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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): SEPTEMBER 3, 1996
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016
212-685-4545
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INCORPORATED UNDER THE LAWS OF COMMISSION FILE NUMBER I.R.S. EMPLOYER IDENTIFICATION NUMBER
STATE OF NEW YORK 0-20946 13-2770433
</TABLE>
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ITEM 5. OTHER EVENTS.
On September 3, 1996, Health Management Systems, Inc. (the "Company")
entered into an Agreement and Plan of Merger (the "Merger Agreement") by and
among the Company, QSM Acquisition Corp. ("Sub"), which is a newly-formed,
wholly owned subsidiary of the Company, and Quality Standards in Medicine, Inc.
("QSM"). The Merger Agreement contemplates that QSM will merge (the "Merger")
with Sub, with the result that QSM will become a wholly owned subsidiary of the
Company. The Merger will be treated as a tax-free reorganization for federal
income tax purposes, and will be accounted for utilizing the pooling of
interests method of accounting.
At the effective time (the "Effective Time") of the Merger, each share
of QSM capital stock issued and outstanding immediately prior to the Effective
Time, together with all (i) promissory notes issued by QSM which are outstanding
immediately prior to the closing date (the "Closing Date") of the Merger
(excluding any promissory notes issued to the Company evidencing working capital
loans made to QSM prior to the Effective Time) and (ii) common stock purchase
warrants issued by QSM which are outstanding immediately prior to the Closing
Date will be converted into an aggregate of 228,000 shares of common stock, $.01
par value per share (the "Merger Shares"), of the Company, subject to an
increase to an aggregate of 233,000 Merger Shares in certain circumstances.
The obligations of the Company and QSM to consummate the Merger will be
subject to the following conditions, among others: (1) the approval of the
Merger Agreement by the required affirmative vote of QSM's stockholders; (2) all
material consents from third parties having been obtained; (3) the approval of
the Merger Shares for listing on the Nasdaq National Market System, subject to
official notice of issuance; and (4) the effectiveness of the registration
statement relating to the Merger Shares. In general, either party may terminate
the Merger Agreement if the Merger is not consummated on or before November 30,
1996.
In accordance with applicable Delaware law, the affirmative vote of the
holders of a majority of the outstanding shares of common stock ("QSM Common
Stock") of QSM, which is the only class of QSM capital stock entitled to vote
thereon, present at a
1
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meeting at which a quorum is present is required to approve the Merger. Pursuant
to the Merger Agreement, stockholders of QSM holding in excess of 50% of the
outstanding QSM Common Stock have granted irrevocable proxies to designees of
the Company to vote their shares of QSM Common Stock in favor of the Merger
Agreement.
The foregoing description of the Merger Agreement is qualified in its
entirety by reference to the full text of the Merger Agreement, a copy of which
is included as Exhibit 10.2 to this Current Report on Form 8-K. The Merger is
expected to be effected approximately on or about October 31, 1996. There can be
no assurance, however, the Merger will be consummated, or, if consummated, that
it will be on the same terms described above or in the Merger Agreement.
2
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) EXHIBITS
10.1 Press Release of Health Management Systems, Inc. (the
"Company") relating to the proposed merger with Quality
Standards in Medicine, Inc. ("QSM").
10.2 Agreement and Plan of Merger, dated as of September 3,
1996, by and between the Company, QSM Acquisition Corp.
and QSM.
3
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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/ Phillip Siegel
-------------------------------
Phillip Siegel
Vice President and Chief
Financial Officer
Date: September 17, 1996
4
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Press Release of Health
Management Systems, Inc. (the
"Company") relating to the
proposed merger with Quality
Standards in Medicine, Inc.
("QSM").
10.2 Agreement and Plan of Merger,
dated as of September 3,
1996, by and between the
Company, QSM Acquisition
Corp. and QSM.
5
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Release: September 4, 1996, 6:00 a.m.
Contact: Phillip Siegel, Chief Financial Officer
Felice Blanco, Assistant Corporate Secretary Patrick Hojlo
Office of Investor Relations Noonan/Russo Communications
(212) 685-4545 ext. 423 (212) 696-4455 ext. 246
E-Mail: [email protected] http://www.noonanrusso.com
HEALTH MANAGEMENT SYSTEMS, INC. REPORTS FISCAL YEAR 1996 THIRD QUARTER RESULTS
--RECORD REVENUE AND EARNINGS PRIOR TO ONE-TIME CHARGE ANNOUNCED AUGUST 21, 1996--
</TABLE>
NEW YORK, N.Y. September 4, 1996 - Health Management Systems, Inc. (Nasdaq-HMSY)
announced fiscal year 1996 third quarter results reflecting record levels of
revenue and operating margin less a previously announced one-time charge
relating to the discontinuance of a data processing agreement with, and the
write-off of an investment in, HHL Financial Services, Inc. (HHL).
HMSY's fiscal year 1996 third quarter revenue of $25.8 million (net of $2.2
million in revenue recorded from HHL in the quarter and reversed) increased 12%
from the comparable prior year period (21% before the reversal). As announced on
August 21, 1996, the Company recorded a one-time charge relating to the
write-off of (i) prior period accounts receivable of $2.9 million, (ii)
estimated net costs relating to the Company's continued contractual obligation
with HHL of $3.8 million, and (iii) its investment in HHL of $0.9 million,
resulting in a total write-off of $7.6 million. Additionally, revenue of $2.2
million relating to the third quarter was reversed. The result of the total
write-off and the reversal of revenue recognized in the third quarter translates
to an after tax charge of $5.5 million, or $0.32 per share (see attached
Analysis of HHL Write-Off). Including one-time items, net loss for the third
quarter ended July 31, 1996 was $1.8 million, and net loss per share was $0.11,
compared to net income of $2.4 million and net income per share of $0.14 for the
same period last year. Excluding the one-time charges for HHL, net income and
earnings per share for the third quarter would have been $3.7 million and $0.21,
up 53% and 50% over the comparable period last year, respectively.
Revenue for the first nine months of the fiscal year ending October 31, 1996 was
$76.8 million (net of $2.2 million in revenue recorded from HHL in the third
quarter and reversed), an increase of 18% over the comparable prior year period
(21% prior to the reversal). Including the one-time HHL items, net income and
earnings per share for the nine months were $5.3 million and $0.29, a decrease
of $1.4 million and $0.09, respectively, from the comparable period last year.
Excluding the after-tax effects of the HHL one-time items of $5.5 million ($0.30
per share), and the one-time charge of $0.5 million ($0.03 per share) associated
with the April 1996 acquisition of CDR Associates, Inc. from the first nine
months of fiscal year 1996, and a one-time charge of $1.0 million ($0.05 per
share) in connection with the February 1995 acquisition of HCm, Inc. (HCm) from
the first nine months of fiscal year 1995, net income would have been $11.3
million and earnings per share $0.62, up 47% and 41%, respectively, from the
first nine months of fiscal year 1995.
Paul J. Kerz, President and CEO of HMSY, observed: "The past three months have
served to crystallize several factors which would seem to bode well for HMSY in
the future. First, it is becoming apparent that much of the reduction in health
care costs attributed to managed care over the past several years has been the
result of price reductions accomplished by the application of purchasing
power-rather than having been made possible by restructuring the manner in which
the care is being delivered. As further price reductions become increasingly
difficult, ever greater reliance is being placed upon the identification and
recovery of additional resources, whether in the form of incremental revenue or
costs which can be saved through structural reformation. Second, as health care
risk moves from indemnity carriers to managed care payors, the amount of
information required from the provider and patient is growing, and the capacity
of the payor to process the information is declining. In general, managed care
payors are typically considerably less advanced in terms of automated data
exchanges than are the indemnity payors. Third, the devolution of federal
welfare programs to the states, who will predictably seek to avoid having these
funds disappear directly into the maws of traditional welfare bureaucracies,
will engender significant changes in the already complex transfer payment
processes upon which providers of care to
<PAGE> 2
the indigent rely. The confluence of these various factors makes us optimistic
about our ability to remain relevant in the future."
Finally, HMSY announced that it has entered into a merger agreement with Quality
Standards in Medicine (QSM). It is anticipated that the companies will effect
the merger in HMSY's fourth quarter 1996.
QSM is a Boston-based company, providing an expert system for abstracting and
analyzing clinical data in support of quality management of physician
performance and patient outcomes in hospital settings. The QSM system is used by
clients to improve quality of care, lower costs, demonstrate value to payors,
and comply with regulatory requirements.
QSM had 1995 revenue of $0.8 million, and has clients in 13 states, the District
of Columbia, and the United Kingdom; it will continue to be led by its founder
and current CEO, Bill Munier, formerly Executive Vice President of the
Massachusetts Medical Society, as well as director of the first Medicare quality
control program.
Kerz said: "The association of QSMOs clinical protocols with HCmOs detailed cost
accounting data will provide increased capability to explore value assessments
and execute cost/quality analyses, which are key to managing quality and
cost-effectiveness. Further, HMSY can provide robust distribution channels for
the QSM system from the current HMSY and HCm combined client base of over 500
hospitals, as well as facilitate the introduction of QSM into other market
segments."
HMSY furnishes proprietary information management and data processing services
and software to hospitals and 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 transfer payment process, affording HMSY's clients the benefits of
enhanced revenue (achieved through improved reimbursability and/or
collectibility), accelerated cash flow, and reduced operating and administrative
costs.
This press release contains forward-looking statements. Such statements involve
various risks that may cause actual results to differ materially. These risks
include but are not limited to the ability of HMSY to grow internally or by
acquisition and to integrate acquired businesses into the HMSY group of
companies, changing conditions in the health care industry which could simplify
the reimbursement process and adversely affect HMSY's business, government
regulatory and political pressures which could reduce the rate of growth of
health care expenditures, competitive actions by other companies, and other
risks referred to in HMSYOs registration statements and periodic reports filed
with the Securities and Exchange Commission.
<PAGE> 3
Consolidated Statements of Operations
(Unaudited, In Thousands, Except $ Per Share Amounts)
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<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
1996 (1) 1995 1996 (1) 1995
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Revenue $ 25,785 23,020 76,752 65,046
Cost of services
Compensation 14,076 11,381 37,325 31,575
Data processing 4,131 2,037 8,393 5,615
Occupancy 2,071 1,635 5,478 4,847
Other 7,857 3,733 16,369 9,972
28,135 18,786 67,565 52,009
Operating (loss) margin before amortization (2,350) 4,234 9,187 13,037
Amortization of intangibles 51 54 161 189
Operating (loss) income (2,401) 4,180 9,026 12,848
Other income/expense
Interest income, net 186 296 665 709
Merger related costs 0 (19) (489) (1,045)
Equity in (loss) earnings of affiliate (109) 11 188 11
Loss on investment (927) 0 (927) 0
Other 0 15 0 (46)
(Loss) income before income taxes (3,251) 4,483 8,463 12,477
Income tax benefit (expense) 1,424 (2,070) (3,209) (5,840)
Net (loss) income $ (1,827) 2,413 5,254 6,637
Per Common Share:
Net (loss) income $ (0.11) 0.14 0.29 0.38
Weighted EPS denominator 17,193 17,538 18,276 17,322
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Consolidated Condensed Balance Sheets
(In Thousands)
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July 31, October 31,
1996 (1) 1995
(Unaudited)
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Assets
Cash and short-term investments $ 30,054 30,088
Accounts receivable, net 47,505 31,630
Property and equipment, net 7,257 5,874
Intangible assets 5,300 5,461
Investment in affiliates 6,963 7,673
Other 11,714 6,658
Total assets $108,793 87,384
Liabilities and Shareholders' Equity
Current liabilities $ 31,277 24,403
Other liabilities 2,245 1,739
Deferred income taxes 2,444 2,018
Total liabilities 35,966 28,160
Shareholder's equity 72,827 59,224
Total liabilities and shareholders' equity $108,793 87,384
</TABLE>
(1) Includes one-time charge to write off current quarter's revenue,
accounts receivable as of July 31, 1996, and investment in HHL, plus
the costs in excess of anticipated revenue associated with servicing
the HHL outsourcing agreement through the projected termination date
(see attached Analysis of HHL Write-Off).
<PAGE> 4
Consolidated Statements of Operations
Analysis of HHL Write-Off
(Unaudited, In Thousands, Except $ Per Share Amounts)
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Three Months Ended Nine Months Ended
July 31, 1996 July 31, 1996
Before HHL As Before HHL As
Write-Off Write-Off Adjusted Write-Off Write-Off Adjusted
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Revenue $ 27,965 (2,180)(A) 25,785 78,932 (2,180)(A) 76,752
Cost of services
Compensation 12,714 1,362 (B) 14,076 35,963 1,362 (B) 37,325
Data processing 1,932 2,199 (B) 4,131 6,194 2,199 (B) 8,393
Occupancy 2,071 0 2,071 5,478 0 5,478
Other 4,714 3,143 (B)(C) 7,857 13,226 3,143 (B)(C) 16,369
21,431 6,704 28,135 60,861 6,704 67,565
Operating margin (loss) before amortization 6,534 (8,884) (2,350) 18,071 (8,884) 9,187
Amortization of intangibles 51 0 51 161 0 161
Operating income (loss) 6,483 (8,884) (2,401) 17,910 (8,884) 9,026
Other income/expense
Interest income, net 186 0 186 665 0 665
Merger related costs 0 0 0 (489) 0 (489)
Equity in (loss) earnings of affiliate (109) 0 (109) 188 0 188
Loss on investment 0 (927)(D) (927) 0 (927)(D) (927)
Other 0 0 0 0 0 0
Income (loss) before income taxes 6,560 (9,811) (3,251) 18,274 (9,811) 8,463
Income tax (expense) benefit (2,873) 4,297 (E) 1,424 (7,506) 4,297 (E) (3,209)
Net income (loss) $ 3,687 (5,514) (1,827) 10,768 (5,514) 5,254
Per Common Share:
Net income (loss) $ 0.21 (0.32) (0.11) 0.59 (0.30) 0.29
Weighted EPS denominator 17,193 17,193 17,193 18,276 18,276 18,276
</TABLE>
Consolidated Condensed Balance Sheets
Analysis of HHL Write-Off
July 31, 1996
(Unaudited, in Thousands)
<TABLE>
<CAPTION>
Before HHL As
Write-Off Write-Off Adjusted
<S> <C> <C> <C>
Assets
Cash and short-term investments $ 30,054 0 30,054
Accounts receivable, net 52,566 (5,061) (A)(C) 47,505
Property and equipment, net 7,257 0 7,257
Intangible assets 5,300 0 5,300
Investment in affiliates 7,890 (927) (D) 6,963
Other 11,714 0 11,714
Total assets $114,781 (5,988) 108,793
Liabilities and Shareholders Equity
Current liabilities $ 31,751 (474) (B)(E) 31,277
Other liabilities 2,245 0 2,245
Deferred income taxes 2,444 0 2,444
Total liabilities 36,440 (474) 35,966
Shareholders' equity 78,341 (5,514) 72,827
Total liabilities and shareholders' equity $114,781 (5,988) 108,793
</TABLE>
(A) Reflects the reversal of HHL revenue recorded in the third quarter.
(B) Reflects the accrual of $3,823 relating to estimated costs in excess of
revenue associated with servicing the HHL outsourcing agreement through
the anticipated termination date.
(C) Reflects the recording of a reserve of $2,881 relating to receivables
from HHL as of July 31, 1996. (D) Reflects the write-off of the
investment in HHL.
(E) Reflects the tax effect of the write-off and revenue reversal.
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
By And Among
HEALTH MANAGEMENT SYSTEMS, INC.,
QSM ACQUISITION CORP.
And
QUALITY STANDARDS IN MEDICINE, INC.
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TABLE OF CONTENTS
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Page
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RECITALS .............................................................. 1
ARTICLE 1.
DEFINITIONS....................................................... 1
1.1 Certain Definitions................................... 1
1.2 Other Definitions..................................... 5
ARTICLE 2.
THE MERGER........................................................ 5
2.1 Effective Time of the Merger.......................... 5
2.2 Effects of the Merger................................. 6
2.3 Effect on QSM Notes................................... 6
2.4 Effect on QSM Warrants................................ 6
2.5 Effect on QSM Stock Options........................... 7
2.6 Effect on QSM Capital Stock........................... 7
2.7 Conversion of Sub Capital Stock....................... 8
2.8 Adjustments to Exchange Ratio......................... 8
2.9 Exchange Procedures................................... 8
2.10 Escrow Fund........................................... 9
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF QSM............................. 10
3.1 Organization and Standing............................. 10
3.2 Capital Structure..................................... 10
3.3 Equity Investments.................................... 11
3.4 Authority............................................. 11
3.5 Governmental Consents................................. 11
3.6 Financial Statements.................................. 12
3.7 Accounting Matters.................................... 12
3.8 Absence of Changes.................................... 13
3.9 Properties............................................ 15
3.10 Taxes................................................. 15
3.11 Compliance with Law................................... 15
3.12 Litigation............................................ 16
3.13 Material Agreements................................... 16
3.14 Proprietary Rights.................................... 18
3.15 Insurance............................................. 18
3.16 No Conflict........................................... 19
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3.17 No Default.............................................. 19
3.18 Brokers or Finders...................................... 19
3.19 Certain Advances........................................ 20
3.20 Related Parties......................................... 20
3.21 Information Supplied.................................... 20
3.22 Employee Benefit Plans.................................. 20
3.23 Labor Relations; Employees.............................. 22
3.24 Compensation............................................ 22
3.25 ........................................................ 23
Bank Accounts....................................................... 23
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF HMS AND SUB....................... 23
4.1 Organization............................................ 23
4.2 Capital Structure....................................... 23
4.3 Authority............................................... 23
4.4 Governmental Consents................................... 24
4.5 SEC Documents........................................... 24
4.6 Information Supplied.................................... 25
4.7 No Conflict............................................. 25
4.8 Shares of HMS Common.................................... 26
4.9 Accounting Matters...................................... 26
4.10 No Prior Activities..................................... 26
4.11 Brokers or Finders...................................... 26
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS........................... 27
5.1 Ordinary Course......................................... 27
5.2 Dividends; Changes in Stock............................. 27
5.3 Issuance of Securities.................................. 27
5.4 Governing Documents..................................... 27
5.5 No Acquisitions......................................... 27
5.6 No Dispositions......................................... 28
5.7 Indebtedness............................................ 28
5.8 Benefit Plans, Etc...................................... 28
5.9 Accounting Practices.................................... 28
5.10 No Solicitation; Competing Transactions................. 28
ARTICLE 6.
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ii
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QSM SHAREHOLDERS' MEETING;
INFORMATION STATEMENT/REGISTRATION STATEMENT........................ 29
6.1 QSM Shareholders' Meeting............................... 29
6.2 Recommendations of QSM Board of Directors............... 29
6.3 Preparation and Filing of Information Statement/
Registration Statement......................................... 29
6.4 Accuracy of Information................................. 30
6.5 Additional Information.................................. 30
6.6 QSM Accountants Letter.................................. 30
6.7 Expenses................................................ 31
6.8 Indemnification......................................... 31
6.9 Restrictions on Resale.................................. 33
ARTICLE 7.
ADDITIONAL AGREEMENTS............................................... 33
7.1 Access to Information................................... 33
7.2 Legal Conditions to the Merger.......................... 34
7.3 Rule 145 Affiliates..................................... 34
7.4 Irrevocable Proxies..................................... 35
7.5 Employment and Not-to-Compete Agreements................ 35
7.6 Employee Benefits....................................... 35
7.7 Treatment of Assumed QSM Stock Options.................. 35
7.8 Grant of HMS Stock Options Following the Closing........ 36
7.9 Communications.......................................... 37
7.10 Delivery of Stock Certificates.......................... 37
7.11 Parachute Payments...................................... 37
7.12 Notification of Certain Matters......................... 37
7.13 Tax Treatment........................................... 38
7.14 Beacon Resources Fee.................................... 38
7.15 Accountants' Opinions as to Accounting Treatment........ 38
ARTICLE 8.
CONDITIONS PRECEDENT................................................ 38
8.1 Conditions to Each Party's Obligations to Effect the
Merger......................................................... 38
8.2 Conditions to Obligations of HMS and Sub................ 40
8.3 Conditions to Obligations of QSM........................ 41
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ARTICLE 9.
CLOSING.............................................................. 42
ARTICLE 10.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS................ 42
ARTICLE 11.
PAYMENT OF EXPENSES.................................................. 42
ARTICLE 12.
TERMINATION, AMENDMENT AND WAIVER.................................... 43
12.1 Termination.............................................. 43
12.2 Effect of Termination.................................... 44
12.3 Amendment................................................ 44
12.4 Extension; Waiver........................................ 44
ARTICLE 13.
INDEMNIFICATION OF HMS............................................... 44
13.1 Indemnification.......................................... 44
13.2 Method of Indemnification................................ 45
13.3 Conditions of Indemnification............................ 45
13.4 Limitations on Indemnification........................... 45
ARTICLE 14.
GENERAL.............................................................. 46
14.1 Notices.................................................. 46
14.2 Headings................................................. 47
14.3 Counterparts............................................. 47
14.4 Binding Nature........................................... 47
14.5 Other Agreements......................................... 47
14.6 Good Faith............................................... 47
14.7 Applicable Law........................................... 47
14.8 No Dissenters' Rights of Appraisal....................... 47
</TABLE>
iv
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LIST OF EXHIBITS
Exhibit A - Form of Noteholders Consent
Exhibit B - Form of Preferred Stockholders Consent
Exhibit C - Form of Warrantholders Consent
Exhibit D - Certificate of Incorporation of Surviving
Corporation
Exhibit E - By-laws of Surviving Corporation
Exhibit F - List of Directors and Officers of Surviving
Corporation
Exhibit G - Escrow Agreement
Exhibit H - Form of Affiliate Letter
Exhibit I - Form of Irrevocable Proxy
Exhibit J - Form of Employment Agreement
Exhibit K - Form of Not-to-Compete Agreement with QSM
v
<PAGE> 7
LIST OF SCHEDULES
Schedule 2.6(a) - List of all Shares of QSM Capital Stock
owned by HMS and QSM
Schedule 3.1 - List of all of QSM Qualified and/or Licensed
Jurisdictions
Schedule 3.2 - List of all QSM Shareholders, Warrantholders
and Optionholders
Schedule 3.3 - List of QSM Equity Investments
Schedule 3.6 - Exceptions to Prior Financial Statements and
Interim Financial Statements
Schedule 3.8 - Changes since June 30, 1996
Schedule 3.9 - Encumbrances
Schedule 3.10 - Assessment or Collection of Taxes
Schedule 3.12 - Litigation
Schedule 3.13 - Material Agreements
Schedule 3.14 - List of Proprietary Rights
Schedule 3.16 - Consents, Waivers and Approvals Required
from Parties to Material Agreements
Schedule 3.19 - Advances
Schedule 3.20 - Related Parties
Schedule 3.22 - Employee Benefit Plans
Schedule 3.23 - Claims By Current or Past QSM Employees
Schedule 3.24 - Salaries, Consulting and Employment
Agreements
vi
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Schedule 3.25 - Bank Accounts
Schedule 5.7 - QSM Indebtedness
vii
<PAGE> 9
LIST OF SCHEDULES (continued)
Schedule 7.3 - List of Rule 145 Affiliates
Schedule 7.7 - QSM Option Plans
viii
<PAGE> 10
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is made and entered into as of the 3rd day of September,
1996, by and among HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation
("HMS"), QSM ACQUISITION CORP., a Delaware corporation and wholly-owned
subsidiary of HMS ("Sub"), and QUALITY STANDARDS IN MEDICINE, INC., a Delaware
corporation ("QSM").
RECITALS
A. The parties wish to provide for the merger (the "Merger") of Sub with
and into QSM, whereby it is contemplated that all shares of common stock, $.01
par value, and all shares of preferred stock, $.01 par value, of QSM issued and
outstanding, together with all outstanding loans of QSM, all outstanding common
stock purchase warrants issued by QSM and all outstanding vested $.25 stock
options issued by QSM will either be converted, exercised and then converted or
exchanged for an aggregate of 228,000 shares of common stock, par value $.01 per
share, of HMS subject to adjustment, in accordance with the terms set forth in
Sections 2.3 through 2.6 and 2.8 of this Agreement.
B. The parties hereto desire to set forth certain representations,
warranties and covenants made by QSM to HMS and Sub, and by HMS and Sub to QSM,
and the conditions precedent to the consummation of the Merger.
C. The Boards of Directors of HMS, Sub and QSM, 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 and QSM 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
1
<PAGE> 11
herein specified, unless the context expressly or by necessary implication
otherwise requires:
(a) "Affiliate" shall have the meaning specified in Rule 144
promulgated by the SEC under the Securities Act.
(b) "Closing Date" shall have the meaning ascribed to such term in
Article 9.
(c) "Effective Time of the Merger" shall have the meaning ascribed
to such term in Section 2.1.
(d) "Escrow Fund" shall have the meaning ascribed to such term in
Section 2.9.
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
(f) "Exchange Ratio" shall have the meaning ascribed to such term
in Section 2.6(b)(ii).
(g) "Fair Value" shall mean (i) with respect to HMS Common, the
average closing price of HMS Common on the Nasdaq National Market for a period
of five (5) consecutive business days ending two (2) business days prior to the
Closing Date, (ii) with respect to HMS Stock Options, the value thereof as of
two (2) business days prior to the Closing Date as determined by HMS in
accordance with the Black-Scholes pricing model, and (iii) with respect to QSM
Preferred Stock, Notes, Stock Options and Warrants, the appraised values thereof
as of two (2) business days prior to the Closing Date as determined by Fechtor,
Detwiler & Co., Inc.
(h) "HMS Common" shall mean the common stock, par value $.01 per
share, of HMS.
(i) "Information Statement/Prospectus" shall mean the combined (i)
information statement of QSM notifying its shareholders of the QSM Shareholders'
Meeting and providing information to the holders of QSM Preferred Stock, Notes,
Warrants, and Stock Options relating to a proposed exchange for
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HMS Common in connection with the Merger and (ii) the prospectus of HMS relating
to the HMS Common to be issued to QSM Securityholders in the Merger and the
other transactions contemplated by this Agreement, which information statement
and prospectus are contained in the Registration Statement.
(j) "Knowledge" or "known" shall mean, with respect to any
representation or warranty or other statement in this Agreement qualified by
knowledge of any party, that (i) such party has no actual knowledge of the
inaccuracy of the matters therein stated and (ii) assuming the exercise by such
party of a reasonable due and diligent investigation as to the matters that are
the subject of such representations, warranty or other statement, such party
would have no actual knowledge of the inaccuracy of the matters therein stated,
it being understood that no party will have any obligation as part of its due
and diligent investigation to consult with any outside third parties, other than
its respective accountants and legal counsel. Where reference is made to the
knowledge of QSM or HMS, such reference shall be deemed to include only the
Chief Executive and Chief Financial Officer of QSM and Rodrigo Rocha and the
Chief Executive and Chief Financial Officers of HMS, each of whom shall be
deemed to have conducted the investigation required by this definition.
(k) "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).
(l) "Material Agreements," as used in relation to QSM, shall have
the meaning ascribed to such term in Section 3.13.
(m) "NASD" shall mean the National Association of Securities
Dealers, Inc.
(n) "Person" shall mean any natural person, corporation, limited
liability company, unincorporated organization, partnership, association, joint
stock company, joint venture, trust or government, or any agency or political
subdivision of any government, or any other entity.
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(o) "QSM Capital Stock" shall mean the QSM Common Stock and
Preferred Stock.
(p) "QSM Common Stock" shall mean the common stock of QSM, par
value $.01 per share.
(q) "QSM Noteholders" shall mean all holders of QSM Notes
immediately prior to the Closing Date. A list of all QSM Noteholders is set
forth on Schedule 3.13.
(r) "QSM Noteholder Consents" shall refer to the written consents
of holders of QSM Notes in the form attached to this Agreement as Exhibit A, for
the purpose of evidencing the agreement of such QSM Noteholder to the exchange
of such Noteholder's QSM Notes and the cancellation of the debt related thereto,
for shares of HMS Common, as contemplated by this Agreement and the Merger.
(s) "QSM Notes" shall mean all promissory notes issued by QSM which
are outstanding immediately prior to the Closing Date, excluding any promissory
notes issued to HMS evidencing working capital loans made to QSM prior to the
Effective Time of the Merger.
(t) "QSM Optionholders" shall mean all holders of QSM Stock Options
immediately prior to the Closing Date. A list of all QSM Optionholders is set
forth on Schedule 3.2.
(u) "QSM Preferred Stock" shall mean the preferred stock of QSM,
par value $.01 per share.
(v) "QSM Preferred Shareholder Consents" shall refer to the written
consents of holders of QSM Preferred Stock in the form attached to this
Agreement as Exhibit B, for the purpose of evidencing the agreement of such QSM
Preferred Shareholder to the cancellation of such QSM Preferred Shareholder's
outstanding QSM Preferred Stock, in exchange for shares of HMS Common, as
contemplated by this Agreement and the Merger.
(w) "QSM Principals" shall mean William B. Munier and Rodrigo
Rocha.
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(x) "QSM Securityholders" shall mean all QSM Shareholders,
Noteholders, Warrantholders and Optionholders.
(y) "QSM Shareholders" shall mean all holders of QSM Capital Stock
immediately prior to the Closing Date. A list of all QSM Shareholders is set
forth on Schedule 3.2.
(z) "QSM Shareholders' Meeting" shall mean the meeting, and any
adjournments thereof, of the holders of QSM Capital Stock duly called and
convened for the purpose of their consideration of and voting upon the
transactions contemplated by this Agreement and the Merger.
(aa) "QSM Stock Options" shall mean all outstanding options to
purchase QSM Common Stock.
(bb) "QSM Warrantholders" shall mean all holders of QSM Warrants
immediately prior to the Closing Date. A list of all QSM Warrantholders is set
forth on Schedule 3.2.
(cc) "QSM Warrantholder Consents" shall refer to the written
consents of holders of QSM Warrants in the form attached to this Agreement as
Exhibit C, for the purpose of evidencing the agreement of such QSM Warrantholder
to the cancellation of such QSM Warrantholder's outstanding QSM Warrants, in
exchange for shares of HMS Common, as contemplated by this Agreement and the
Merger.
(dd) "QSM Warrants" shall mean all outstanding common stock purchase
warrants issued by QSM.
(ee) "Registration Statement" shall mean the registration statement
of HMS on Form S-4 pursuant to which the HMS Common to be issued to the QSM
Securityholders in the Merger and the other transactions contemplated by this
Agreement will be registered under the Securities Act.
(ff) "SEC" shall mean the Securities and Exchange Commission.
(gg) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
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(hh) "Subsidiary" shall mean 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.
(ii) "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.
(jj) "Threshold" shall have the meaning ascribed to such term in
Section 13.4(b).
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 251
of the Delaware 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 Delaware Secretary of State (the "Effective Time of the
Merger").
2.2 Effects of the Merger. At the Effective Time of the Merger:
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(a) the separate existence of Sub shall cease and Sub shall be
merged with and into QSM as the surviving corporation (the "Surviving
Corporation");
(b) the Certificate of Incorporation and By-laws of the Surviving
Corporation shall be in the forms attached to this Agreement as Exhibits D and
E, respectively;
(c) the Persons listed on Exhibit F shall be the directors and
officers of the Surviving Corporation, and such directors and officers shall
continue to act as such and hold such offices in the Surviving Corporation,
until their respective successors are duly elected and qualified; and
(d) the name of the Surviving Corporation shall continue to be
Quality Standards in Medicine, Inc. subsequent to the Effective Time of the
Merger, and the location of its principal office shall be 581 Boylston Street,
Suite 250, Boston, Massachusetts 02116.
2.3 Effect on QSM Notes. As of the Effective Time of the Merger,
and with the consent of the QSM Noteholders, the QSM Notes, including accrued
interest thereon through the Closing Date, shall be exchanged for shares of HMS
Common ("QSM Note Shares") having a Fair Value equal to the Fair Value of the
QSM Notes, and the debt related thereto shall be extinguished.
2.4 Effect on QSM Warrants.
(a) Exercise of $.25 QSM Warrants. All outstanding $.25 QSM
Warrants shall be exercised by their respective holders immediately prior to the
Closing Date and an aggregate of 231,250 shares of QSM Common Stock will be
issued to the holders of these warrants, which shares of QSM Common Stock will
thereafter at the Effective Time of the Merger be converted into shares of HMS
Common in accordance with Section 2.6(b)(ii) below.
(b) Exchange of $.75 and $1.00 QSM Warrants. As of the Effective
Time of the Merger and with the consent of the QSM Warrantholders, all
outstanding $.75 and $1.00 QSM Warrants shall be exchanged for shares of HMS
Common (the "QSM Warrant Exchange Shares") having a Fair Value equal to the Fair
Value of the respective QSM Warrants.
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2.5 Effect on QSM Stock Options.
(a) Exercise of Vested $.25 QSM Stock Options. All outstanding
vested $.25 QSM Stock Options shall be exercised by their respective holders
immediately prior to the Closing Date and an aggregate of 58,500 shares of QSM
Common Stock will be issued to the holders of these QSM Stock Options, which
shares of QSM Common Stock will thereafter at the Effective Time of the Merger
be converted into shares of HMS Common in accordance with Section 2.6(b)(ii)
below.
(b) Conversion of Vested $1.00 QSM Stock Options and All Non-Vested
QSM Stock Options. As of the Effective Time of the Merger, all outstanding
vested $1.00 QSM Stock Options and all non-vested QSM Stock Options
(collectively, the "Assumed QSM Stock Options") shall be assumed by HMS and
converted into HMS Stock Options having a Fair Value equal to the Fair Value of
the respective QSM Stock Options, in accordance with such further conditions as
are set forth in Section 7.7 of this Agreement.
2.6 Effect on QSM Capital Stock. As of the Effective Time of the
Merger and by virtue of the Merger:
(a) Cancellation of QSM Capital Stock Owned by HMS or QSM. All
shares of QSM Capital Stock, if any, that are owned directly or indirectly by
HMS, QSM or any Subsidiary of HMS or QSM, shall be canceled without any action
on the part of the holder of such shares, and no stock of HMS or other
consideration shall be delivered in exchange therefor. A list of all such shares
of QSM Capital Stock is set forth on Schedule 2.6(a).
(b) Exchange/Conversion of QSM Capital Stock. Other than shares to
be canceled pursuant to Section 2.6(a) and fractional shares as provided in
Section 2.6(c), each share of QSM Preferred Stock (including all accrued
dividends thereon) and each share of QSM Common Stock issued and outstanding
immediately prior to the Closing Date shall be exchanged or converted, as the
case may be, as follows:
(i) QSM Preferred Stock. Pursuant to the terms of the
Preferred Stock and with the consent of the holders thereof, each share of QSM
Preferred Stock shall be exchanged for shares of HMS
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Common (the "QSM Preferred Stock Exchange Shares") having a Fair Value equal to
the Fair Value of the QSM Preferred Stock plus accrued dividends.
(ii) QSM Common Stock. Without any action on the part of any
holder of QSM Common Stock, each share of QSM Common Stock shall be converted
into shares of HMS Common in accordance with an exchange ratio (the "Exchange
Ratio") to be determined as of the Closing Date equal to (x) 228,000 shares of
HMS Common minus (y) the sum of the QSM Note Shares, Warrant Exchange Shares and
Preferred Stock Exchange Shares divided by (z) the total number of shares of QSM
Common Stock then issued and outstanding.
(c) Fractional Shares. No fractional shares of HMS Common
shall be issued, and the number of shares of such stock to which each holder of
QSM Capital Stock, Notes and Warrants shall be entitled by reason of the Merger
and the other transactions contemplated by this Agreement shall be rounded up or
down to the nearest whole share.
2.7 Conversion of Sub Capital Stock. Each share of Sub capital
stock issued and outstanding immediately prior to the Closing Date 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.
2.8 Adjustments to Exchange Ratio.
(a) 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.
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(b) If the Fair Value of HMS Common shall be less than $27.00 per
share, the Exchange Ratio shall be adjusted by substituting 233,000 shares of
HMS Common in place of 228,000 shares.
2.9 Exchange Procedures.
(a) QSM Common Stock. As soon as practicable after the Closing
Date, HMS shall deliver to each holder of record of a certificate or
certificates representing outstanding shares of QSM Common 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 2.6(b)(ii) 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 QSM Capital Stock is entitled
pursuant to Section 2.6(b)(ii) and is represented by the Certificate so
surrendered. The Certificate so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of QSM Common Stock which is not registered in
the transfer records of QSM, 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 2.9(a), 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
2.6(b)(ii) and the provisions of the Delaware General Corporation Law.
(b) QSM Preferred Stock, Notes and Warrants. As soon as practicable
after the Closing Date, HMS shall deliver to all holders of QSM Preferred Stock,
Notes and Warrants, certificates representing the QSM Preferred Stock Exchange
Shares, Note Shares and Warrant Exchange Shares.
(c) No Further Ownership Rights in QSM Capital Stock. All HMS
Common delivered upon the surrender for exchange of shares of QSM Capital Stock
in accordance with the terms hereof shall be
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deemed to have been delivered in full satisfaction of all rights pertaining to
such shares of QSM Capital Stock. There shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of QSM 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.
2.10 Escrow Fund. In order to secure the obligations of QSM to HMS
and Sub under this Agreement, the holders of QSM Capital Stock, Notes and
Warrants immediately prior to the Effective Time of the Merger shall each
deliver to the Escrow Agent ten (10%) percent of the shares of HMS Common to be
issued to such holders pursuant to the terms hereof (the "Escrow Fund"), to be
held in escrow by the Escrow Agent in accordance with the terms of an Escrow
Agreement substantially in the form of Exhibit G hereto (the "Escrow
Agreement").
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF QSM
QSM 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. QSM 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. QSM is now, and
will on the Closing Date 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 QSM and the nature of the business conducted by it do not require such
qualification and/or licensing in any other jurisdiction.
3.2 Capital Structure. The authorized capital stock of QSM consists
of 15,000,000 shares of Common Stock and 750,000 shares of Preferred Stock, of
which 9,061,992 shares of Common Stock
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(9,351,742 shares after exercise of the $.25 QSM Warrants and vested $.25 QSM
Stock Options) and 500,000 shares of Preferred Stock are issued and outstanding.
The record holders of all of the issued and outstanding QSM Capital Stock are
set forth on Schedule 3.2 attached hereto. All of the outstanding shares of QSM
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 QSM
Capital Stock are validly issued, fully paid and nonassessable and not subject
to preemptive rights created by statute, QSM's Certificate of Incorporation or
By-laws or, except as set forth on Schedule 3.2, any agreement to which QSM or
any QSM shareholder is a party or is bound. Except for the foregoing and except
as set forth on Schedule 3.2, there are no equity securities of any class of QSM
or any security exchangeable or convertible into or exercisable for such equity
securities, issued, reserved for issuance or outstanding. Except as set forth in
Schedule 3.2, there are no options, warrants, calls, rights, commitments or
agreements of any character to which QSM is a party or by which it is bound
obligating QSM to issue, deliver or sell, or cause to be issued, delivered or
sold, additional shares of capital stock of QSM or obligating QSM to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. Except as set forth in Schedule 3.2, there are no voting trusts or
other agreements or understandings with respect to the shares of capital stock
of QSM.
3.3 Equity Investments. Except as set forth on Schedule 3.3
attached hereto, QSM does not own directly or indirectly, any equity interest in
any corporation, partnership, joint venture, trust or other business entity.
3.4 Authority. QSM has all requisite corporate power and authority
to enter into this Agreement and, subject to approval of this Agreement by the
shareholders of QSM, 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 QSM, subject to such approval by the shareholders of QSM. This
Agreement has been duly executed and delivered by QSM and, subject to such
approval by the shareholders of QSM, constitutes a valid and binding obligation
of QSM, enforceable
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against QSM in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws relating to creditors' rights generally and by
general principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity). Subject to satisfaction of the
conditions set forth in Sections 8.1 and 8.3, 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, can cellation or acceleration of any obligation or to loss of a
material benefit under (i) any provision of the Certificate of Incorporation or
By-laws of QSM or (ii) any Material Agreement or permit, license, judgment,
order, statute, rule or regulation applicable to QSM 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 QSM.
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 QSM
in connection with the execution and delivery of this Agreement by QSM or the
consummation by QSM of the transactions contemplated hereby, except for (i) the
filing of a Certificate of Merger with the Delaware Secretary of State, and
appropriate documents with the relevant authorities of other states in which QSM
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 QSM.
3.6 Financial Statements. QSM has furnished to HMS: (i) the balance
sheet of QSM as of December 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
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Financial Statements"), certified by Ernst & Young LLP, (ii) the balance sheets
of QSM as of December 31, 1993 and 1994, and the related statements of earnings
for the years then ended, certified by Ernst & Young LLP (together, the "Prior
Financial Statements") and (iii) the unaudited balance sheet of QSM as of June
30, 1996 (the "June Balance Sheet"), and the related statement of earnings for
the six months then ended, certified by the Chief Financial Officer of QSM
(together with the June Balance Sheet, the "Interim Financial Statements"). The
1995 Financial Statements (including any related schedules and/or notes, if any)
are complete and correct in all material respects and have been prepared in
accordance with generally accepted accounting principles, consistently applied
("GAAP"). The 1995 Balance Sheet fairly presents the financial position of QSM
as of its date, and the 1995 Financial Statements fairly present the results of
operations of QSM for the period then ended. Except as described in Schedule 3.6
attached 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 QSM at the dates and for the periods
presented, and have been prepared 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 for certain working capital loans
made or to be made to QSM by HMS prior to the Effective Time of the Merger or as
described in Schedule 3.6, there has been no material adverse change in the
operations or condition (financial or other) of QSM since June 30, 1996. Except
as reflected in the 1995 Financial Statements, the Prior Financial Statements or
the Interim Financial Statements, QSM had no obligations or liabilities,
absolute, accrued or contingent, as of December 31, 1995, December 31, 1993,
December 31, 1994 and June 30, 1996, respectively, that are material to the
business or assets of QSM.
3.7 Accounting Matters. To the knowledge of QSM, (i) neither QSM
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
QSM or any of its Affiliates, which in each case could reasonably be expected to
prevent HMS from accounting for the business
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combination to be effected by the Merger as a pooling of interests.
3.8 Absence of Changes. Since June 30, 1996, QSM 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 QSM 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 QSM;
(c) incurred additional debt for borrowed money other than to HMS;
(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 QSM Capital Stock;
(f) purchased, redeemed or otherwise acquired or committed itself
to acquire, directly or indirectly, any share or shares of QSM 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;
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(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
Material Adverse Effect upon QSM;
(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 software);
(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
June 30, 1996;
(o) effected or committed itself to effect any amendment or
modification in its Certificate 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
QSM;
(p) waived, canceled, sold or otherwise disposed of, for less than
the face amount thereof, any claim or right which it has against others;
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(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 QSM has taken or contemplates any steps which could
disrupt the business relationship of QSM with said supplier or customer or could
result in the diminution in the value of QSM as a going concern.
3.9 Properties. QSM 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 QSM in its business or
otherwise held by QSM, as of their respective dates, except for (i) property
acquired or disposed of in the ordinary and usual course of the business of QSM
since the date of the June Balance Sheet, and (ii) property not required under
generally accepted accounting principles to be reflected thereon. QSM has good
and marketable title to all assets and properties listed on the 1995 Balance
Sheet, the Prior Financial Statements and the June 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 June
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. QSM has duly filed with the appropriate United States,
state, local and foreign governmental agencies all tax returns required to be
filed, and all such returns are true, correct and complete, in all material
respects. QSM has paid all Taxes shown thereon as owing. All Taxes due through
the Closing Date will have been fully paid by that date or provided
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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
attached hereto, QSM is not a party to any pending action or proceeding, nor 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 QSM. 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 QSM.
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 QSM,
the business of QSM has been conducted in accordance with all applicable laws,
regulations, orders and other requirements of Governmental Entities.
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 QSM or affecting any of
its assets or properties (including the Proprietary Rights), before any court,
agency, authority, arbitration panel or other tribunal and, to its knowledge,
none has been threatened against QSM nor is QSM aware of any facts which might
give rise to any such claim, dispute, action, proceeding, suit, appeal or
investigation which, singly or in the aggregate, might have a Material Adverse
Effect on QSM. QSM 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 QSM or the right of QSM 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 QSM, and not
listed on another schedule hereto, to which QSM 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, QSM has delivered
or made available to HMS a true and complete copy of each such Material
Agreement. Except as set forth on Schedule
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3.13 or any other schedule to this Agreement, QSM 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 QSM
with a third Person;
(b) each contract or agreement under which QSM 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 QSM 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 QSM of more than $25,000;
(d) each of the ten (10) contracts or agreements which (i)
accounted for the largest percentage of QSM's net revenues for the twelve (12)
months ended December 31, 1994 and 1995 and the seven (7) months ended July 31,
1996, and (ii) is projected to account for the largest percentage of QSM's net
revenues for the twelve (12) months ended December 31, 1996 and projected for
1997 and all contracts or agreements which account for or are projected to
account for development costs in excess of $50,000 during the twelve (12) months
ended December 31, 1996 and 1997;
(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 QSM, without regard
to the value thereof;
(f) all leases and subleases from any third Person to QSM;
(g) each contract or agreement to which QSM or its Affiliates is a
party limiting, in any material respect, the right of QSM prior to the Effective
Time 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
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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 QSM 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
(ii) to solicit any customer or client;
(h) fire, casualty, liability, title, worker's compensation and
all other insurance policies and binders maintained by QSM;
(i) all material licenses, licensing agreements and other
agreements (both granting and receiving) pertaining to any Proprietary Rights;
(j) all distribution and development agreements;
(k) all QSM Notes; and
(l) all other contracts or agreements which are material to QSM or
the conduct of its business, other than those made in the ordinary and usual
course of business or those which are terminable by QSM 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 QSM, no third Person has made
or raised any claim, dispute or controversy with respect to any of the Material
Agreements nor has QSM received notice or warning of alleged nonperformance,
delay in delivery or other noncompliance by QSM with respect to its obligations
under any of the Material Agreements, nor 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 attached hereto 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 QSM or in
which it has any material rights or licenses (including, as to each such
license, the name of the licensee and licensor, the
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termination date or notice requirement with respect to termination, basis of
royalties calculation and renewal options). QSM 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 QSM,
and the same are sufficient to conduct QSM'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, QSM
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
QSM do not conflict with or infringe, and no one has asserted to QSM that such
operations conflict with or infringe, any Proprietary Rights owned, possessed or
used by any third Person.
3.15 Insurance. QSM 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 QSM's judgment, reasonable for the business and
assets of QSM. 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.
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3.16 No Conflict. The execution and delivery of this Agreement by QSM,
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 Certificate of Incorporation or By-laws of QSM or any Material
Agreement; (ii) will not give rise to a right by any Person to terminate its
obligations under any Material Agreement; (iii) to its knowledge, will not
result in the creation or imposition of any lien, encumbrance, equity or
restriction in favor of any third Person upon any of the material assets or
properties of QSM; and (iv) to its knowledge, 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 QSM
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 QSM and the performance of
QSM's obligations hereunder.
3.17 No Default. QSM 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 QSM, assuming in the case of any such agreement, that
it is a legal, binding and enforceable obligation of the other party(ies)
thereto, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws relating
to creditors' rights generally and by general principles of equity (regardless
of whether such enforceability is considered in a proceeding at law or in
equity).
3.18 Brokers or Finders. Except with respect to Beacon Resources,
Inc.("Beacon Resources"), QSM has not dealt with, directly or indirectly, any
person to which any brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby would be payable. QSM shall indemnify and hold HMS harmless
from and against any and all claims, liabilities or
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obligations with respect to any other brokerage or finders fees, commissions or
expenses arising on account of a breach of the foregoing representation.
3.19 Certain Advances. Except as set forth on Schedule 3.19 attached
hereto, there are no receivables of QSM owing by directors, officers, or
shareholders of QSM or owing by any Affiliate of any director or officer of QSM,
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 on Schedule
3.19.
3.20 Related Parties. Except as disclosed in Schedule 3.20 attached
hereto, none of the QSM Principals or any Affiliate of any 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 QSM; or (ii) a beneficial
interest in any contract or agreement to which QSM is party or by which QSM is
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. To the knowledge of QSM, as of the date of
this Agreement and at all times subsequent thereto until the Closing Date, none
of the information provided or to be provided by QSM and the QSM Principals to
HMS 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
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 by QSM and the QSM Principals for the specific purpose of
inclusion in the Information Statement/Prospectus will contain all material
statements which are required to be stated therein in accordance with the
Securities Act, and will in all material respects conform to the requirements of
the Securities Act. This Section 3.21 does not apply to the 1995 Financial
Statements, the Prior Financial Statements and the Interim Financial Statements,
as to which Section 3.6 shall apply.
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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, 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 QSM 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
attached hereto. Except as set forth on Schedule 3.22, QSM 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 QSM 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 QSM 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 QSM Benefit Plans, individually and in the
aggregate, no event has occurred, and there exists no condition or set of
circumstances in connection with which QSM could be subject to any liability
that could reasonably be expected to have a Material Adverse Effect on QSM
(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 QSM 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 QSM. QSM does not maintain a
"welfare benefit fund", as defined in Code Section 419(e).
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(d) With respect to any QSM 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 QSM, any of its Affiliates or
HMS.
(e) With respect to any multiemployer plan within the meaning of
Section 3(37) of ERISA to which QSM contributes (or has at any time contributed
or had an obligation to contribute): (i) QSM 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 QSM 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 QSM, if, as of the
Effective Time of the Merger, QSM 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) QSM 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 QSM contributes and
all collective bargaining agreements requiring contributions to be made to any
such multiemployer plan or plans.
3.23 Labor Relations; Employees. QSM 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 QSM employee has made a claim
before any government agency or in any court against QSM, any of its directors
or officers, or any of the QSM Principals or threatened to make such a claim.
QSM 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 QSM through the Closing
Date (whether or not payable by such date); provided, however, that all vacation
pay and sick pay obligations of QSM relating to periods prior to January 1, 1996
will be fully satisfied by QSM prior to the Closing Date. Upon termination of
the employment of any QSM 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 3.24. QSM is in compliance with all federal,
state, local, and foreign
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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 QSM pending before any
Governmental Entity or strike, dispute, slowdown or stoppage pending or
threatened against or involving QSM, and none has occurred since December 31,
1995. No representation question exists respecting the employees of QSM and no
collective bargaining agreement is currently being negotiated by QSM. Except 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 attached hereto contains a list of
all officers, employees (both full time and part time) and consultants of QSM
during calendar year 1995 and the first eight months of calendar year 1996,
together with their current job titles (if currently employed) and aggregate
remuneration rate (salary, bonus and commission) for each such person for each
respective period. Schedule 3.24 also contains a list of all employment
contracts in effect with respect to employees and consultants of QSM.
3.25 Bank Accounts. Schedule 3.25 attached hereto is a list of all
bank and investment accounts and safe deposit boxes in the name of or controlled
by QSM 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 QSM 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.
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4.2 Capital Structure. The authorized capital stock of HMS consists
of 45,000,000 shares of HMS Common, of which 17,312,549 shares are issued and
outstanding, and 5,000,000 shares of Preferred Stock, $.01 par value, of which
no shares are 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
agreement to which HMS is a party or is bound. The authorized capital stock of
Sub consists of 200 shares of Common Stock, no par value ("Sub Common"). An
additional 2,015,376 shares of HMS Common (the "Option Shares") are reserved for
issuance upon the (i) exercise of options outstanding under HMS's Stock Option
and Restricted Stock Purchase Plan and HMS's Non-Employee Director Stock Option
Plan and (ii) purchase of shares of HMS Common under HMS's Employee Stock
Purchase Plan. The Option Shares, when issued and paid for, will constitute
validly issued, fully paid and non-assessable shares of HMS 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.
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 trans actions contemplated hereby have been duly authorized
by the Boards 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. 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 By-laws of HMS, (ii) any
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provision of the Certificate 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 or HMS's other
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 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 Delaware Secretary of State and appropriate
documents with the relevant authorities of other states in which 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 Exchange Act, as may be required in
connection with this Agreement and the transactions contemplated hereby, (iv)
the filing of a Notification of Additional Listing with the NASD, (v) the filing
of the Registration Statement with the SEC, and (vi) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not have a Material Adverse Effect on HMS, Sub or HMS's other
Subsidiaries.
4.5 SEC Documents. HMS has furnished or made available to QSM, 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 to QSM 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 Securities Act, and none
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of the HMS SEC Documents (excluding (i) any information (including financial
information) contained or incorporated by reference into any HMS SEC Document
with respect to QSM 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.
4.6 Information Supplied. To the knowledge of HMS, as of the date
of this Agreement and at all times subsequent thereto until the Closing Date,
none of the information provided or to be provided by HMS to QSM 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 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 Information Statement/Prospectus will
contain all material statements which are required to be stated therein in
accordance with the Securities Act, and will in all material respects conform to
the requirements of the Securities Act (excluding (i) any information (including
financial information) contained or incorporated by reference into the
Information Statement/Prospectus with respect to QSM and (ii) any pro forma
financial information included in the Information Statement/Prospectus, as to
which no representations are made by HMS).
4.7 No Conflict. The execution and delivery of this Agree ment by
HMS, 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 Certificate of Incorporation or By-laws 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 Person to terminate its obligations under any such
HMS material agreement; (iii) to its knowledge, will not result in the
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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) to its knowledge, 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 HMS Common. The shares of HMS Common will, when issued
and delivered to the QSM Securityholders in accordance with this Agreement and
the transactions contemplated hereby, be duly authorized, validly issued, fully
paid and nonassessable.
4.9 Accounting Matters. To the knowledge of HMS, (i) neither HMS 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 QSM), and (ii) no facts or circumstances exist with regard to HMS 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.
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 is not contemplated by this Agreement or incurred in
connection with its incorporation.
4.11 Brokers or Finders. HMS has not dealt with, directly or
indirectly, any person to which any brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement or any
transaction contemplated hereby would be payable, other than with respect to
Beacon Resources, as provided herein. HMS shall indemnify and hold QSM harmless
from and against any and all claims, liabilities or obligations with respect to
any other brokerage or finders fees, commissions or
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expenses arising on account of a breach of the foregoing representation.
4.12 Certain Proceedings. There is no pending claim, dispute,
action, proceeding, suit, appeal or investigation that has been commenced
against HMS or Sub that may have the effect of preventing, delaying, making
illegal or otherwise interfering with the Merger and related transactions nor,
to the knowledge of HMS, are any such proceedings threatened. Moreover, HMS has
no knowledge of facts which might give rise to a claim for indemnification under
Article 13 hereunder, other than with respect to the operations of QSM in the
United Kingdom as set forth in Section 13.4(b) hereof.
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until
the Effective Time of the Merger, QSM agrees (except as expressly contemplated
by this Agreement or to the extent that HMS shall otherwise consent in writing)
that:
5.1 Ordinary Course. QSM 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 consistent with such business; (ii) to preserve intact its present
business organization; (iii) keep available the services of its present
officers, key employees and members of its Medical Advisory Panel; and preserve
its relationship with customers, suppliers and others having business dealings
with it; and (iv) maintain continuous insurance coverage substantially
equivalent to the insurance coverage in existence on the date of this Agreement.
In addition, QSM will not engage in any transaction not in the ordinary course
consistent with its past practices, nor will QSM 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. QSM shall not: (i) declare, pay or
promise to pay any dividends on or make other
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distributions in respect of any of its capital stock, (ii) split, combine or
reclassify any of its capital stock or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
capital stock of QSM or (iii) repurchase or otherwise acquire any shares of its
capital stock.
5.3 Issuance of Securities. QSM 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. QSM shall not amend its Certificate of
Incorporation or By-laws, except as contemplated in this Agreement.
5.5 No Acquisitions. QSM 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 QSM.
5.6 No Dispositions. QSM shall not sell, lease or otherwise dispose
of any of its assets except in the ordinary course of business consistent with
QSM's prior practices.
5.7 Indebtedness. Except for certain working capital loans made or to
be made to QSM by HMS prior to the Effective Time of the Merger, as set forth on
Schedule 5.7 attached hereto, QSM 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 QSM or guarantee any debt securities of others.
5.8 Benefit Plans, Etc. QSM shall not adopt or amend in any material
respect any agreement with employees, other than as provided in this Agreement.
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5.9 Accounting Practices. QSM 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. QSM 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 QSM 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 QSM, or afford to any Person other than HMS and its agents
access to the properties, books or records of QSM. If QSM receives any offer or
proposal, written or otherwise, of the type referred to above, QSM promptly
shall inform HMS of such offer or proposal and furnish HMS with a copy thereof
if such offer or proposal is in writing.
ARTICLE 6.
QSM SHAREHOLDERS' MEETING;
INFORMATION STATEMENT/REGISTRATION STATEMENT
6.1 QSM Shareholders' Meeting. QSM agrees that this Agreement shall be
submitted to its shareholders for approval at the QSM Shareholders' Meeting. As
soon as practicable after the date of this Agreement, QSM shall take all action,
to the extent necessary in accordance with applicable law and its Certificate of
Incorporation and By-laws, to convene the QSM Shareholders' Meeting promptly to
consider and vote upon the approval of the Merger and such other matters as may
be necessary or desirable to consummate the Merger and the transactions
contemplated hereby.
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6.2 Recommendations of QSM Board of Directors. QSM hereby represents
that its Board of Directors has (i) determined that the Merger is fair to and in
the best interests of QSM's shareholders and it is fair to the holders of the
QSM Notes, Warrants and Stock Options, (ii) approved the Merger and the other
transactions contemplated hereby, and (iii) resolved to and will recommend in
the Information Statement adoption of this Agreement, authorization of the
Merger by the shareholders of QSM and the consents of the QSM Noteholders,
Preferred Shareholders and Warrantholders.
6.3 Preparation and Filing of Information Statement/ Registration
Statement. As soon as practicable after the date of this Agreement, QSM and HMS
shall jointly prepare and file with (i) the SEC, subject to the prior approval
of the other party, which approval shall not be unreasonably withheld, an
information statement relating to the QSM Shareholders' Meeting and the
Registration Statement relating to the registration under the Securities Act of
the shares of HMS Common issuable to the QSM Securityholders, and (ii) state
securities administrators, such registration statements or other documents as
may be required under applicable blue sky laws to qualify or register the shares
of HMS Common issuable to the QSM Securityholders (the "Blue Sky Filings"). QSM,
HMS and Sub will use their reasonable best efforts to cause the Registration
Statement to become effective as soon as practicable. Promptly after the
Registration Statement has become effective and all applicable blue sky laws
have been complied with, QSM shall mail the Information Statement/Prospectus to
the QSM Securityholders. Notice of the QSM Shareholders' Meeting shall be mailed
to the shareholders of QSM along with the Information Statement.
6.4 Accuracy of Information. Each party represents and warrants that
the information supplied or to be supplied by it for and included or
incorporated by reference in the Registration Statement, the Blue Sky Filings,
the Information Statement/Prospectus and any other documents to be filed with
the SEC or any regulatory agency in connection with the transactions
contemplated hereby will, at the respective times such documents are filed or,
as applicable, declared effective and, as of the Effective Time of the Merger,
and, with respect to the Information Statement, when first published, sent or
given to the QSM Securityholders and at the time of the QSM Shareholders'
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Meeting, not be false or misleading with respect to a material fact, or omit or
state any material fact necessary in order to make the statements therein not
misleading.
6.5 Additional Information. Each party covenants and agrees that (i)
if, at any time prior to the Effective Time of the Merger, any event relating to
it or any of its Affiliates, officers, or directors is discovered that should be
set forth in an amendment to the Registration Statement or Blue Sky Filings or a
supplement to the Information Statement, such party will promptly inform the
other parties, and such amendment or supplement will be promptly filed with the
SEC and appropriate state securities administrators and disseminated to the
shareholders of QSM, to the extent required by applicable federal and state
securities laws, and (ii) documents which either party files or is responsible
for filing with the SEC and any regulatory agency in connection with the Merger
(including, without limitation, the Information Statement) will comply as to
form and content in all material respects with the provisions of applicable law.
Notwithstanding the foregoing, no party makes any representations or warranties
with respect to any information that has been supplied by the other party or by
its auditors, attorneys, financial advisors, other consultants or advisors
specifically for use in the Registration Statement, Blue Sky Filing, the
Information Statement, or any other documents to be filed with the SEC or any
regulatory agency in connection with the transactions contemplated hereby.
6.6 QSM Accountants Letter. QSM shall use all reasonable efforts to
cause to be delivered to HMS a letter of Ernst & Young LLP, QSM's independent
accountants, dated a date within five (5) business days before the date on which
the Registration Statement shall become effective and addressed to HMS, of the
kind contemplated by the Statement of Auditing Standards with respect to Letters
to Underwriters promulgated by the American Institute of Certified Public
Accountants (the "AICPA Statement"), in form and substance reasonably
satisfactory to HMS and customary in scope and substance for letters delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement.
6.7 Expenses. The out-of-pocket costs and expenses incurred in
connection with the QSM Shareholders' Meeting shall
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be expenses of QSM and 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 to be borne by HMS 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 Securities 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 purchasers of the securities so registered, the costs and expenses
incurred in connection with the Blue Sky Filings, and any other costs and
expenses of complying with the foregoing provisions of this Article 6 with
respect to such registration (the "Registration Expenses").
6.8 Indemnification.
(a) Indemnification by HMS. HMS hereby indemnifies and agrees to hold
harmless the QSM Securityholders and each Person, if any, who controls, within
the meaning of Section 15 of the Securities Act, the QSM Securityholders against
any losses, claims, damages or liabilities (collectively, "Damages"), to which
any such Persons may be subject, under the Securities 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 Damages 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 the shares of HMS Common were registered
under the Securities 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 Damages 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 QSM or the QSM Principals specifically for use therein or (ii) the 1995
Financial Statements, the Prior Financial Statements, the Interim
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Financial Statements or any other financial statements or related financial
information of QSM provided to HMS in writing by QSM or any of the QSM
Principals.
(b) Indemnification by QSM. QSM hereby agrees to indemnify and to hold
harmless HMS and its directors and officers and each Person, if any, who
controls HMS within the meaning of Section 15 of the Securities Act against any
Damages to which any of such Persons may be subject under the Securities 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 Damages, but only to the extent such Damages 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 shares of HMS Common were registered under the Securities 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) information
furnished in writing to HMS by QSM or the QSM Principals or (ii) the 1995
Financial Statements, the Prior Financial Statements, the Interim Financial
Statements or any other financial statements or related financial information of
QSM provided to HMS in writing by QSM or any of the QSM Principals.
(c) Notification. Each party indemnified under Section 6.8(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 6.8 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
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to such indemnified party under this Section 6.8 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 6.8 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.
(d) Method of Indemnification. In the event that an Indemnitee shall
seek indemnification pursuant to Section 6.8(b), such Indemnitee may seek
recovery in an amount equal to the aggregate Damages incurred or suffered by
such Indemnitee with respect to which such Indemnitee is entitled to
indemnification pursuant to Section 6.8(b), and any obligation to indemnify an
Indemnitee shall be satisfied solely from the Escrow Fund, in accordance with
the terms of withdrawal specified in the Escrow Agreement.
6.9 Restrictions on Resale. In addition to the resale restrictions on
shares of HMS Common applicable to "Rule 145 Affiliates" of QSM set forth in
Section 7.3 hereof, all executive officers of QSM after the Merger shall be
subject to the "window period" resale restrictions applicable to all directors
and executive officers of HMS and its Subsidiaries.
ARTICLE 7.
ADDITIONAL AGREEMENTS
7.1 Access to Information. QSM 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 QSM's properties, books, contracts, commitments and records and, during
such
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period, QSM shall use all reasonable efforts to furnish promptly to HMS all
other information concerning the business, properties and personnel of QSM as
HMS may reasonably request, provided that QSM shall not be required to disclose
any information which it is legally required to keep confidential. QSM shall
request a waiver of any such confidentiality requirement. 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
QSM all nonpublic documents obtained from QSM which it would not otherwise have
been entitled to obtain, and any copies made of such documents, extracts and
copies thereof. 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.
7.3 Rule 145 Affiliates. Schedule 7.3 attached hereto sets forth a
list of names and addresses of those Persons, who may be deemed "Affiliates" of
QSM within the meaning of Rule 145 under the Securities Act ("Rule 145") or from
whom a letter in the form of Exhibit H 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, a
"Rule 145 Affiliate"). QSM shall provide HMS such information and documents as
HMS shall reasonably request for purposes of reviewing such list. There shall be
added to
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such list the names and addresses of any other Person who becomes a Rule 145
Affiliate of QSM at any time after the date hereof up to and including the time
of the QSM Shareholders' Meeting or who HMS reasonably identifies (by written
notice to QSM) as being a Person who may be deemed to be an Affiliate of QSM.
QSM 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 Rule 145 Affiliates identified on Schedule 7.3 (as the same may be
supplemented as aforesaid), the Affiliate Letter.
If any Rule 145 Affiliate of QSM refuses to provide a Rule 145
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 Rule 145 Affiliate 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 Rule 145 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 QSM 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 Rule 145 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 Rule 145 Affiliate has exchanged the certificates
previously evidencing such Rule 145 Affiliate's shares of QSM Capital Stock,
Notes or Warrants for certificates evidencing the shares of HMS Common into
which such shares of QSM Capital Stock, Notes or Warrants were converted or
exchanged, as the case may be.
7.4 Irrevocable Proxies. In consideration of the execution of this
Agreement by HMS and Sub, QSM has caused to be delivered to HMS irrevocable
proxies, in the form of Exhibit I hereto, in favor of designees of HMS,
authorizing such proxies to vote in favor of this Agreement and the transactions
contemplated hereby
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at the QSM Shareholders' Meeting. Such irrevocable proxies represent in excess
of fifty (50%) percent of the shares of QSM Capital Stock which will be entitled
to vote on the Merger at the QSM Shareholders' Meeting.
7.5 Employment Agreements.
(a) QSM and each of William B. Munier, Ira Yanowitz, Susan
Terrillion, Lori Blades and Kenneth Housely shall, at the Closing, execute an
employment agreement, substantially in the form of Exhibit J to this Agreement.
(b) HMS, QSM and each of Rodrigo Rocha, William B. Munier, Ira
Yanowitz, Susan Terrillion, Lori Blades and Kenneth Housely shall, at the
Closing, execute an agreement, substantially in the form of Exhibit K to this
Agreement, not to compete with QSM.
7.6 Employee Benefits. HMS agrees that, after the Closing Date, QSM
employees will be afforded the opportunity to participate in benefits and equity
acquisition programs that are currently available to all HMS employees.
7.7 Treatment of Assumed QSM Stock Options.
(a) Each Assumed QSM Stock Option has been issued pursuant to QSM's
stock option plans (collectively, the "QSM Option Plans"), a complete list of
which is set forth on Schedule 7.7 attached hereto. In addition to the
provisions of Section 2.5(b) of this Agreement, in the case of any Assumed QSM
Stock Option to which Section 421 of the Code applies by reason of its
qualifications under Section 422 or Section 423 of the Code ("Qualified Stock
Options"), the option price, the number of shares purchasable pursuant to such
Assumed QSM Stock Options and the terms and conditions of exercise of such
Assumed QSM Stock Options shall be determined in order to comply with Section
424 of the Code. As soon as practicable after the Effective Time of the Merger,
HMS shall deliver to holders of Assumed QSM Stock Options appropriate option
agreements under the HMS Stock Option and Restricted Stock Purchase Plan
representing the right to acquire shares of HMS Common.
(b) HMS shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of HMS Common
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for delivery upon exercise of the Assumed QSM Stock Options assumed in
accordance with Section 2.5(b) and this Section 7.7. The shares of HMS Common
subject to such Assumed QSM Stock Options are included in a Registration
Statement on Form S-8 previously filed by HMS and declared effective by the SEC
and HMS agrees to use all reasonable efforts to maintain the effectiveness of
such registration statement (and maintain the current status of the prospectus
or prospectuses contained therein) for so long as such Assumed QSM Stock Options
remain outstanding.
7.8 Grant of HMS Stock Options Following the Closing. Pursuant to
Section 7.6 above, HMS will cause options to purchase an aggregate of 40,000
shares of HMS Common minus the number of shares of HMS Common issuable upon the
exercise of the Assumed QSM Stock Options to be issued immediately following the
Effective Time of the Merger to such senior management and other employees of
QSM as the Chief Executive Officer of QSM may direct, after consultation with
the Chief Executive Officer of HMS. It is anticipated that the terms of such
options will be subject to continued employment, will have a vesting schedule
spanning three years, with one-quarter of the options vesting immediately
following the Effective Time of the Merger, an additional one-quarter of the
options vesting on October 31, 1997, an additional one-quarter of the options
vesting on October 31, 1998 and the remaining options vesting on October 31,
1999, and will be subject to such other terms and conditions as are set forth in
the HMS Stock Option and Restrictive Stock Purchase Plan pursuant to which the
options will be granted and the HMS Stock Option Agreement which will evidence
the options; provided, however, that in the event of a termination of employment
other than a voluntary termination by the employee or termination by QSM for
"cause", which for purposes of this Section 7.8 shall mean (i) conviction of the
employee of a crime of moral turpitude, (ii) clear and convincing evidence that
the employee acted dishonestly to the material detriment of QSM or HMS or any of
HMS's Subsidiaries, or (iii) the employee acting in gross dereliction of his
duties, the vesting of all unvested options granted pursuant to this Section 7.8
which are held by the terminated employee as of the termination date of
employment shall be accelerated to the date of termination of employment. The
grant of such options shall be conditioned upon each recipient executing an HMS
confidentiality/non-competition
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agreement substantially in the form attached to the employment agreements
contemplated by Section 7.5 of this Agreement.
7.9 Communications. Between the date hereof and the Effective Time of
the Merger, neither QSM 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 (provided that, in such event, HMS shall make
reasonable efforts to advise QSM in advance of such disclosure).
7.10 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 QSM Capital Stock, the QSM
Notes and QSM Warrants outstanding immediately prior to the Effective Time of
the Merger shall have been converted or exchanged as provided herein.
7.11 Parachute Payments. QSM shall comply with the provisions of
Section 280G(b)(5)(A)(ii) of the Code, such that neither HMS, Sub, QSM 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 QSM
or any entity affiliated therewith.
7.12 Notification of Certain Matters. QSM shall give prompt notice to
HMS and HMS shall give prompt notice to QSM, 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) 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 QSM, HMS or Sub, as the case may be, to comply with or satisfy
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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
7.12 shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
7.13 Tax Treatment. QSM 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
QSM's historic business or use a significant portion of QSM'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.
7.14 Beacon Resources Fee. The fee of Beacon Resources in the amount
of $150,000, as provided for in the engagement agreement between QSM and Beacon
Resources dated May 13, 1996, and thereafter agreed to by QSM, Beacon Resources
and HMS, will be paid by HMS via an HMS check, which will be delivered
immediately following the Effective Time of the Merger.
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) Effective Registration Statement. The Registration Statement shall
have been declared effective, and no stop order suspending the effectiveness of
the Registration Statement shall have been issued by the SEC or shall be
continuing to be in
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effect and no proceedings for that purpose shall have been initiated or
threatened by the SEC. HMS shall have received all state securities laws or
"blue sky" permits and authorizations necessary to issue the shares of HMS
Common pursuant to the Merger and the transactions contemplated hereby.
(b) Shareholder Approval. This Agreement shall have been approved and
adopted by the required affirmative vote of (i) the holders of the outstanding
shares of QSM Capital Stock and (ii) HMS in its capacity as the sole shareholder
of Sub.
(c) 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 QSM.
(d) Third-Party Approvals. Any and all consents or approvals
required from third parties shall have been obtained.
(e) 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,
or seeking the imposition against QSM or HMS of substantial damages if the
Merger is consummated, shall be pending or threatened which, in the good faith
judgment of QSM'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.
(f) 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.
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(g) Nasdaq HMS Listing. The shares of HMS Common to be issued in the
Merger and the other transactions contemplated hereby 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 QSM 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 Officer of QSM.
(b) Performance of Obligations of QSM. QSM 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 QSM to such effect.
(c) Opinion of QSM's Counsel. HMS shall have received an opinion dated
the Closing Date of LeBoeuf, Lamb, Greene & MacRae L.L.P., counsel to QSM, in
form reasonably acceptable to HMS.
(d) Rule 145 Affiliate's Letters. Each Person who is identified as a
Rule 145 Affiliate of QSM pursuant to Section 7.3 shall have executed and
delivered to HMS and its counsel an Affiliate Letter.
(e) Employment. Each of the employment and not-to-compete agreements
contemplated under Section 7.5 of this Agreement shall have been duly executed
and delivered.
(f) QSM Preferred Shareholder, Noteholder and Warrantholder Consents.
QSM shall have received fully executed QSM Preferred Shareholder Consents,
Noteholder Consents and Warrantholder Consents from each QSM Preferred
Shareholder, Noteholder and Warrantholder listed on Schedule 3.2 attached hereto
and the holders of all outstanding $.25 QSM Warrants and vested $.25 QSM
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Stock Options shall have fully exercised their respective $.25 QSM Warrants and
$.25 QSM Stock Options.
(g) No Adverse Change in the Business of QSM. HMS shall have received
a certificate signed by the Chief Executive and Chief Financial Officer of QSM
that since the date of the Interim Financial Statements there has been no
material adverse change in the business of QSM other than as disclosed in this
Agreement.
(h) Corporate Action. HMS shall have received from QSM certified
copies of resolutions of QSM'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 QSM by the corporate secretary
of QSM to such effect. In addition, HMS shall have received (i) a copy of QSM's
Certificate of Incorporation, and all amendments thereto, certified by the
Secretary of State of Delaware, (ii) a copy of QSM's By-laws certified by QSM's
corporate secretary, (iii) good standing certificates for QSM and each of its
Subsidiaries from their respective states of incorporation and all states where
they are qualified to do business, and (iv) incumbency certificates covering the
officers of QSM certified by its corporate secretary and Chief Executive
Officer.
8.3 Conditions to Obligations of QSM. The obligations of QSM to
effect the Merger are subject to the satisfaction on or prior to the Closing
Date of the following conditions unless waived by QSM:
(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 QSM shall have received a certificate signed by the Chief Executive
and Chief Financial Officer 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 QSM shall have received a certificate
signed by the Chief Executive Officer of HMS to such effect.
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(c) Opinion of HMS's Counsel. QSM shall have received an opinion dated
the Closing Date of Coleman & Rhine LLP, counsel to HMS, in form reasonably
acceptable to QSM.
(d) Corporate Action. QSM shall have received from HMS certified
copies of resolutions of Sub's sole shareholder and of HMS's and Sub's Boards of
Directors approving and adopting this Agreement and the transactions
contemplated hereby, and QSM 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.
CLOSING
The closing under this Agreement (the "Closing") shall be held as soon
as practicable following satisfaction of all 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 about October 31, 1996. In any event, if the Closing has not occurred on
or before November 30, 1996, this Agreement may be terminated as provided in
Article 12. 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.
ARTICLE 10.
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 13.4.
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 Articles 11 and 13 of this Agreement shall survive any
termination of this Agreement.
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ARTICLE 11.
PAYMENT OF EXPENSES
HMS, Sub and QSM shall each pay their own out-of-pocket expenses
incurred incident to the preparation and carrying out of the transactions herein
contemplated, except as specifically set forth below. At the Closing, HMS shall
pay the fee of Beacon Resources if the Merger is consummated, in accordance with
the provisions of Section 7.14 above. In addition, unless the Merger is not
consummated because (a) QSM fails to meet the accounting criteria for pooling
transactions and/or (b) QSM affirmatively decides not to consummate the Merger,
HMS will reimburse QSM its actual and reasonable accounting, legal and
independent appraisal fees ("QSM Transaction Expenses") up to a maximum of
$90,000.
ARTICLE 12.
TERMINATION, AMENDMENT AND WAIVER
12.1 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 QSM:
(a) by mutual written consent of QSM and HMS;
(b) by HMS or QSM, 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 QSM if the Merger shall not have been
consummated on or before November 30, 1996; provided, however, that if the
Merger shall not be consummated on or before November 30, 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 QSM may rely upon its own actions or lack thereof to
terminate the Agreement;
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(d) by either HMS or QSM 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 QSM 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 (i) prohibit
HMS's or QSM's ownership or operation of all or a material portion of the
business or assets of QSM or HMS and its Subsidiaries taken as a whole, or
compel HMS or QSM to dispose of or hold separate all or a material portion of
the business or assets of QSM and its Subsidiaries taken as a whole or HMS and
its Subsidiaries taken as a whole, as a result of the Merger or (ii) render HMS
or QSM unable to consummate the Merger, except for any waiting period
provisions.
Where action is taken to terminate this Agreement pursuant to this
Section 12.1, it shall be sufficient for such action to be authorized by the
Board of Directors of the party taking such action.
12.2 Effect of Termination. In the event of termination of this
Agreement by either QSM or HMS as provided in Section 12.1, this Agreement shall
forthwith become void and there shall be no liability or obligation on the part
of HMS or QSM or their respective officers or directors except as set forth in
Article 11 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.
12.3 Amendment. This Agreement may be amended by the parties hereto,
by action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
shareholders of QSM 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.
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This Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto.
12.4 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 13.
INDEMNIFICATION OF HMS
13.1 Indemnification. Subject to the terms and conditions of this
Article 13, QSM shall 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 (collectively
"Damages"), imposed upon or incurred by HMS or QSM by reason of or resulting
from:
(a) any inaccuracy or breach of any representation, warranty or
covenant of QSM contained in or made pursuant to this Agreement, or
(b) any inaccuracy or misrepresentation in any certificate or any
QSM Schedule delivered by QSM pursuant to this Agreement, or
(c) any breach by QSM of this Article 13.
13.2 Method of Indemnification. In the event HMS shall seek
indemnification pursuant to Section 13.1, HMS may seek recovery in the amount
equal to the aggregate Damages incurred or suffered by HMS with respect to which
HMS is entitled to indemnification
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pursuant to Section 13.1, and any obligation of QSM to indemnify HMS shall be
satisfied solely from the net proceeds derived from the sale of shares of HMS
Common held by the Escrow Agent in accordance with the terms of withdrawal
specified in the Escrow Agreement, and the QSM Securityholders shall have no
other obligation to indemnify HMS hereunder.
13.3 Conditions of Indemnification. HMS's right to indemnification
under Section 13.1 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 QSM Representatives (as such term is defined in the Escrow Agreement)
written notice thereof together with a copy of such claim, process or other
legal pleading, and the QSM Representatives shall have the right to undertake
the defense thereof through a legal representative of the QSM Representatives'
own choosing, and reasonably satisfactory to HMS.
(b) If the QSM 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 QSM
Representatives) will have the right to undertake the defense, compromise or
settlement of such claim.
13.4 Limitations on Indemnification.
(a) The indemnities set forth in this Article 13 and all
representations, warranties and covenants hereunder shall survive for a period
of nine (9) months following the Effective Time of the Merger, including such
indemnities, representations, warranties and covenants of QSM hereunder which
pertain to tax claims. Upon the expiration of such period, HMS shall have no
further right of indemnification for Damages and the balance of HMS Common held
by the Escrow Agent shall be distributed as provided in the Escrow Agreement
unless HMS has been given notice of a claim asserting liability by a third
Person prior to the
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expiration of such period and thereafter provides notice to the QSM
Representatives in the manner provided in Section 13.3 above.
(b) If HMS shall become entitled to indemnification for Damages
hereunder, there shall be a credit or offset against such liability of an amount
equal to $100,000 (the "Threshold"). Notwithstanding the foregoing, there shall
be no credit or offset for Damages relating to (i) taxes incurred with respect
to the operations of QSM in the United Kingdom prior to the Closing Date, and
(ii) an account receivable in the amount of $30,956.36 due to QSM from the
Beacon Group. At such time as the aggregate of all Damages exceeds the
Threshold, HMS shall be entitled to recover any and all amounts for which a
claim for indemnity has been made, without regard to the Threshold.
ARTICLE 14.
GENERAL
14.1 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: Chief Executive Officer
with a copy to
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
Attention: Bruce S. Coleman, Esq.
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If to QSM or the QSM Principals:
Quality Standards in Medicine, Inc.
581 Boylston Street - Suite 250
Boston, Massachusetts 02116
Attention: Chief Executive Officer
with a copy to
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
260 Franklin Street
Boston, Massachusetts 02110
Attention: David S. Balabon, Esq.
or to such other Persons as may be designated in writing by the parties, by a
notice given as aforesaid.
14.2 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.
14.3 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.
14.4 Binding Nature. This Agreement shall be binding upon and inure
to the benefit of the parties hereto. Neither HMS, Sub nor QSM may assign or
transfer any rights under this Agreement.
14.5 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.
14.6 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.
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14.7 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.
14.8 No Dissenters' Rights of Appraisal. Pursuant to Section 262(b)
of the Delaware General Corporation Law, holders of QSM Capital Stock are not
entitled to dissenters' rights of appraisal in connection with the Merger
because shares of HMS Common are currently, and on the record date for the QSM
Shareholders' Meeting will be, listed for trading in the Nasdaq National Market.
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IN WITNESS WHEREOF, HMS, Sub and QSM have caused this Agreement to be
duly signed all as of the date first written.
HEALTH MANAGEMENT SYSTEMS, INC.
By:
--------------------------------
QSM ACQUISITION CORP.
By:
--------------------------------
QUALITY STANDARDS IN MEDICINE, INC.
By:
--------------------------------
AGREED TO AND ACCEPTED:
QSM Principals
- -------------------------
William B. Munier
- -------------------------
Rodrigo Rocha
COLEMAN & RHINE LLP,
as Escrow Agent
By:
----------------------
Bruce S. Coleman, Esq.
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