<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HEALTH MANAGEMENT SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
NEW YORK 13-2770433
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PAUL J. KERZ, PRESIDENT
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
(212) 685-4545
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
BRUCE S. COLEMAN, ESQ.
COLEMAN & RHINE LLP
1120 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
(212) 840-3330
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value ................. 233,000 $28.75 $6,698,750 $2,309.91
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</TABLE>
(1) Estimated pursuant to Rules 457(c) and 457(h) solely for the purpose of
calculating the registration fee, and based on the average of the high and
low sales prices reported on the Nasdaq National Market of $29.75 and $27.75
on September 30, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
CROSS REFERENCE TABLE
LOCATION IN INFORMATION STATEMENT/PROSPECTUS
REQUIRED BY ITEMS ON FORM S-4
<TABLE>
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ITEM NUMBER AND CAPTION IN FORM S-4 LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover of Information
Statement/Prospectus; Facing Page of the
Registration Statement
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Special Note Regarding Forward-Looking
Statement; Incorporation of Certain
Documents by Reference; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information........... Risk Factors
4. Terms of the Transaction................... Summary; The Merger
5. Pro Forma Financial Information............ Not Applicable
6. Material Contracts with the Company Being
Acquired................................. Summary; The Merger; The Merger Agreement
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters....................... Not Applicable
8. Interests of Named Experts and Counsel..... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
10. Information with Respect to S-3
Registrants.............................. Summary; The Merger; The Merger Agreement;
Business of HMS
11. Incorporation of Certain Information by
Reference................................ Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3
Registrants.............................. Not Applicable
13. Incorporation of Certain Information by
Reference................................ Not Applicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants........ Not Applicable
15. Information with Respect to S-3
Companies................................ Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................ Not Applicable
17. Information with Respect to Companies Other
Than S-2 or S-3 Companies................ Summary; Business of QSM; Facilities;
Comparative Per Share Information; QSM
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations; Ownership of QSM Capital
Stock; Financial Statements of QSM
18. Information if Proxies, Consents or
Authorizations are to be Solicited....... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited,
or in an Exchange Offer.................. Summary; The Special Meeting; The Merger;
The Merger Agreement; Ownership of QSM
Capital Stock; Executive Compensation of
QSM
</TABLE>
<PAGE> 3
QUALITY STANDARDS IN MEDICINE, INC.
581 BOYLSTON STREET, SUITE 250
BOSTON, MASSACHUSETTS 02116
October , 1996
Dear Fellow Stockholder:
You are cordially invited to attend a special meeting of Stockholders (the
"Special Meeting") of Quality Standards in Medicine, Inc. ("QSM") to be held on
October , 1996 at QSM's principal offices at 581 Boylston Street, Suite 250,
Boston, Massachusetts 02116.
On September 3, 1996, we signed an Agreement and Plan of Merger (the
"Merger Agreement") with Health Management Systems, Inc. ("HMS") pursuant to
which QSM will become a wholly-owned subsidiary of HMS. In connection with the
merger (the "Merger") contemplated by the Merger Agreement, 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 promissory notes of QSM
(excluding certain promissory notes issued to HMS), 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 ("HMS Common"), subject to (i) upward adjustment in certain
circumstances and (ii) a nine month escrow arrangement covering 10% of the
shares of HMS Common to be issued in connection with the Merger to secure the
obligations of QSM to HMS under the Merger Agreement and to provide for the
payment of certain expenses incurred by QSM relating to the Merger. The
accompanying Information Statement/Prospectus provides a detailed description of
the Merger and its effects on QSM's stockholders.
Your Board of Directors believes that the terms of the Merger are fair to
and in the best interests of QSM and its stockholders, are fair to the holders
of promissory notes, stock options and common stock purchase warrants of QSM,
has approved the Merger and recommends that you vote FOR the ratification and
approval of the Merger Agreement and the Merger.
Simultaneously with the execution of the Merger Agreement, certain
stockholders of QSM who in the aggregate own or control a sufficient number of
shares of common stock to approve the Merger Agreement delivered their
irrevocable proxies to designees of HMS to vote their shares in favor of
approval of the Merger.
A copy of the accompanying Information Statement/Prospectus is also being
sent to the holders of all outstanding promissory notes of QSM, all outstanding
common stock purchase warrants issued by QSM and all outstanding vested $.25
stock options issued by QSM in connection with the conversion, exercise and
conversion or exchange of their respective securities.
Sincerely yours,
William B. Munier, M.D.
President
<PAGE> 4
QUALITY STANDARDS IN MEDICINE, INC.
581 BOYLSTON STREET, SUITE 250
BOSTON, MASSACHUSETTS 02116
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on October , 1996
TO THE STOCKHOLDERS OF QUALITY STANDARDS IN MEDICINE, INC.:
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting") of
the stockholders of Quality Standards in Medicine, Inc., a Delaware corporation
("QSM"), will be held on October , 1996 at 10:00 A.M., local time, at the
Company's principal offices at 581 Boylston Street, Suite 250, Boston,
Massachusetts 10016, for the following purposes:
1. To ratify and approve an Agreement and Plan of Merger, dated as of
September 3, 1996 (the "Merger Agreement"), by and among Health Management
Systems, Inc., a New York corporation ("HMS"), QSM Acquisition Corp., a
newly-formed Delaware corporation which is a wholly-owned subsidiary of HMS
("Sub"), and the Company, pursuant to which, among other things, Sub would
be merged with and into the Company (the "Merger"); all shares of common
stock, $.01 par value ("QSM Common Stock"), and all shares of preferred
stock, $.01 par value ("QSM Preferred Stock" and, collectively with QSM
Common Stock, the "QSM Capital Stock"), of the Company issued and
outstanding, together with all outstanding promissory notes (other than
promissory notes issued to HMS in connection with working capital loans to
the Company) of the Company, all outstanding common stock purchase warrants
issued by the Company and all outstanding vested $.25 stock options issued
by the Company will either be converted, exercised and then converted or
exchanged for an aggregate of 228,000 (subject to adjustment) shares of
common stock, par value $.01 per share, of HMS; and
2. To transact such other business as may properly come before the
Special Meeting and any adjournments thereof.
The Merger Agreement is more fully described in the Information
Statement/Prospectus accompanying this notice.
The Board of Directors of the Company has fixed the close of business on
October , 1996 as the record date (the "Record Date") for the Special Meeting.
Accordingly, only holders of record at the Record Date of QSM Capital Stock are
entitled to notice of, and only holders of QSM Common Stock are entitled to vote
at, the Special Meeting and any adjournments thereof.
By Order of the Board of Directors,
William B. Munier, M.D.
Secretary
Boston, Massachusetts
October , 1996
<PAGE> 5
AFTER CAREFUL CONSIDERATION, THE QSM BOARD OF DIRECTORS HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD BELIEVES THAT THE
TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF THE COMPANY AND
ITS STOCKHOLDERS AND ARE FAIR TO THE HOLDERS OF PROMISSORY NOTES, STOCK OPTIONS
AND COMMON STOCK PURCHASE WARRANTS OF THE COMPANY. CERTAIN STOCKHOLDERS OF THE
COMPANY IN THE AGGREGATE OWN OR CONTROL A SUFFICIENT NUMBER OF SHARES OF QSM
COMMON STOCK TO APPROVE THE MERGER AGREEMENT AND HAVE DELIVERED THEIR
IRREVOCABLE PROXIES TO DESIGNEES OF HMS TO VOTE THEIR SHARES IN FAVOR OF SUCH
APPROVAL.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR QSM SECURITIES AT THIS TIME.
<PAGE> 6
QUALITY STANDARDS IN MEDICINE, INC.
INFORMATION STATEMENT
Special Meeting of Stockholders
To be Held October , 1996
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY
-------------------------------------------------------------
HEALTH MANAGEMENT SYSTEMS, INC.
PROSPECTUS
SHARES OF COMMON STOCK
-------------------------------------------------------------
This Information Statement/Prospectus is being furnished to stockholders of
Quality Standards in Medicine, Inc., a Delaware corporation ("QSM"), in
connection with a Special Meeting of the stockholders of QSM (the "Special
Meeting") to be held on October , 1996, and at any adjournment thereof.
At the Special Meeting, holders of outstanding shares of the common stock,
par value $.01 per share (the "QSM Common Stock") of QSM, entitled to notice of
and to vote at the Special Meeting will be asked to ratify and approve an
agreement and plan of merger dated as of September 3, 1996 (the "Merger
Agreement"), by and among Health Management Systems, Inc., a New York
corporation ("HMS"), QSM Acquisition Corp. ("Sub"), a Delaware corporation and a
wholly-owned subsidiary of HMS, and QSM, providing for the merger of Sub with
and into QSM (the "Merger") pursuant to the Delaware General Corporation Law
(the "Delaware Act"). The Merger will become effective upon the filing of a
Certificate of Merger with the Delaware Secretary of State pursuant to the
Delaware Act. It is expected that the Merger, if approved at the Special
Meeting, will become effective on or about October 31, 1996.
Pursuant to the terms of the Merger Agreement, all shares of QSM Common
Stock and all shares of preferred stock, $.01 par value ("QSM Preferred Stock"
and, together with the QSM Common Stock, the "QSM Capital Stock"), of QSM issued
and outstanding, together with all outstanding promissory notes of QSM
(excluding certain promissory notes issued to HMS), 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 (subject to adjustment) shares of common
stock, par value $.01 per share ("HMS Common"), of HMS. Ten percent of the
shares of HMS Common to be issued in connection with the Merger will be subject
to a nine month escrow arrangement to secure the obligations of QSM to HMS under
the Merger Agreement and to provide for the payment of certain expenses incurred
by QSM in connection with the Merger.
ON SEPTEMBER 3, 1996, CERTAIN STOCKHOLDERS OF QSM (THE "QSM PRINCIPALS")
OWNED OR CONTROLLED 5,193,788 SHARES OF QSM COMMON STOCK (REPRESENTING
APPROXIMATELY 57% OF THE SHARES OF QSM COMMON STOCK OUTSTANDING ON SUCH DATE).
ACCORDINGLY, THE QSM PRINCIPALS HAVE A SUFFICIENT NUMBER OF SHARES TO APPROVE
THE MERGER AGREEMENT AND HAVE DELIVERED THEIR IRREVOCABLE PROXIES TO HMS TO VOTE
THEIR SHARES IN FAVOR OF SUCH APPROVAL.
IN CONSIDERING THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF QSM WITH
RESPECT TO THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, QSM
STOCKHOLDERS SHOULD BE AWARE THAT CERTAIN MEMBERS OF QSM'S MANAGEMENT AND QSM'S
BOARD OF DIRECTORS HAVE INTERESTS IN THE MERGER THAT ARE IN ADDITION TO AND MAY
CONFLICT WITH THE INTERESTS OF STOCKHOLDERS OF QSM GENERALLY. SEE "THE
MERGER -- INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST" AND
"THE MERGER AGREEMENT -- ESCROW FUND."
The Board of Directors of QSM has fixed the close of business on October ,
1996, as the record date (the "Record Date") for the determination of holders of
shares of QSM Capital Stock entitled to notice of, and for the determination of
holders of shares of QSM Common Stock entitled to vote at, the Special Meeting.
As of the Record Date, there were 9,061,992 shares of QSM Common Stock issued
and outstanding, each of which is entitled to one vote. The affirmative vote of
the holders of at least a majority of the outstanding shares of QSM Common Stock
is required to approve the Merger. The QSM Principals beneficially own or
control in excess of a majority of the outstanding shares of such stock.
Pursuant to the Merger Agreement, the QSM Principals have delivered their
irrevocable proxies to vote all shares of QSM Common Stock over which they
exercise voting control in favor of the Merger Agreement and the Merger. NO
ACTION BY ANY OTHER STOCKHOLDER IS REQUIRED TO APPROVE THE MERGER.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED IN EVALUATING THE MERGER DESCRIBED HEREIN AND THE
SECURITIES OFFERED HEREBY.
HMS has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement (the "Registration Statement") on Form S-4 (Commission
File No. 333- ) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of HMS Common to be issued in
connection with the Merger. This Information Statement/Prospectus constitutes
the Prospectus of HMS filed as part of the Registration Statement. All
information contained herein with respect to HMS has been furnished by HMS. All
information contained herein with respect to QSM has been furnished by QSM.
The HMS Common is traded on the Nasdaq National Market under the symbol
"HMSY". On October , 1996, the last reported sale price for the HMS Common on
the Nasdaq National Market was $ . Based on such last reported sale
price, the maximum aggregate value of the transactions contemplated by the
Merger Agreement is $ .
------------------------
THE SECURITIES ISSUABLE PURSUANT TO THIS INFORMATION STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS INFORMATION STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT/PROSPECTUS IS FIRST BEING MAILED OR
DELIVERED TO THE STOCKHOLDERS OF QSM ON OR ABOUT OCTOBER , 1996.
The date of this Information Statement/Prospectus is October , 1996.
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..................................... (iv )
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... (v )
AVAILABLE INFORMATION................................................................. (vi )
SUMMARY............................................................................... 1
Description of HMS.................................................................. 1
Description of Sub.................................................................. 1
Description of QSM.................................................................. 1
Synergies of Proposed Merger........................................................ 2
The Special Meeting................................................................. 2
The Merger.......................................................................... 2
Summary Historical Financial Data................................................... 5
Selected Consolidated Financial and Operating Data -- HMS........................... 7
Selected Financial and Operating Data -- QSM........................................ 8
RISK FACTORS.......................................................................... 9
HHL Financial Services, Inc......................................................... 9
Acquisitions and Expansion.......................................................... 9
Industry and Market Changes; Competition............................................ 9
Proprietary Technology.............................................................. 10
Health Care Payment Complexity...................................................... 10
Health Care Regulation and Reform................................................... 10
Dependence Upon Key Personnel....................................................... 11
Possible Volatility of Stock Prices................................................. 11
Certain Anti-Takeover Provisions.................................................... 11
No Assurance that HMS Will Realize Anticipated Benefits from the Merger............. 11
Interests of Certain Persons in the Merger; Conflicts of Interest................... 11
Issuance of HMS Common in the Merger................................................ 12
Federal Income Tax.................................................................. 12
COMPARATIVE PER SHARE INFORMATION..................................................... 13
PRICE RANGE OF HMS COMMON............................................................. 14
DIVIDEND POLICY....................................................................... 14
THE SPECIAL MEETING................................................................... 15
Date, Time, Place and Purpose....................................................... 15
Record Date......................................................................... 15
Vote Required....................................................................... 15
THE MERGER............................................................................ 16
Background of the Merger............................................................ 16
QSM's Reasons for the Merger; Recommendation of the QSM Board of Directors.......... 16
Certain Federal Income Tax Consequences............................................. 17
Interests of Certain Persons in the Merger; Conflicts of Interest................... 18
Employment Agreements............................................................... 18
No Dissenters' Rights of Appraisal.................................................. 19
Regulatory Approvals................................................................ 19
Accounting Treatment................................................................ 19
Resale Restrictions................................................................. 19
THE MERGER AGREEMENT.................................................................. 20
The Merger.......................................................................... 20
</TABLE>
i
<PAGE> 8
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Effective Time of the Merger........................................................ 20
Conversion of Securities............................................................ 20
Treatment of Stock Options.......................................................... 21
Exchange Procedures................................................................. 21
Escrow Fund......................................................................... 22
Representations and Warranties...................................................... 22
Covenants; Conduct of Business Prior to Effective Time of the Merger................ 22
Negotiations with Others............................................................ 23
Management, Name and Location after the Merger...................................... 23
Conditions of the Merger............................................................ 23
Termination......................................................................... 24
Effect of Termination............................................................... 24
Expenses............................................................................ 24
Amendment........................................................................... 25
Extension; Waiver................................................................... 25
COMPARISON OF RIGHTS OF HOLDERS OF QSM COMMON STOCK AND HMS COMMON.................... 26
General............................................................................. 26
Voting Rights....................................................................... 26
Amendments to Certificate of Incorporation.......................................... 27
Special Meetings.................................................................... 27
Stockholders' Action Without a Meeting.............................................. 27
Preemptive Rights................................................................... 28
Dividends........................................................................... 28
Stock Repurchases................................................................... 28
Issuance of Rights or Options to Purchase Shares to Directors, Officers and
Employees........................................................................ 29
Loans to Directors.................................................................. 29
Classification of the Board of Directors............................................ 29
Duties of Directors................................................................. 29
Interested Director Transactions.................................................... 30
Limitations on Directors' Liability................................................. 30
Indemnification of Directors and Officers........................................... 30
Removal of Directors................................................................ 31
BUSINESS OF HMS....................................................................... 32
Overview............................................................................ 32
Business Strategy................................................................... 32
HMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 34
Results of Operations............................................................... 34
Nine Months Ended July 31, 1996 and 1995............................................ 35
Years Ended October 31, 1995 and 1994............................................... 36
Years Ended October 31, 1994 and 1993............................................... 37
Liquidity and Capital Resources..................................................... 38
BUSINESS OF QSM....................................................................... 39
Overview............................................................................ 39
The QSM System...................................................................... 39
Synergies Resulting from the Proposed Merger........................................ 41
FACILITIES............................................................................ 41
</TABLE>
ii
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LEGAL PROCEEDINGS..................................................................... 41
QSM MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 43
Overview............................................................................ 43
Results of Operations............................................................... 43
Three Months Ended June 30, 1996 and 1995........................................... 43
Six Months Ended June 30, 1996 and 1995............................................. 43
Years Ended December 31, 1995, 1994 and 1993........................................ 44
Net Operating Loss Carryforward..................................................... 44
Liquidity and Capital Resources..................................................... 44
OWNERSHIP OF QSM CAPITAL STOCK........................................................ 45
MANAGEMENT OF QSM FOLLOWING THE EFFECTIVE TIME OF THE MERGER.......................... 46
EXECUTIVE COMPENSATION OF QSM......................................................... 47
LEGAL MATTERS......................................................................... 47
EXPERTS............................................................................... 47
QUALITY STANDARDS IN MEDICINE, INC.
INDEX TO FINANCIAL STATEMENTS....................................................... F-1
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Escrow Agreement
</TABLE>
iii
<PAGE> 10
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in the Summary and under the captions "Risk Factors,"
"HMS Management's Discussion and Analysis of Financial Conditions and Results of
Operations," "Business of HMS," and elsewhere in this Information
Statement/Prospectus constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
HMS, or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: changes in
general economic and business conditions; loss of market share through
competition; introduction of competing services by other companies; changes in
the degree of protection created by HMS's intellectual property rights; pressure
on prices from competition or from purchasers of HMS's services; regulatory
changes to the health care reimbursement process; regulatory obstacles to the
introduction of new services that are important to HMS's growth; availability of
qualified personnel; the loss of any significant customers; and other factors
both referenced and not referenced in this Information Statement/Prospectus.
When used in this Information Statement/Prospectus, the words "estimate,"
"project," "anticipate," "expect," "intend," "believe," and similar expressions
are intended to identify forward-looking statements.
iv
<PAGE> 11
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by HMS (File No. 0-20946) with the Commission
pursuant to the Exchange Act of 1934, as amended (the "Exchange Act") are
incorporated by reference in this Information Statement/Prospectus and are made
a part hereof:
(1) HMS's Annual Report on Form 10-K for the fiscal year ended October 31,
1995.
(2) HMS's Quarterly Report on Form 10-Q for the quarter ended January 31,
1996.
(3) HMS's Quarterly Report on Form 10-Q for the quarter ended April 30,
1996.
(4) HMS's Current Report on Form 8-K filed on May 14, 1996.
(5) HMS's Quarterly Report on Form 10-Q for the quarter ended July 31,
1996.
(6) HMS's Current Report on Form 8-K filed on September 25, 1996.
(7) The description of the Common Stock contained in HMS's Registration
Statement on Form 8-A.
All reports and any information statements filed by HMS pursuant to
Sections 13, 14, or 15(d) of the Exchange Act subsequent to the date of this
Information Statement/Prospectus and prior to the Special Meeting shall be
deemed to be incorporated by reference into this Information
Statement/Prospectus and to be a part hereof from the date of filing such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference, or contained in this Information
Statement/Prospectus shall be deemed to be modified or superseded for purposes
of this Information Statement/Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Information
Statement/Prospectus.
THIS INFORMATION STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST, FROM THE OFFICE OF INVESTOR RELATIONS, HEALTH
MANAGEMENT SYSTEMS, INC., 401 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016,
TELEPHONE: (212) 685-4545. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
PRIOR TO THE SPECIAL MEETING, ANY SUCH REQUEST SHOULD BE MADE BY [INSERT DATE
WHICH IS FIVE BUSINESS DAYS PRIOR TO MEETING DATE], 1996.
v
<PAGE> 12
AVAILABLE INFORMATION
HMS is subject to the information requirements of the Exchange Act, and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
HMS can be inspected and copied at the Commission's Public Reference Room,
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
at the public reference facilities maintained by the Commission at its regional
offices located at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such materials can be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic registration statements
filed through the Commission's Electronic Data Gathering, Analysis and Retrieval
system are publicly available through the Commission's Website
(http://www.sec.gov). Additionally, material filed by HMS can be inspected at
the offices of the Nasdaq National Market System Reports Section, 1735 K Street,
N.W., Washington, D.C. 20006.
HMS has filed the Registration Statement with the Commission covering HMS
Common to be issued in connection with the Merger. As permitted by the rules and
regulations of the Commission, this Information Statement/Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits thereto. For further information, please refer to the Registration
Statement, including the exhibits thereto. Statements contained in this
Information Statement/Prospectus relating to the contents of any contract or
other document referred to herein are not necessarily complete, and reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
All information concerning HMS contained in this Information
Statement/Prospectus has been furnished by HMS and all information concerning
QSM contained in this Information Statement/Prospectus has been furnished by
QSM. No person is authorized to provide any information or to make any
representations with respect to the matters described in this Information
Statement/Prospectus other than those contained herein and, if given or made,
such information or representation must not be relied upon as having been
authorized by HMS, QSM or any other person. This Information
Statement/Prospectus does not constitute an offer to sell, or a solicitation of
any offer to purchase, any securities, or a solicitation of a proxy, in any
jurisdiction in which, or to or from any person to or from whom, it is unlawful
to make such an offer or solicitation. Neither the delivery of this Information
Statement/Prospectus nor any distribution of securities hereunder shall under
any circumstances be deemed to imply that there has been no change in the
assets, properties or affairs of HMS or QSM since the date hereof or that the
information set forth herein is correct as of any time subsequent to the date
hereof.
vi
<PAGE> 13
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements appearing elsewhere in this
Information Statement/Prospectus and in the documents and financial statements
incorporated into this Information Statement/Prospectus by reference. Unless the
context indicates otherwise, "HMS" refers to Health Management Systems, Inc., a
New York corporation, and its subsidiaries and "QSM" refers to Quality Standards
in Medicine, Inc., a Delaware corporation. Stockholders of QSM are urged to read
carefully the entire Information Statement/Prospectus, including the Appendices.
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page iv for additional factors
relating to such statements.
DESCRIPTION OF HMS
HMS furnishes proprietary information management and data processing
services and software to hospitals and other health care providers and to
government health service agencies and other health care payors. HMS's services
address the various types of data generated by the interaction of the
participants in the health care process: the health care provider; the
third-party payor; and the patient. Through its retrospective, concurrent, and
prospective service offerings, HMS acts as an outsourcer of information
management processes encompassing the clinical, operational, administrative, and
financial data which results from the rendering of health care services. HMS's
service offerings benefit its clients by enhancing revenue and accelerating cash
flow (achieved through improved reimbursability and collectability), reducing
operating and administrative costs (by supplying sophisticated information
analytics), and enhancing decision making capabilities (via the application of
previously unavailable information).
HMS's principal executive offices are located at 401 Park Avenue South, New
York, New York 10016, and its telephone number is (212) 685-4545.
DESCRIPTION OF SUB
Sub is a Delaware corporation recently organized as a wholly-owned
subsidiary of HMS for the purpose of effecting the Merger. It has no material
assets and has not engaged in any activities except in connection with such
proposed transaction.
Sub's principal executive offices are located at 401 Park Avenue South, New
York, New York 10016, and its telephone number is (212) 685-4545.
DESCRIPTION OF QSM
QSM has developed and maintains a system for abstracting and analyzing
clinical data in support of quality management of physician performance and
patient outcomes in hospital settings (the "System"). The System is used by
clients to improve quality, lower costs, demonstrate value to payors, meet
regulatory requirements and lower malpractice risk. The System features 2,500
clinical standards, record abstracting functionality, and a proprietary database
of comparative clinical information. QSM provides information to clients using
the System, allowing all QSM clients to compare performance and benchmark
against best practices with respect to the 2,500 clinical parameters.
Information generated by the System reveals significant variation in clinical
practice heretofore not documented, identifying significant opportunities to
improve quality and reduce cost of care on an on-going basis.
QSM had 1995 revenue of $0.8 million, and has clients in 13 states, the
District of Columbia, and the United Kingdom.
QSM's principal executive offices are located at 581 Boylston Street, Suite
250, Boston, Massachusetts 02116, and its telephone number is (617) 262-0996.
1
<PAGE> 14
SYNERGIES OF PROPOSED MERGER
HMS, in combination with its Health Care Microsystems, Inc. ("HCm")
subsidiary, provides financial and clinical decision support systems to
hospitals and other health care providers. These systems furnish detailed
information on the composition of provider costs, the financial implications of
internal management decisions, and the impact of managed care contracting
alternatives.
HCm's analytics are a sophisticated tool for quantitative analysis, while
QSM's System facilitates qualitative assessments. By combining their
complementary service offerings, HCm and QSM will be able to provide their
institutional clients with sophisticated cost benefit and outcomes analyses. See
"Business of QSM -- Synergy Resulting from the Proposed Merger."
THE SPECIAL MEETING
Place, Date and Time. The Special Meeting will be held at the offices of
QSM, 581 Boylston Street, Suite 250, Boston, Massachusetts on October , 1996,
at 10:00 a.m., local time.
Purpose of Special Meeting. At the Special Meeting, QSM stockholders will
be asked to approve and adopt the Merger Agreement, providing for the Merger of
Sub, a wholly-owned subsidiary of HMS, with and into QSM, whereby QSM will
become a wholly-owned subsidiary of HMS.
Record Date; Voting Rights. Only holders of QSM Capital Stock of record on
the books of the Company at the close of business on October , 1996 (the
"Record Date") are entitled to notice of, and only holders of record of QSM
Common Stock at the Record Date are entitled to vote at, the Special Meeting.
Vote Required. The approval of the Merger Agreement requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of QSM Common Stock entitled to vote thereon. In connection with the
execution of the Merger Agreement, William B. Munier and the spouse of Rodrigo
Rocha and certain entities controlled by Mr. Rocha, who own of record an
aggregate of 5,193,788 shares of QSM Common Stock (or approximately 57% of the
QSM Common Stock outstanding as of the Record Date) granted irrevocable proxies
to designees of HMS to vote their shares in favor of the Merger Agreement and
the Merger. ACCORDINGLY, THE APPROVAL OF THE MERGER AGREEMENT IS ASSURED WITHOUT
THE VOTE OF ANY OTHER QSM STOCKHOLDER. See "The Special Meeting -- Vote
Required" and "The Merger -- Background of the Merger."
THE MERGER
Conversion of Securities. Upon consummation of the transactions
contemplated by the Merger Agreement, Sub will be merged with and into QSM, with
QSM being the surviving corporation (the "Surviving Corporation") in the Merger
and becoming a wholly-owned subsidiary of HMS. At the Effective Time of the
Merger (as defined in "Summary -- The Merger -- Effective Time of the Merger and
Exchange of Share Certificates"):
(a) with the consent of the holders (the "QSM Noteholders") of all
promissory notes ("QSM 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 HMS evidencing working capital
loans made to QSM prior to the Effective Time of the Merger, the QSM Notes,
including accrued interest thereon through the Closing Date, will be
exchanged for shares of HMS Common ("QSM Note Shares") having a Fair Value,
as defined below, equal to the Fair Value of the respective QSM Notes;
(b) with the consent of the holders (the "QSM Warrantholders") of all
common stock purchase warrants ("QSM Warrants") issued by QSM which are
outstanding immediately prior to the Closing Date, the QSM Warrants will 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;
(c) all outstanding options ("QSM Stock Options") to purchase QSM
Common Stock will be assumed (collectively, the "Assumed QSM Stock
Options") by HMS and converted into options
2
<PAGE> 15
("HMS Stock Options") to purchase HMS Common having a Fair Value equal to
the Fair Value of the respective QSM Stock Options;
(d) with the consent of the holders thereof, each share of QSM
Preferred Stock will be exchanged for shares of HMS Common (the "QSM
Preferred Stock Exchange Shares") having a Fair Value equal to the Fair
Value of the QSM Preferred Stock plus accrued dividends; and
(e) without any action on the part of any holder of QSM Common Stock,
each share of QSM Common Stock will 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. See "The Merger
Agreement -- Conversion of Securities."
"Fair Value" is defined in the Merger Agreement to mean (i) with respect to
HMS Common, the average closing price of HMS Common on the Nasdaq National
Market for a period of five consecutive business days ending two business days
prior to the Closing Date, (ii) with respect to HMS Stock Options, the value
thereof as of two 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 business days prior to the Closing Date as determined by
Fechtor, Detwiler & Co., Inc. The Merger Agreement provides that if the Fair
Value of HMS Common is less than $27.00 per share, the Exchange Ratio will be
adjusted by substituting 233,000 shares of HMS Common in place of 228,000
shares.
No fractional shares of HMS Common will be issued in the Merger. The number
of shares of HMS Common to which each holder of QSM Capital Stock, Notes and
Warrants will be entitled by reason of the Merger will be rounded up or down to
the nearest whole share.
Escrow Fund. To secure the obligations of QSM to HMS under the Merger
Agreement, and to provide for the payment of certain expenses incurred by QSM in
connection with the Merger, the holders of QSM Capital Stock, Notes and Warrants
immediately prior to the Effective Time of the Merger are required to deliver to
Coleman & Rhine LLP (the "Escrow Agent") an aggregate of ten percent of the
shares of HMS Common to be issued to such holders in the Merger (the "Escrow
Fund"), to be held in escrow by the Escrow Agent in accordance with the terms of
the Escrow Agreement. The term of the escrow is for a period of nine months.
Claims against the Escrow Fund are subject to a Threshold (as defined) of
$100,000, with certain exceptions, and William B. Munier, Rodrigo Rocha and
Peter B. Stovell are designated as the QSM Representatives. See "The Merger
Agreement -- Escrow Fund."
Recommendation of the QSM Board of Directors. The Board of Directors of
QSM believes that the Merger is fair to, and in the best interest of, QSM and
its securityholders. The QSM Board of Directors has unanimously approved the
Merger Agreement and the Merger and recommends that the holders of QSM Common
Stock vote in favor of the proposal to adopt and approve the Merger and the
Merger Agreement. For a further discussion of this recommendation and the
reasons therefor, see "The Merger -- QSM's Reasons for the Merger;
Recommendation of the QSM Board of Directors."
Effective Time of the Merger and Exchange of Share Certificates. The
Merger will become effective upon the filing of a certificate of merger relating
thereto with the Secretary of State of the State of Delaware (the "Effective
Time of the Merger"). The Merger Agreement provides that the parties thereto
will cause such certificate of merger to be filed as soon as practicable after
all of the conditions to the consummation of the Merger have been satisfied or
waived. See "The Merger -- Effective Time of Merger."
Prior to the Effective Time of the Merger, instructions and a letter of
transmittal will be furnished to all holders of QSM Common Stock for use in
exchanging their stock certificates for certificates evidencing the shares of
HMS Common they will be entitled to receive as a result of the Merger. HOLDERS
OF QSM COMMON STOCK SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE
UNTIL INSTRUCTIONS AND THE LETTER OF TRANSMITTAL ARE RECEIVED. See "The Merger
Agreement -- Exchange Procedures."
3
<PAGE> 16
Conditions to the Merger. In addition to approval of the Merger Agreement
by the holders of QSM Common Stock and certain customary conditions,
consummation of the Merger is subject to the satisfaction or waiver of, among
others, the following conditions: (i) that QSM shall have received fully
executed consents from the holders of the QSM Preferred Stock, Warrants and
Notes with respect to the transactions contemplated by the Merger Agreement;
(ii) that the holders of all outstanding $.25 QSM Warrants and vested $.25 QSM
Stock Options shall have fully exercised their respective instruments prior to
the Closing Date; and (iii) that the Registration Statement of which this
Information Statement/Prospectus forms a part shall be effective. See "The
Merger Agreement -- Conditions of the Merger."
Termination. The Merger 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 stockholders of QSM: (i) by
mutual written consent of QSM and HMS; (ii) 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 the Merger Agreement on the part of
the other party and, if such breach is curable, such breach has not been cured
within a ten day period after written notice of such breach; (iii) by either HMS
or QSM if the Merger is not consummated on or before November 30, 1996, provided
the failure of the Merger to have been consummated by such date was not the
result of the party seeking to terminate the Merger Agreement to perform or
fulfill any of its obligations thereunder; (iv) by either HMS or QSM if (a)
there shall be a final nonappealable order of a federal or state court in effect
preventing consummation of the Merger or (b) 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 (v) 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 (a) prohibit HMS's or QSM's ownership or operation of all or
a material portion of the business or assets of HMS or QSM, or compel HMS or QSM
to dispose of or hold separate all or a material portion of the business or
assets of HMS or QSM as a result of the Merger or (b) render HMS or QSM unable
to consummate the Merger, except for any waiting period provisions. See "The
Merger Agreement -- Termination."
Amendment. The Merger Agreement may be amended by mutual agreement of the
parties thereto. Any amendment to the Merger Agreement must be in writing and
signed by the parties to the Merger Agreement. See "The Merger
Agreement -- Amendment."
Expenses. The parties will each pay their own out-of-pocket expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby, except as specifically set forth below. At the closing
(the "Closing") of the Merger, HMS will pay a brokerage fee in the amount of
$150,000 incurred by QSM. In addition, unless the Merger is not consummated
because (a) QSM fails to meet the accounting criteria for pooling transactions,
as described below, 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 up to a maximum of $90,000. See "The Merger
Agreement -- Expenses."
Interests of Certain Persons in the Merger. In considering the Merger,
holders of QSM Common Stock should be aware that certain executive officers and
directors of QSM have certain interests that may present them with potential
conflicts of interest with respect to the Merger. See "The Merger -- Interests
of Certain Persons in the Merger; Conflicts of Interest."
Ownership of QSM Common Stock. As of the date of this Information
Statement/Prospectus, executive officers and directors of QSM beneficially owned
an aggregate of 6,525,158 shares of QSM Common Stock (including shares which
might be deemed to be beneficially owned on account of outstanding QSM Stock
Options). If the Special Meeting had been held on October , 1996, the trading
day before the date of this Information Statement/Prospectus (the "Last Trading
Date"), executive officers and directors of QSM would have been entitled to
receive in the Merger an aggregate of approximately shares of HMS
Common having an aggregate market value of approximately $ million based on
the closing price per share of HMS Common reported on the Nasdaq National Market
on the Last Trading Date. See "Ownership of QSM Capital Stock."
4
<PAGE> 17
Employment Agreements. In connection with the Merger, William B. Munier,
Ira Yanowitz, Susan Terrillion, Lori Blades and Kenneth Housely (collectively,
the "Key Employees" and individually a "Key Employee") will enter into
employment agreements (the "Employment Agreements") pursuant to which QSM will
agree to employ each of them through December 31, 1997. Each Key Employee
entering into an Employment Agreement will be paid an agreed upon monthly salary
and will be entitled to certain other benefits afforded to employees of HMS and
its subsidiaries. Each Key Employee will also enter into a separate
Confidentiality and Not-to-Compete Agreement with QSM and a Confidentiality and
Non-competition Agreement with HMS. In addition, in consideration of HMS's
completion of the Merger, Rodrigo Rocha, who is a director and a principal
securityholder of QSM, has agreed to enter into a Not-to-Compete Agreement with
QSM. See "The Merger -- Employment Agreements."
Accounting Treatment. The Merger is intended to be accounted for as a
pooling of interests. See "The Merger -- Accounting Treatment."
Certain Federal Income Tax Consequences. HMS and QSM expect the Merger to
be a tax-free reorganization for federal income tax purposes, pursuant to the
Internal Revenue Code of 1986, as amended (the "Code"), so that no gain or loss
will be recognized by HMS, Sub or QSM or their respective stockholders with
respect to QSM Capital Stock that is exchanged for HMS Common. However, certain
exchanges of HMS Common for accrued dividends on QSM Preferred Stock, accrued
interest on QSM Notes, and QSM Warrants may give rise to a taxable exchange, the
exercise of vested $.25 QSM Stock Options may result in ordinary income, and the
exchange of HMS Stock Options for vested $1.00 and all other non-vested QSM
Stock Options may result in gain. Each holder of QSM Capital Stock, Notes,
Warrants and Stock Options should consult with their respective tax advisors
regarding potential tax implications of receiving HMS Common and/or Stock
Options for their interests in QSM. See "The Merger -- Certain Federal Income
Tax Consequences."
Dissenters' Rights. Under the Delaware Act, holders of QSM Capital Stock
are not entitled to dissenters' rights of appraisal in connection with the
Merger, because at the Record Date shares of HMS Common were and, as of the date
of this Information Statement/Prospectus, are, quoted on the Nasdaq National
Market. See "The Merger -- No Dissenters' Rights of Appraisal."
Comparison of Rights of HMS Stockholders and Holders of QSM Capital
Stock. If the Merger Agreement is consummated, holders of QSM Capital Stock and
Notes and Warrants will become HMS stockholders. Accordingly, the rights of such
QSM securityholders will be governed by New York law, which differs in several
respects from Delaware law, and by HMS's Certificate of Incorporation and
By-laws, which differ in a number of respects from QSM's Certificate of
Incorporation and By-laws. See "Comparison of Rights of Holders of QSM Capital
Stock and HMS Common."
Resales of HMS Common. The shares of HMS Common to be issued pursuant to
the Merger Agreement have been registered under the Securities Act, and
therefore may be resold without restriction by persons who are not deemed to be
"affiliates" (as such term is defined under the Securities Act) of either HMS or
QSM. See "The Merger -- Resale Restrictions."
Risk Factors. HMS is subject to a number of factors which may affect its
future operating results. These factors include, among others: (i) the adverse
effects of possible health care reform; (ii) the regulatory environment in which
HMS operates; and (iii) increasing competition in providing accounts receivable
and health care reimbursement management services. See "Risk Factors" for a more
complete discussion of the factors which should be considered in evaluating the
Merger and the securities offered hereby.
SUMMARY HISTORICAL FINANCIAL DATA
The following respective summary historical financial data have been
derived from HMS's Consolidated Financial Statements and the notes thereto,
which are incorporated by reference herein, and QSM's Financial Statements and
the notes thereto, which are included elsewhere herein, and should be read in
conjunction therewith.
5
<PAGE> 18
HMS. The selected consolidated financial and operating data under the
captions "Selected Consolidated Financial and Operating Data -- HMS" for, and as
of the end of, each of the years in the five-year period ended October 31, 1995,
are derived from the consolidated financial statements of HMS, which financial
statements have been audited by KPMG Peat Marwick L.L.P., independent certified
public accountants. The consolidated financial statements as of October 31,
1995, 1994, and 1993, and for each of the years in the three-year period ended
October 31, 1995, and the report thereon, which is based partially upon the
report of other auditors are incorporated by reference elsewhere in this
Information Statement/Prospectus. The selected data presented below for the
nine-month period ended July 31, 1996 and 1995 and as of July 31, 1996 and as of
July 31, 1995, are derived from and should be read in conjunction with the
unaudited consolidated financial statements of HMS incorporated by reference
elsewhere in this Information Statement/ Prospectus. The Unaudited Consolidated
Financial Statements include all adjustments, consisting of normal, recurring
accruals, which HMS management considers necessary for a fair presentation of
the consolidated financial position and consolidated results of operations for
these periods. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the full year. See
"Incorporation of Certain Documents by Reference."
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA -- HMS
(IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED OCTOBER 31, JULY 31,
----------------------------------------------------------- --------------------
1991 1992(1) 1993 1994 1995 1995 1996(2)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $38,838 $47,468 $59,949 $73,176 $89,727 $65,046 $76,752
Cost of services................... 33,798 39,420 48,989 59,314 71,627 52,029 67,565
------- ------- ------- ------- ------- ------- -------
Operating margin before
amortization of intangibles...... 5,040 8,049 10,960 13,862 18,100 13,037 9,187
Amortization of intangibles(3)..... 4,820 3,166 303 190 243 189 161
------- ------- ------- ------- ------- ------- -------
Operating income................... 220 4,883 10,657 13,672 17,857 12,848 9,026
Net interest (expense) income...... (2,576) (2,586) (114) 464 942 674 665
Loss on investment................. -- -- -- -- -- -- (927)
Merger related costs............... -- (7,133) -- (59)(4) (1,045)(5) (1,045) (489)(6)
Equity in earnings of
affiliate(7)..................... -- -- -- -- -- -- 188
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes
and extraordinary item........... (2,357) (4,837) 10,543 14,077 17,754 12,477 8,463
Income tax benefit (expense)....... 595 (1,280) (4,766) (6,353) (8,152) (5,840) (3,209)
(loss) Income before extraordinary
item............................. (1,761) (6,117) 5,777 7,724 9,602 6,637 5,254
Extraordinary loss, net of tax
benefit.......................... -- -- (306)(8) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net (loss) income.................. (1,761) (6,117) 5,471 7,724 9,602 6,637 5,254
------- ------- ------- ------- ------- ------- -------
Accretion of preferred stock
redemption value................. (150) (185) (33) -- -- -- --
Net (loss) income attributable to
common shareholders.............. $(1,911) $(6,302) $ 5,438 $ 7,724 $ 9,602 $ 6,637 $ 5,254
======= ======= ======= ======= ======= ======= =======
PER COMMON SHARE DATA:
(Loss) income (before extraordinary
item)............................ $ (0.20) $ (0.63) $ 0.37 $ 0.46 $ 0.55 $ 0.38 $ 0.29
Net (loss) income.................. $ (0.20) $ (0.63) $ 0.35 $ 0.46 $ 0.55 $ 0.38 $ 0.29
Weighted average shares
outstanding(9)................... 9,401 9,967 15,508 16,674 17,407 17,322 18,276
SELECTED OPERATING DATA:
Operating margin as a percentage of
revenue.......................... 13% 17% 18% 19% 20% 20% 12%
Operating income as a percentage of
revenue.......................... 1% 10% 18% 19% 20% 20% 12%
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------------------------------- JULY 31,
1991 1992(1) 1993 1994 1995 1996(2)
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term investments........................... $ 3,577 $ 7,792 $26,447 $27,760 $30,088 30,054
Working capital........................................... 6,394 13,128 28,319 35,942 41,643 55,828
Total assets.............................................. 31,021 37,592 60,802 69,777 87,384 108,793
Long-term debt obligations................................ 20,268 18,971 -- -- -- --
Redeemable preferred stock................................ 949 1,134 -- -- -- --
Common shareholders' (deficiency) equity.................. (792) 273 38,181 47,043 59,224 72,827
</TABLE>
- ---------------
(1) The financial results as of and for the year ended October 31, 1992 reflect
the effects of a merger termination agreement between HMS and HHL Financial
Services, Inc. ("HHL").
(2) The financial results as of and for the nine months ended July 31, 1996
reflect the effects of a one-time charge and revenue reversal related to
HMS's termination of its contracts with HHL.
(3) Intangible assets were principally recorded in connection with HMS's 1989
recapitalization and its acquisition in 1990 of Quality Medi-Cal
Adjudication, Incorporated. See Notes 1(a), 1(b), and 5 of Notes to
Consolidated Financial Statements.
(4) Includes costs of an acquisition consummated by the Company's Health Care
microsystems, Inc. ("HCm") subsidiary prior to its merger with HMS.
(5) Includes costs associated with HMS's acquisition of HCm. See Note 1(d) of
Notes to Consolidated Financial Statements.
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<PAGE> 20
(6) Includes costs associated with HMS's acquisition of CDR Associates, Inc. See
Note 1(f) of Notes to Consolidated Financial Statements.
(7) HMS has an investment in Health Information Systems Corporation, a joint
venture company, which is accounted for under the equity method of
accounting. See Note 1(e) to the Notes to Consolidated Financial Statements.
(8) The extraordinary loss of $306,000, net of income tax benefit of $257,000,
reflects the write-off of the unamortized debt discount attributable to the
prepayment of subordinated debentures.
(9) Common stock equivalents have not been included in the computation of
weighted average number of shares outstanding in 1991 and 1992 since the
effect would have been antidilutive, except for 234,698 common stock
equivalents that have been included in 1992 related to stock options issued
during 1992 at an exercise price deemed, for financial reporting purposes,
to be below fair market value.
QSM. The selected financial data set forth below with respect to QSM's
statements of operations for the years ended December 31, 1993, 1994 and 1995
and with respect to QSM's balance sheet at December 31, 1995 and 1994 have been
derived from the financial statements of QSM and the notes thereto included
elsewhere in this Information Statement/Prospectus and have been audited by
Ernst & Young LLP, independent auditors. The selected financial data set forth
below with respect to QSM's statements of operations for the years ended
December 31, 1991 and 1992 and with respect to QSM's balance sheets as of
December 31, 1991, 1992 and 1993 have been derived from QSM's financial
statements, which are not included herein. The selected financial data as of
June 30, 1995 and 1996 and for the six months ended June 30, 1995 and 1996 have
been derived from the unaudited financial statements of QSM. The unaudited
financial statements have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information set forth therein. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative of future
operating results. The financial data set forth below is qualified in its
entirety by and should be read in conjunction with QSM Management's Discussion
and Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included elsewhere in this Information
Statement/Prospectus.
SELECTED FINANCIAL AND OPERATING DATA--QSM
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
------------------------------------------------ -------------------------
1991 1992 1993 1994 1995 1995 1996
------ ------- ------- ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
System licensing sales........... $ 178 $ 467 $ 466 $ 813 $ 840 $ 297 $271
Operating and research and
development expense............ 855 1,311 1,489 1,280 1,359 653 681
Amortization of intangibles...... 311 336 103 26 0 0 0
----- ------- ------- ------ ------ ----- -----
Operating loss................... (988) (1,180) (1,126) (493) (519) (356) (409)
Interest expense................. 4 106 212 255 95 37 72
----- ------- ------- ------ ------ ----- -----
Net loss......................... $ (992) $(1,286) $(1,338) $ (748) $ (614) $ (393) $ (481)
===== ======= ======= ====== ====== ===== =====
PER COMMON SHARE DATA:
Net loss......................... $(0.23) $ (0.28) $ (0.24) $(0.11) $(0.07) $ (0.04) $ (0.05)
Weighted average shares
outstanding.................... 4,352 4,627 5,512 6,628 9,024 8,990 9,062
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----- ------- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 122 $ 42 $ 35 $ 43 $ 40 $ 13
Working capital deficiency................... (143) (269) (568) (65) (230) (481)
Total assets................................. 636 412 702 981 778 924
Long-term debt and deferred income........... 510 1,444 2,186 913 1,128 1,554
Redeemable preferred stock................... 8 5 5 5 5 5
Common stockholders' deficit................. (159) (1,442) (2,395) (591) (1,105) (1,581)
</TABLE>
8
<PAGE> 21
RISK FACTORS
The following factors, in addition to the other information contained or
incorporated by reference in this Information Statement/Prospectus, should be
considered carefully by the securityholders of QSM in evaluating the Merger and
the shares of HMS Common offered hereby.
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page iv for additional factors
relating to such statements.
RISKS RELATING TO AN INVESTMENT IN HMS
HHL FINANCIAL SERVICES, INC.
HHL Financial Services, Inc. ("HHL") has been a significant client of HMS
since 1993, accounting for 10%, 13% and 10% of HMS's total revenue in fiscal
years 1993, 1994 and 1995, respectively, and 5% of HMS's total revenue in first
nine months of 1996. HHL is in default of its contractual obligations to HMS. As
a result, HMS expects to receive substantially reduced revenue from HHL in the
future and on August 21, 1996 announced that it had taken a charge to cover a
write-off of (i) prior period accounts receivable of $2.881 million, (ii)
estimated net costs relating to HMS's continued contractual obligations to HHL
of $3.823 million, and (iii) HMS's investment in HHL of $0.927 million,
resulting in a total write-off of $7.631 million. Additionally, revenue of
$2.180 million relating to HMS's third fiscal quarter was reversed. HMS intends
to reallocate a substantial portion of the resources heretofore used to fulfill
HMS's contractual obligations to HHL to support other segments of HMS's
business. The impact on net income after taxes of the one-time charge and
revenue reversal was $5,514 million. HMS does not believe that the loss of HHL's
business will degrade HMS's future performance to any substantial degree. See
"HMS Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ACQUISITIONS AND EXPANSION
HMS's strategy includes the expansion of its business through selective
acquisitions. In pursuing such acquisitions, HMS competes with other prospective
acquirors, some of which may have greater financial resources than HMS. There
can be no assurance that suitable acquisition opportunities will be identified
or that acquisitions can be consummated or integrated successfully into HMS's
operations. In addition, future acquisitions by HMS could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other tangible
assets, any of which could materially adversely affect HMS's operating results
and financial position. See "Business of HMS -- Business Strategy."
Growth through acquisition entails certain risks in that acquired
operations could be subject to unanticipated business uncertainties or legal
liabilities. HMS seeks to minimize these risks through investigation and
evaluation of the operations proposed to be acquired and through transaction
structure and indemnification. Further, HMS may use its affiliate, Health
Information Systems Corporation ("HISCo"), to make acquisitions that do not
fully satisfy the criteria mandated for acquisitions made directly by HMS. The
various risks associated with the operational integration of future acquisitions
and the subsequent performance of such acquired operations may adversely affect
HMS's results of operations. The ability of HMS to acquire additional operations
may depend upon its ability to obtain appropriate financing and personnel.
INDUSTRY AND MARKET CHANGES; COMPETITION
The market for providing accounts receivable and health care reimbursement
management services to hospitals is emerging rapidly, primarily because of the
increasing recognition by hospitals of the need for revenue enhancement
services. HMS's proprietary data processing services respond to a need caused
primarily by the complexity and magnitude of the information demands made on
hospitals and other providers of health care services by government and private
health insurance programs. The demand for HMS's services may be adversely
affected by advances in data processing technology that reduce the cost and
complexity of accurate
9
<PAGE> 22
data collection by hospitals and government agencies, as well as by regulatory
changes aimed at simplifying the health care reimbursement process. Potential
developments that could simplify the reimbursement process and adversely affect
HMS's business include (i) a significant increase in reimbursement to health
care service providers based on a fee for each patient enrolled, regardless of
the cost of the services performed in the course of treatment, relative to
conventional fee-for-service arrangements and (ii) the development of direct
technological interfaces between third party payors and providers of health care
services. At the same time, HMS believes that any changes in the health care
reimbursement system will create opportunities to provide data management
services to meet the information requirements of such changes.
Although HMS's data processing services involve certain unique aspects, the
business of providing accounts receivable and health care reimbursement
management services to hospitals and governmental health care agencies is highly
competitive. Various companies compete with HMS in providing one or more aspects
of HMS's services. HMS may also encounter increased competition from companies
attempting to expand the scope of their health care management services.
PROPRIETARY TECHNOLOGY
The fields of data processing and related computer software have undergone,
and are expected to continue to undergo, rapid and significant technological
change. HMS expects that the technology associated with its data processing
services will continue to develop rapidly, and HMS's success will depend, in
large part, on its ability to maintain a competitive position with respect to
such technology.
HMS's success is dependent to a significant extent on its ability to
maintain the proprietary and confidential aspects of its data processing and
computer software technology. HMS relies on a combination of copyright and
contractual protections to establish and protect its proprietary rights.
However, there can be no assurance that such measures will be adequate to
prevent misappropriation of HMS's technology. In addition, these protections do
not prevent independent third party development of competitive technologies or
services.
HEALTH CARE PAYMENT COMPLEXITY
The complexity of the health care payment process, and the experience of
HMS in offering services that improve the ability of its customers to recover
incremental revenue through that process, have been contributing factors to the
success of HMS's service offerings. Complexities of the health care payment
process include multiple payors, the coordination and utilization of review and
other administrative procedures instituted by third-party payors in an effort to
control costs and manage care. If the payment processes associated with the
health care industry are simplified, the need for services such as those offered
by HMS could be reduced, and there could be a resulting adverse effect on HMS's
business, results of operations or financial condition.
HEALTH CARE REGULATION AND REFORM
Government regulation can adversely affect HMS's business by, among other
things, reducing the amount of reimbursement HMS's hospital clients are entitled
to receive for providing health care services. During the past decade, federal
and state governments have implemented legislation designed to contain the
increase in health care costs, and it is anticipated that such legislative
initiatives will continue. Proposals to reduce the rate of growth in Medicare
and Medicaid expenditures are currently being actively considered by the
executive and legislative branches of government. Future legislation
initiatives, such as a nationalized health insurance system, could, if
implemented, simplify the health care reimbursement process and adversely affect
the demand for HMS's services. HMS is unable to predict the effect, if any, that
future legislation would have on its business. HMS's operations are not subject
to laws and regulations dealing with collection agency activities because HMS's
services do not deal with the collection of delinquent accounts receivable and
do not involve any contact with patients, but are directed exclusively towards
the transfer of medical payments between providers and payors of health care. A
substantial portion of HMS's activities are subject to laws and regulations of
the federal and state agencies that administer the Medicare and Medicaid
programs.
10
<PAGE> 23
While it is not expected that federal legislation regarding health care
reform will be enacted in the near future, it is uncertain at this time what
legislation on health care reform will ultimately be enacted or whether other
changes in the administration or interpretation of governmental health care
programs will occur. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have an adverse effect on the
business, results of operations or financial condition of HMS.
DEPENDENCE UPON KEY PERSONNEL
As HMS's success depends upon the continued contributions of its senior
management, the loss of services of certain of HMS's executive officers could
have an adverse effect on HMS's business. Accordingly, although HMS does not
have long term service agreements with most of its executive officers, HMS does
have confidentiality, non-compete and non-solicitation agreements with each of
its executive officers and certain other employees. In general, such agreements
(i) require the employee to protect the confidential and proprietary information
of HMS and (ii) preclude the employee from soliciting other employees of HMS or
competing with HMS for periods of up to three years following termination of
employment.
POSSIBLE VOLATILITY OF STOCK PRICES
The market price of HMS Common could be subject to significant fluctuations
in response to variations in quarterly operating results and other factors, such
as announcements of technological innovations or new products by HMS or by HMS's
competitors, adoption of new or amended government regulations, changes in
patent or other proprietary rights, and developments in HMS's relationships with
its customers. In addition, the stock market has in recent years experienced
significant price fluctuations. These fluctuations often have been unrelated to
the operating performance of the specific companies whose stock is traded. Broad
market fluctuations, as well as fluctuating economic conditions generally, may
adversely affect the market price of HMS Common.
CERTAIN ANTI-TAKEOVER PROVISIONS
HMS's Certificate of Incorporation, as amended, authorizes the issuance of
up to 5,000,000 shares of "blank check" Preferred Stock with such designations,
rights and preferences as may be determined by HMS's Board of Directors.
Accordingly, HMS's Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of holders of the HMS Common. In the event of issuance, Preferred Stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of HMS. Although HMS has no present
intention to issue any shares of Preferred Stock, there can be no assurance that
HMS will not do so in the future. In addition, HMS's By-laws provide for a
classified Board of Directors, which provision could also have the effect of
discouraging a change of control of HMS.
RISKS RELATING TO THE MERGER
NO ASSURANCE THAT HMS WILL REALIZE ANTICIPATED BENEFITS FROM THE MERGER
The Merger involves the combination of certain aspects of two companies
that have operated independently. Accordingly, there can be no assurance that
QSM can be successfully integrated into HMS or that HMS and its stockholders
(including persons who become stockholders as a result of the Merger) will
ultimately realize any of the anticipated benefits of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
In considering the recommendation of the Board of Directors of QSM with
respect to the Merger Agreement and the transactions contemplated thereby, QSM's
securityholders should be aware that certain members of QSM's management and
QSM's Board of Directors have interests in the Merger that are in addition to
and may conflict with the interests of securityholders of QSM generally. The
Board of Directors of
11
<PAGE> 24
QSM was aware of these interests and considered them, among other factors, in
approving the Merger Agreement and the transactions contemplated thereby. See
"The Merger -- Interests of Certain Persons in the Merger; Conflicts of
Interest" and "The Merger Agreement -- Treatment of Stock Options."
ISSUANCE OF HMS COMMON IN THE MERGER
Pursuant to the Merger Agreement, the number of shares of HMS Common to be
received by each holder of QSM Common Stock, Preferred Stock, Warrants and Notes
will be based on the Fair Value of the HMS Common. If the Fair Value of HMS
Common is less than $27.00 per share, the Exchange Ratio will be adjusted by
substituting 233,000 shares of HMS Common in place of 228,000 shares.
Accordingly, the aggregate number of shares of HMS Common issuable in the
Merger, and the actual number of shares of HMS Common to be issued to each QSM
securityholder in connection therewith, will not be determinable (based on the
price of HMS Common during the relevant five business day period) until the
second business day prior to the Closing Date, which date may be after the date
of the Special Meeting. See "The Merger Agreement -- Conversion of Securities."
FEDERAL INCOME TAX
If the Merger were not to constitute a tax-free reorganization under
Section 368(a)(1) of the Code, each holder of QSM Capital Stock, Notes and
Warrants would recognize gain or loss equal to the difference between the fair
market value of the HMS Common Stock received and such holder's basis in the QSM
securities exchanged therefor. Such gain or loss would be long-term capital gain
or loss, provided such securities had been held for more than one year. See "The
Merger -- Certain Federal Income Tax Consequences", "-- Accounting Treatment"
and "The Merger -- Conditions of the Merger."
12
<PAGE> 25
COMPARATIVE PER SHARE INFORMATION
The following table sets forth certain per common share information for HMS
and QSM on both historical and pro forma combined bases (giving effect to the
Merger using the pooling-of-interests method of accounting) and certain
information on an equivalent pro forma combined basis for each share of QSM
Common Stock. No cash dividends have ever been declared or paid on HMS Common or
QSM Common Stock.
<TABLE>
<CAPTION>
PER SHARE OF COMMON STOCK
----------------------------------
INCOME CASH BOOK
(LOSS) DIVIDENDS(8) VALUE
------ ------------ ------
<S> <C> <C> <C>
HMS -- Historical(1)(2)(3)
Year ended October 31, 1993................. $ 0.69 $-- $ 2.46
Year ended October 31, 1994................. 0.82 -- 2.82
Year ended October 31, 1995................. 1.03 -- 3.40
Nine months ended July 31, 1996............. 0.70 -- 3.98
HMS -- Pro Forma Combined(1)(2)(3)(4)(5)
Year ended October 31, 1993................. $ 0.61 $-- $ 2.27
Year ended October 31, 1994................. 0.78 -- 2.87
Year ended October 31, 1995................. 0.98 -- 3.50
Nine months ended July 31, 1996............. 0.47 -- 4.06
QSM -- Historical(6)
Year ended December 31, 1993................ $(0.20) $-- $(0.43)
Year ended December 31, 1994................ (0.07) -- (0.09)
Year ended December 31, 1995................ (0.06) -- (0.12)
QSM -- Equivalent Pro Forma Combined(7)
Year ended October 31, 1993................. $ 0.02 $-- $ 0.08
Year ended October 31, 1994................. 0.02 -- 0.07
Year ended October 31, 1995................. 0.02 -- 0.08
Nine months ended July 31, 1996............. 0.01 -- 0.10
</TABLE>
- ---------------
(1) Income (loss) represents income (loss) from continuing operations.
(2) Historical book value per share information for HMS as of the end of each
period presented is computed by dividing historical stockholders' equity by
the number of shares of HMS Common outstanding at the end of each period
presented, excluding common stock equivalents. Pro forma combined book value
per share information as of the end of each period presented is computed by
dividing pro forma stockholders' equity by the number of shares of HMS
Common outstanding on such dates and the 228,000 shares of HMS Common to be
issued in the Merger.
(3) In February 1995, HMS acquired Health Care microsystems, Inc. ("HCm") in a
merger transaction accounted for as a pooling-of-interests. Subsequently, in
April 1996, HMS acquired CDR Associates, Inc. ("CDR") in a merger
transaction accounted for as a pooling-of-interests. Accordingly, the
historical financial statements of HMS have been restated to reflect these
mergers.
(4) The HMS Pro Forma Combined Income (Loss) per share amounts for the years
ended October 31, 1993, 1994 and 1995 and the nine months ended March 31,
1996 give effect to (i) the Merger as if it had occurred on November 1, 1992
and (ii) certain pro forma adjustments related to the mergers with HCm and
CDR.
(5) For purposes of preparing Pro Forma Combined per share information, QSM's
operating results for the years ended December 31, 1993, 1994 and 1995 were
combined with HMS's operating results for the years ended October 31, 1993,
1994 and 1995.
13
<PAGE> 26
(6) Historical book value per share information for QSM as of the end of each
period presented is computed by dividing historical stockholders' equity
attributable to holders of QSM Common Stock by the number of shares of QSM
Common Stock outstanding at the end of the period.
(7) Equivalent pro forma combined per share information for QSM is determined by
multiplying the HMS's pro forma combined amounts (which are based on HMS's
October 31 fiscal year results and QSM's calendar year results) by an
assumed Exchange Ratio of approximately .014 to 1, .013 to 1 and .013 to 1
for the years ended October 31, 1993, 1994 and 1995 and .012 to 1 for the
nine month period ended July 31, 1996 to represent equivalent per share
amounts to common stockholders of QSM.
(8) Distributions made by CDR while it was an "S" corporation prior to its
merger with HMS are not included in Cash Dividends Per Share.
PRICE RANGE OF HMS COMMON
The HMS Common is traded on the Nasdaq National Market under the symbol
"HMSY." The table below sets forth the high and low sales prices for the Common
Stock as reported on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First Quarter............................................ $12.00 $ 7.55
Second Quarter........................................... 11.55 9.55
Third Quarter............................................ 11.78 9.55
Fourth Quarter........................................... 12.78 9.89
1995
First Quarter............................................ 15.33 11.11
Second Quarter........................................... 17.17 12.55
Third Quarter............................................ 22.83 14.09
Fourth Quarter........................................... 23.67 17.17
1996
First Quarter............................................ 26.83 17.17
Second Quarter........................................... 31.75 24.50
Third Quarter............................................ 37.00 21.75
Fourth Quarter (through October 3, 1996)................. 29.75 25.67
</TABLE>
As of the date of this Information Statement/Prospectus, HMS had
approximately stockholders of record.
On (i) September 3, 1996, the last trading date prior to public
announcement of the Merger, and (ii) October , 1996, the closing sale price of
HMS Common, as reported on the Nasdaq National Market, was $28.00 and
$ per share, respectively.
QSM is privately held and there is no established public market for the QSM
Common Stock or QSM Preferred Stock. As of the date of this Information
Statement/Prospectus, there were 33 holders of record of QSM Common Stock and
one holder of record of QSM Preferred Stock.
DIVIDEND POLICY
HMS has never paid any cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. It is the present
intention of HMS's Board of Directors to retain all earnings in HMS in order to
support the future growth of its business. HMS's existing bank credit facility
prohibits the payment of cash dividends.
14
<PAGE> 27
THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE
The Special Meeting will be held at the principal offices of QSM, 581
Boylston Street, Suite 250, Boston, Massachusetts 02116. At the Special Meeting,
the holders of QSM Common Stock will be asked to consider and vote upon (i) a
proposal to ratify and approve the Merger Agreement, pursuant to which, among
other things, Sub will be merged with and into QSM, and QSM will become a
wholly-owned subsidiary of HMS, and (ii) such other business as may properly
come before the Special Meeting. The text of the Merger Agreement is attached as
Appendix A to this Information Statement/Prospectus.
RECORD DATE
The Board of Directors of QSM has fixed the close of business on October
, 1996, as the Record Date for the Special Meeting, and only holders of record
of QSM Common Stock and Preferred Stock at the close of business on the Record
Date will be entitled to notice of, and only holders of Common Stock will be
entitled to vote at, the Special Meeting. As of the Record Date, there were
9,061,992 shares of Common Stock outstanding and entitled to vote, which shares
were held by approximately 33 holders of record.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the issued and
outstanding shares of QSM Common Stock entitled to vote at the Special Meeting
is required to adopt and approve the Merger Agreement and the transactions
contemplated thereby. Any abstentions will have the same effect as a vote
against the proposal to adopt and approve the Merger Agreement.
Concurrent with the execution of the Merger Agreement, each of the QSM
Principals has executed an irrevocable proxy in favor of designees of HMS,
authorizing such proxies to vote in favor of the Merger Agreement and the
transactions contemplated thereby at the Special Meeting. Such irrevocable
proxies represent in excess of 50% of the shares of QSM Common Stock outstanding
as of the Record Date and entitled to vote on the Merger at the Special Meeting.
Accordingly, the approval of the Merger Agreement is assured without the vote of
any other QSM stockholder.
15
<PAGE> 28
THE MERGER
BACKGROUND OF THE MERGER
In May 1996, HMS approached QSM regarding the possible acquisition of QSM
through a pooling of interests. Both QSM and HMS's wholly-owned subsidiary, HCm,
support the financial survival of health care providers having to cope with the
complexities of the health care delivery system by applying data, analytics, and
process improvement to the health care provider's clinical and financial
business processes. QSM furnishes clinical quality management and improvement
systems to hospital providers in the United States and the United Kingdom,
offering a product solution tailored to address the unique requirements of the
clinical quality management and improvement processes. In turn, HMS, and
particularly HCm, deliver financial and clinical management systems and services
across the United States and in Europe (including the United Kingdom) and Asia
to hospitals and other health care providers and to third party and self-insured
payors. Given the current position of QSM and HCm, HMS expressed the belief that
a combined entity comprised of QSM and HCm could: (a) expand QSM's current
market; (b) augment QSM's current product set for hospitals; (c) facilitate the
introduction of QSM into other segments of the provider marketplace (e.g.,
managed health care organizations, larger proprietary hospital chains, third
party payors and self-insured payors, etc.); (d) accrete QSM software offerings
to HCm systems and services; (e) accrete HCm systems and services to QSM
systems, enabling HCm and QSM to offer more fully expansive capabilities for
clinical and financial management of the health care provider's business; (f)
afford QSM the benefit of HCm and HMS's corporate infrastructure -- comprised of
effective processes directed at marketing, planning, budgeting, personnel
administration, system development, client support, recruiting, and training;
(g) support QSM's technological migration from its character-based DOS software
to a platform better suited to the demands of today's market place; and (h)
afford HCm the benefit of QSM's considerable clinical skills, thereby furthering
the maturation and efficacy of the HCm applications development process.
HMS's initial approach was followed by a preliminary letter of interest
dated June 3, 1996. On June 4, 1996, the Board of Directors of QSM met to
discuss the letter of interest from HMS and passed a resolution authorizing
William B. Munier to negotiate an agreement with HMS for the merger of the two
companies, subject to final approval by the QSM Board of Directors prior to
being submitted to the holders of QSM Common Stock for their consideration and
approval.
On June 10, 1996, HMS and QSM signed a letter of interest covering the
proposed merger and in late August and early September, a final agreement was
negotiated and the Boards of Directors of HMS and QSM voted unanimously for
adoption of the Merger Agreement.
On September 3, 1996, HMS and QSM executed an Agreement and Plan of Merger
and holders of more than 50% of the outstanding Common Stock of QSM on the
record date delivered their irrevocable proxies to designees of HMS, to vote all
of their shares of QSM Common Stock for ratification and approval of the Merger
Agreement.
QSM'S REASONS FOR THE MERGER; RECOMMENDATION OF THE QSM BOARD OF DIRECTORS
In reaching its determination that the Merger is fair to and in the best
interests of all securityholders of QSM, the Board of Directors of QSM consulted
with QSM's management and legal counsel. Set forth below are the material
factors that the QSM Board considered in reaching this determination:
(i) the QSM Board's review and analysis of QSM's business, operations,
financial condition, competitive position, earnings and prospects.
Following its review of such factors, the QSM Board made the determination
that the consideration to be received by the holders of QSM's Common Stock,
Preferred Stock, Notes and Warrants reflected an appropriate valuation of
QSM;
(ii) the current and prospective economic and competitive environment
in the health care industry. The QSM Board recognized a trend toward
consolidation in the health care industry and took note of certain factors
responsible for the trend. The QSM Board noted, for example, a drive toward
greater efficiency resulting in lower cost operations and the advantages of
greater geographic diversification. The
16
<PAGE> 29
Board believed that the Merger would result in cost savings because certain
duplicative administrative expenses would be eliminated. As a result, the
QSM Board determined that the combined company would be better equipped to
compete in a rapidly consolidating health care industry;
(iii) the possible alternatives to the Merger, including the prospects
of continuing to operate QSM, the value to QSM's securityholders of such
alternatives and the timing and likelihood of actually achieving additional
value from these alternatives. The Board determined, based on a review of
such alternatives, that none of the alternatives appeared to offer the same
prospects for success as the proposed combination with HMS;
(iv) the possibility that, as a result of the Exchange Ratio, changes
in the share price of HMS Common could materially affect, positively or
negatively, the value of the consideration to be received in the Merger by
QSM securityholders, but concluded that such risk was outweighed by the
possible benefits to be obtained by QSM from the Merger;
(v) the terms and conditions of the Merger Agreement;
(vi) that certain members of QSM's management and QSM's Board have
certain interests in the Merger that are in addition to their interests as
securityholders of QSM generally. The QSM Board did not believe that such
interests affected its evaluation of the Merger; and
(vii) the expectation that the Merger will afford QSM securityholders
the opportunity to receive HMS Common in a transaction that is nontaxable
for federal income tax purposes to the maximum extent practicable.
The foregoing discussion addresses several of the material factors
considered by the QSM Board in connection with its evaluation of the Merger. In
view of the wide variety of factors, the QSM Board did not find it practicable
to, and did not, quantify or otherwise attempt to assign relative weights to the
foregoing factors or determine that any factor was of particular importance.
Rather, the QSM Board viewed its position and recommendation as being based on
the totality of the information presented to and considered by it.
THE BOARD OF DIRECTORS OF QSM UNANIMOUSLY RECOMMENDS THAT HOLDERS OF QSM
COMMON STOCK VOTE TO RATIFY AND APPROVE THE MERGER AGREEMENT.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion relates to the material federal income tax
consequences of the Merger to holders of QSM Capital Stock who hold their shares
as capital assets. The discussion is based on the current provisions of the
Code, applicable Treasury Regulations, judicial authority and administrative
rulings and practice. It does not address all aspects of federal income taxation
that may be relevant to particular QSM stockholders in light of their personal
investment circumstances, or to certain types of stockholders subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, foreign persons, and stockholders who acquired QSM Capital Stock
pursuant to the exercise of employee stock options or otherwise as compensation.
In addition, this discussion does not address the state, local or foreign tax
consequences of the Merger. There can be no assurance that the Internal Revenue
Service will not take a contrary view to those expressed herein. No rulings have
been or will be requested from the Internal Revenue Service with respect to the
tax consequences of the Merger. Moreover, legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein.
HOLDERS OF QSM CAPITAL STOCK, NOTES, WARRANTS AND STOCK OPTIONS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS, AND OF ANY CHANGES IN APPLICABLE TAX LAWS.
Assuming the Merger is consummated at the Effective Time of the Merger
pursuant to the terms of the Merger Agreement, the Merger will qualify as a
tax-free reorganization under Section 368(a)(1) of the Code
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<PAGE> 30
and no gain or loss will be recognized by a holder whose shares of QSM Capital
Stock are converted into and exchanged for shares of HMS Common. In addition, as
a result of the Merger: (i) the tax basis of the HMS Common received by the
holders of QSM Capital Stock will be equal to the basis of the QSM Capital Stock
exchanged therefor; and (ii) the holding period of the HMS Common received by
the holders of QSM Capital Stock will include the holding period of the QSM
Capital Stock surrendered in exchange therefor.
The preceding discussion assumes that: (i) the Merger will be consummated
in accordance with the Merger Agreement; (ii) following the Merger, QSM will
continue its historic business or use a significant portion of its historic
business assets in a business; and (iii) the management of QSM knows of no plan
or intention on the part of the QSM stockholders to dispose of a number of
shares of HMS Common received in the Merger that would reduce the QSM
stockholders' ownership of HMS Common to a number of shares having a value, as
of the Effective Time of the Merger, of less than 50% of the value of all of the
formerly outstanding QSM Capital Stock as of the Effective Time of the Merger.
If the Merger were not to constitute a reorganization under Section
368(a)(1) of the Code, each holder of QSM Capital Stock would recognize gain or
loss equal to the difference between the fair market value of the HMS Common
received and such holder's basis in the shares of QSM Capital Stock exchanged
therefor. Such gain or loss would be long-term capital gain or loss, provided
such shares had been held for more than one year.
In addition to the foregoing: (i) holders of QSM Preferred Stock and Notes
may recognize taxable income in the exchange for shares of HMS Common to the
extent of accrued dividends or interest; (ii) holders of QSM Warrants may
recognize a taxable gain on the exchange for shares of HMS Common; (iii) holders
of vested $.25 QSM Stock Options may recognize ordinary income upon the exercise
of their options for shares of QSM Common Stock, which are then converted into
shares of HMS Common in the Merger; and (iv) holders of Assumed QSM Stock
Options may recognize gain upon the exchange of HMS Stock Options for their
Assumed QSM Stock Options. SUCH HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
Certain members of QSM's management and QSM's Board of Directors have
certain interests in the Merger that are in addition to and may conflict with
the interests of stockholders of QSM generally. QSM's Board was aware of and
discussed these interests in connection with its consideration and approval of
the Merger Agreement. In considering the recommendation of the QSM Board in
respect of the Merger Agreement and the transactions contemplated thereby, QSM's
stockholders should be aware of these interests which may present actual or
potential conflicts of interest with respect to the Merger.
Pursuant to the QSM Stock Option Plan and under the terms of the Merger
Agreement, all outstanding vested $.25 QSM Stock Options will be exercised
immediately prior to the Closing Date of the Merger and an aggregate of 58,500
shares of QSM Common Stock will be issued to the holders of these QSM Stock
Options. As of the Effective Time of the Merger, all outstanding $1.00 QSM Stock
Options and all non-vested QSM Stock Options (collectively, the "Assumed QSM
Stock Options") will be assumed by HMS and converted into identical HMS Stock
Options having a Fair Value equal to the Fair Value of the respective QSM Stock
Options. As of September 3, 1996, there were issued and outstanding options to
acquire 430,000 shares of QSM Common Stock under the QSM Stock Option Plan. As
of such date, directors and executive officers of QSM did not hold any QSM Stock
Options.
In addition, HMS will grant to certain members of senior management and
certain employees of QSM up to 40,000 HMS Stock Options minus the amount of
Assumed QSM Stock Options. These options will be fully vested by October 31,
1999.
EMPLOYMENT AGREEMENTS
In connection with the Merger, William B. Munier, Ira Yanowitz, Susan
Terrillion, Lori Blades and Kenneth Housely (collectively, the "Key Employees"
and individually a "Key Employee") will enter into
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employment agreements (the "Employment Agreements") pursuant to which QSM will
agree to employ each of them through December 31, 1997. Each Key Employee
entering into an Employment Agreement will be paid an agreed upon annual salary
and will be entitled to certain other benefits afforded to employees of HMS and
its subsidiaries. Each Key Employee will also enter into a separate
Not-to-Compete Agreement with QSM and a Confidentiality and Non-competition
Agreement with HMS. In addition, Rodrigo Rocha, who is a director and a
principal securityholder of QSM, has agreed to enter into a Not-to-Compete
Agreement with QSM in consideration of HMS's effecting the Merger.
NO DISSENTERS' RIGHTS OF APPRAISAL
Under Section 262(b) of the Delaware Act, holders of QSM Capital Stock are
not entitled to dissenters' rights of appraisal in connection with the Merger
because, at the QSM Record Date, shares of HMS Common were quoted on the Nasdaq
National Market. The HMS Common is currently quoted on the Nasdaq National
Market.
REGULATORY APPROVALS
HMS and QSM are not aware of any license or regulatory permit which is
material to the business of HMS or QSM and which is likely to be adversely
affected by consummation of the Merger or any approval or other action by any
state, federal or foreign government or governmental agency (other than routine
relicensing procedures) that would be required prior to the Merger.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. Under the pooling of interests accounting
method, (i) the recorded historical cost basis of the assets and liabilities of
both HMS and QSM will be carried forward to the operations of HMS generally at
their recorded amounts and (ii) financial statements of HMS issued subsequent to
the consummation of the Merger will be restated to include the combined
financial position, results of operations and cash flows for HMS and QSM for all
periods presented therein. Certain events, including certain transactions with
respect to HMS Common or QSM Capital Stock by affiliates of HMS or QSM,
respectively, may prevent the Merger from qualifying as a pooling of interests
for accounting and financial reporting purposes. See "The Merger -- Resale
Restrictions."
RESALE RESTRICTIONS
All shares of HMS Common received by holders of QSM Capital Stock, Notes
and Warrants in the Merger (other than those to be held in escrow pursuant to
the Terms of the Merger Agreement) will be freely transferable, except that (i)
shares of HMS Common received by persons who are deemed "affiliates" (as such
term is defined under the Securities Act) of HMS or QSM prior to the Merger may
be resold by them only in transactions permitted by the resale provisions of
Rule 145 promulgated under the Securities Act (or Rule 144 in the case of such
persons who become affiliates of HMS or as otherwise permitted under the
Securities Act) and (ii) executive officers of QSM after the Merger shall be
subject to the "window period" resale restrictions applicable to all HMS
directors and executive officers of HMS (including its subsidiaries). Persons
who may be deemed to be affiliates of HMS or QSM generally include individuals
or entities that control, are controlled by, or are under common control with,
such party and may include certain officers and directors of such party as well
as principal stockholders of such party. The Merger Agreement requires QSM to
use all reasonable efforts to cause each of its affiliates to execute a written
agreement to the effect that such person will not offer to sell, transfer or
otherwise dispose of any of his or her shares of HMS Common until such time as
financial results covering at least 30 days of combined operations of the
Surviving Corporation and HMS after the Effective Time of the Merger have been
published by HMS, either by issuance of a quarterly earnings report, an
effective registration statement filed with the Commission, a report filed with
the Commission on Form 10-K, 10-Q or 8-K or any other public filing or
announcement which includes such information.
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THE MERGER AGREEMENT
THE DETAILED TERMS AND CONDITIONS TO THE MERGER ARE CONTAINED IN THE MERGER
AGREEMENT, WHICH IS INCLUDED IN FULL AS APPENDIX A TO THIS INFORMATION
STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. THE FOLLOWING SUMMARY
OF THE MATERIAL TERMS OF THE MERGER AGREEMENT IS QUALIFIED IN ITS ENTIRETY BY,
AND MADE SUBJECT TO, THE MORE COMPLETE INFORMATION SET FORTH IN THE MERGER
AGREEMENT.
THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time of the Merger, Sub will be merged with and into QSM and thereupon
the separate existence of Sub will cease and QSM will become a wholly-owned
subsidiary of HMS. The Merger will have effects specified in the Delaware Act.
EFFECTIVE TIME OF THE MERGER
Upon the satisfaction or waiver of all conditions to the Merger, and
provided that the Merger Agreement has not been terminated or abandoned, HMS and
QSM will cause the Certificate of Merger to be filed with the Secretary of State
of the State of Delaware. The Merger will become effective upon the filing of
the Certificate of Merger or at such later time as HMS and QSM have agreed upon
and designated in such filing as the Effective Time of the Merger.
CONVERSION OF SECURITIES
Pursuant to the Merger Agreement, as of the Effective Time of the Merger:
(a) with the consent of the QSM Noteholders, the QSM Notes, including
accrued interest thereon through the Closing Date, will be exchanged for
shares of HMS Common having a Fair Value equal to the Fair Value of the
respective QSM Notes;
(b) with the consent of the QSM Warrantholders, the QSM Warrants will
be exchanged for shares of HMS Common having a Fair Value equal to the Fair
Value of the respective QSM Warrants;
(c) all outstanding QSM Stock Options will 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;
(d) with the consent of the holders thereof, each share of QSM
Preferred Stock will be exchanged for shares of HMS Common having a Fair
Value equal to the Fair Value of the QSM Preferred Stock plus accrued
dividends; and
(e) without any action on the part of any holder of QSM Common Stock,
each share of QSM Common Stock (other than shares of QSM Common Stock that
are owned by HMS or are held by QSM as treasury shares) will be converted
into shares of HMS Common in accordance with the Exchange Ratio.
Each of the issued and outstanding shares of capital stock of Sub
immediately prior to the Effective Time of the Merger will be converted into one
share of QSM issued and outstanding Capital Stock, all of which will be owned by
HMS.
"Fair Value" is defined in the Merger Agreement to mean (i) with respect to
HMS Common, the average closing price of HMS Common on the Nasdaq National
Market for a period of five consecutive business days ending two business days
prior to the Closing Date, (ii) with respect to HMS Stock Options, the value
thereof as of two 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, Warrants and Stock Options, the appraised values
thereof as of two business days prior to the Closing Date as determined by
Fechtor, Detwiler & Co., Inc. The Merger Agreement provides that if the Fair
Value of HMS Common is less
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than $27.00 per share, the Exchange Ratio will be adjusted by substituting
233,000 shares of HMS Common in place of 228,000 shares.
HMS Common is quoted on the Nasdaq National Market under the symbol "HMSY."
All shares of QSM Capital Stock converted in the Merger will no longer be
outstanding and will automatically be canceled and retired and will cease to
exist. Each holder of a certificate formerly representing shares of QSM Capital
Stock will cease to have any rights with respect thereto, except the right to
receive, without interest, certificates representing shares of HMS Common upon
surrender of such certificate representing shares of QSM Capital Stock.
TREATMENT OF STOCK OPTIONS
The Merger Agreement provides that, 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 will be determined in order to comply with Section 424 of the Code. As
soon as practicable after the Effective Time of the Merger, HMS is required to
deliver to holders of Assumed QSM Stock Options appropriate option agreements
under the HMS Stock Option and Restricted Stock Purchase Plan (the "HMS Stock
Option Plan") representing the right to acquire shares of HMS Common.
HMS is required to take all corporate action necessary to reserve for
issuance a sufficient number of shares of HMS Common for delivery upon exercise
of the Assumed QSM Stock Options. The shares of HMS Common subject to such
Assumed QSM Stock Options were included in a Registration Statement on Form S-8
previously filed by HMS and declared effective by the Commission. HMS has agreed
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 the Assumed QSM Stock Options remain
outstanding.
EXCHANGE PROCEDURES
QSM Common Stock. As soon as practicable after the Closing Date, HMS will
deliver to each holder of record of a certificate or certificates (the
"Certificates") representing outstanding shares of QSM Common Stock, a Letter of
Transmittal or similar instrument for use in effecting the surrender of the
Certificates in exchange for HMS Common pursuant to the Merger Agreement. 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 the Merger Agreement 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, each Certificate will 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 the Merger Agreement and the
provisions of the Delaware Act.
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.
QSM STOCKHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A NOTICE AND TRANSMITTAL FORM FROM HMS.
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No fractional shares of HMS Common will be issued in the Merger. The number
of shares of HMS Common each holder of shares of QSM Capital Stock, Notes and
Warrants will be entitled to receive under the Merger Agreement will be rounded
up or down to the nearest whole share.
In the event any Certificate is lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by HMS, the posting by such person of a
bond in such amount, form and with such surety as HMS may direct as indemnity
against any claim that may be made against it with respect to such Certificate,
HMS will issue in exchange for such lost, stolen or destroyed Certificate the
appropriate number of shares of HMS Common in respect of such Certificate.
ESCROW FUND
To secure the obligations of QSM to HMS under the Merger Agreement, and to
provide for the payment of certain expenses incurred by QSM in connection with
the Merger (see "Expenses" below), the holders of QSM Capital Stock, Notes and
Warrants immediately prior to the Effective Time of the Merger are required to
deliver to the Escrow Agent an aggregate of 10% of the shares of HMS Common to
be issued to such holders in the Merger, to be held in escrow by the Escrow
Agent in accordance with the terms of the Escrow Agreement. The term of the
escrow is for a period of nine months. Claims against the Escrow Fund are
subject to a Threshold (as defined) of $100,000, with certain exceptions, and
William B. Munier, Rodrigo Rocha and Peter B. Stovell are designated as the QSM
Representatives. Reference is made to the Escrow Agreement attached hereto as
Appendix B for a complete description thereof.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, HMS's and/or QSM's: (i) organization
and similar corporate matters; (ii) capital structure and the ownership of
subsidiaries; (iii) other material investment interests; (iv) authorization,
execution, delivery, performance and enforceability of the Merger Agreement; (v)
conflicts under certificates of incorporation or by-laws or comparable
organizational documents, required consents and approvals, and breaches of
material contracts; (vi) compliance with material laws and regulations; (vii)
documents filed by HMS with the Commission and the accuracy of information
contained therein; (viii) litigation; (ix) absence of certain material changes;
(x) tax matters; (xi) employee benefit plans; (xii) labor matters; (xiii)
proprietary rights; (xiv) absence of actions preventing the accounting for the
Merger as a pooling of interests; (xv) the use of brokers in arranging the
Merger; (xvi) related party transactions; and (xvii) undisclosed material
liabilities.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME OF THE MERGER
QSM has agreed, among other things, prior to the Effective Time of the
Merger, unless HMS agrees in writing or as otherwise required to consummate the
transactions contemplated by the Merger Agreement: (i) to 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) to 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) to maintain continuous insurance coverage
substantially equivalent to the insurance coverage in existence at the date of
the Merger 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.
Furthermore, QSM will not: (i) declare, pay or promise to pay any dividends
on or make other distributions in respect of any of its capital stock; (ii)
split, combine or reclassify any of its capital stock or issue or 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.
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QSM will 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.
QSM has agreed not to amend its Certificate of Incorporation or By-laws,
except as contemplated in the Merger Agreement.
QSM will 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.
QSM has agreed not to sell, lease or otherwise dispose of any of its assets
except in the ordinary course of business consistent with QSM's prior practices.
Except for certain working capital loans made or to be made to QSM by HMS
prior to the Effective Time of the Merger, QSM will 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.
QSM will not adopt or amend in any material respect any agreement with
employees, other than as provided in the Merger Agreement.
QSM has agreed not to alter the manner of keeping its books, accounts or
records, or change in any manner the accounting practices therein reflected.
NEGOTIATIONS WITH OTHERS
The Merger Agreement provides that, prior to the Effective Time of the
Merger, QSM will not, and will cause each of its officers, directors, employees,
agents, legal and financial advisors and affiliates not to, directly or
indirectly, (i) 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 or properties of QSM
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 the Merger Agreement, or (ii) 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 will inform HMS of such offer or proposal and
furnish HMS with a copy thereof if such offer or proposal is in writing.
MANAGEMENT, NAME AND LOCATION AFTER THE MERGER
After the Effective Time of the Merger, QSM will be a wholly-owned
subsidiary of HMS. QSM's Board of Directors will be comprised of individuals
designated by HMS. The name of the Surviving Corporation will continue to be
Quality Standards in Medicine, Inc. and the location of its principal office
will be 581 Boylston Street, Suite 250, Boston, Massachusetts 02116.
CONDITIONS OF THE MERGER
The respective obligations of HMS and QSM to consummate the Merger are
subject to the fulfillment of certain conditions, some of which may be waived by
the mutual consent of QSM and HMS, including, without limitation, the following:
(i) the Registration Statement, of which this Information Statement/ Prospectus
forms a part, shall have become effective and no stop order with respect thereto
shall be in effect; (ii) the Merger Agreement and the transactions contemplated
thereby shall have been approved and adopted
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in the manner required by applicable law by the holders of the issued and
outstanding shares of QSM Common Stock entitled to vote thereon; (iii) all
necessary approvals under state securities laws relating to the issuance or
trading of the HMS Common to be issued in connection with the Merger shall have
been received; (iv) all consents or approvals from third parties shall have been
obtained; (v) neither HMS nor QSM shall be subject to any order or injunction of
a court of competent jurisdiction which prohibits the consummation of the
transactions contemplated by the Merger Agreement; (vi) no statute, rule or
regulation shall been enacted which would make the consummation of the Merger
illegal; (vii) the shares of HMS Common to be issued in the Merger shall be
authorized for listing on the Nasdaq National Market; (viii) HMS shall have
received the opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel to QSM,
and QSM shall have received the opinion of Coleman & Rhine LLP, counsel to HMS,
each in a form acceptable to HMS and QSM, respectively; (ix) holders of
Preferred Stock, QSM Notes and Warrants shall have consented to the Merger and
the transactions thereunder; and (x) the other party shall have performed in all
material respects its agreements contained in the Merger Agreement required to
be performed by it and the representations and warranties of the other party
contained in the Merger Agreement shall be true and correct. There is currently
no intention on the part of either QSM or HMS to waive any of the conditions set
out above.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time of the Merger, before or after approval by the
stockholders 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 the Merger Agreement on the part of the other party
set forth in the Merger Agreement and, if such breach is curable, such
breach has not been cured within a ten 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, the failure of the Merger to have
been consummated by such date was not the result of the party seeking to
terminate the Merger Agreement to perform or fulfill any of its obligations
thereunder;
(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 or HMS or QSM, or compel HMS or QSM to dispose of
or hold separate all or a material portion of the business or assets of
QSM, as a result of the Merger or (ii) render HMS or QSM unable to
consummate the Merger, except for any waiting period provisions.
EFFECT OF TERMINATION
In the event of termination of the Merger Agreement by either QSM or HMS,
the Merger Agreement shall forthwith become void and there will be no liability
or obligation on the part of HMS or QSM or their respective officers or
directors except with respect to the payment of expenses and except to the
extent that such termination results from the breach by a party hereto of any of
its covenants or agreements in the Merger Agreement.
EXPENSES
The parties will each pay their own out-of-pocket expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby,
except as specifically set forth below. At the Closing of
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the Merger, HMS will pay a brokerage fee in the amount of $150,000 incurred by
QSM. In addition, unless the Merger is not consummated because (a) QSM fails to
meet the accounting criteria for pooling transactions, as described below,
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 up to a maximum of $90,000. Any expenses incurred by QSM in
connection with the Merger not reimbursable by HMS will be payable from the
Escrow Fund.
AMENDMENT
The Merger Agreement may be amended by the parties thereto, 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 stockholders of QSM and
Sub but, after any such stockholder approval, no amendment will be made which by
law requires the further approval of stockholders without obtaining such further
approval. The Merger Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties thereto.
EXTENSION; WAIVER
At any time prior to the Effective Time of the Merger, any party to the
Merger Agreement, 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 thereto and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
therein. Any agreement on the part of a party thereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party.
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COMPARISON OF RIGHTS OF HOLDERS OF
QSM COMMON STOCK AND HMS COMMON
GENERAL
As a result of the Merger, holders of QSM Capital Stock will become
stockholders of HMS, and the rights of such former QSM stockholders will
thereafter be governed by the HMS Certificate of Incorporation (the "HMS
Charter") and By-laws (the "HMS By-laws"). The following summary, which does not
purport to be a complete statement of the differences between the rights of the
holders of QSM Capital Stock and the holders of HMS Common, is an explanation of
the material differences between the QSM Common Stock and the HMS Common
resulting from the differences between the HMS Charter and the QSM Certificate
of Incorporation (the "QSM Charter"), the HMS By-laws and the QSM By-laws and
New York and Delaware law. This summary is qualified in its entirety by
reference to the full text of each of such documents and the applicable state
statutes.
VOTING RIGHTS
Generally
Each holder of QSM Common Stock is entitled to one vote for each share held
by such holder on all matters upon which holders of QSM Common Stock are
entitled or afforded the opportunity to vote. Except where the Delaware Act
prescribes a higher vote, to be effective, corporate action taken by vote of
stockholders of a Delaware corporation must be authorized by the vote of the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or by proxy at the meeting.
Each stockholder of record of HMS Common is entitled to one vote for every
share of such stock. Except as otherwise provided by law, whenever any corporate
action other then the election of directors is to be taken by vote of the
shareholders of HMS, it must be authorized by a majority of the votes cast at a
meeting of shareholders by the holders of shares entitled to vote thereon.
Election of Directors
The QSM Charter provides that the number of directors shall be fixed in the
QSM By-laws, which provide that the number of directors cannot be less than
three or more than nine.
The HMS By-laws provide that the HMS Board of Directors shall consist of
not less than three members.
Approval of Certain Transactions
The Delaware Act generally requires the affirmative vote of a majority of
the outstanding stock entitled to vote thereon for the approval of any merger or
consolidation. Unless required by the certificate of incorporation, no
stockholder approval is required for certain mergers in which (i) there is no
amendment to the certificate of incorporation of a corporation, (ii) each share
of stock of such corporation is to be an identical outstanding or treasury share
of the surviving corporation after the effective date of the merger and (iii)
either no shares of common stock of the surviving corporation and no shares,
securities or obligations convertible into such stock will be issued or
delivered in connection with the merger or the unissued shares or treasury
shares of stock of the surviving corporation to be issued or delivered in
connection with the merger plus those initially issuable upon conversion of any
other shares, securities or obligations to be issued or delivered in connection
with the merger do not exceed 20% of the shares of common stock of such
corporation outstanding immediately prior to the effective date of the merger.
The New York Business Corporation Law (the "NYBCL") requires the
affirmative vote of two-thirds of all outstanding shares entitled to vote
thereon to effect a merger, a consolidation, a share exchange or the sale, lease
or disposition of all or substantially all of a corporation's assets.
Notwithstanding any provision in the certificate of incorporation, the holders
of shares of a class or series are entitled to vote as a class if the proposed
transaction contains any provision which, if contained in an amendment to the
certificate of
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<PAGE> 39
incorporation, would entitle the holder of shares of such class or series to
vote as a class thereon; in such a case, in addition to the required two-thirds
vote of all outstanding shares, the merger must be authorized by a vote of the
holders of a majority of all outstanding shares of each such class or series.
The NYBCL does not contain a provision for mergers (other than those between a
corporation and its 90% or more owned subsidiary) without the approval of
shareholders similar to that in the Delaware Act.
Accordingly, as opposed to the Delaware Act, the NYBCL would make approval
of a merger, a consolidation, a share exchange or the sale, lease or disposition
of all or substantially all of a corporation's assets more difficult to obtain.
Because the Merger is structured as a merger of two Delaware corporations,
the two-thirds affirmative vote requirement and the other procedures under New
York law described in the preceding paragraph do not apply to HMS in connection
with the Merger.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
Under both Delaware and New York law, amendments to a certificate of
incorporation may be authorized by the vote of the holders of a majority of all
outstanding shares entitled to vote thereon. Both state statutes also provide
for approval by vote of the holders of a majority of outstanding shares of a
particular class of stock in certain circumstances.
SPECIAL MEETINGS
Under both Delaware and New York law, special meetings of stockholders may
be called by the board of directors and by such other person or persons
authorized to do so by the corporation's certificate of incorporation or
by-laws. In addition, Delaware law provides that, if an annual meeting is not
held within 30 days of the date designated for such a meeting, or is not held
for a period of 13 months after the last annual meeting, the Delaware Court of
Chancery may summarily order a meeting to be held upon the application of any
stockholder or director. Under New York law, if there is a failure to elect a
sufficient number of directors to conduct the business of the corporation for a
period of one month after the date fixed by or under the by-laws for the annual
meeting of stockholders or for a period of 13 months after the last annual
meeting, the board of directors will call a special meeting for the election of
directors. If the board fails to do so within 14 days of the expiration of such
period or if a meeting is so called but the directors are not elected within two
months, holders of 10% of the shares entitled to vote in an election of
directors may demand the call of a special meeting of directors.
Therefore, in comparison to Delaware law, New York law makes calling a
special meeting a more difficult process for stockholders because of the 10% of
stockholders requirement and other procedures under New York law described
above.
STOCKHOLDERS' ACTION WITHOUT A MEETING
The Delaware Act provides that stockholders may take any action without a
meeting by written consent signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote thereon were
present and voted, unless otherwise provided in the certificate of
incorporation. The QSM Charter contains no provision limiting the right to act
by written consent. Prompt notice of the taking of any action by less than
unanimous consent must be given to stockholders who did not consent to such
action. The NYBCL, however, provides that stockholders may take any action
without a meeting by written consent only if such consent is signed by the
holders of all outstanding shares entitled to vote thereon, unless otherwise
provided in the certificate of incorporation. The HMS Charter contains no
provisions altering the provisions of the statute.
Therefore, stockholders will find it more difficult to take any action
without a meeting under the more restrictive NYBCL requirement that a written
consent be signed by the holders of all of the shares entitled to vote.
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<PAGE> 40
PREEMPTIVE RIGHTS
The Delaware Act allows for, but does not require, the grant of preemptive
rights in a company's certificate of incorporation. Neither the QSM Charter nor
the QSM By-laws provide preemptive rights to holders of QSM Capital Stock. The
NYBCL provides, subject to certain exceptions, preemptive rights to stockholders
upon an issuance of securities which would adversely affect certain specified
interests of such stockholders, provided that the certificate of incorporation
may provide otherwise. Under the HMS Charter there are no preemptive or other
subscription rights.
Therefore, stockholders are not entitled to receive preemptive rights under
either Delaware or New York law.
DIVIDENDS
Subject to any restrictions in a corporation's certificate of incorporation
(which the QSM Charter does not include), the Delaware Act generally provides
that the directors of a corporation may declare and pay dividends out of surplus
(defined as the excess, if any, of the net assets over capital (defined as the
aggregate par value of the outstanding stock, if par value stock, plus or minus
any amount added or subtracted by resolution of the board, but in no event less
than the aggregate par value)) or, when no surplus exists, out of net profits
for the fiscal year in which the dividend is declared and/or the preceding
fiscal year. Dividends may not be paid out of net profits if the capital of the
corporation is less than the aggregate amount of capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets.
Under the NYBCL, a corporation may declare and pay dividends on its
outstanding shares except when the corporation is insolvent or would thereby be
made insolvent, or when the declaration, payment or distribution would be
contrary to any restrictions contained in the certificate of incorporation. In
general, dividends may be declared or paid out of surplus only. When any
dividend is paid or any other distribution is made, in whole or in part, from
sources other than earned surplus, it must be accompanied by a written notice
disclosing the amounts by which such dividend or distribution affects stated
capital, capital surplus and earned surplus, or, if such amounts are not yet
determinable, disclosing the approximate effect of such dividend on stated
capital, capital surplus and earned surplus and stating that such amounts are
not yet determinable.
Accordingly, although both Delaware and New York law will allow for a
dividend to be declared, the NYBCL has heightened disclosure requirements with
respect to a dividend paid out from sources other than surplus.
STOCK REPURCHASES
The Delaware Act permits a corporation to repurchase or redeem its shares,
except that a corporation may not do so when the capital of the corporation is
impaired or when such purchase or redemption would cause any impairment of the
capital of the corporation. A purchase or redemption out of capital of shares
which are entitled upon any distribution of the corporation's assets, whether by
dividend or liquidation, to a preference over another class or series of its
stock, is permitted if such shares will be retired upon their acquisition and
the capital of the corporation reduced in accordance with Delaware law.
Under the NYBCL, a corporation may, subject to restriction imposed by law
or its certificate of incorporation, repurchase or redeem its shares out of
surplus except when the corporation is insolvent or would thereby be made
insolvent. A corporation may repurchase its shares out of stated capital (with
the foregoing exception) if the purchase is made for the purpose of (i)
eliminating fractions of shares, (ii) collecting or compromising indebtedness to
the corporation or (iii) paying shareholders the fair value of their shares in
connection with the exercise of statutory appraisal rights.
Accordingly, although both the Delaware Act and the NYBCL will allow a
corporation to repurchase or redeem its shares from surplus, New York law is
more restrictive regarding the use of stated capital for such purchases or
redemptions in that the corporation must comply with the above stated purposes.
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<PAGE> 41
ISSUANCE OF RIGHTS OR OPTIONS TO PURCHASE SHARES TO DIRECTORS, OFFICERS AND
EMPLOYEES
The Delaware Act permits any corporation, either in its certificate of
incorporation or by resolution of its board of directors, to create rights or
options entitling the holders thereof to purchase from the corporation any
shares of its capital stock of any class or classes. In the absence of actual
fraud in the transaction, the judgment of the directors as to the consideration
for the issuance of such rights or options and the sufficiency thereof shall be
conclusive. The NYBCL requires that the issuance to officers, directors or
employees of rights or options to purchase shares be authorized by a majority of
all outstanding shares entitled to vote thereon, or authorized by and consistent
with a plan adopted by such vote of stockholders. In the absence of preemptive
rights, such authorization is not required in New York for the issuance of
rights or options in substitution for or upon the assumption of rights or
options of a corporation with which the issuing corporation is merging or
consolidating.
Accordingly, under the NYBCL it is more difficult to issue to directors,
officers or employees rights or options to purchase shares than it would
otherwise be under the DGCL.
LOANS TO DIRECTORS
The Delaware Act permits any corporation to lend money to, or guarantee an
obligation of, or otherwise assist any officer or other employee of the
corporation or of any of its subsidiaries, including any officer or employee who
is a director of the corporation or its subsidiaries, whenever, in the judgment
of the directors, such loan, guaranty or assistance may reasonably be expected
to benefit the corporation. Under New York law, any loan made by the corporation
to any director must be authorized by a vote of the stockholders. For purposes
of this authorization, the shares held by the director who would be the borrower
are not entitled to vote.
Therefore, under New York law, loans to directors will be more difficult to
obtain than under Delaware law because New York requires a stockholder vote
whereas Delaware relies solely on the directors' judgment.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Both the Delaware Act and the NYBCL provide that a corporation's board of
directors may be divided into classes with staggered terms of offices. While
neither the QSM Charter nor the QSM By-laws provide for a classified board, the
HMS By-laws divide HMS's Board of Directors into two classes, each to serve
alternate two year terms.
DUTIES OF DIRECTORS
The NYBCL specifically permits a board of directors to consider
constituencies other than the holders of a corporation's capital stock and to
consider both the long-term and short-term interests of the corporation and such
constituencies when taking any action, including action taken in connection with
a change or potential change in the control of the corporation. The NYBCL
permits directors to consider the effect that a corporation's action may have in
the short-term and the long-term upon: (i) potential growth, development,
productivity and profitability of the corporation; (ii) current employees; (iii)
retired employees and other beneficiaries receiving or entitled to receive
retirement, welfare or similar benefits from the corporation; (v) the
corporation's customers and creditors; and (v) the ability of the corporation to
provide continuously goods, services, employment opportunities and employment
benefits and otherwise to contribute to the communities in which it does
business. The Delaware Act contains no similar provision; however, Delaware case
law has established that, in circumstances involving a potential change of
control, directors may consider, among various other proper factors, the impact
of both the bid and the potential acquisition on constituencies other than
stockholders.
Accordingly, although only the NYBCL allows a board of directors to
consider constituencies other than the holders of a corporation's capital stock
when taking any action, both Delaware and New York law allow such considerations
when the action involves a potential change of control of the corporation.
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INTERESTED DIRECTOR TRANSACTIONS
Under the Delaware Act, no contract or transaction between a corporation
and one or more of its directors or officers, or between a corporation and any
other corporation, partnership, association or other organization in which one
or more of its directors or officers are directors or officers, or have a
financial interest, is void or voidable solely for that reason or solely because
the director or officer is present at or participates in the meeting of the
board or committee which authorized the contract or transaction, or solely
because his or their votes are counted for such purpose, provided that (i) the
material facts concerning the individual's interest and the transaction are
disclosed and the transaction is approved by a majority of the disinterested
directors of the board or a committee of the board, or (ii) the material facts
concerning the individual's interest and the transaction are disclosed and the
transaction is approved in good faith by vote of the shareholders or (iii) the
contract or transaction is fair to the corporation as of the time it is
authorized, approved or ratified by the board of directors, a committee thereof
or the stockholders.
The NYBCL provides that no transaction between a corporation and one or
more of its directors or an entity in which one or more of its directors are
directors or officers or have a substantial financial interest shall be void or
voidable solely for that reason. In addition, no such transaction shall be void
or voidable solely because the director is present at or votes at the meeting of
the board of directors or committee which authorized the transaction. In order
to avoid such a transaction being void or voidable, it must, after disclosure of
material facts (unless such facts were known), (i) be approved by the
disinterested directors or a committee of disinterested directors by a vote
sufficient for such purpose without counting the vote of any interested director
(or, if the vote of disinterested directors is insufficient to constitute an act
of the board under New York law, by the unanimous vote of the disinterested
directors) or (ii) be approved by a vote of the shareholders. Alternatively, the
transaction will not be void or voidable if it is shown to have been fair to the
corporation at the time it was approved by the board of directors, a committee
thereof or the stockholders.
Accordingly, although the Delaware Act may differ slightly from the NYBCL,
Delaware and New York law contain substantially similar treatments of interested
director transactions.
LIMITATIONS ON DIRECTORS' LIABILITY
The Delaware Act permits a corporation to include a provision in its
certificate of incorporation eliminating or limiting the personal liability of a
director to the corporation or its stockholders for damages for breach of the
director's fiduciary duty, subject to certain limitations. The QSM Charter
contains no such provision limiting the liability of directors.
The NYBCL permits a corporation to limit or eliminate a director's personal
liability to the corporation or the holders of its capital stock for breach of
duty. This limitation is generally unavailable for acts or omissions by a
director which were (i) in bad faith, (ii) involved intentional misconduct or a
knowing violation of law or (iii) involved a financial profit or other advantage
to which such director was not legally entitled. The NYBCL also prohibits
limitations on director liability for acts or omissions which resulted in a
violation of a statute prohibiting certain dividend declarations, certain
payments to stockholders after dissolution and particular types of loans.
The HMS By-laws contain a provision limiting the liability of directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware Act permits a corporation to indemnify directors, officers,
employees and agents for actions taken in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. The Delaware Act also provides that a
corporation may advance expenses of defense (upon receipt of a written
undertaking to reimburse the corporation if it is ultimately determined that
such individual is not entitled to indemnification) and must reimburse a
successful defendant for expenses, including attorneys' fees, actually and
reasonably incurred, and permit a corporation to purchase and maintain liability
insurance for its directors and officers. The Delaware Act further provides that
indemnification may not be made for any claim,
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issue or matter as to which a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation, except only to the extent a court determines that the person is
entitled to indemnity for such expenses that such court deems proper.
The QSM By-laws currently provide for indemnification of directors and
officers to the full extent permitted by the Delaware Act.
Under the NYBCL, indemnification of directors and officers may be provided
to whatever extent shall be authorized by a corporation's certificate of
incorporation or a by-law or vote adopted by the stockholders. However, the
NYBCL does not permit indemnification with respect to any matter as to which the
director or officer has been adjudicated not to have acted in good faith in the
reasonable belief that his action was in the best interest of the corporation.
The NYBCL provides that no indemnification of directors in stockholder
derivative suits may be made in respect of (i) a threatened action, or a pending
action which is settled or otherwise disposed of, or (ii) any claim, issue or
matter as to which the director or officer has been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
was brought or, if no action is brought, any court of competent jurisdiction,
determines upon application that, in view of the circumstances of the case, the
director or officer is fairly and reasonably entitled to indemnity for such
portion of the settlement amount and expenses as the court deems proper. The
statutory provisions for indemnification and advancement of expenses are not
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled independently of the applicable
statutory provision.
The HMS By-laws currently provide for indemnification of directors and
officers and advancement of indemnified expenses to the full extent now or
hereafter permitted by the NYBCL.
Accordingly, although the Delaware Act may differ slightly from the NYBCL,
Delaware and New York law contain substantially similar limitations on
directors' liability.
REMOVAL OF DIRECTORS
As permitted under the Delaware Act, directors of QSM may be removed, with
or without cause, by the vote of the holders of a majority of the outstanding
shares of all classes of stock entitled to vote at an election of directors. The
Delaware Act imposes additional restrictions on the removal of directors for
corporations with a classified board, cumulative voting or directors elected by
the holders of a specific class or series of shares.
The NYBCL provides that any or all of the directors of a corporation may be
removed for cause by a vote of the stockholders and that the certificate of
incorporation or by-laws may provide for removal without cause by vote of the
stockholders. HMS's By-laws provide that any director may be removed, with or
without cause, at any time by the stockholders. The NYBCL also imposes
additional restrictions on the removal of directors of corporation with
cumulative voting or directors elected by the holders of a specific class or
series of shares.
Accordingly, the removal of HMS directors would be treated in a
substantially similar manner under Delaware and New York law.
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BUSINESS OF HMS
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page iv for additional factors
relating to such statements.
OVERVIEW
HMS furnishes proprietary information management and data processing
services and software to hospitals and other health care providers and to
government health service agencies and other health care payors. These services
address the various types of data generated by the interaction of the
participants in the health care process: the health care provider; the
third-party payor; and the patient. Through its retrospective, concurrent, and
prospective service offerings, HMS acts as an outsourcer of information
management processes encompassing the clinical, operational, administrative, and
financial data which result from the rendering of health care services. HMS's
service offerings benefit its clients by enhancing revenue and accelerating cash
flow (achieved through improved reimbursability and collectibility), reducing
operating and administrative costs (by supplying advanced information
analytics), and enhancing decision making capabilities (by supplying previously
unavailable information).
The health care industry is undergoing significant and rapid change. As
health care costs have increased more rapidly than inflation in recent years,
there has been an increasing pressure on the health care system to contain
costs, placing new burdens on providers and payors alike. Accordingly, the
health care system has migrated towards managed care reimbursement, including
discounted fee for service and capitation. Under capitation, providers of health
care services are paid a predetermined fee per individual to provide all
necessary services and effectively assume the financial risks associated with
delivering a variable service at a fixed price. As a result, health care
providers are attempting to rationalize and control costs by providing
cost-effective care.
Health care information systems are evolving to meet the needs of this
changing marketplace. Initially, health care information systems were
financially oriented, focusing on the ability to capture charges and generate
bills. As cost containment has forced providers and payors to focus on their
costs, manage risk, and provide outcomes and quality analysis, system needs have
evolved from the traditional billing information to a wider range of needs,
including enterprise wide systems capable of capturing and analyzing data of all
points-of-care and data repositories for storage. Historically, cost containment
efforts have been hampered by a lack of integrated clinical and financial
information. As reimbursement is shifting more toward risk sharing and
capitation, providers and payors need to better manage risk by controlling
costs, demonstrating quality, measuring outcomes, and influencing utilization.
Each of these goals requires the collection, analysis, interpretation, and
application of clinical, operational, administrative, and financial information
related to the provision of health care.
HMS applies its information management services to this abundance of raw
data to assist clients in meeting their goals of integrated decision making and
cost effectiveness. HMS's services consist of information, analytics, and
processor outsourcing. Each of these services is utilized by health care
participants to manage a specific universe of data at a predetermined time in
the course of a provider's relationship with the patient. HMS's services can
manage information retrospectively (after the patient has been discharged and
costs have been incurred), concurrently (while the provider and patient are
interacting), or prospectively (prior to the provision of care and incurrence of
particular costs). Thus, each of HMS's principal services provides a product
(either information, analytics or process) to a health care participant (payor
or provider) at a predetermined point in time (before, during, and/or after
patient care).
BUSINESS STRATEGY
Expansion of Client Base. HMS believes that the expertise it has developed
over the last 22 years in the health care reimbursement arena provides a solid
foundation for the expansion of HMS's services to nongovernmental payors
(commercial insurance carriers and large self-insured corporations) and other
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companies servicing the health care industry (accounts receivable management
companies and third-party claims administrators).
HMS intends to expand its client base by continuing to offer
technologically innovative, cost-effective services that increase the ability of
health care providers to receive reimbursement for health care services for
which they are otherwise eligible. HMS's strategy seeks to exploit its data
processing skills and knowledge of the health care reimbursement process in
providing value-added services to hospitals and third party payors and their
intermediaries. HMS also intends to take advantage of the current trend among
many hospitals to "outsource" data processing and patient accounting functions,
as well as the recent growth in the volume of outpatient services as an
alternative to inpatient treatment.
New Services. In response to the varying needs of individual clients, HMS
historically has devoted significant resources to expanding the range of its
services and will continue to do so. As a result of these efforts, HMS expects
to develop new services that will benefit existing as well as future hospital,
large self-insured corporate, other health care provider, and government agency
clients in managing the reimbursement process. This includes the utilization of
the Electronic Data Interchange platform of its Quality Medi-Cal Adjudication,
Incorporated ("QMA") subsidiary in jurisdictions outside California.
Acquisitions. HMS's strategy includes the expansion of its business
through selective acquisitions, and HMS continually explores possible
acquisitions of complementary business and technologies. However, other than as
set forth in this Information Statement/Prospectus with respect to QSM, HMS
currently has no commitments or agreements with respect to any such
transactions.
In furtherance of its strategy, HMS may acquire companies that furnish
health care providers with automated billing, electronic media claims transfer,
accounts receivable management, and health care utilization management
information services if the services or operations of such companies would
benefit from access to HMS's proprietary computer technology or software
applications. HMS believes that many such acquisition opportunities exist due,
in part, to competitive pressures on local service businesses that lack adequate
capital, technical, and management resources. HMS also believes that
consolidation will continue to occur within the health care information services
industry.
In recent years, HMS has acquired HCm and CDR Associates, Inc. ("CDR") in
furtherance of its acquisition strategy.
HMS has invested in HISCo, which in turn has acquired Health Systems
Architects, Inc., to enable HMS and its stockholders to benefit from strategic
investments in health information systems and service companies whose product
and service development is in an early stage or which possess other special
characteristics that make a direct investment by HMS inadvisable.
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HMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements set forth below under this caption constitute
"forward-looking statements" within the meaning of the Reform Act. See "Special
Note Regarding Forward-Looking Statements" on page iv for additional factors
relating to such statements.
HMS serves its clients in the health care industry by delivering
proprietary information management services. Since 1993, HMS has achieved a
compound annual revenue growth rate of 22% with over 90% of its revenue each
year coming from entities that were clients in the previous year.
During this period, HMS engaged in two mergers to expand its product
offerings. Each of the mergers was accounted for using the pooling of interests
method of accounting. Consequently, HMS's financial statements have been
restated for all periods presented. Also, HMS accounts for its investment in
HISCo using the equity method.
RESULTS OF OPERATIONS
The table below summarizes HMS's results of operations and the percentage
of total revenue of selected line items for the last three fiscal years and for
the nine-month periods ended July 31, 1995 and 1996.
NINE MONTHS ENDED
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED OCTOBER ENDED
31, JULY 31,
---------------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Proprietary Services
RCR..................................... 26 % 26 % 26 % 26 % 29 %
CAMS.................................... 28 30 27 27 19
TPLR.................................... 13 16 21 20 25
--- --- --- --- ---
67 72 74 73 73
EDI..................................... 13 11 9 10 9
MCS..................................... 20 17 17 17 18
--- --- --- --- ---
100 % 100 % 100 % 100 % 100 %
Cost of Services:
Compensation............................ 52 % 48 % 48 % 49 % 49 %
Data Processing......................... 7 9 9 7 11
Occupancy............................... 9 9 7 7 7
Other................................... 13 15 15 15 21
--- --- --- --- ---
82 81 80 80 88
Operating margin before amortization of
intangibles.......................... 18 19 20 20 12
Amortization of intangibles............. (1 ) -- -- -- --
--- --- --- --- ---
Operating income........................ 17 % 19 % 20 % 20 % 12 %
Net interest and other income............. -- 1 1 1 1
Equity in earnings of affiliate........... -- -- -- -- --
Merger related costs...................... -- -- -- (2 ) (1 )
--- --- --- --- ---
Loss on investment........................ -- -- -- -- (1 )
Income before income tax expense.......... 17 20 20 19 11
--- --- --- --- ---
Income tax expense........................ (9 ) (9 ) (9 ) (9 ) (4 )
--- --- --- --- ---
Income before extraordinary item.......... 9 % 11 % 11 % 10 % 7 %
--- --- --- --- ---
</TABLE>
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NINE MONTHS ENDED JULY 31, 1996 AND 1995
Revenue for the nine months ended July 31, 1996 was $76,752,000, an
increase of $11,706,000 or 18% over the comparable prior year period. During the
nine months ended July 31, 1996, HMS recorded a reversal of $2,180,000 of HHL
revenue recorded in the third quarter. Revenue for the nine months ended July
31, 1996 before the reversal was $78,932,000, an increase of $13,886,000 or 21%
over the comparable prior year period. Revenue from proprietary services after
the revenue reversal increased $8,801,000 or 18%, to $56,567,000, principally
due to revenue generated by HMS's TPLR and RCR engagements. Revenue from MCS
services was $13,643,000, an increase of $2,530,000 or 23% over the comparable
prior year period. Revenue from EDI services was $6,542,000, an increase of
$375,000 or 6% from last year.
Cost of services for the nine months ended July 31, 1996 was $67,565,000,
an increase of $15,556,000 or 30% over the comparable period in 1995. During the
nine months ended July 31, 1996, HMS recorded a one-time charge pertaining to
its relationship with HHL. This charge increased cost of services by $6,704,000
or 13% over the quarter ended July 31, 1995. The $6,704,000 charge was comprised
of (i) $1,362,000 of net compensation costs, and (ii) $2,199,000 of net data
processing costs associated with the continued servicing of the HHL data
processing agreement, plus (iii) $3,143,000 of other operating costs, including
$2,881,000 of bad debt expense related to HHL receivables and $262,000 of net
other operating expenses associated with the continued servicing of the HHL data
processing agreement.
Compensation expense, HMS's largest component, totaled $37,325,000, an
increase of $5,750,000 or 18% over the comparable prior year period.
Compensation expense prior to the one-time charge of $1,362,000 was $35,963,000,
an increase of $4,388,000 or 14%. Exclusive of the effect of the one-time
charge, this increase reflected a 16% increase in the average number of
employees in support of business growth and expansion, offset by salary savings
associated with employee turnover.
Data processing expense was $8,393,000, an increase of $2,778,000 or 49%
over the comparable period in 1995. Data processing expense prior to the
one-time charge of $2,199,000 was $6,194,000, an increase of $579,000 or 10%.
Exclusive of the effect of the one-time charge, this increase was attributable
to costs associated with the continuing enhancement of HMS's data processing
environments.
Occupancy expense was $5,478,000, an increase of $631,000 or 13% over the
comparable period in 1995. This increase was primarily due to the expansion of
HMS's facilities, including HMS's headquarters.
Other operating expense was $16,369,000, an increase of $6,397,000 or 64%
over 1995. Other operating expense prior to the one-time charge of $3,143,000
was $13,226,000, an increase of $3,254,000 or 33%. Exclusive of the effect of
the one-time charge, this increase was principally attributable to higher levels
of direct project costs, including professional fees, employee related costs,
and professional marketing fees.
Operating margin before amortization of intangible assets for the nine
months ended July 31, 1996 was $9,187,000, a decrease of $3,850,000 or 30% from
the $13,037,000 amount realized in the comparable period in 1995. HMS's
operating margin rate before amortization of intangible assets was 12%, compared
to 20% in 1995. Operating margin before amortization of intangibles and prior to
the one-time charge and revenue reversal was $18,071,000, an increase of
$5,034,000 or 39%. Exclusive of the effect of the one-time charge and revenue
reversal, the operating margin rate would have been 23%, an increase of 3
percentage points over the 20% realized in the comparable prior year period.
Amortization of intangible assets for the nine months ended July 31, 1996
was $161,000, a decrease of $28,000 or 15% from the comparable prior year
period. The decrease resulted from the full amortization of one of HMS's
intangible assets.
Net interest and other income of $665,000 in the nine months ended July 31,
1996 increased by $2,000 from $663,000 in the comparable period in 1995; the
increase would have been $45,000 but for the loan origination fees associated
with HMS's securing a new line of credit with a major money center financial
institution. HMS wrote off its investment in HHL of $927,000 in the nine months
ended July 31, 1996 as part of the one-time charge. Merger related costs of
$489,000 were incurred in the nine months ended July 31,
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<PAGE> 48
1996 related to HMS's merger with CDR in April 1996. Merger related costs of
$1,045,000 were incurred in the nine months ended July 31, 1995 related to HMS's
merger with HCm in February 1995.
HMS's income tax expense for the nine months ended July 31, 1996 was
$3,209,000, resulting in an effective tax rate of approximately 37.9%. This
compares to income tax expense of $5,840,000 and an effective tax rate of
approximately 46.8% for the prior year period. The reduction in the effective
tax rate results from the non-taxability of income from CDR for the first six
months of the fiscal year due to its status as an S Corporation, and from the
decrease of non-tax deductible merger costs from the comparable prior year
period. Income tax expense without the HHL one-time charge and revenue reversal
would have been $7,506,000, an increase of $1,666,000 or 29% over the comparable
prior period.
Net income and earnings per share for the nine months ended July 31, 1996
were $5,254,000 and $0.29, a 21% and 24% decrease, respectively, from net income
of $6,637,000 and $0.38 in earnings per share reported in the comparable prior
year period. Net income and earnings per share prior to the one-time charge,
revenue reversal, and merger costs were $11,257,000 and $0.62 year to date, an
increase of $3,575,000 and $0.18 over the same period last year, or 47% and 41%,
respectively.
Years Ended October 31, 1995 and 1994
Revenue for the year ended October 31, 1995 was $89,727,000, an increase of
$16,551,000 or 23% over 1994. Revenue from proprietary services grew $13,738,000
or 26%, to $66,385,000, reflecting strong performance in a number of RCR, TPLR,
and CAMS engagements as well as the continued extension of services to existing
clients. Revenue from EDI services was $8,222,000, an increase of $193,000 or 2%
from 1994. Revenue from MCS services was $15,120,000, an increase of $2,620,000
or 21% over the prior year.
Cost of services for the year ended October 31, 1995 was $71,627,000, an
increase of $12,313,000 or 21% from 1994, trailing the rate of revenue growth
for the same period. Compensation expense of $43,373,000 increased $8,018,000 or
23% compared to 1994. This increase reflected: (i) a 12% increase in the average
number of employees, in support of business growth and expansion; (ii) a bonus
accrual for the principals of CDR of approximately $1,067,000, an increase of
$801,000 or over 300%; and (iii) routine salary and benefit cost increases.
Processing expense was $8,144,000, an increase of $1,272,000 or 19% over 1994.
This increase was attributable to costs associated with the continuing
enhancement of HMS's data processing environments. Occupancy expense was
$6,529,000, an increase of $609,000 or 10% over the comparable period in 1994,
related primarily to the expansion of HMS's New York City facilities begun in
the first quarter of 1994. Other operating expense of $13,581,000 represented an
increase of $2,414,000 or 22% over 1994 and was principally attributable to
higher levels of costs directly associated with professional fees and the
increased number of employees over the prior year.
Operating margin before amortization of intangibles for the year ended
October 31, 1995 was $18,100,000, an increase of $4,238,000 or 31% over the
$13,862,000 amount realized in 1994. HMS's operating margin rate was 20%, as
compared to 19% in 1994.
Amortization of intangibles for the year ended October 31, 1995 was
$243,000, an increase from $190,000 reported for the year ended October 31,
1994. This increase was primarily associated with amortization related to
acquired EDI software rights.
Net interest and other income of $942,000 for the year ended October 31,
1995 increased by $478,000 from $464,000 for 1994, due to the investment in
higher interest yielding securities and implementation of an enhanced cash
management system. Merger related costs of $1,045,000 were incurred in year
ended October 31, 1995 related to the merger with HCm in February 1995. HMS
reported no equity in earnings of affiliate during the year ended October 31,
1995 (see Note 1(e) of Notes to Consolidated Financial Statements).
HMS's income tax expense for the year ended October 31, 1995 was
$8,152,000, resulting in an effective tax rate of approximately 46%. This
compares to income tax expense of $6,353,000 and an effective rate of
approximately 45% for the prior year. The 28% increase in income tax expense in
1995 was primarily driven by
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HMS's improved pre-tax profitability, which increased 26% from the prior year,
and as a result of the non-deductibility of the costs incurred in connection
with the merger with HCm.
As a result of HMS's expanded revenue base, improved operating results, and
increased interest income, net income for the year ended October 31, 1995 rose
to $9,602,000, a 24% increase over the $7,724,000 reported for the prior year.
HMS's performance translated to earnings per share for the year ended October
31, 1995 of $0.55, an increase of $0.09 or 20% from the $0.46 reported for the
prior year.
Years Ended October 31, 1994 and 1993
Revenue for the year ended October 31, 1994 was $73,176,000, an increase of
$13,227,000 or 22% over 1993. Revenue from proprietary services grew $12,675,000
or 32%, to $52,647,000, and reflected: (i) strong performance in a number of
TPLR and RCR engagements; and (ii) a substantial increase in revenue due to the
expansion of HMS's CAMS engagement for HHL to encompass various outsourcing
services. See Note 15 of Notes to Consolidated Financial Statements. Revenue
from EDI services was $8,029,000, an increase of $117,000 or 1% over 1993. HMS's
EDI revenue has been restated to include in the years ended October 31, 1994 and
1993, respectively, $518,000 and $667,000 that were previously reported in the
CAMS product line. Revenue from MCS services was $12,500,000, an increase of
$435,000 or 4% over 1993.
Cost of services for the year ended October 31, 1994 was $59,314,000, an
increase of $10,325,000 or 21% over 1993. Compensation expense of $35,355,000
increased $3,976,000 or 13% compared to 1993. This increase reflected: (i) a 13%
increase in the average number of employees, in support of business growth and
expansion; and (ii) routine salary and benefit cost increases. Data processing
expense was $6,872,000, an increase of $2,511,000 or 58% over 1993. This
increase was primarily attributable to costs associated with the outsourcing
services provided by HMS to HHL as well as the continuing enhancement of HMS's
data processing environment. Occupancy expense was $5,920,000, an increase of
$724,000 or 14% over 1993, related primarily to the expansion of HMS's New York
City facilities begun in the first quarter of 1994. Other operating expense of
$11,167,000 represented an increase of $3,114,000 or 39% over 1993 and was
principally attributable to higher levels of costs directly associated with
revenue-producing projects.
Operating margin before amortization of intangibles for the year ended
October 31, 1994 was $13,862,000, an increase of $2,902,000 or 27% over the
$10,960,000 amount realized in 1993. HMS's operating margin rate was 19%, as
compared to 18% in 1993.
Amortization of intangibles for the year ended October 31, 1994 was
$190,000, a decrease from $303,000 reported in the year ended October 31, 1993.
This reduction reflects the completion, in the first quarter of 1993, of the
amortization of capitalized software costs arising from HMS's 1990 acquisition
of its QMA subsidiary.
Net interest and other income was $464,000 for the year ended October 31,
1994 compared with net interest and other expense of $114,000 in the year ended
October 31, 1993. As a result of debt reduction effected with the proceeds of
HMS's 1992 initial public offering, HMS realized a reduction of $514,000 in
interest expense in 1994 compared to 1993. Enhanced levels of investable funds,
principally resulting vfrom HMS's initial public offering, yielded an increase
in interest income of $64,000 for the year ended October 31, 1994 compared to
the prior year.
HMS's income tax expense for the year ended October 31, 1994 was
$6,353,000, resulting in an effective tax rate of approximately 45%. This
compares to income tax expense of $4,766,000 and an effective tax rate of
approximately 45% for the prior year. The 33% increase in income tax expense
approximated HMS's improved pre-tax profitability, which increased 34% from the
prior year.
As a result of HMS's expanded revenue base, improved operating results, and
reduced levels of amortization of intangibles and debt service, income before
extraordinary item for the year ended October 31, 1994 rose to $7,724,000, a 34%
increase when compared to $5,777,000 reported in the prior year. An
extraordinary loss of $306,000, net of income tax benefit of $251,000, was
recognized in the year ended October 31, 1993. This reflected the write-off of
the unamortized debt discount attributable to the subordinated debentures issued
in connection with HMS's 1989 recapitalization that were prepaid with a
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<PAGE> 50
portion of the proceeds of the initial public offering. As a result, net income
for the year ended October 31, 1994 was $7,724,000, an increase of $2,253,000 or
41% over net income of $5,471,000 for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, HMS had $55,828,000 in net working capital, $14,185,000
greater than net working capital at October 31, 1995. HMS's principal sources of
liquidity at July 31, 1996 consisted of cash, cash equivalents, and short-term
investments aggregating $30,054,000 and net accounts receivable of $47,505,000.
Accounts receivable at July 31, 1996 reflected an increase of $15,875,000 or 50%
over the October 31, 1995 balance. This increase is due to revenue growth,
delays in processing payments through a government client, and changes in HMS's
product revenue mix which serve to elongate HMS's liquidation cycle. Management
does not believe that this increase reflects adversely on the quality or
collectibility of HMS's accounts receivable.
On July 15, 1996, HMS entered into a $40,000,000 unsecured revolving credit
facility with a major money center financial institution. The credit facility,
which is fully available as of this date, has a term of three years, carries an
unused commitment fee of 20 basis points, and bears interest at the
institution's prime lending rate, or LIBOR plus 5/8%, at HMS's option. HMS has
advised the bank that, as a result of the one-time charge and revenue reversal
recorded for HHL in the quarter ended July 31, 1996, HMS was not in compliance
with one of the financial covenants of the Credit Agreement. The bank has waived
HMS's compliance with this covenant for such quarter and amended the Credit
Agreement changing the covenant. Under the revised covenant, HMS would have been
in compliance.
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BUSINESS OF QSM
OVERVIEW
QSM has developed and maintains a system for abstracting and analyzing
clinical data in support of quality management of physician performance and
patient outcomes in hospital settings (the "System"). The System is used by
clients to improve quality, lower costs, demonstrate value to payors, meet
regulatory requirements and lower malpractice risk. The System incorporates
2,500 clinical standards, record abstracting functionality, and a proprietary
database of clinical information. QSM provides comparative information to
clients using the System, allowing all QSM clients to compare performance and
benchmark against best practices with respect to the 2,500 clinical parameters.
Data generated by the System have revealed significant variation in clinical
practice never before documented, pointing to significant opportunities to
improve quality and reduce cost on an on-going basis.
Dr. William B. Munier, the founder and Chief Executive Officer of QSM, was
formerly Executive Vice President of the Massachusetts Medical Society
(publishers of the New England Journal of Medicine). He also directed the first
Medicare quality control program ("PSRO"); in addition, he designed and
implemented an automated quality measurement system which was used by all 170
United States Department of Defense hospitals worldwide. QSM had 1995 revenue of
$0.8 million, and has clients in 13 states, the District of Columbia, and the
United Kingdom.
Measuring the quality of health care services has become an important
subject in the health care industry. The heightened focus on quality is a result
of three principal factors:
1. Japanese-perfected techniques of continuous quality improvement ("CQI")
have been widely and enthusiastically adopted within the health care
industry.
2. The Joint Commission on Accreditation of Healthcare Organizations
("JCAHO") has steadily increased hospital quality requirements, forcing
hospitals to devote greater resources to quality improvement ("QI") and
enhancing the appeal of systems that automate labor-intensive QI
activities.
3. There is increasing awareness that cost analysis, without examination of
underlying clinical issues, is insufficient for managing costs
effectively, creating a demand for more sophisticated clinical
information.
The primary market in the United States for automated quality tools
includes hospitals and managed care organizations. There are also a number of
secondary markets, including the long-term care, mental health, the entire
spectrum of clinical modualities and the pharmaceutical and international
markets.
THE QSM SYSTEM
QSM has developed a system for IBM-compatible microcomputers which supports
the definition and measurement of the quality of hospital care. Hospitals use
the System to improve the quality of care they deliver, decrease the cost of
care, meet regulatory requirements, and manage risk.
QSM operates on two principal assumptions:
1. To assess quality of care, both the process of delivering medical care
and patient outcome must be examined simultaneously; and
2. To assure objectivity, consistency, and efficiency, explicit medical
criteria must be used in the assessment.
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The System provides the following five principal functions:
1. Abstraction of medical record data;
2. Computerized analysis of cases;
3. Automated physician review of selected cases;
4. Management of the QI process; and
5. Reporting.
Reports on performance are available institution-wide, by department, and
by individual physician. They cover specialities, diagnoses, procedures, and
user-defined topics. Cost and quality information can be arranged side-by-side.
These reports are useful in identifying and correcting sub-standard medical
practice, and are of substantial assistance in controlling costs and lessening
the risks associated with malpractice.
JCAHO. JCAHO requirements are of great concern to QSM clients and
potential clients. QSM reports have been tailored to produce data required by
JCAHO surveyors, such as transfusion reactions and nosocomial infections.
Hospitals using the System have been very successful in securing multi-year
JCAHO accreditation.
Comparative Analysis and Benchmarking. The standard QSM license agreement
requires submission of all data from clients to QSM, which agrees to keep
individual institutional data confidential. Reports are provided back to clients
for comparative purposes. QSM management believes that the process of
"benchmarking" institutional performance against best practices of other
hospitals is very appealing to QSM clients and potential clients and a unique
advantage to QSM hospitals in an increasingly competitive environment.
Medical Advisory Panel. QSM maintains a panel of advisory physicians.
Panel responsibilities include both generation of new screening criteria and
revision of existing criteria, based on advances in medical science as well as
feedback from medical staffs using the System. Panel physicians come from both
the United States and the United Kingdom.
Business Strategy. The primary market for the System includes 5,500
acute-care hospitals in the United States, 1,000 acute-care hospitals in the
United Kingdom, and over 500 managed care organizations in the United States.
Secondary markets include long-term care, mental health, purchasers of
information from QSM's comparative database (e.g., pharmaceutical
manufacturers), and hospitals in other developed countries. The market is
currently served by a variety of commercial software systems, home-grown
programs, and manual systems.
QSM's strategy has been to leverage its acceptance and credibility in the
US and UK acute-care hospital markets rapidly to increase market share, and then
expand into managed care and other markets. QSM targeted the hospital market as
its point of entry, not only because the hospital is the most costly single
focus for health care delivery, but also because it serves as the organizing
vehicle for physicians, whose acceptance of the System is critical to
maintaining and extending the Company's credibility.
Market Segment Strategy. The key sales targets for the hospital segment
are:
1. Multi-hospital systems;
2. Medium-sized and small hospitals; and
3. UK hospitals.
Multi-hospital systems now account for approximately one third of the
nation's hospital beds, and they continue to grow through acquisition. While
most multi-hospital systems are not highly centralized, reference sales within a
"family" of hospitals will decrease the average sales cycle. QSM has sold its
product in
hospital systems and focuses significant sales effort on expanding its presence
in this vital market sector.
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Medium-sized and small hospitals (those under 400 beds) make up 90% of the
hospital market in the United States. They often do not have the resources to
develop sophisticated quality assessment systems. QSM offers these hospitals a
cost-effective way to meet their quality requirements. With demonstrable success
on the part of current QSM clients in satisfying JCAHO surveyors, QSM plans to
make reference-based selling to small and medium-sized hospitals facing
increasing JCAHO requirements a key strategy.
QSM has placed a significant emphasis on hospitals in the United Kingdom
following an early, multiple-hospital, multiple-year sale to the largest
district in the National Health Service ("NHS"). The UK represents an attractive
opportunity for QSM, in that acceptance within several NHS districts carries
with it the possibility of accelerated dissemination to NHS hospitals throughout
the UK.
QSM also plans to enter the managed care market, where need for automated
quality management tools is expanding as cost pressures grow. With managed care
penetration reaching 30 to 40 percent or more in some urban markets, successful
health plans need differentiating features, one of which can be validation of
high quality care. More directly, managed care organizations can use QSM to
evaluate how their physicians and their hospitals should change practice
patterns to deliver improved quality care at less cost, thus beginning truly to
manage care.
Sales and Marketing Strategy. The System is a new and innovative
technology and, at least in the immediate future, needs to be sold and supported
directly. Experience to date with direct sales has been positive. Sales leads
are generated by a combination of marketing strategies, in addition to cold
calling and referral selling by QSM sales representatives. National advertising,
trade show participation, regional workshops, direct mail, and various other
strategies have also proven effective.
QSM charges an annual license fee to hospitals priced according to their
size (average daily census). QSM offers an introductory discount for first-time
purchasers (based on the number of license-years purchased) and negotiates
discounts for multiple-hospital purchases by chains. This pricing structure
rewards multiple-year commitments to QSM and provides a source for future
revenue. Renewal licenses are written at list price, with protection from price
increases available through multi-year licenses payable annually.
The average license commitment for all sales to date is $65,000, with an
average annual license fee of $25,000. The average license duration for all
sales to date is 2.2 years. QSM's introductory prices are typically less than
those of alternative systems. The license fee includes training (five days
on-site per year), telephone and other client support, software maintenance
services, and product upgrade.
QSM's license fee also covers an annual comparative data/benchmarking
release, allowing each client to compare its performance with that of other
clients. In addition, QSM is developing a pricing structure for user-defined
custom queries.
SYNERGY RESULTING FROM THE PROPOSED MERGER
HMS, in combination with HCm, provides financial and clinical decision
support systems to hospitals and other health care providers. These systems
furnish detailed information on the composition of provider costs, the financial
implications of internal management decisions, and the impact of managed care
contracting alternatives. To maximize the value of this information, an
institution must obtain the support of the medical staff, individuals whose
behavior -- ordering tests, services, and procedures -- has enormous impact on
costs. In the past, it has often been difficult to obtain cooperation from
medical staffs in reducing costs because of the inability to demonstrate in
concrete terms the connection between financial information and the clinical
processes that generated costs in the first place. Physicians are concerned that
cost-saving behavior may impair the quality of care, and they resist attempts to
reduce costs in the absence of an understanding of the clinical consequences.
As discussed above, QSM's System analyzes the quality of care, as defined
by approximately 2,500 clinical standards developed by experts and tested
through years of use. Physicians and other clinical personnel can identify
deficient processes of care that lead to unacceptable outcomes and, by altering
specific behavior, can improve those outcomes. QSM currently lacks the ability
to tie costs to these clinical processes and patient outcomes, however.
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HCm's analytics are a sophisticated tool for quantitative analysis, while
QSM's System facilitates qualitative assessments. By combining their
complementary service offerings, HCm and QSM will be able to provide their
institutional clients with sophisticated cost benefit and outcomes analyses. See
"Business of QSM -- Synergy Resulting from the Proposed Merger."
FACILITIES
QSM currently maintains an office in Boston, Massachusetts consisting of
approximately 4,000 square feet of leased space. The lease for this facility is
on a year-to-year basis.
QSM believes that its current facilities are adequate for its current level
of business.
LEGAL PROCEEDINGS
QSM is not a party to any material litigation and is not aware of any
pending or threatened litigation that could have a materially adverse effect on
QSM's business, financial condition, or operating results.
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QSM MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1986, QSM has been engaged in the development and
marketing of the System, which is an automated computer software system for
abstracting and analyzing clinical data in support of quality management of
physician performance and patient outcomes in hospital settings. QSM has
dedicated most of its financial resources to the development and marketing of
the System. QSM has been unprofitable since its inception, and QSM's accumulated
deficit was $6,534,632 as of June 30, 1996. QSM expects to incur continuing
losses for at least the next year. QSM expects that losses will fluctuate from
quarter to quarter and that the fluctuations may be substantial. Due to the
anticipated continuation of operating losses for the foreseeable future, and
QSM's current lack of capital and lines of credit (other than certain loans
which have been made available to QSM by HMS in connection with the proposed
Merger), QSM's ability to continue as a going concern in the absence of the
proposed Merger is dependent upon QSM's ability to raise capital from third
parties, either in the form of debt or equity. There can be no assurance that
QSM will be able to raise such capital and continue as a going concern should
the proposed Merger not be consummated.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1995, and June 30, 1996
Total revenues declined from $194,213 for the three months ended June 30,
1995, to $150,956 for the three months ended June 30, 1996. Revenues were
derived primarily from licensing fees for QSM's System. The decrease in revenues
was due to the non-renewal by certain customers of their licensing arrangements
for the System.
Operating and administrative expenses increased from $206,965 for the three
months ended June 30, 1995, to $239,266 for the three months ended June 30,
1996. The increase was principally due to legal and accounting expenses incurred
largely in connection with the Merger. Research and development expense
increased from $103,415 for the three months ended June 30, 1995, to $112,513
for the three months ended June 30, 1996, primarily due to the use of a
technical writer in conjunction with a new release of the System.
Net loss increased from $142,142 for the three months ended June 30, 1995,
to $240,525 for the three months ended June 30, 1996. The increase in QSM's net
loss during that period from the same period in the previous year was due both
to decreased revenues and increased expenses.
Six Months Ended June 30, 1995 and 1996
Total revenues declined from $297,071 for the six months ended June 30,
1995, to $271,037 for the six months ended June 30, 1996. Revenues were derived
primarily from licensing fees for the System. The decrease in revenues was due
to the non-renewal by certain customers of their licensing arrangements for the
System.
Operating and administrative expenses increased from $448,521 for the six
months ended June 30, 1995, to $463,820 for the six months ended June 30, 1996.
The increase was principally due to legal and accounting expenses incurred
largely in connection with the proposed Merger. Research and development expense
increased slightly from $204,616 for the six months ended June 30, 1995 to
$216,636 for the six months ended June 30, 1996, primarily due to use of a
technical writer in conjunction with a new release of the System.
Net loss increased from $393,417 for the six months ended June 30, 1995, to
$480,872 for the six months ended June 30, 1996. The increase in QSM's net loss
during that period from the same period in the previous year was due both to
decreased revenues and increased expenses.
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Years ended December 31, 1993, 1994 and 1995
Total revenues increased from $465,564 in 1993 to $812,783 in 1994, and
increased again in 1995 to $840,074. Revenues in each of 1993, 1994 and 1995
were derived primarily from licensing fees for use of the System. The increase
in revenues in each of 1994 and 1995 is attributable primarily to an increase in
the number of customers paying license fees for the use of the System.
Operating and administrative expenses decreased from $1,094,552 in 1993 to
$817,335 in 1994, and increased to $945,790 in 1995. The decrease from 1993 to
1994 was primarily due to staff reductions and less use of outside consultants,
and the increase from 1994 to 1995 was primarily due to greater use of
consultants and salary adjustments. Research and development expenses increased
from $394,143 in 1993 to $462,081 in 1994, and decreased to $413,318 in 1995.
The increase in research and development expense in 1994 was due primarily to
the hiring of additional less experienced staff, and the decrease in such
expense in 1995 was due primarily to the departure of an employee who had been
hired in 1994.
Net Operating Loss Carryforward
As of December 31, 1995, QSM's reported federal net operating loss
carryforwards were approximately $5,782,000. If not used, the tax loss
carryforwards will begin to expire in 2002. QSM's ability to use these
carryforwards is subject to limitations resulting due to "equity structure
shifts" and "owner shifts" involving "5% shareholders", as those terms are
defined in Section 382 of the Code. See Note 4 of Notes to QSM's Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, a principal source of cash for QSM has been from
financing activities, which have consisted of private placements of equity
securities and debt. These financing activities have provided QSM with aggregate
proceeds of approximately $6,000,000 since QSM's inception through June 30,
1996. Over the past three years, revenues from licensing fees for the System
have provided QSM with an increasing percentage of QSM's cash needs, and QSM's
reliance on financing activities has decreased accordingly.
Cash and cash equivalents were $39,627 at December 31, 1995, and were
$12,560 at June 30, 1996. The decrease in cash and cash equivalents was due
primarily to the use of cash in QSM's operating activities.
QSM's current cash position and anticipated revenues through the end of the
year are not sufficient to permit QSM to meet its cash needs during that period.
Accordingly, QSM's ability to continue operating as a going concern is dependent
upon either the consummation of the Merger or the securing of additional debt or
equity financing should the Merger not be consummated. In connection with the
proposed Merger, HMS has agreed to advance certain funds to QSM to cover QSM's
operating deficits pending completion of the Merger. There can be no assurance
that, should the proposed Merger not be consummated, QSM will be able to secure
sufficient financing to repay to HMS the operating deficit loans provided by it,
or to continue QSM as a going concern.
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OWNERSHIP OF QSM CAPITAL STOCK
The following table sets forth certain information regarding the beneficial
ownership of QSM Common Stock and QSM Preferred Stock determined in accordance
with Rule 13d-3 under the Exchange Act, as of October , 1996, by (i) each
person who is known by QSM to own beneficially more than 5% of QSM Common Stock
and QSM Preferred Stock; (ii) each of QSM's directors and executive officers;
and (iii) all directors and executive officers of QSM as a group. Except as
indicated in the footnotes to the table, the persons named in the table have
sole voting and investment power with respect to all shares of QSM Common Stock
or QSM Preferred Stock shown as beneficially owned by them, subject to community
property laws where applicable.
Application of Rule 13d-3 under the Exchange Act may have the effect of
increasing the amount of securities required to be disclosed as beneficially
owned by a person.
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------------- --------------------
NUMBER APPROXIMATE NUMBER PERCENT
OF PERCENT OF OF
NAME SHARES(1) OF CLASS(2) SHARES CLASS
- ----------------------------------------------- --------- ----------- ------- -------
<S> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Peter G. Goldschmidt........................... 583,333 6% 0 0%
William B. Munier.............................. 1,073,919(3) 10% 0 0%
Thomas C. Peebles.............................. 200,000 2% 0 0%
Larry Robinson................................. 294,340 3% 0 0%
Rodrigo Rocha.................................. 4,864,152(4) 47% 500,000(5) 100%
James Gellert.................................. 0 0% 0 0%
5% STOCKHOLDERS
Peter B. Stovell............................... 805,627(6) 8% 0 0%
164 Greenfield Hill Rd.
Fairfield, CT 06430
Rosebery Capital Ltd. ......................... 2,155,911(7) 21% 0 0%
c/o Rodrigo Rocha
203 Weaver Road
Boulder, CO 80302
Queltun Ltd. .................................. 1,793,241 17% 0 0%
c/o Mr. Rodrigo Rocha
203 Weaver Road
Boulder, CO 80302
Vernon Corp. .................................. 915,000(8) 9% 500,000 100%
c/o Mr. Rodrigo Rocha
203 Weaver Road
Boulder, CO 80302
Rocha Trust 1992............................... 4,864,152(9) 47% 500,000(10) 100%
c/o Fernando Perez-Verdia
Perez-Verdia, Chavez y Associados, S.C.
Rio Guadiana 23, 8(++) Piso
Colonia, Cuauhtemoc 06500
Mexico D.F.
All directors and executive officers as a group
(6 persons).................................. 6,525,158(11) 63% 500,000(12) 100%
</TABLE>
- ---------------
(1) Unless otherwise indicated by footnote, the named individuals have sole
voting and investment power with respect to the shares of QSM Capital Stock
beneficially owned.
(2) Represents the voting power as of October , 1996 held by each named
person or group, expressed as a percentage of (a) all shares of QSM Capital
Stock actually outstanding as of such date, plus (b) all outstanding
options (including options which are currently vested or which will vest
within 60 days of the date of this Information Statement/Prospectus) and
all outstanding warrants to purchase QSM
45
<PAGE> 58
Capital Stock as of such date. The total number of shares of QSM Common
Stock outstanding, including shares issuable upon exercise of vested
options and warrants, as of October , 1996 was 10,276,197.
(3) Dr. Munier is the record and beneficial owner of 583,333 shares of QSM
Common Stock, and the beneficial owner of 490,586 shares of QSM Common
Stock held of record by Rosebery Capital Ltd. with respect to which shares
Dr. Munier has sole voting power. Such shares held of record by Rosebery
Capital Ltd. are held as security for a promissory note issued by Dr.
Munier to Rosebery Capital Ltd. in connection with the payment by Rosebery
Capital Ltd. on behalf of Dr. Munier of the original purchase price for
such shares.
(4) Includes all QSM Common Stock and QSM Warrants held of record by Rosebery
Capital Ltd., Queltun Ltd. and Vernon Corp. The Rocha Trust 1992, a British
West Indies trust, owns 100% of the capital stock of each of Rosebery
Capital Ltd., Queltun Ltd. and Vernon Corp. Joel Rivero Rocha (Mr. Rocha's
brother) and Fernando Perez-Verdia are the trustees of such trust with sole
discretion to name the beneficiaries of the trust and the extent of their
beneficial interest. Mr. Rocha has been designated a beneficiary under the
Rocha Trust 1992 and is the President of each of Rosebery Capital Ltd.,
Queltun Ltd. and Vernon Corp. Mr. Rocha disclaims beneficial ownership of
the QSM Common Stock and Warrants held by each such company to the extent
of any beneficial interest in the Rocha Trust 1992 which may be granted in
the future by the trustees thereof to persons other than Mr. Rocha or
members of his immediate family.
(5) Includes 500,000 shares of QSM Preferred Stock held of record by Vernon
Corp. See footnote 4.
(6) Includes outstanding QSM Warrants to purchase 188,500 shares of QSM Common
Stock.
(7) Includes 490,586 shares of QSM Common Stock held of record by Rosebery
Capital Ltd., but owned beneficially by William B. Munier. See footnote 3.
(8) Includes outstanding QSM Warrants to purchase 415,000 shares of QSM Common
Stock.
(9) Includes all of the QSM Common Stock and Warrants owned of record by each
of Rosebery Capital Ltd., Queltun Ltd. and Vernon Corp.
(10) Includes 500,000 shares of QSM Preferred Stock owned by Vernon Corp.
(11) Includes an aggregate of 4,864,152 shares of QSM Common Stock and QSM
Warrants held of record by each of Rosebery Capital Ltd., Queltun Ltd. and
Vernon Corp. See footnote 4.
(12) Includes 500,000 shares of QSM Preferred Stock held by Vernon Corp. See
footnote 4.
MANAGEMENT OF QSM FOLLOWING THE EFFECTIVE TIME OF THE MERGER
Pursuant to the Merger Agreement, the directors and executive officers of
QSM, as the Surviving Corporation, following the Effective Time of the Merger
will be the following individuals:
<TABLE>
<CAPTION>
NAME POSITION
----------------------------------------------------------------------------
<S> <C>
Paul J. Kerz Chairman and Director
William B. Munier, M.D. President and Director
Phillip Siegel Vice President, Secretary and Director
</TABLE>
Paul J. Kerz, 55, a founder of HMS, has been its Chairman, President, Chief
Executive Officer, and a director since HMS's inception in 1974. From 1970 until
1973, he served as Senior Vice President of Finance and Chairman of the
Management Review Committee of the New York City Health and Hospitals
Corporation. Prior to 1970, Mr. Kerz served in various capacities in state and
federal Bureaus of the Budget.
William B. Munier, M.D., the founder of QSM, has been its President and
Chief Executive Officer and a director since QSM's inception in 1986. Dr. Munier
was a principal in Ernst & Whinney from 1984 to 1985 and Executive Vice
President of the Massachusetts Medical Society from 1979 to 1984. Dr. Munier
also directed the first Medicare quality control program and the implementation
of a computerized quality measurement system for the 170 U.S. Department of
Defense hospitals.
46
<PAGE> 59
Phillip Siegel, 53, joined HMS as Vice President and Chief Financial
Officer in May 1996. From 1993 until he joined HMS, he was an independent
financial and management consultant. From 1989 through 1993, he served as Senior
Vice President of Presidential Life Insurance Company. During 1987 and 1989, Mr.
Siegel was an independent consultant. During 1988, Mr. Siegel served as Chief
Operating Officer and Chief Financial Officer of Sherwood Group and Sherwood
Securities. From 1972 through 1987, he was employed by the American subsidiary
of Reuters Limited, a news, information, and communications company, as a senior
financial officer and as Vice President for Acquisitions and General Counsel.
Mr. Siegel is a director of WestPoint Stevens, Inc., a textile manufacturer.
EXECUTIVE COMPENSATION OF QSM
The following table provides information with respect to all compensation
paid by QSM during the fiscal years ended December 31, 1993, 1994 and 1995 to
William B. Munier, QSM's President and Chief Executive Officer, who is the only
executive officer who had compensation (combined salary and bonus) in excess of
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#) COMPENSATION($)
- ------------------------- ---- --------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
William B. Munier........ 1993 $ 94,785 0 0 0 0
1994 $ 100,407 0 0 0 0
1995 $ 117,634 0 0 0 0
</TABLE>
Dr. Munier has never been granted options to purchase QSM Capital Stock and
is not a party to an employment agreement with QSM.
LEGAL MATTERS
The validity of the shares of HMS Common offered hereby will be passed upon
for HMS by Coleman & Rhine LLP, New York, New York. Partners of Coleman & Rhine
LLP own 8,604 shares of HMS Common.
EXPERTS
The consolidated financial statements and schedule of Health Management
Systems, Inc. and subsidiaries as of October 31, 1995 and 1994, and for each of
the years in the three-year period ended October 31, 1995, included in HMS's
Current Report on Form 8-K filed on May 14, 1996 and incorporated by reference
herein, have been incorporated by reference herein in reliance upon the report
of KPMG Peat Marwick LLP, Coopers & Lybrand LLP and Ernst & Young LLP,
independent certified public accountants, included in HMS's Current Report on
Form 8-K filed on May 14, 1996 incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Quality Standards in Medicine, Inc. at December
31, 1994 and 1995, and for each of the three years in the period ended December
31, 1995 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon (which contains an explanatory paragraph with respect to the Company's
ability to continue as a going concern) appearing elsewhere herein and are
included in reliance upon such report, given upon the authority of such firm as
experts in accounting and auditing.
47
<PAGE> 60
QUALITY STANDARDS IN MEDICINE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Statements of Operations for the years ended December 31, 1995, 1994 and 1993
(audited) and the three and six month periods ended June 30, 1996 and 1995
(unaudited)......................................................................... F-3
Balance Sheets at December 31, 1995 and 1994 (audited) and June 30, 1996
(unaudited)......................................................................... F-4
Statements of Stockholders' Deficit for the years ended December 31, 1993, 1994 and
1995 (audited) and the six months ended June 30, 1996 (unaudited)................... F-5
Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 and the
six months ended June 30, 1996 and 1995 (unaudited)................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 61
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Quality Standards in Medicine, Inc.
We have audited the accompanying balance sheets of Quality Standards in
Medicine, Inc. (the Company) as of December 31, 1995 and 1994, and the related
statements of operations, stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Quality Standards in
Medicine, Inc. at December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Quality Standards in Medicine, Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has a working capital deficiency. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that may result from the outcome of
this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
April 12, 1996, except for Note 10,
as to which the date is
September 3, 1996
F-2
<PAGE> 62
QUALITY STANDARDS IN MEDICINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, JUNE 30,
------------------------------------- ----------------------- -----------------------
1995 1994 1993 1996 1995 1996 1995
---------- ---------- ----------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Systems licensing sales..... $ 840,074 $ 812,783 $ 465,564 $ 150,956 $ 194,213 $ 271,037 $ 297,071
Expenses:
Operating and
administrative........... 945,790 817,335 1,094,552 239,286 206,965 463,820 448,521
Amortization of software
development costs........ -- 25,792 103,168 -- -- -- --
Research and development.... 413,318 462,081 394,143 112,513 103,415 216,636 204,616
--------- --------- --------- --------- --------- --------- ---------
1,359,108 1,305,208 1,591,863 351,779 310,380 680,456 653,137
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.......... (519,034) (492,425) (1,126,299) (200,823) (116,167) (409,419) (356,066)
Other expenses:
Interest.................... (94,651) (255,369) (211,570) (39,702) (25,975) (71,453) (37,351)
--------- --------- --------- --------- --------- --------- ---------
Net loss...................... $ (613,685) $ (747,794) $(1,337,869) $ (240,525) $ (142,142) $ (480,872) $ (393,417)
========= ========= ========= ========= ========= ========= =========
Net loss per common share..... $ (.07) $ (.11) $ (.24) $ (0.03) $ (0.02) $ (.05) $ (.04)
========= ========= ========= ========= ========= ========= =========
Weighted average common shares
outstanding................. 9,023,659 6,627,623 5,512,417 9,061,992 9,023,659 9,061,992 8,990,325
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 63
QUALITY STANDARDS IN MEDICINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1994 1996
----------- ----------- -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 39,627 $ 43,108 $ 12,560
Accounts receivable............................... 453,526 542,602 431,140
Other current assets.............................. 27,139 3,475 22,142
----------- ----------- -----------
Total current assets................................ 520,292 589,185 465,842
Property and equipment:
Computer equipment................................ 125,448 108,345 129,079
Office furniture and equipment.................... 32,317 32,317 32,317
Leasehold improvements............................ 17,203 17,203 17,203
----------- ----------- -----------
174,968 157,865 178,599
Less accumulated depreciation..................... (119,523) (99,639) (129,417)
----------- ----------- -----------
55,445 58,226 49,182
Accounts receivable -- long term.................... 197,000 328,000 404,000
Other assets........................................ 5,455 5,455 5,455
----------- ----------- -----------
Total assets.............................. $ 778,192 $ 980,866 $ 924,479
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses............. $ 422,626 $ 183,556 $ 505,782
Customer deposits................................. 35,000 44,500
Deferred income -- current........................ 292,346 470,526 396,538
----------- ----------- -----------
Total current liabilities........................... 749,972 654,082 946,820
Deferred income -- long term........................ 211,884 350,263 371,223
Note payable........................................ 452,805 262,805 677,805
Note payable -- stockholder......................... 463,500 300,000 504,473
Redeemable Preferred Stock:
Preferred Stock, 3% nonconvertible, $.01 par
value, authorized 750,000 shares, 500,000
shares issued and outstanding at June 30, 1996,
December 31, 1995 and 1994 (liquidating value
of approximately $638,000 at June 30, 1996).... 5,000 5,000 5,000
Stockholders' deficit:
Common Stock, $.01 par value, authorized
10,000,000 shares, issued and outstanding
9,590,325 shares at December 31, 1995,
9,490,325 shares at December 31, 1994 and
9,595,325 shares at June 30, 1996 (including
533,333 treasury shares)....................... 95,903 94,903 95,953
Additional paid-in capital........................ 4,867,881 4,768,881 4,872,830
Accumulated deficit............................... (6,053,490) (5,439,805) (6,534,362)
Treasury stock (533,333 shares, at cost).......... (15,263) (15,263) (15,263)
----------- ----------- -----------
Total stockholders' deficit......................... (1,104,969) (591,284) (1,580,842)
----------- ----------- -----------
Total liabilities and stockholders'
deficit................................. $ 778,192 $ 980,866 $ 924,479
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 64
QUALITY STANDARDS IN MEDICINE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED TREASURY
STOCK CAPITAL DEFICIT STOCK TOTAL
------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993..... $59,135 $1,868,405 $(3,354,142) $(15,263) $(1,441,865)
Exercise of stock options.... 155 3,720 3,875
Issuance of Common Stock..... 3,805 376,695 380,500
Net loss..................... (1,337,869) (1,337,869)
-------- ---------- ----------- -------- -----------
Balance at December 31, 1993... 63,095 2,248,820 (4,692,011) (15,263) (2,395,359)
Exercise of stock options.... 500 12,000 12,500
Issuance of Common Stock..... 750 74,250 75,000
Conversion of debt to
equity.................... 30,558 2,261,311 2,291,869
Warrants issued for
compensation.............. 172,500 172,500
Net loss..................... (747,794) (747,794)
-------- ---------- ----------- -------- -----------
Balance at December 31, 1994... 94,903 4,768,881 (5,439,805) (15,263) (591,284)
Issuance of Common Stock..... 1,000 99,000 100,000
Net loss..................... (613,685) (613,685)
-------- ---------- ----------- -------- -----------
Balance at December 31, 1995... 95,903 4,867,881 (6,053,490) (15,263) (1,104,969)
Issuance of Common Stock
(unaudited)............... 50 4,949 4,999
Net loss (unaudited)......... (480,872) (480,872)
-------- ---------- ----------- -------- -----------
Balance at June 30, 1996
(unaudited).................. $95,953 $4,872,830 $(6,534,362) $(15,263) $(1,580,842)
======== ========== =========== ======== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 65
QUALITY STANDARDS IN MEDICINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------ ---------------------
1995 1994 1993 1996 1995
--------- ---------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................. $(613,685) $ (747,794) $(1,337,869) $(480,872) $(393,417)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 19,884 50,209 130,329 9,894 2,905
Issuance of warrants for
services........................ -- 75,000 97,500 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. 220,076 (302,975) (390,779) (184,614) 232,047
Accounts payable and accrued
expenses...................... 239,070.. 251,021 228,506 83,156 135,313
Customer deposits............... 35,000 (35,000) (9,875) 9,500
Deferred income................. (316,559) 257,436 366,812 263,531 (212,071)
Other assets.................... (23,664) 33 1,712 4,997 (21,018)
--------- ---------- ----------- --------- ---------
Net cash used in operating
activities......................... (439,878) (452,070) (913,664) (294,408) (256,241)
INVESTING ACTIVITY
Purchase of property and equipment... (17,103) (17,707) (38,097) (3,631) (5,502)
--------- ---------- ----------- --------- ---------
Net cash used in investing
activity........................... (17,103) (17,707) (38,097) (3,631) (5,502)
FINANCING ACTIVITIES
Proceeds from issuance of Common
Stock.............................. 100,000 87,500 384,375 4,999 100,000
Proceeds from borrowings from
stockholder........................ 163,500 -- 30,000 40,973 162,008
Proceeds from issuance of notes
payable............................ 190,000 390,213 621,001 225,000 --
Repayment of borrowings.............. -- -- (90,000) -- --
--------- ---------- ----------- --------- ---------
Net cash provided by financing
activities......................... 453,500 477,713 945,376 270,972 262,008
--------- ---------- ----------- --------- ---------
Net increase (decrease) in cash...... (3,481) 7,936 (6,385) (27,067) 265
Cash and cash equivalents at
beginning of year.................. 43,108 35,172 41,557 39,627 43,108
--------- ---------- ----------- --------- ---------
Cash and cash equivalents at end
of period.......................... $ 39,627 $ 43,108 $ 35,172 $ 12,560 $ 43,373
========= ========= ========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for the year for
interest........................... -- -- -- -- --
========= ========= ========== ========= =========
Debt converted to stock.............. -- $2,291,869 -- -- --
========= ========= ========== ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 66
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Quality Standards in Medicine, Inc. (the Company) is engaged in the
production and licensing of a computer software product referred to as the "QSM
System." This software is used to measure the quality of medical care services
rendered in acute-care hospitals. The principal markets of the Company are
located in the United States and United Kingdom.
The Company has incurred significant losses over the past five years and,
at December 31, 1995, has a working capital deficiency of $229,680 and a
deficiency in stockholders' equity of $(1,104,969).
The Company's current cash position and anticipated revenues through the
end of 1996 are not sufficient to permit the Company to meet its cash needs
during that period. Accordingly, the Company's ability to continue as a going
concern is dependent upon either the consummation of an Agreement and Plan of
Merger (the "Merger") with Health Management Systems, Inc. (see note 10) or the
securing of additional debt or equity financing should the Merger not be
consummated. In connection with the proposed Merger, Health Management Systems
has agreed to advance certain funds to the Company to cover the Company's
operating deficits pending consummation of the Merger. There can be no assurance
that, should the proposed Merger not be consummated, the Company will be able to
secure sufficient financing to repay the Company the operating deficit loans
provided to it, or to continue the Company as a going concern.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amount and classification of liabilities that may result from the outcome of
this uncertainty.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses reported during the
period. Actual results could differ from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenues
The Company accounts for revenue in accordance with Statement of Position
91-1, Software Revenue Recognition (SOP 91-1), issued by the American Institute
of Certified Public Accountants. In accordance with SOP 91-1, the Company
recognizes ninety percent (90%) of the licensing fee upon delivery and
installation of the software, and the remaining ten percent (10%) is deferred
and recognized on a straight-line basis over the term of the licensing
agreement. The Company has determined, based upon historical results, that
approximately ten percent (10%) of the licensing fee represents post
installation customer support which in conformity with SOP 91-1 is being
recognized separately from software licensing fees on a ratable basis over the
term of the agreement.
For multiple-year licenses, all revenue attributable to future years
(beyond year one) is deferred and a long-term account receivable is recorded.
Each year, as collectibility of revenue related to that year becomes
assured, 90% of the year's revenue is recognized and the remaining 10% is
deferred as discussed above. The portion of the corresponding long-term account
receivable relating to that year is then recorded as current accounts receivable
until collected.
Software Development Costs
The computer software has been internally developed and the cost represents
an accumulation of salaries and other costs directly related to the development
of the software after technological feasibility had been
F-7
<PAGE> 67
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
established through when the product was ready for general release to customers.
The costs are amortized over three years, which represents management's estimate
of the software's useful life, using the straight-line method. As of December
31, 1994, all software development costs have been fully amortized. Costs of
routine software maintenance, enhancements and upgrades are expensed as
incurred.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options and warrants as
permitted by Financial Accounting Standards Board (FASB) Statement No. 123,
"Accounting for Stock-Based Compensation." Under APB 25, compensation expense is
recognized for employee stock options when the market price of the options or
warrants exceeds the exercise price on the date of grant.
Accounting Pronouncements
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt Statement 121
in the first quarter of 1996 and, based on the current circumstances, does not
believe the effect of the adoption will be material.
Income Taxes
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under this method, deferred income taxes are recognized for the future
tax consequences of differences between the tax and financial accounting bases
of assets and liabilities at each year end. Deferred income taxes are based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized and when the Company cannot make the determination that it is
more likely than not that some portion or all of the related tax asset will be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
Operating Leases
During 1995, the Company leased office space as a tenant at will. Rent
expense amounted to $84,441 in 1995, $68,525 in 1994 and $65,687 in 1993.
F-8
<PAGE> 68
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Net Loss Per Common Share
Net loss per common share is computed using the weighted average number of
common shares, convertible preferred shares assuming conversion at date of
issuance and, when dilutive, equivalent shares from stock options and warrants
using the treasury stock method.
Interim Financial Statements (Unaudited)
The balance sheet at June 30, 1996, the statements of operations,
statements of cash flows and the statements of stockholders' deficit for the six
months ended June 30, 1996 and 1995 (and the statements of operations for the
three months ended June 30, 1996 and 1995) are unaudited, but, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of results for these interim periods. The
results of operations for the six months ended June 30, 1996 are not necessarily
indicative of results to be expected for the entire year.
3. NOTE PAYABLE
As more fully described in Note 7, on September 30, 1994, the holder of an
unsecured revolving note agreement exercised warrants at $.75 per share to
convert his note holdings to shares of $.01 par value Common Stock. The total
principal and interest of the note holdings converted amounted to $2,291,869.
Four individuals who participated in the revolving note through a loan agreement
between them and the noteholder did not partake in the conversion.
Other notes payable balance includes various promissory notes bearing
interest at 12% (compounded annually) and due at various dates from February 13,
1998 to April 21, 2000. Of these notes, $363,500 represents promissory notes to
two stockholders and is separately disclosed on the balance sheet as notes
payable -- stockholders.
In exchange for financing in the amount of $200,000, during 1995 the
Company entered into a promissory note in the amount of $100,000 due April 20,
2000, which is also disclosed on the balance sheet as notes
payable -- stockholder. The note bears interest at prime plus 4% for the first
six months and prime plus 12% for the remaining period. Interest is payable
annually in cash, notes similar to the original note or in shares of the
Company's common stock at the then-effective conversion price. All outstanding
principal and interest of the note are convertible into common stock at a
conversion price of $1.00 per share. The conversion price is subject to
adjustment.
In connection with this note, the Company issued 100,000 shares of $.01 par
common stock and warrants to purchase 100,000 nonassessable shares of common
stock at $1.00 per share. The warrants contain "full-ratchet" anti-dilution
protection and the number of shares subject to purchase and the exercise price
are subject to adjustment. The exercise period of the warrants is three years
from the date of issuance. No value has been assigned to the warrants.
Also in connection with this financing, the Company was required to enter
into a marketing agreement with Medical Scientists, a company owned by the
financier. Under this agreement, the Company must pay to Medical Scientists a
percentage of license fees generated from customer introductions made by Medical
Scientists. The applicable percentages are as follows:
<TABLE>
<S> <C>
Direct Sales To More Than 3 Hospitals................. 10% Annually For Five Years
All Other Sales....................................... 10% in Year 1
5% in each of the
following two years
</TABLE>
F-9
<PAGE> 69
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTE PAYABLE -- (CONTINUED)
Future maturities of notes payable at December 31, 1995 are as follows:
1998 -- $816,305 and 2000 -- $100,000.
4. INCOME TAXES
At December 31, 1995, 1994 and 1993, the Company has available for federal
income tax purposes net operating loss (NOL) carryforwards of approximately
$5,782,000, $5,159,000 and $4,423,000 million, respectively, which expire in
years 2002 through 2010. The amount of NOL carryforwards that can be utilized in
any future year may be limited due to "equity structure shifts" and "owner
shifts" involving "5% shareholders" (as these terms are defined in Section 382
of the Internal Revenue Code).
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1995,
1994 and 1993, the Company has a net deferred tax asset of approximately
$2,299,000, $2,108,000 and $1,845,000, respectively, for which a valuation
allowance has been fully provided. This asset relates primarily to net operating
loss carryforwards at December 31, 1995, 1994 and 1993. The $2,299,000 valuation
allowance at December 31, 1995 reflects a $191,000 increase from December 31,
1994 and a $454,000 increase from December 31, 1993.
5. STOCK OPTION PLAN
The Board of Directors authorized a nonqualified stock option plan to issue
options to purchase up to 250,000 shares of Common Stock of the Company, at
option prices determined by the Board of Directors to represent fair value.
During 1994, the Board of Directors authorized an increase in stock options
available to allow for options to purchase a total of 1,500,000 shares of Common
Stock of the Company. The options expire ten years from the date of grant or, in
the case of an employee who, at the time of grant, owns stock possessing more
than ten percent of the total combined voting power of all classes of stock,
five years from the date of grant.
Activity as to stock options is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- -------
<S> <C> <C> <C>
Outstanding at beginning of year:.................. 292,500 167,500 130,000
Granted.......................................... 130,000 235,000 60,000
Canceled......................................... (12,500) (60,000) (7,000)
Exercised........................................ 0 (50,000) (15,500)
--------- --------- -------
Outstanding at end of year......................... 410,000 292,500 167,500
========= ========= =======
Price range per share of outstanding options....... $.25-$1 $.25-$1 $.25-$1
========= ========= =======
Exercisable at end of year......................... 97,000 42,000 128,500
========= ========= =======
Available for grant at end of year................. 1,021,000 1,138,500 63,500
========= ========= =======
</TABLE>
In January 1996, 20,000 options were granted and issued to employees at
$1.00 per share.
6. WARRANTS
As of December 31, 1995, the Company has outstanding warrants to purchase
586,107 shares of the Company's $.01 par value Common Stock at an exercise price
of $1.00. These warrants expire at various times throughout 1996 through the
year 2000. These warrants were issued in connection with the purchase of
F-10
<PAGE> 70
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. WARRANTS -- (CONTINUED)
Common Stock and as an attachment to certain loans. As of December 31, 1994 and
1993, 458,357 and 225,700, respectively, of these shares were outstanding. No
value has been assigned to these warrants.
In addition, during 1994, as an attachment to loans from the four
individuals referred to in Notes 3 and 7, the Company issued warrants for the
purchase of 135,455 shares of the Company's $.01 par value Common Stock at an
exercise price of $.75 per share. These warrants expire in 2002. No value has
been assigned to these warrants.
During 1994, certain employees were issued warrants in connection with
their employment to purchase an aggregate of 231,250 shares of $.01 par value
Common Stock at an exercise price of $.25 per share. These warrants, which were
issued for 1994 compensation and in settlement of accrued compensation as of
December 31, 1993 were valued at $175,500. The warrants expire in 1999 and 2000.
7. CONVERSION OF LONG-TERM DEBT AND WARRANTS TO COMMON STOCK
On September 30, 1994 the Company converted a note payable, including
accrued interest and the warrants accompanying the related revolving note
agreement, into Common Stock of the Company at a price of $.75 per share. This
transaction was approved by the Board on September 20, 1993, after which time
there was no further activity on the note. The note holder and all but four
individuals who participated through direct agreement with the note holder
participated in this conversion. Immediately prior to the conversion, the note
payable balance, including accrued interest, totaled $2,291,869, which, together
with warrants, resulted in the issuance of 3,055,825 additional shares of Common
Stock of the Company. The loans of the four individual participants, as
discussed in Note 3, were not converted. These participants entered into notes
directly with the Company and were issued warrants in conjunction with these
notes. The exercise price of these warrants is $.75 per share.
The notes payable balances of the four remaining participants consist of
principal and accrued interest totaling $101,591, due February 18, 1996.
Subsequent to year end, the due date of these notes was extended until 1998.
Each note bears interest which is compounded annually at 12%.
8. RESTRUCTURE OF PREFERRED STOCK
In 1992, the Company entered into an agreement with a stockholder holding
the 500,000 shares of 3% nonconvertible Preferred Stock which provides for the
issuance of new preferred shares, effective upon execution of a revised stock
agreement, with preference over other Preferred Stock and Common Stock.
Cumulative dividends on the new issue shall accrue at a rate of 4%. Redemption
may occur only upon the Company earning a positive earnings before income taxes,
depreciation and amortization. Redemption, at the holder's option, would be at
$1.15 per share.
9. CONCENTRATION OF CREDIT RISK
A significant portion of the Company's revenue and accounts receivable are
derived from software and licenses provided to the hospital industry primarily
in the United States and United Kingdom. A majority of the Company's revenue is
generated from its sole software product.
10. SUBSEQUENT EVENTS
Subsequent to year end, the Company issued 20,000 stock options to
employees to purchase Common Stock at $1.00 per share.
F-11
<PAGE> 71
QUALITY STANDARDS IN MEDICINE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS -- (CONTINUED)
In addition, subsequent to year end, the Company issued 2,500 warrants to
purchase Common Stock at $1.00 per share. These warrants expire in 1999. Also,
on the same date the warrants were issued, the Company awarded 5,000 shares of
Common Stock to the same individual.
Warrants to purchase 250,000 shares of Common Stock at $1.00 per share,
expiring in 1999, were authorized but not issued subsequent to year end.
On June 6, 1996, the number of shares of $.01 par value common stock
authorized was increased to 15,000,000.
The Company entered into a convertible note payable, dated April 21, 1996,
which represents accrued interest payments of $15,973 due on the note discussed
in Note 3.
On September 3, 1996, the Company entered into an agreement and plan of
merger (the Merger) with Health Management Systems, Inc. for the merger of
Health Management Systems, Inc. with and into the Company, whereby it is
contemplated that all shares of common stock and all shares of preferred stock,
together with all outstanding loans, all outstanding common stock purchase
warrants issued by the Company and all outstanding vested $.25 stock options
issued by the Company will either be converted, exercised and then converted or
exchanged for an aggregate of 228,000 shares of common stock of Health
Management Systems, Inc., subject to certain adjustments. The Merger is subject
to the attainment of certain regulatory approvals, among other conditions.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The accounts payable and accrued expenses account comprises the following
items:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Trade accounts payable............................... $147,744 $ 76,991
Accrued interest..................................... 129,858 33,706
Accrued payable...................................... 104,952 47,952
Other................................................ 40,072 24,907
-------- --------
Total accounts payable and accrued
expenses................................. $422,626 $183,556
======== ========
</TABLE>
F-12
<PAGE> 72
CONFORMED
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HEALTH MANAGEMENT SYSTEMS, INC.,
QSM ACQUISITION CORP.
AND
QUALITY STANDARDS IN MEDICINE, INC.
<PAGE> 73
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
RECITALS................................................................................. 1
ARTICLE 1.
DEFINITIONS..................................................................... 1
1.1 Certain Definitions............................................ 1
1.2 Other Definitions.............................................. 3
ARTICLE 2.
THE MERGER...................................................................... 4
2.1 Effective Time of the Merger................................... 4
2.2 Effects of the Merger.......................................... 4
2.3 Effect on QSM Notes............................................ 4
2.4 Effect on QSM Warrants......................................... 4
2.5 Effect on QSM Stock Options.................................... 4
2.6 Effect on QSM Capital Stock.................................... 5
2.7 Conversion of Sub Capital Stock................................ 5
2.8 Adjustments to Exchange Ratio.................................. 5
2.9 Exchange Procedures............................................ 5
2.10 Escrow Fund.................................................... 6
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF QSM........................................... 6
3.1 Organization and Standing...................................... 6
3.2 Capital Structure.............................................. 6
3.3 Equity Investments............................................. 7
3.4 Authority...................................................... 7
3.5 Governmental Consents.......................................... 7
3.6 Financial Statements........................................... 7
3.7 Accounting Matters............................................. 8
3.8 Absence of Changes............................................. 8
3.9 Properties..................................................... 9
3.10 Taxes.......................................................... 9
3.11 Compliance with Law............................................ 9
3.12 Litigation..................................................... 9
3.13 Material Agreements............................................ 10
3.14 Proprietary Rights............................................. 11
3.15 Insurance...................................................... 11
3.16 No Conflict.................................................... 11
3.17 No Default..................................................... 11
3.18 Brokers or Finders............................................. 12
3.19 Certain Advances............................................... 12
3.20 Related Parties................................................ 12
3.21 Information Supplied........................................... 12
3.22 Employee Benefit Plans......................................... 12
3.23 Labor Relations; Employees..................................... 13
3.24 Compensation................................................... 13
3.25 Bank Accounts.................................................. 13
</TABLE>
i
<PAGE> 74
<TABLE>
<CAPTION>
ARTICLE 4.
<S> <C> <C> <C> <C>
REPRESENTATIONS AND WARRANTIES OF HMS AND SUB................................... 14
4.1 Organization................................................... 14
4.2 Capital Structure.............................................. 14
4.3 Authority...................................................... 14
4.4 Governmental Consents.......................................... 14
4.5 SEC Documents.................................................. 15
4.6 Information Supplied........................................... 15
4.7 No Conflict.................................................... 15
4.8 Shares of HMS Common........................................... 15
4.9 Accounting Matters............................................. 15
4.10 No Prior Activities............................................ 15
4.11 Brokers or Finders............................................. 16
4.12 Certain Proceedings............................................ 16
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS....................................... 16
5.1 Ordinary Course................................................ 16
5.2 Dividends; Changes in Stock.................................... 16
5.3 Issuance of Securities......................................... 16
5.4 Governing Documents............................................ 16
5.5 No Acquisitions................................................ 16
5.6 No Dispositions................................................ 16
5.7 Indebtedness................................................... 16
5.8 Benefit Plans, Etc............................................. 17
5.9 Accounting Practices........................................... 17
5.10 No Solicitation; Competing Transactions........................ 17
ARTICLE 6.
QSM SHAREHOLDERS' MEETING; INFORMATION STATEMENT/ REGISTRATION STATEMENT........
17
6.1 QSM Shareholders' Meeting...................................... 17
6.2 Recommendations of QSM Board of Directors...................... 17
Preparation and Filing of Information Statement/Registration
6.3 Statement...................................................... 17
6.4 Accuracy of Information........................................ 17
6.5 Additional Information......................................... 18
6.6 QSM Accountants Letter......................................... 18
6.7 Expenses....................................................... 18
6.8 Indemnification................................................ 18
6.9 Restrictions on Resale......................................... 19
ARTICLE 7.
ADDITIONAL AGREEMENTS........................................................... 20
7.1 Access to Information.......................................... 20
7.2 Legal Conditions to the Merger................................. 20
7.3 Rule 145 Affiliates............................................ 20
7.4 Irrevocable Proxies............................................ 21
7.5 Employment Agreements.......................................... 21
7.6 Employee Benefits.............................................. 21
7.7 Treatment of Assumed QSM Stock Options......................... 21
7.8 Grant of HMS Stock Options Following the Closing............... 21
7.9 Communications................................................. 22
</TABLE>
ii
<PAGE> 75
<TABLE>
<CAPTION>
7.10 Delivery of Stock Certificates................................. 22
<S> <C> <C> <C> <C>
7.11 Parachute Payments............................................. 22
7.12 Notification of Certain Matters................................ 22
7.13 Tax Treatment.................................................. 22
7.14 Beacon Resources Fee........................................... 22
ARTICLE 8.
CONDITIONS PRECEDENT............................................................ 23
8.1 Conditions to Each Party's Obligations to Effect the Merger.... 23
8.2 Conditions to Obligations of HMS and Sub....................... 23
8.3 Conditions to Obligations of QSM............................... 24
ARTICLE 9.
CLOSING......................................................................... 24
ARTICLE 10.
SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS........................... 25
ARTICLE 11.
PAYMENT OF EXPENSES............................................................. 25
ARTICLE 12.
TERMINATION, AMENDMENT AND WAIVER............................................... 25
12.1 Termination.................................................... 25
12.2 Effect of Termination.......................................... 26
12.3 Amendment...................................................... 26
12.4 Extension; Waiver.............................................. 26
ARTICLE 13.
INDEMNIFICATION OF HMS.......................................................... 26
13.1 Indemnification................................................ 26
13.2 Method of Indemnification...................................... 26
13.3 Conditions of Indemnification.................................. 26
13.4 Limitations on Indemnification................................. 27
ARTICLE 14.
GENERAL......................................................................... 27
14.1 Notices........................................................ 27
14.2 Headings....................................................... 28
14.3 Counterparts................................................... 28
14.4 Binding Nature................................................. 28
14.5 Other Agreements............................................... 28
14.6 Good Faith..................................................... 28
14.7 Applicable Law................................................. 28
14.8 No Dissenters' Rights of Appraisal............................. 28
</TABLE>
iii
<PAGE> 76
LIST OF EXHIBITS
<TABLE>
<S> <C> <C>
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
</TABLE>
LIST OF SCHEDULES
<TABLE>
<S> <C> <C>
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
Schedule 3.25 -- Bank Accounts
Schedule 5.7 -- QSM Indebtedness
Schedule 7.3 -- List of Rule 145 Affiliates
Schedule 7.7 -- QSM Option Plans
</TABLE>
iv
<PAGE> 77
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 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
2.10.
(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.
<PAGE> 78
(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 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.
(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.
2
<PAGE> 79
(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.
(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.
3
<PAGE> 80
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:
(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.
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.
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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 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.
(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
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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 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 (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
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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 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, 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 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 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
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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 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;
(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
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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;
(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 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
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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 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
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.
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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 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.
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
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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 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.
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
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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).
(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 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.
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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.
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 transactions 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 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.
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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 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 Agreement 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 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.
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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 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 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.
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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.
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.
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
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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' 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 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
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(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 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 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.
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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 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 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
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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 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 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. 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
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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
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 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.
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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 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.
(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.
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(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 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.
(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.
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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.
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;
(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.
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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. 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 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
26
<PAGE> 103
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
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.
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.
27
<PAGE> 104
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.
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.
28
<PAGE> 105
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: /s/ PHILLIP SIEGEL
------------------------------------
QSM ACQUISITION CORP.
By: /s/ PHILLIP SIEGEL
------------------------------------
QUALITY STANDARDS IN MEDICINE, INC.
By: /s/ WILLIAM E. MUNIER
------------------------------------
AGREED TO AND ACCEPTED:
QSM Principals
/s/ WILLIAM B. MUNIER
- --------------------------------------
William B. Munier
/s/ RODRIGO ROCHA
- --------------------------------------
Rodrigo Rocha
COLEMAN & RHINE LLP,
as Escrow Agent
By: /s/ BRUCE S. COLEMAN
------------------------------------
Bruce S. Coleman, Esq.
29
<PAGE> 106
APPENDIX B
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement"), dated as of , 1996,
is entered into by and among HEALTH MANAGEMENT SYSTEMS, INC., a New York
corporation ("HMS"), QUALITY STANDARDS IN MEDICINE, INC., a Delaware corporation
("QSM"), COLEMAN & RHINE LLP, as escrow agent (the "Escrow Agent"), RODRIGO
ROCHA ("Rocha"), WILLIAM B. MUNIER ("Munier") and PETER V. STOVELL ("Stovell"
and, collectively with Rocha and Munier, the "QSM Representatives").
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of September
3, 1996 (the "Merger Agreement"), among HMS, QSM Acquisition Corp., a Delaware
corporation ("Sub") and a wholly-owned subsidiary of HMS, and QSM, Sub has been
merged with and into QSM and the QSM Securityholders received aggregate merger
consideration (the "Merger Consideration") consisting of 228,000 shares of
Common Stock, par value $.01 per share, of HMS (the "HMS Common"), subject to
adjustment as provided in the Merger Agreement; and
WHEREAS, as an inducement for HMS to enter into the Merger Agreement and as
a condition therein, HMS has required that QSM indemnify HMS against certain
representations, warranties and QSM Transaction Expenses set forth in the Merger
Agreement and that the QSM Securityholders deposit into escrow a portion of the
aggregate Merger Consideration (the "Escrow Fund") as security for such
indemnification; and
WHEREAS, HMS, QSM, and the Escrow Agent desire to set forth the terms,
conditions and provisions pursuant to which the Escrow Fund will be held by the
Escrow Agent and disbursed to HMS or the QSM Securityholders.
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein set forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Capitalized terms which are not defined herein shall have the meanings set
forth in the Merger Agreement.
ARTICLE II
TERM OF THE AGREEMENT
The term (the "Term") of this Agreement shall commence on the date of this
Agreement and shall continue in effect for as long as the Escrow Fund shall
contain any escrowed HMS Common (the "Escrowed Shares"), unless earlier
terminated because all of the Escrowed Shares deposited pursuant to Article III
below have been disbursed.
ARTICLE III
ESTABLISHMENT OF THE ESCROW FUND
3.1 Delivery of Escrow Fund. The Escrow Fund shall consist of ten (10%)
percent of the Merger Consideration, as such amount may decrease upon
disposition by the Escrow Agent. Upon the signing of this Agreement,
certificate(s) issued in the name of the Escrow Agent representing the shares of
HMS Common
<PAGE> 107
comprising the Escrow Fund shall be delivered to the Escrow Agent. The
contributions to the Escrow Fund by each of the QSM Securityholders are set
forth in Schedule A attached hereto.
3.2 Receipt of Escrow Fund. The Escrow Agent agrees, after delivery of
certificate(s) representing the shares of HMS Common provided in Section 3.1
above, to hold and dispose of the Escrow Fund in accordance with the terms,
conditions and provisions of this Agreement.
3.3 Voting of Escrowed Shares. With respect to all matters in which the
vote of HMS shareholders is necessary or desirable, the Escrow Agent shall vote
the Escrowed Shares in accordance with the written instructions of the QSM
Representatives.
3.4 Dividends on Escrowed Shares. Any shares of HMS Common issued as
dividends on or in respect of the Escrowed Shares shall be added to and become a
part of the Escrow Fund.
ARTICLE IV
DISTRIBUTION OF THE ESCROW FUND
4.1 Distribution of Escrow Fund.
(a) Notice of Claims Against the Escrow Fund. At any time following the
Closing Date and during the Term, HMS may give written notice ("Notice of
Claim") to the Escrow Agent (with a copy to the QSM Representatives), that HMS
is entitled to indemnification pursuant to the Merger Agreement, and such Notice
of Claim shall constitute the assertion of a claim by HMS against the Escrow
Fund. Each Notice of Claim shall (i) be given in good faith, and (ii) set forth
in reasonable detail the nature and estimated amount of the Damages giving rise
to a right of indemnification. Upon receipt by the Escrow Agent of a Notice of
Claim, the Escrow Agent shall retain in the Escrow Fund Escrow Shares having a
Fair Value (determined as of the date of receipt of Notice of Claim) equal to
One Hundred and Twenty-Five (125%) percent of the Damages claimed by HMS until
such time as there has been a determination of such Damages in accordance with
the provisions of Sections 4.1(b) and 4.1(c) hereof.
(b) Determination of Damages.
(i) Thirty (30) business days after receipt by the Escrow Agent and
the QSM Representatives of any Notice of Claim hereunder, the claim
referred to therein shall be deemed to have resulted in a final
determination in favor of, and to have become payable to, HMS in the full
amount set forth in such Notice of Claim, subject to the provisions of
Section 4.1(e) hereof, unless prior thereto the QSM Representatives shall
have delivered a written notice to HMS (with a copy to the Escrow Agent)
disputing the claim or the amount of any Damages, referred to in the Notice
of Claim.
(ii) If a claim asserted hereunder or the amount of such claim is
disputed in the manner provided herein, the determination of such claim or
the amount thereof, as the case may be, shall be made in accordance with
the provisions of Article V hereof.
(c) Payment of Damages. Promptly after receipt of a notice of final
determination of Damages in HMS's favor pursuant to Article V hereof (which
notice shall be accompanied by a copy of any document, agreement, arbitration
award or order, judgment or decree evidencing such final determination) or a
claim having resulted in a final determination pursuant to Section 4.1(b)(i)
hereof, and subject to Section 4.1(f) hereof, the Escrow Agent shall sell in the
open market sufficient Escrowed Shares to provide net proceeds equal to the
amount of the Damages and shall remit such net proceeds to HMS in payment of the
Damages.
(d) Payment of Excess QSM Transaction Expenses. Upon receipt of invoices
covering QSM Transaction Expenses in excess of $90,000, following notice to the
QSM Representatives, the Escrow Agent shall sell in the open market sufficient
Escrow Shares to provide net proceeds equal to the amount of such excess QSM
Transaction Expenses and shall remit such proceeds in payment thereof.
(e) Termination of Escrow Fund. On the nine (9) month anniversary of the
date hereof, the then balance of the Escrow Fund shall be released from the
escrow created hereby and distributed pro rata to all
2
<PAGE> 108
QSM Securityholders (based on the amount of the contribution of each of them to
the Escrow Fund). In the event on the nine (9) month anniversary of the date
hereof there is pending a claim against the Escrow Fund, the amount to be
distributed on the nine (9) month anniversary of the date hereof shall be
reduced by One Hundred Twenty-Five (125%) percent the amount of such claim and
the Escrow Agent shall retain in the Escrow Fund Escrow Shares having a Fair
Value (determined as of the date of receipt of Notice of Claim) equal to One
Hundred and Twenty-Five (125%) percent of the Damages claimed by HMS until such
time as there has been a determination of such Damages in accordance with the
provisions of Sections 4.1(b) and 4.1(c) hereof.
(f) Threshold. The "Threshold" shall equal $100,000. No Escrowed Shares
shall be sold and the net proceeds distributed to HMS pursuant hereto until the
aggregate amount payable pursuant hereto exceeds the Threshold, at which point
all such amounts (including amounts comprising the Threshold) shall be paid.
4.2 Indemnification Provisions of Merger Agreement. Nothing in this
Agreement shall derogate from, or modify in any respect, the procedures and
limitations established pursuant to Article 13 of the Merger Agreement with
respect to indemnification thereunder.
ARTICLE V
SETTLEMENT OF DISPUTES
5.1 Settlement of Disputes. Any dispute that may arise under this
Agreement with respect to: (a) the delivery or right to possession of the Escrow
Fund, or any portion thereof; (b) the facts upon which the Escrow Agent's
determinations are based; (c) the duties of the Escrow Agent hereunder; and (d)
any other questions arising under this Agreement, shall be finally determined by
mutual agreement of HMS and the QSM Representatives (evidenced by appropriate
instructions in writing to the Escrow Agent signed by or on behalf of HMS and
the QSM Representatives) within thirty (30) days after such dispute arises, or
(ii) binding arbitration in accordance with Section 5.2 hereof; provided,
however, that if the Escrow Agent has deposited the Escrow Fund with a court
pursuant to Section 6.7 hereof, the dispute shall be determined by such court.
The Escrow Agent shall be under no duty to institute or defend any proceeding
relating to any such dispute and none of the costs and expenses of any such
proceeding shall be borne by the Escrow Agent. Pending the resolution of any
dispute as provided in this Article V, the Escrow Agent is authorized and
directed to retain in its possession the portion of the Escrow Fund that is the
subject of or involved in the dispute.
5.2 Arbitration. Any controversy or claim arising out of or relating to
this Agreement not resolved by mutual agreement of HMS and the QSM
Representatives shall be settled by arbitration in New York, New York, or in
such other location as HMS and the QSM Representatives may mutually agree, in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association (the "AAA"). In the event of such a dispute, either HMS or the QSM
Representatives may demand arbitration by written notice to the other and,
within fifteen (15) days after receipt of such demand, each party shall appoint
an arbitrator (each, an "Appointed Arbitrator") who shall together agree on a
third Arbitrator, failing which agreement they shall request the AAA to appoint
a third and presiding arbitrator ("Presiding Arbitrator"), in accordance with
the then existing rules of the AAA or any successor organization thereto. HMS
and the QSM Representatives acknowledge and agree that individuals may be
designated as Appointed Arbitrators by each respective party, whether or not
such Appointed Arbitrators are listed on the National Panel of Arbitrators as
such list is maintained by the AAA. Any award therein shall be final and binding
on the parties and judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. The costs of the arbitration
(including, but not limited to, fees and disbursements of counsel and the
Appointed Arbitrator, and the fees of the Presiding Arbitrator) and reasonable
attorneys' fees and expenses of the prevailing party shall be borne by the
non-prevailing party or as otherwise determined by the Presiding Arbitrator.
5.3 Advances.
(a) Request for Advances. The QSM Representatives may, by written notice
to the Escrow Agent, request an advance or advances (each, an "Advance") from
the Escrow Fund to pay fees and expenses
3
<PAGE> 109
incurred with respect to an arbitration under Section 5.2 hereof; provided,
however, that the sum of all such Advances shall not exceed $25,000.
(b) Payment of Advances. Promptly after receipt of a notice of Advances
pursuant to Section 5.3(a) hereof, the Escrow Agent shall sell in the open
market sufficient Escrowed Shares to provide net proceeds equal to the amount of
the requested Advance and shall remit such net proceeds to the QSM
Representatives in payment of the Advance.
ARTICLE VI
PROVISIONS CONCERNING THE ESCROW AGENT
6.1 Amendments and Modifications. The Escrow Agent shall not in any way be
bound or affected by any amendment, modification or cancellation of this
Agreement which increases or alters the obligations of the Escrow Agent under or
pursuant to this Agreement, unless the same shall have been agreed to in writing
by the Escrow Agent.
6.2 Duties of the Escrow Agent. This Agreement sets forth the duties and
obligations of the Escrow Agent with respect to any and all matters pertinent to
its acting as such hereunder. The Escrow Agent shall not have duties or
responsibilities under this Agreement other than those specifically set forth
herein and shall act only in accordance with the provisions hereof. Without
limiting the generality of the foregoing, the Escrow Agent shall not have any
duty or responsibility (i) to enforce or cause to be enforced any of the terms
and conditions contained in the Merger Agreement, or (ii) to verify the accuracy
or sufficiency of any notice or other document received by it in connection with
this Agreement. The Escrow Agent shall be entitled to rely upon any instructions
or directions to it in writing under this Agreement signed by the proper party
or parties and shall be entitled to treat as genuine any instruction or document
delivered to the Escrow Agent hereunder and reasonably believed by the Escrow
Agent to be genuine and to have been presented by the proper party or parties,
without being required to determine the authenticity or correctness of any fact
stated therein, or the authority or authorization of the person or persons
making and/or delivering the same.
6.3 Liability of the Escrow Agent. Neither the Escrow Agent nor any of its
officers, directors, shareholders, partners, employees or agents shall be liable
to HMS, the QSM Security-holders or any other person or entity for or in respect
of any loss, claim, damage, liability or expense resulting from or arising out
of any act or failure to act by it in connection with this Agreement, other than
for any loss, claim, damage, liability or expense which shall be finally
adjudicated to be the result of gross negligence or willful bad faith on the
part of the Escrow Agent or any such officers, directors, shareholders,
partners, employees or agents.
6.4 Indemnity of the Escrow Agent. HMS shall indemnify and hold the Escrow
Agent harmless from and against any and all losses, claims, damages, liabilities
and expenses (including, without limitation, reasonable attorneys' fees and
disbursements) arising out of or in connection with any act or failure to act
(other than by reason of any gross negligence or willful bad faith) on the part
of the Escrow Agent in connection with any of the duties required to be
performed by the Escrow Agent hereunder.
6.5 Resignation of the Escrow Agent. At any time that the Escrow Agent so
chooses, the Escrow Agent may resign from its duties hereunder by giving not
less than thirty (30) days' prior written notice to HMS and the QSM
Representatives. Prior to the expiration of such thirty (30) day period, HMS and
the QSM Representatives shall designate, by mutual consent, a successor escrow
agent; provided, that notwithstanding any resignation date set forth in the
Escrow Agent's notice, such resignation shall not take effect until receipt by
the Escrow Agent of an instrument duly executed by a successor escrow agent
evidencing its appointment as Escrow Agent hereunder and acceptance of this
Agreement. If no successor escrow agent is appointed within such thirty (30) day
period, the Escrow Agent may deposit the Escrow Fund with a court of competent
jurisdiction as provided in Section 6.7 hereof, whereupon the Escrow Agent shall
be discharged of all duties and obligations hereunder.
6.6 Removal of Escrow Agent. The Escrow Agent may be removed at any time
by mutual agreement of HMS and the QSM Representatives by giving not less than
thirty (30) days' prior written notice to the
4
<PAGE> 110
Escrow Agent. Prior to the expiration of such thirty (30) day period, HMS and
the QSM Representatives shall designate, by mutual consent, a successor escrow
agent. If no successor escrow agent is appointed within such thirty (30) day
period, the Escrow Agent may deposit the Escrow Fund with a court of competent
jurisdiction as provided in Section 6.7 hereof, whereupon the Escrow Agent shall
be discharged of all duties and obligations hereunder.
6.7 Deposit with Court. Notwithstanding anything herein to the contrary,
in the event of any disagreement between any of the parties to this Agreement,
or between them and any other person, resulting in adverse claims or demands
being made against the Escrow Fund, or in the event the Escrow Agent in good
faith is in doubt as to what action it should take hereunder, the Escrow Agent
may be discharged of its duties and obligations hereunder upon its deposit, at
any time after written notice to HMS and the QSM Representatives, of the Escrow
Fund with a court of competent jurisdiction in the State and City of New York.
The parties hereto hereby submit to the personal jurisdiction of any such court,
waive any and all right to contest the jurisdiction of such court, and consent
to service of process by hand delivery or mail delivery thereof to their
respective addresses set forth in Section 7.2 hereof.
ARTICLE VII
MISCELLANEOUS
7.1 Entire Agreement. This Agreement has been entered into pursuant to the
Merger Agreement and together with such agreement embodies the entire agreement
and understanding among the parties hereto relating to the escrow created
hereunder and may be changed only by an instrument in writing signed by all the
parties hereto.
7.2 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when delivered, if delivered in person or by
telecopy, or when received, if mailed by first-class mail or express delivery
service, postage or other fee prepaid, with return receipt requested, addressed
to each party hereto as follows:
(a) if to the QSM Representatives:
William B. Munier
22 Hillside Road
Wellesley, Massachusetts 02181
Facsimile: None
Rodrigo Rocha
1203 Weaver Road
Boulder, Colorado 80302
Facsimile: (303) 447-3705
Peter B. Stovell
164 Greenfield Hill Road
Fairfield, Connecticut 06430
Facsimile: (203) 838-1738
with a copy to
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
260 Franklin Street
Boston, Massachusetts 02110
Attention: David S. Balabon, Esq.
Facsimile: (617) 439-0341
5
<PAGE> 111
(b) if to HMS:
Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Attention: Chief Executive Officer
Facsimile: (212) 889-8776
with a copy to:
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
Attention: Bruce S. Coleman, Esq.
Facsimile: (212) 840-3744
(c) If to the Escrow Agent:
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
Attention: Bruce S. Coleman, Esq.
Facsimile: (212) 840-3744
or at such other address as any party may designate by means of notice given in
accordance with this Section 7.2.
7.3 Headings. The article and section headings contained in this Agreement
have been inserted for convenience only and shall not modify, define, limit or
expand the express provisions of this Agreement.
7.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without regard to
the principles of the conflict of laws thereof.
7.5 Binding on Successors and Assigns. This Agreement shall be binding
upon the parties hereto and their respective successors and assigns, provided
that the Escrow Agent may not assign its obligations hereunder without the
consent of the HMS and the QSM Representatives.
7.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement, and it shall not be
necessary, in proving the due execution and delivery of this Agreement, to
produce or account for more than one such counterpart.
7.7 Actions by QSM Representatives. All actions by the QSM Representatives
under this Agreement shall be in writing and shall require the signatures of a
majority of the QSM Representatives.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
6
<PAGE> 112
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and the year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By:
------------------------------------
Phillip Siegel
Vice President and
Chief Financial Officer
QUALITY STANDARDS IN MEDICINE, INC.
By:
------------------------------------
William B. Munier
President
AGREED TO AND ACCEPTED:
QSM REPRESENTATIVES
- --------------------------------------
Rodrigo Rocha
- --------------------------------------
William B. Munier
- --------------------------------------
Peter B. Stovell
COLEMAN & RHINE LLP
as Escrow Agent
By:
------------------------------------
Bruce S. Coleman
7
<PAGE> 113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 722 of the New York Business Corporation Law (the "BCL") provides
that a corporation may indemnify directors and officers as well as other
employees and individuals against judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees, in connection with actions
or proceedings, whether civil or criminal (other than an action by or in the
right of the corporation -- a "derivative action"), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to amounts paid in settlement and reasonable
expenses (including attorneys' fees) incurred in connection with the defense or
settlement of such actions, and the statute does not apply in respect of a
threatened action, or a pending action that is settled or otherwise disposed of,
and requires court approval before there can be any indemnification where the
person seeking indemnification has been found liable to the corporation. Section
721 of the BCL provides that Article 7 of the BCL is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, disinterested director vote, stockholder vote, agreement or
otherwise. Article VIII, Section 7, of the Registrant's by-laws requires the
Registrant to indemnify its officers and directors to the fullest extent
permitted under the BCL.
Article VIII, Section 2, of the Registrant's by-laws provides that no
director of the Registrant shall be personally liable to the Registrant or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except that no indemnification shall be made in respect of (1) a threatened
action, or a pending action which is settled or otherwise disposed of, or (2)
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the Registrant unless and only to the extent that the court in
which such action or suit was brought or, if no action was brought, any court of
competent jurisdiction determines upon application that, in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such portion of the settlement and expenses as the court deems
proper.
Any amendment to or repeal of the Registrant's certificate of incorporation
or by-laws shall not adversely affect any right or protection of a director of
the Registrant for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
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------ -------------------------------------------------------------------------------
<C> <S> <C>
2.1 -- Agreement and Plan of Merger, dated as of September 3, 1996, by and among
Health Management Systems, Inc., QSM Acquisition Corp. and Quality Standards in
Medicine, Inc. (attached as Appendix A to the Information Statement/Prospectus
forming a part of the Registration Statement). The Registrant agrees to furnish
supplementally a copy of any omitted schedule to the Commission upon request.
2.2 -- Form of Escrow Agreement by and among Health Management Systems, Inc., Quality
Standards in Medicine, Inc., Coleman & Rhine LLP, Rodrigo Rocha, William B.
Munier and Peter B. Stovell (attached as Appendix B to the Information
Statement/Prospectus forming a part of the Registration Statement).
5 -- Opinion of Coleman & Rhine LLP.
23.1 -- Consent of Coleman & Rhine LLP (included in Exhibit 5).
23.2 -- Consent of KPMG Peat Marwick LLP, independent certified public accountants.
23.3 -- Consent of Ernst & Young LLP, independent auditors.
23.4 -- Consent of Coopers & Lybrand LLP, independent certified public accountants.
23.5 -- Consent of Ernst & Young LLP, independent auditors.
24 -- Power of Attorney.
</TABLE>
II-1
<PAGE> 114
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act of 1933 and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-2
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of New York, State of New York, on October 4, 1996.
HEALTH MANAGEMENT SYSTEMS, INC.
By: /s/ PAUL J. KERZ
------------------------------------
Paul J. Kerz, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below on the 4th day of October, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -----------------------------------------------
<C> <S>
/s/ PAUL J. KERZ Director, Chairman, President and Chief
- ------------------------------------------ Executive Officer
Paul J. Kerz
/s/ PHILLIP SIEGEL Vice President and Chief Financial and
- ------------------------------------------ Accounting Officer
Phillip Siegel
* Director
- ------------------------------------------
Russell L. Carson
* Director
- ------------------------------------------
John W. McIntyre
* Director
- ------------------------------------------
William W. Neal
* Director
- ------------------------------------------
Galen D. Powers
* Director
- ------------------------------------------
Richard H. Stowe
*By: /s/ PHILLIP
SIEGEL
- ------------------------------------------
Phillip Siegel
Attorney-in-fact
</TABLE>
II-3
<PAGE> 116
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger, dated as of September 3, 1996, by and among Health
Management Systems, Inc., QSM Acquisition Corp. and Quality Standards in Medicine,
Inc. (attached as Appendix A to the Information Statement/Prospectus forming a part
of the Registration Statement). The Registrant agrees to furnish supplementally a
copy of any omitted schedule to the Commission upon request.
2.2 -- Form of Escrow Agreement by and among Health Management Systems, Inc., Quality
Standards in Medicine, Inc., Coleman & Rhine LLP, Rodrigo Rocha, William B. Munier
and Peter B. Stovell (attached as Appendix B to the Information
Statement/Prospectus forming a part of the Registration Statement).
5 -- Opinion of Coleman & Rhine LLP.
23.1 -- Consent of Coleman & Rhine LLP (included in Exhibit 5).
23.2 -- Consent of KPMG Peat Marwick LLP, independent certified public accountants.
23.3 -- Consent of Ernst & Young LLP, independent auditors.
23.4 -- Consent of Coopers & Lybrand LLP, independent certified public accountants.
23.5 -- Consent of Ernst & Young LLP, independent auditors.
24 -- Power of Attorney.
</TABLE>
<PAGE> 1
EXHIBIT 5
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
October 4, 1996
Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Re: Form S-4 Registration Statement (the "Registration Statement")
Gentlemen:
We have acted as counsel to Health Management Systems, Inc., a New York
corporation ("HMS"), in connection with the merger (the "Merger") and related
transactions contemplated by that certain Agreement and Plan of Merger, dated as
of September 3, 1996 (the "Merger Agreement"), by and among HMS, QSM Acquisition
Corp. and Quality Standards in Medicine, Inc. As such counsel, we have examined
and relied upon such records, documents, certificates and other instruments as
in our judgment are necessary or appropriate to form the basis for the opinion
hereinafter set forth. In all such examinations, we have assumed the genuineness
of signatures on original documents and the conformity to such original
documents of all copies submitted to us as certified, conformed or photographic
copies, and as to certificates of public officials, we have assumed the same to
have been properly given and to be accurate.
Based upon the foregoing, we are of the opinion that the shares of common
stock, par value $.01 per share, of HMS issuable in connection with the Merger
have been duly authorized, and, when issued in accordance with the terms set
forth in the Merger Agreement, will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement and to the reference to us under the caption "Legal Matters" in the
Information Statement/Prospectus that forms a part of the Registration
Statement. By giving the foregoing consent, we do not admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
This opinion is as of the date hereof and is limited to the laws in effect
as of the date hereof. We undertake no obligation to advise you of any change,
whether legal or factual, in any matters set forth herein.
Very truly yours,
/s/ COLEMAN & RHINE LLP
--------------------------------------
Coleman & Rhine LLP
<PAGE> 1
EXHIBIT 23.2
The Board of Directors
Health Management Systems, Inc.:
We consent to the use of our reports incorporated herein by reference and
to the reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
New York, New York
October 4, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 12, 1996, except for Note 10, as to which the
date is September 3, 1996, with respect to the financial statements of Quality
Standards in Medicine, Inc. (which contains an explanatory paragraph with
respect to the Company's ability to continue as a going concern) included in the
Registration Statement (Form S-4) and related Prospectus of Health Management
Systems, Inc. for the registration of 233,000 shares of its common stock.
ERNST & YOUNG LLP
Boston, Massachusetts
October 4, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference of our report dated February
7, 1995, on our audits of the financial statements of Health Care microsystems,
Inc. as of and for the years ended December 31, 1994 and 1993, included in this
Registration Statement on Form S-4 of Health Management Systems, Inc. dated
October 4, 1996, in the Registration Statements on Forms S-3 (File Nos. 33-91518
and 333-6769) and in the Registration Statements on Forms S-8 (Nos. 33-65560,
33-76638, 33-76770, 33-95326 and 33-33706) of Health Management Systems, Inc.
Coopers & Lybrand L.L.P.
Los Angeles, California
October 3, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Health Management Systems, Inc.:
We consent to the incorporation by reference of our report dated November
12, 1995 with respect to the consolidated financial statements of Health
Information Systems Corporation and Subsidiary as of and for the period ended
October 31, 1995, included in the Annual Report (Form 10-K) of Health Management
Systems, Inc. for the year ended October 31, 1995, in the Registration Statement
(Form S-4) of Health Management Systems, Inc. for the registration of 233,000
shares of its $.01 par value common stock.
ERNST & YOUNG LLP
New York, New York
September 27, 1996
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes Paul J. Kerz
and Phillip Siegel, and each of them, with full power of substitution and full
power to act without the others, his true and lawful attorney-in-fact and agent
in his name place, and stead, to execute in the name and on behalf of each such
person, individually and as a director of Health Management Systems, Inc., a New
York corporation (the "Company"), and to file, the Registration Statement of the
Company on Form S-4 (the "Registration Statement"), and any and all amendments
to the Registration Statement, including any and all post-effective amendments.
WITNESS our hands on the respective dates set forth below:
<TABLE>
<CAPTION>
SIGNATURE DATE
- --------------------------------------------- ----------------
<S> <C>
/s/ Russell L. Carson October 3, 1996
- ---------------------------------------------
Russell L. Carson
/s/ John W. McIntyre October 3, 1996
- ---------------------------------------------
John W. McIntyre
/s/ William W. Neal October 3, 1996
- ---------------------------------------------
William W. Neal
/s/ Galen D. Powers October 4, 1996
- ---------------------------------------------
Galen D. Powers
/s/ Richard H. Stowe October 3, 1996
- ---------------------------------------------
Richard H. Stowe
</TABLE>
