Principals
shall, at the Closing, execute an agreement not to compete with the business of
CDR and HMS (or any successor corporations) for a period of three (3) years
after the termination of their employment. Each agreement shall be in the form
attached hereto as Exhibit E.
7.8 Employee Benefits. HMS agrees that, after the Closing
Date, CDR employees will be afforded the opportunity to participate in benefits
and equity acquisition programs that are currently available to all HMS
employees. Within 60 days after the Closing Date, CDR will terminate the CDR
Plan. The Principals will be responsible for all costs associated with the CDR
Plan termination including, but not limited to, plan funding, IRS notification,
associated attorney fees, and record keeping expense.
7.9 Stock Options at Closing. At the Closing Date, HMS will
cause options ("Closing Options") to purchase an aggregate of 100,000 shares of
HMS Common to be issued to the Principals pro rata in proportion to their
holdings of CDR Capital Stock, or to such other senior management and employees
of CDR as the Principals may direct. It is anticipated that the Closing
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Options will be exercisable for a period of ten (10) years, will have an
exercise price equal to the fair market value of HMS Common on the Closing Date
and will be deemed to be "incentive stock options," to the maximum extent
permissible under the Code. It is further anticipated that the Closing Options,
which will be subject to continued employment, will have a vesting schedule
spanning four years, with one-third of the Closing Options vesting on October
31, 1997, an additional one-third of the Closing Options vesting on October 31,
1998 and the remaining Closing Options vesting on October 31, 1999.
7.10 Communications. Between the date hereof and the Effective
Time of the Merger, neither CDR nor HMS will furnish any communication to its
shareholders or to the public generally if the subject matter thereof relates to
the other party or to the transactions contemplated by this Agreement without
the prior approval of the other party as to the content hereof, which approval
shall not be unreasonably withheld; provided, however, that HMS shall be
entitled to make any disclosure to the public as it shall reasonably believe to
be necessary to comply with the requirements of federal or state securities laws
or the Nasdaq National Market System (provided that, in such event, HMS shall
make reasonable efforts to advise CDR in advance of such disclosure).
7.11 Delivery of Stock Certificates. HMS will issue and
deliver as and when required by the provisions of this Agreement, certificates
representing the shares of HMS Common into which the shares of CDR Capital Stock
outstanding immediately prior to the Effective Time of the Merger shall have
been converted as provided herein.
7.12 Parachute Payments. CDR shall comply with the provisions
of Section 208G(b)(5)(A)(ii) of the Code, such that neither HMS, Sub, CDR or any
entity affiliated therewith shall be considered by the IRS to have paid (at any
time before or after the Merger) a parachute payment to a person who is or was a
disqualified individual (within the meaning of Section 280G(c) the Code) of CDR
or any entity affiliated therewith.
7.13 Notification of Certain Matters. CDR shall give prompt
notice to HMS and HMS shall give prompt notice to CDR, of (i) the occurrence, or
non-occurrence, of any event the occurrence, or non-occurrence, of which would,
in the reasonable judgment of their respective management, be likely to cause
either (a) any representation or warranty contained in this Agreement to be
untrue or inaccurate in any material respect at any time from the date of this
Agreement to the Effective Time of the Merger or (b)
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any condition set forth herein to be unsatisfied in any material respect at any
time from the date of this Agreement to the Effective Time of the Merger, and
(ii) any material failure of CDR, HMS or Sub, as the case may be, to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder, provided that the delivery of any notice pursuant to this
Section 7.15 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
7.14 Tax Treatment. CDR and HMS shall, and from and after the
Effective Time of the Merger HMS shall, use best efforts to qualify the Merger,
and shall use best efforts not to take any action to cause the Merger not to
qualify, as a reorganization under Section 368(a) of the Code. From and after
the Effective Time of the Merger, (i) HMS shall cause the Surviving Corporation
to continue CDR's historic business or use a significant portion of CDR's
historic business assets in a business within the meaning of Treasury Regulation
Section 1.368-1(d), and (ii) HMS and Sub shall, and HMS shall cause the
Surviving Corporation to, treat the Merger as a "reorganization" within the
meaning of Section 368(a) of the Code and shall file such information with their
income tax returns as may be required by Treasury Regulation Section 1.368-3 or
other applicable law.
7.15 Wallingford Fee. The fee of Wallingford in the amount of
$380,000, as provided for in the engagement agreement between CDR and
Wallingford, and thereafter agreed to by CDR, Wallingford and HMS, will be paid
via an HMS check, which will be delivered immediately following the Effective
Time of the Merger.
7.16 Confirmation as to Accounting Treatment. Immediately
following the mutual execution and delivery of this Agreement, HMS shall take
all reasonable and customary steps to obtain from the staff of the SEC a formal
or informal concurrence that the Merger may be treated as a pooling of
interests. As requested by HMS, CDR will cooperate reasonably with HMS toward
this objective.
7.17 Nasdaq Listing. Prior to the Closing Date, HMS shall have
prepared and filed with the National Association of Securities Dealers, Inc. an
Additional Listing Application covering the shares of HMS Common to be issued in
the Merger so that such shares will be listed on the Nasdaq National Market
System upon official notice of issuance.
7.18 Sub Sole Stockholder's Approval. HMS agrees, in its
capacity as the sole stockholder of Sub, to approve this
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Agreement and any related matters, as provided by law and Sub's Articles of
Incorporation and By-laws, immediately following the execution of this
Agreement.
7.19 CDR Minimum Net Cash. On the Closing Date, CDR shall have
net cash of not less than $235,000, after (i) deduction of all CDR transaction
expenses (consisting of legal, accounting and pension termination expenses
estimated to be approximately $38,000), all operating expenses (billed and
accrued) through the Closing Date and all amounts owed to insurance companies
(estimated to be approximately $149,470), and (ii) repayment of all shareholder
loans ($124,132).
ARTICLE 8.
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligations to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction, or to the waiver by such party, on or prior to the
Closing Date, of each of the following conditions:
(a) Shareholder Approval. This Agreement shall have been
approved and adopted by the required affirmative vote of (i) the holders of the
outstanding shares of CDR Capital Stock and (ii) HMS in its capacity as the sole
stockholder of Sub.
(b) Government Approvals. All authorizations, consents, orders
or approvals of, or declarations or filings with, or expiration of waiting
periods imposed by, any Governmental Entity necessary for the consummation of
the transactions contemplated by this Agreement including, but not limited to,
such requirements under applicable state securities laws, shall have been filed,
occurred or been obtained, other than filings with and approvals by foreign
governments relating to the Merger if failure to make such filings or obtain
such approvals would not be materially adverse to HMS or its Subsidiaries taken
as a whole, or CDR.
(c) Third-Party Approvals. Any and all consents or approvals
required from third parties shall have been obtained.
(d) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
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or seeking the imposition against CDR or HMS of substantial damages if the
Merger is consummated, shall be pending or threatened which, in the good faith
judgment of CDR's or HMS's Board of Directors has a reasonable probability of
resulting in such order, injunction or damages. In the event any such order or
injunction shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted.
(e) Statutes. No statute, rule or regulation shall have been
enacted by the government of the United States or any state or agency thereof
which would make the consummation of the Merger illegal.
(f) Nasdaq HMS Listing. The shares of HMS Common to be issued
in the Merger shall have been duly listed on the Nasdaq National Market System,
subject to official notice of issuance.
8.2 Conditions to Obligations of HMS and Sub. The obligations
of HMS and Sub to effect the Merger are subject to the satisfaction on or prior
to the Closing Date of the following conditions, unless waived by HMS and Sub:
(a) Representations and Warranties. The representations and
warranties of CDR set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing Date,
and HMS shall have received a certificate or certificates to such effect signed
by the Chief Executive and Chief Financial Officers of CDR.
(b) Performance of Obligations of CDR. CDR shall have
performed in all material respects all obligations required to be performed by
it under this Agreement prior to the Closing Date, and HMS shall have received a
certificate signed by the Chief Executive Officer of CDR to such effect.
(c) Opinion of CDR's Counsel. HMS shall have received an
opinion dated the Closing Date of Miles & Stockbridge, counsel to CDR,
substantially in the form set forth in Exhibit F attached hereto.
(d) Affiliate's Agreement. Persons who are identified as
affiliates of CDR pursuant to Section 7.3 shall have executed and delivered to
HMS and its counsel the Affiliate's Letters.
(e) Non-Competition Agreements. The non-competition agreements
of the Principals, as contemplated under Section 7.7, shall have been duly
executed and delivered.
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(f) Dissenting CDR Shareholders. CDR shareholders owning more
than 5% of the CDR Capital Stock shall not have sought to pursue their rights as
objecting shareholders with respect to such shares.
(g) Pooling Treatment. HMS shall have obtained from the staff
of the SEC and/or its independent outside accountants a formal or informal
concurrence that the Merger may be treated for accounting purposes as a pooling
of interests.
(h) No Adverse Change in the Business of CDR. HMS shall have
received a certificate signed by the Chief Executive and Chief Financial
Officers of CDR that since the date of the Interim Financial Statements there
has been no Material Adverse Change in the business of CDR.
(i) Corporate Action. HMS shall have received from CDR
certified copies of resolutions of CDR's shareholders and Board of Directors
approving and adopting this Agreement and the transactions contemplated hereby,
and HMS shall have received a certificate signed on behalf of CDR by the
corporate secretary of CDR to such effect.
8.3 Conditions to Obligations of CDR. The obligations of CDR
to effect the Merger are subject to the satisfaction on or prior to the Closing
Date of the following conditions unless waived by CDR:
(a) Representations and Warranties. The representations and
warranties of HMS and Sub set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the Closing
Date, and CDR shall have received a certificate signed by the Chief Executive
and Principal Accounting Officers of HMS to such effect.
(b) Performance of Obligations of HMS and Sub. HMS and Sub
shall have performed all obligations required to be performed by them under this
Agreement prior to the Closing Date, and CDR shall have received a certificate
signed by the Chief Executive Officer of HMS to such effect.
(c) Opinion of HMS's Counsel. CDR shall have received an
opinion dated the Closing Date of Coleman & Rhine LLP, counsel to HMS,
substantially in the form set forth in Exhibit G attached hereto.
(d) Corporate Action. CDR shall have received from HMS
certified copies of resolutions of Sub's sole shareholder and of
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HMS's and Sub's Boards of Directors approving and adopting this Agreement and
the transactions contemplated hereby, and CDR shall have received a certificate
signed on behalf of each of HMS and Sub by the corporate secretary of each such
company to such effect.
ARTICLE 9.
INVESTMENT REPRESENTATIONS OF THE PRINCIPALS
The Principals hereby represent that they are acquiring the
shares of HMS Common to be issued pursuant to the Merger for their own accounts
for the purpose of investment and not with a view to, or for sale in connection
with, any distribution thereof except as otherwise contemplated by this
Agreement. The Principals further represent that they understand that (i) the
shares of HMS Common have not been registered under the Act pursuant to the
exemption afforded by Section 4.2 thereof, (ii) the shares must be held
indefinitely unless a subsequent disposition thereof is registered under the Act
or is exempt from such registration, (iii) the shares will bear a legend to such
effect and (iv) HMS will make a notation on its transfer books to such effect.
The Principals further understand that the exemption from registration afforded
by Rule 144 under the Securities Act depends upon the satisfaction of various
conditions and that, if applicable, Rule 144 affords the basis of sales of the
shares in limited amounts under certain conditions.
ARTICLE 10.
CLOSING
10.1 Closing Date. The Closing under this Agreement (the
"Closing") shall be held not more than five (5) business days following (a) the
delivery to HMS of the CDR Financial Statements as provided in Section 8.2(f)
hereof and (b) satisfaction of all other conditions precedent to the Merger
specified in this Agreement, unless duly waived by the party entitled to
satisfaction thereof. The parties hereto anticipate that the Closing will occur
on or before April 30, 1996. In any event, if the Closing has not occurred on or
before May 31, 1996, this Agreement may be terminated as provided in Article 13.
Such date on which the Closing is to be held is herein referred to as the
"Closing Date." The Closing shall be held at the offices of Coleman & Rhine LLP,
1120 Avenue of the Americas, 19th Floor, New York, New York 10036, at 10:00 a.m.
on such date, or at such other time and place as the parties may mutually agree.
40
<PAGE> 47
10.2 Filing Date. Subject to the provisions of this Agreement,
on the Closing Date, a fully-executed and acknowledged copy of this Agreement,
if required, along with required related certificates of CDR and Sub meeting the
requirements of the Maryland General Corporation Law, shall be filed with the
Maryland Department of Assessments and Taxation, all in accordance with the
provisions of this Agreement.
ARTICLE 11.
NON-COMPETITION AND NON-SOLICITATION
11.1 Statement of Intent. HMS has agreed to engage in the
Merger and to exchange shares of HMS Common for the CDR Capital Stock in
anticipation that HMS will benefit from the organization, proprietary
information and product technology, and good will pertaining to and constituting
the business operations of CDR. As a consequence, and to preserve the value of
CDR, HMS would have not have agreed to the Merger unless, for the period
specified in this Article 11, the Principals agreed, on the terms described
herein, to refrain from (a) performing services to third parties in competition
with CDR, (b) disclosing to third parties confidential information proprietary
to CDR and (c) soliciting the employment of persons employed by CDR. The
Principals hereby acknowledge the foregoing and the importance placed thereon by
HMS in the negotiations which led to this Agreement. The Principals further
acknowledge that, as the key management, professional and technical staff of
CDR, they each have had free access to the proprietary information pertaining to
the business and operations of CDR and that any violation by them of the
provisions of this Article 11 would diminish the value of CDR and thereby have
an adverse effect upon HMS. In connection with the foregoing, each Principal
represents that his experience, capabilities and circumstances are such that the
provisions of this Article 11 will not prevent him from earning a livelihood and
that the limitations set forth herein are reasonable and properly required for
the adequate protection of HMS and are primary inducement to HMS to enter into
the Merger.
11.2 Definitions. For purposes of this Article 11, the
following definitions will apply:
(a) Business. "Business" shall be defined as audit services
which enable recovery by payors of health care of inappropriate payments which
are either duplicative or the result of an improper coordination of benefits or
have resulted in a payment in excess of the payor's liability.
41
<PAGE> 48
(b) Territory. In recognition of the national scope of CDR's
business, and in order to effect the statement of intent in Section 11.1, the
geographic area covered by this Article 11 (the "Territory") shall be defined as
the Continental United States.
(c) Competing Organization. "Competing Organization" will be
defined as a business or organization which competes in the Business; provided
that, if the business or organization has distinct divisions or other operating
groups, each such division or operating group will be deemed a separate business
or organization such that a Principal may act as an officer, employee, manager,
consultant, independent contractor, advisor or provide services for any division
or operating group that does not compete in the Business.
11.3 Non-Competition. Each Principal covenants and agrees
that, for a period covering his employment by CDR and three (3) years after the
termination hereof (the "Contract Period"), he will refrain from:
(a) directly or indirectly (as a director, officer, employee,
manager, consultant, independent contractor, advisor or otherwise) engaging in
competition in the Business, or owning any interest in, performing any services
for, participating in or being connected with any "Competing Organization" (as
set forth in Section 11.2(c) above). This covenant shall not be construed to
prohibit such Principal from working in data processing, health care or related
industries, so long as the focus of the work of the Principal is not in
competition in the Business. The provisions of this Section 11.3 shall not be
deemed to prohibit such Principal's ownership of less than five (5%) of the
total shares of all classes of stock outstanding of any public company;
(b) discussing with any existing or potential client of CDR
the present or future availability of services or products of a Competing
Organization; or
(c) making any statement or doing any act intended to cause
any existing or potential client of CDR to make use of the services or purchase
the products of any Competitive Organization.
11.4 Non-Solicitation. Each Principal covenants and agrees
that, during the Contract Period, he will refrain from:
(a) directly or indirectly soliciting for employment or
advising or recommending to any other person that they employ or solicit for
employment, any employee of CDR;
42
<PAGE> 49
(b) soliciting any other employee of CDR in connection with
the formation or operations of any Competing Organization for the possible
future employment of such other employee.
11.5 Confidential Information.
(a) Each Principal acknowledges that, as a result of his prior
employment by CDR, he possesses secret and confidential information of CDR which
constitute trade secrets and is proprietary to the Business of CDR.
(b) Each Principal agrees that, during the term of his
employment by CDR and for a period of five (5) years thereafter, such Principal
will not directly or indirectly furnish, disclose or divulge any confidential or
proprietary information, methods, processes or trade secrets of CDR
(collectively, "CDR Confidential Information") to any other party or use CDR
Proprietary Information without the prior written consent of CDR. The foregoing
obligations of confidentiality and restrictions on use shall not apply to
information that: (a) was in such Principal's possession prior to his employment
with CDR and is not CDR Confidential Information; (b) was or is developed
independently by or for such Principal without breaching any obligation owed by
such Principal to CDR or HMS; (c) is rightfully received by such Principal from
a third party without breaching any obligation owed by such Principal to CDR or
HMS, if such Principal is not restricted by the third party from disclosing such
information; (d) is or becomes publicly available or readily ascertainable
through no breach of this Agreement; or (e) is information concerning such
Principal's employment generic to, or which such Principal would reasonably
learn from, similar employment in the industry.
(c) Each Principal agrees that, during the term of his
employment by CDR and for a period of one (1) year thereafter, such Principal
will return to CDR, upon request of HMS, all documents, materials, photographs,
memoranda, and all copies or reproductions thereof, or any property of a similar
or different nature containing information relating to the CDR systems or other
CDR Confidential Information. Each Principal further agrees to use diligent best
efforts to protect, guard and keep secret and confidential all CDR Confidential
Information that has come or, in the future, may come into such Principal's
possession by reason of his employment by CDR.
11.6 Remedies. The Principals agree and acknowledge that the
rights and obligations set forth under this Article 11 are of a unique and
special nature and that HMS and CDR are, therefore,
43
<PAGE> 50
without an adequate legal remedy in the event of any Principal's violation of
the covenants set forth therein. The parties, therefore, agree that the
covenants made by each Principal in this Article 11 shall be specifically
enforceable in equity in addition to all other rights and remedies, at law or in
equity, that may be available to HMS or CDR.
ARTICLE 12.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties and covenants contained in
this Agreement shall survive the Merger for the periods specified in Section
14.3. All representations, warranties and covenants in or pursuant to this
Agreement shall be deemed to be conditions to the Merger, and in the event this
Agreement shall be terminated in accordance with the terms thereof, the
provisions of Section 7.1 and Article 12 of this Agreement shall survive any
termination of this Agreement.
ARTICLE 13.
PAYMENT OF EXPENSES
HMS, Sub and CDR shall each pay their own out-of-pocket
expenses incurred incident to the preparation and carrying out of the
transactions herein contemplated, whether or not such transactions are
consummated; provided that HMS shall pay the fee of Wallingford if the Merger is
consummated, in accordance with the provisions of Section 7.15 above. If for any
reason the Merger as contemplated herein is not consummated, HMS, Sub and CDR
shall each pay their own out-of-pocket expenses incurred incident to the
preparation and carrying out of the transactions herein contemplated (including
but not limited to the fees and expenses of KPMG Peat Marwick LLP incurred in
connection with the preparation of the 1995 Financial Statements, the Prior
Financial Statements and the Interim Financial Statements, which fees and
expenses shall be the sole responsibility of CDR); provided, however, that,
unless the Merger is not consummated because of a material breach by CDR of one
or more of its representations, warranties or covenants contained herein, HMS
will reimburse CDR its actual documented costs incurred, up to a maximum of
$25,000, in consideration of the expenses incurred by CDR and the termination of
this Agreement and the Merger; and provided further, that if the Merger is not
consummated because of a material breach by CDR of one or more of its
representations, warranties or covenants contained herein, CDR will reimburse
HMS its actual documented costs incurred, up to a maximum of $25,000,
44
<PAGE> 51
in consideration of the expenses incurred by HMS and the termination of this
Agreement and the Merger.
ARTICLE 14.
TERMINATION, AMENDMENT AND WAIVER
14.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time of the Merger, whether before or after approval of
matters presented in connection with the Merger by the shareholders of CDR:
(a) by mutual written consent of CDR and HMS;
(b) by HMS or CDR, as the non-defaulting party, if there has
been a material breach of any material representation, warranty, covenant or
agreement contained in this Agreement on the part of the other party set forth
in this Agreement and, if such breach is curable, such breach has not been cured
within a ten (10) day period after written notice of such breach;
(c) by either HMS or CDR if the Merger shall not have been
consummated on or before May 31, 1996; provided, however, that if the Merger
shall not be consummated on or before May 31, 1996, because of a party's failure
to satisfy any of the conditions set forth in Sections 8.2 or 8.3, neither HMS
nor CDR may rely upon its own actions or lack thereof to terminate the
Agreement.
(d) by either HMS or CDR if (i) there shall be a final
nonappealable order of a federal or state court in effect preventing
consummation of the Merger or (ii) there shall be any action taken, or any
statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity which would make
consummation of the Merger illegal; and
(e) by either HMS or CDR if there shall be any action taken,
or any statute, rule, regulation or order enacted, promulgated or issued or
deemed applicable to the Merger by any Governmental Entity, which would (A)
prohibit HMS's or CDR's ownership or operation of all or a material portion of
the business or assets of CDR or HMS and its Subsidiaries taken as a whole, or
compel HMS or CDR to dispose of or hold separate all or a material portion of
the business or assets of CDR and its Subsidiaries taken as a whole or HMS and
its Subsidiaries taken as a whole, as a result of the Merger or (B) render HMS
or CDR unable to consummate the Merger, except for any waiting period
provisions;
45
<PAGE> 52
Where action is taken to terminate this Agreement pursuant to
this Section 13.01, it shall be sufficient for such action to be authorized by
the Board of Directors of the party taking such action.
14.2 Effect of Termination. In the event of termination of
this Agreement by either CDR or HMS as provided in Section 13.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of HMS or CDR or their respective officers or directors except as set forth
in Article 12 and except to the extent that such termination results from the
breach by a party hereto of any of its covenants or agreements set forth in this
Agreement.
14.3 Amendment. This Agreement may be amended by the parties
hereto, by action taken by their respective Board of Directors, at any time
before or after approval of matters presented in connection with the Merger by
the shareholders of CDR and Sub but, after any such shareholder approval, no
amendment shall be made which by law requires the further approval of
shareholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
14.4 Extension; Waiver. At any time prior to the Effective
Time of the Merger, any party hereto, by such corporate action as shall be
appropriate, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties made to such
party contained herein or in any document delivered pursuant hereto and (iii)
waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE 15.
INDEMNIFICATION
15.1 Indemnity by Principals. Subject to the terms and
conditions of this Article 14, each of the Principals hereby jointly and
severally agrees to indemnify, defend and hold HMS and its affiliates harmless
from and against all demands, claims, actions or causes of action, assessments,
losses, damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys, fees and expenses
46
<PAGE> 53
(collectively "Damages"), imposed upon or incurred by HMS or CDR by reason of or
resulting from:
(a) any inaccuracy or breach of any representation, warranty
or covenant of CDR contained in or made pursuant to this Agreement, or
(b) any inaccuracy or misrepresentation in any certificate or
any CDR Schedule delivered by CDR pursuant to this Agreement.
15.2 Conditions of Indemnification. The Principals'
obligations to HMS under Section shall be subject to the following terms and
conditions:
(a) within twenty (20) days after receipt of notice of
commencement of any action evidenced by service of process or other legal
pleading, or with reasonable promptness after the assertion in writing of any
claim, HMS shall give the Principals written notice thereof together with a copy
of such claim, process or other legal pleading, and the Principals shall have
the right to undertake the defense thereof through a legal representative of the
Principals' own choosing, and reasonably satisfactory to HMS.
(b) If the CDR legal representative, by the thirtieth (30th)
day after receipt of notice of any such claim (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim),
does not elect to defend against such claim, HMS (upon further notice to the
Principals) will have the right to undertake the defense, compromise or
settlement of such claim on behalf of and for the account and risk of the
Principals.
15.3 Limitations on Liability of Principals.
(a) The indemnities set forth in this Article 14 and all
representations, warranties and covenants hereunder shall survive for a period
of two (2) years following the Effective Time of the Merger, unless such
indemnities, representations, warranties and covenants of CDR hereunder pertain
to tax claims, in which event they shall survive until expiration of the
applicable statute of limitations. Upon the expiration of such respective
periods, the Principals shall have no liability for Damages under such
indemnification provisions unless HMS has been given notice of a claim asserting
liability by a third party prior to the expiration of such respective periods
and thereafter provides
47
<PAGE> 54
notice to the Principals in the manner provided in Section above.
(b) If the Principals become liable for Damages to HMS
hereunder, the Principals shall be entitled to a credit or offset against such
liability of an amount equal to ($50,000) (the "Threshold"). At such time as the
aggregate of all Damages exceeds the Threshold, HMS shall be entitled to recover
from the Principals any and all amounts for which a claim for indemnity has been
made, without regard to the Threshold.
ARTICLE 16.
GENERAL
16.1 Notices. Any notice, request, instruction or other
document to be given hereunder by any party to the other shall be in writing and
delivered personally or sent by certified mail, postage prepaid, as follows:
If to HMS or Sub:
Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Attention: President
with a copy to
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
Attention: Bruce S. Coleman, Esq.
If to CDR or Principals:
CDR Associates, Inc.
100 West Padonia Road, Suite 2A
Baltimore, Maryland 21903
Attention: Chief Executive Officer
with a copy to
Miles & Stockbridge
10 Light Street
Baltimore, Maryland 21202
Attention: Susan L. Spence, Esq.
48
<PAGE> 55
or to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
16.2 Headings. The headings of the several sections of this
Agreement are inserted for convenience of reference only and are not intended to
affect the meaning or interpretation of this Agreement.
16.3 Counterparts. This Agreement may be executed in
counterparts, and when so executed each counterpart shall be deemed to be an
original, and said counterparts together shall constitute one and the same
instrument.
16.4 Binding Nature. This Agreement shall be binding upon and
inure to the benefit of the parties hereto. Neither HMS, Sub nor CDR may assign
or transfer any rights under this Agreement.
16.5 Other Agreements. This Agreement, together with all of
the Exhibits and Schedules hereto, constitute the entire agreement and
understanding of the parties with respect to the subject matter hereof. All
other written agreements heretofore made between the parties hereto in
contemplation of this Agreement are superseded by this Agreement and are hereby
terminated in their entirety.
16.6 Good Faith. Each of the parties hereto agrees that it
shall act in good faith in an attempt to cause all the conditions precedent to
their respective obligations to be satisfied.
16.7 Applicable Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of New York, without regard to principles of conflicts of laws.
49
<PAGE> 56
IN WITNESS WHEREOF, HMS, Sub, CDR and each Principal have caused this
Agreement to be duly signed all as of the date first written
HEALTH MANAGEMENT SYSTEMS, INC.
By:
----------------------------
CDR ACQUISITION CORP.
By:
----------------------------
CDR ASSOCIATES, INC.
By:
----------------------------
-------------------------------
JEFFREY R. DONNELLY
-------------------------------
JOSEPH H. CZAJKOWSKI
50
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Health Management Systems, Inc.:
We consent to incorporation by reference in the registration statement (No.
33-91518) on Form S-3 and registration statements (Nos. 33-33706, 33-65560,
33-76638, 33-76770 and 33-95326) on Form S-8 of Health Management Systems, Inc.
of our report dated November 21, 1995, except as to note 17, which is as of
December 15, 1995 and note 1(f) which is as of May 13, 1996, relating to the
supplemental consolidated balance sheets of Health Management Systems, Inc. and
subsidiaries as of October 31, 1995 and 1994, and the related supplemental
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended October 31, 1995, and related
supplemental schedule, which report appears in Form 8-K of Health Management
Systems, Inc.
KPMG PEAT MARWICK LLP
New York, New York
May 13, 1996
<PAGE> 2
The Board of Directors
CDR Associates, Inc.:
We consent to the inclusion of our report dated March 29, 1996, with respect to
the balance sheet of CDR Associates, Inc., as of October 31, 1995, and the
related statements of operations and accumulated deficit and cash flows for the
year then ended, which report appears in the Form 8-K of Health Management
Systems, Inc., dated May 13, 1996.
KPMG Peat Marwick LLP
New York, New York
May 13, 1996
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated February 7,
1995, on our audits of the financial statements of Health Care Microsystems,
Inc. as of and for the years ended December 31, 1994 and 1993, included in this
Current Report on Form 8-K of Health Management Systems, Inc. dated May 13,
1996 in the Registration Statement on Form S-3 (File No. 33-91518) and in the
Registration Statements on Form S-8 (File Nos. 33-65560, 33-76638, 33-76770,
33-95326 and 33-33706) of Health Management Systems, Inc.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Los Angeles, California
May 10, 1996
<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Health Care microsystems, Inc.
We have audited the accompanying balance sheets of Health Care microsystems,
Inc. as of December 31, 1994 and 1993, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Health Care microsystems, Inc.
as of December 31, 1994 and 1993 and the results of its operations and cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Los Angeles, California
February 7, 1995
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Health Management Systems, Inc.:
We consent to the incorporation by reference of our report dated November 12,
1995 with respect to the consolidated financial statements of Health Information
Systems Corporation and Subsidiary as of and for the period ended October 31,
1995, included in this Current Report (Form 8-K) of Health Management Systems,
Inc. dated May 13, 1996, in the Registration Statement (Form S-3 No. 33-91518)
and Registration Statements (Form S-8 Nos. 33-65560, 33-76638, 33-76770,
33-95326 and 33-33706) of Health Management Systems, Inc.
/s/ ERNST & YOUNG LLP
New York, New York Ernst & Young LLP
May 13, 1996
<PAGE> 1
Report of Independent Auditors
The Board of Directors and Stockholders
Health Information Systems Corporation
We have audited the accompanying consolidated balance sheet of Health
Information Systems Corporation (the "Company") and subsidiary as of October 31,
1995 and the related consolidated statements of operations, stockholders' equity
and cash flows for the period from June 8, 1995 (date of inception) to October
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Information
Systems Corporation at October 31, 1995 and the consolidated results of their
operations and their cash flows for the period from June 8, 1995 (date of
inception) to October 31, 1995 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
November 12, 1995 Ernst & Young LLP
New York, New York
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL STATEMENT INFORMATION EXTRACTED FROM
THE SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS AT OCTOBER 31, 1995 AND 1994 AND
JANUARY 31, 1996 (UNAUDITED) AND THE STATEMENTS OF OPERATIONS FOR THE YEARS
ENDED OCTOBER 31, 1995, 1994 AND 1993 AND THE THREE MONTH PERIODS ENDED
JANUARY 31, 1996 (UNAUDITED AND 1995 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS YEAR YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1995 OCT-31-1995 OCT-31-1994 OCT-31-1993
<PERIOD-START> NOV-01-1995 NOV-01-1994 NOV-01-1994 NOV-01-1993 NOV-01-1992
<PERIOD-END> JAN-31-1996 JAN-31-1995 OCT-31-1995 OCT-31-1994 OCT-31-1993
<CASH> 11,843 0 10,801 14,962 0
<SECURITIES> 19,587 0 19,287 12,798 0
<RECEIVABLES> 36,765 0 31,630 24,023 0
<ALLOWANCES> (568) 0 (296) (269) 0
<INVENTORY> 0 0 0 0 0
<CURRENT-ASSETS> 73,588 0 66,046 54,294 0
<PP&E> 15,725 0 15,169 13,900 0
<DEPRECIATION> (9,903) 0 (9,295) (7,289) 0
<TOTAL-ASSETS> 94,508 0 87,384 69,777 0
<CURRENT-LIABILITIES> 24,101 0 24,403 18,352 0
<BONDS> 0 0 0 0 0
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<COMMON> 168 0 164 160 0
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<TOTAL-LIABILITY-AND-EQUITY> 94,508 0 87,384 69,777 0
<SALES> 25,390 20,985 89,727 73,176 59,949
<TOTAL-REVENUES> 25,390 20,985 89,727 73,176 59,949
<CGS> 0 0 0 0 0
<TOTAL-COSTS> 19,558 16,471 71,627 59,314 48,989
<OTHER-EXPENSES> (374) 777 103 (405) 114
<LOSS-PROVISION> 272 38 111 190 31
<INTEREST-EXPENSE> (251) (191) (942) (464) 114
<INCOME-PRETAX> 6,151 3,657 17,754 14,077 10,543
<INCOME-TAX> 2,408 1,850 8,152 6,353 4,766
<INCOME-CONTINUING> 3,743 1,807 9,602 7,724 5,777
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 (306)
<CHANGES> 0 0 0 0 0
<NET-INCOME> 3,743 1,807 9,602 7,724 5,471
<EPS-PRIMARY> .21 .11 .55 .46 .35
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
<PAGE> 1
Health Management Systems, Inc. [HMS LOGO]
401 Park Avenue South Nasdaq: HMSY
New York, New York 10016
(212) 685-4545
(212) 889-8776 (fax)
PRESS RELEASE
Release: May 1, 1996; 6:00 am
<TABLE>
<S> <C>
Contact: Felice Blanco, Assistant Corporate Secretary Patrick Hojlo
Office of Investor Relations Noonan/Russo Communications
(212) 685-4545 ext. 457 (212) 696-4455 ext. 246
</TABLE>
HEALTH MANAGEMENT SYSTEMS, INC. ACQUIRES CDR ASSOCIATES, INC.
NEW YORK, NY May 1, 1996 - Health Management Systems, Inc. (Nasdaq:HMSY)
announced the acquisition of CDR Associates, Inc. (CDR), a supplier of
third-party liability recovery services to the health care industry.
The transaction entails HMSY's issuance of 460,000 shares of its common stock in
exchange for all the shares of CDR stock. The transaction will be accounted for
using the pooling of interests method and was consummated effective April 29,
1996.
Paul J. Kerz, Chief Executive Officer of HMSY, said, "CDR's merger with HMSY
will grow and strengthen our robust Third Party Liability Recovery (TPLR)sm
proprietary service offerings. CDR complements the activities on which HMSY has
traditionally focused. We are currently moving to translate CDR's expertise into
additional revenue recoveries for existing TPLR clients."
Founded in 1989 and located in Baltimore, Maryland, CDR will continue to be led
by its founders. CDR's current clients include 15 Blue Cross and Blue Shield
plans in 12 states and the District of Columbia, as well as several commercial
insurers and HMOs.
HMSY furnishes proprietary information management services and software to
hospitals and other health care providers, government health services agencies,
other payors or purchasers of health care, and companies serving the health care
industry. The Company's offerings constitute an outsourcing of various aspects
of the information processing functions associated with the health care payment
process, affording HMSY's clients the benefits of enhanced revenue, accelerated
cash flow, and reduced operating and administrative costs.
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