<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ___________________
Commission File Number 0-20946
HEALTH MANAGEMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
New York 13-2770433
State of Incorporation (I.R.S. Employer Identification Number)
401 Park Avenue South, New York, New York 10016
(Address of principal executive offices, zip code)
(212) 685-4545
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed
since last report.)
Indicate by check [root] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No ________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at May 31, 1997
<S> <C> <C>
Common Stock, $.01 Par Value 17,709,793 Shares
</TABLE>
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED APRIL 30, 1997
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
<S> <C> <C>
Item 1 Financial Statements
Consolidated Balance Sheets as of April 30, 1997 (unaudited) 1
and October 31, 1996
Consolidated Statements of Operations (unaudited) for the three 2
month and six month periods ended April 30, 1997 and April
30, 1996
Consolidated Statement of Shareholders' Equity (unaudited) for 3
the six month period ended April 30, 1997
Consolidated Statement of Cash Flows (unaudited) for the 4
three month and six month periods ended April 30, 1997 and
April 30, 1996
Notes to Interim Consolidated Financial Statements (unaudited) 5
Item 2 Management's Discussion and Analysis of Results of Operations and 7
Financial Condition
PART II OTHER INFORMATION 11
SIGNATURES 12
EXHIBIT INDEX 13
</TABLE>
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,462 22,340
Short-term investments 17,588 17,181
Accounts receivable, net 41,670 42,730
Other current assets 7,008 4,706
-------- -------
Total current assets 84,728 86,957
Property and equipment, net 7,708 7,823
Intangible assets, net 12,336 5,257
Capitalized software costs, net 3,100 1,472
Investments in affiliates 0 6,824
Other assets 2,077 1,310
-------- -------
Total assets $109,949 109,643
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 14,320 19,676
Amounts payable to affiliates 0 585
Deferred revenue 5,291 4,975
Deferred income taxes 6,807 6,968
-------- -------
Total current liabilities 26,418 32,204
Other liabilities 2,010 2,770
Deferred income taxes 0 57
-------- -------
Total liabilities 28,428 35,031
-------- -------
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized;
none issued and outstanding 0 0
Common stock - $.01 par value; 45,000,000 shares authorized;
17,709,783 shares issued and outstanding at April 30, 1997;
17,520,991 shares issued and outstanding at October 31, 1996 177 175
Capital in excess of par value 67,334 62,541
Retained earnings 13,509 11,425
Unrealized appreciation on short-term investments 501 471
-------- -------
Total shareholders' equity 81,521 74,612
-------- -------
Commitments and contingencies
Total liabilities and shareholders' equity $109,949 109,643
======== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE> 4
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 3 April 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Trade $ 19,821 23,491 42,049 46,958
Affiliates 287 2,216 331 4,368
-------- ------ ------ ------
20,108 25,707 42,380 51,326
Cost of services:
Compensation 13,505 11,892 25,164 23,647
Data processing 1,795 2,112 3,588 4,277
Occupancy 2,416 1,775 4,559 3,483
Other 4,603 4,459 7,953 8,751
-------- ------ ------ ------
22,319 20,238 41,264 40,158
-------- ------ ------ ------
Operating (loss) margin before amortization of intangibles (2,211) 5,469 1,116 11,168
Amortization of intangibles 239 55 285 110
-------- ------ ------ ------
Operating (loss) income (2,450) 5,414 831 11,058
Other income:
Net interest income 1,331 228 1,772 479
Merger related costs (37) (489) (537) (489)
Equity in (loss) earnings of affiliate (294) 174 (310) 297
-------- ------ ------ ------
1,000 (87) 925 287
(Loss) income before income taxes (1,450) 5,327 1,756 11,345
Income tax benefit (expense) 1,731 (2,225) 328 (4,633)
-------- ------ ------ ------
Net income $ 281 3,102 2,084 6,712
======== ====== ====== ======
Earnings per share data:
Net income per weighted average share of common stock outstanding $ 0.02 0.17 0.12 0.37
======== ====== ====== ======
Weighted average shares outstanding 17,832 18,477 18,034 18,329
======== ====== ====== ======
</TABLE>
See accompanying notes to interim consolidated financial statements
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
($ In Thousands)
<TABLE>
<CAPTION>
Common Stock Capital In
----------------- --------------------- Appreciation Total
Par Excess Of Retained on Short-term Shareholders'
Shares Value Par Value Earnings Investments Equity
------ ----- --------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996, as originally reported 17,348,841 $174 57,583 18,301 471 76,529
Adjustments for Quality Standards in
Medicine, Inc. ("QSM") pooling of interests 172,150 1 4,958 (6,876) 0 (1,917)
---------- ---- ------- ------- ------- ---------
Balance at October 31, 1996, as restated 17,520,991 175 62,541 11,425 471 74,612
Net income 0 0 0 2,084 0 2,084
Stock option activity 37,913 0 233 0 0 233
Employee Stock Purchase Plan activity 63,029 1 552 0 0 553
Stock issued to retire QSM debt 87,850 1 1,434 0 0 1,435
Disqualifying dispositions 0 0 2,574 0 0 2,574
Appreciation on
short-term investments 0 0 0 0 30 30
---------- ---- ------- ------- ------- ---------
Balance at April 30, 1997 17,709,783 $177 67,334 13,509 501 81,521
========== ==== ======= ======= ======= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ In Thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 281 3,102 2,084 6,712
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,219 846 1,994 1,630
Software capitalization (477) (272) (782) (551)
Provision for doubtful accounts (109) 14 (126) 297
Deferred tax (benefit) expense (932) 133 (371) 488
Equity in loss (earnings) of affiliate 295 (231) 311 (354)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 4,888 (8,253) 2,652 (13,693)
Decrease (increase) in other current assets 161 406 877 (65)
Increase (decrease) in accounts payable and accrued expenses 569 (1,032) (4,740) (3,275)
Decrease in amounts payable to affiliates (585) 0 (747) 0
Increase (decrease) in deferred revenue 264 (627) (406) 619
Decrease (increase) in other assets and liabilities, net (906) 326 (554) 1,237
-------- ------ ------ -------
Total adjustments 4,387 (8,690) (1,892) (13,667)
-------- ------ ------ -------
Net cash provided by (used in) operating activities 4,668 (5,588) 192 (6,955)
-------- ------ ------ -------
Investing activities:
Capital asset expenditures (458) (1,039) (821) (1,599)
Acquisition of Health Information Services Corporation, net of cash acquired (3,689) 0 (3,689) 0
Proceeds from sale of short-term investments (266) (393) (346) (637)
-------- ------ ------ -------
Net cash used in investing activities (4,413) (1,432) (4,856) (2,236)
-------- ------ ------ -------
Financing activities:
Proceeds from issuance of common stock 122 200 553 1,767
Proceeds from exercise of stock options 77 1,719 233 3,240
Proceeds from issuance of notes payable 0 0 0 148
-------- ------ ------ -------
Net cash provided by financing activities 199 1,919 786 5,155
-------- ------ ------ -------
Net increase (decrease) in cash and cash equivalents 454 (5,101) (3,878) (4,036)
Cash and cash equivalents at beginning of period 18,008 11,890 22,340 10,825
-------- ------ ------ -------
Cash and cash equivalents at end of period $ 18,462 6,789 18,462 6,789
======== ====== ====== =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. UNAUDITED INTERIM FINANCIAL INFORMATION
Health Management Systems, Inc. ("HMS" or the "Company") management is
responsible for the accompanying unaudited interim consolidated financial
statements and the related information included in these notes to the
unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position
and results of operations and cash flows for the periods presented.
Results of operations of interim periods are not necessarily indicative of
the results to be expected for the entire year. The Company completed an
acquisition during the second quarter of fiscal year 1997. The acquisition
transaction was accounted for using the purchase method of accounting. For
further details see Note 2 to the Interim Consolidated Financial
Statements.
These unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements of the
Company as of and for the year ended October 31, 1996 included in the
Company's Annual Report on Form 10-K for such year as filed with the
Securities and Exchange Commission (the "Commission"). However, the reader
should be aware that the October 31, 1996 financial statements have been
retroactively restated for the acquisition of Quality Standards in
Medicine, Inc. ("QSM") as noted in the Company's Quarterly Report on Form
10-Q for the quarter ended January 31, 1997.
2. ACQUISITION OF HEALTH INFORMATION SYSTEMS, INC. ("HISCo")
In March 1997, the Company, which owned 43% of HISCo's stock, acquired the
remaining 57% of HISCo's stock for $3,689,000, net of cash acquired. HISCo
has been renamed HSA Managed Care Systems, Inc. ("HSA"). HSA provides
automated business and information solutions, including software and
services, to the bearers of risk in the health care industry.
The acquisition was accounted for using the purchase method of accounting
and accordingly the results of operations of HSA from the date of
acquisition through April 30, 1997 are included in the accompanying
unaudited interim financial statements. The $2,309,000 excess of the
purchase price over fair market value of the net assets acquired was
recorded as goodwill and is being amortized over a period not to exceed 20
years.
3. SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for income taxes during the quarters ended April 30, 1997 and
1996 was $50,000 and $2,570,000, respectively. Cash paid for income taxes
during the six months ended April 30, 1997 and 1996 was $179,000 and
$4,444,000, respectively.
The Company recorded significant non-cash transactions during the six
months ended April 30, 1997 and 1996. The non-cash transactions included
the issuance of 87,850 shares of the Company's common stock to settle
$1,435,000 of QSM notes payable plus accrued interest in the six months
ended April 30, 1997. Additionally, the Company recorded $2,574,000 and
$708,000 for the six months ended April 30, 1997 and 1996 as disqualified
dispositions related to certain compensatory stock option exercises, which
has the effect of reducing the Company's tax liability with an offsetting
increase to shareholders' equity.
5
<PAGE> 8
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earning Per
Share". SFAS 128 establishes standards for computing and presenting
earnings per share. In accordance with the effective date of SFAS 128, the
Company will adopt SFAS 128 as of January 31, 1998. This statement is not
expected to have a material impact on the Company's financial statements.
5. RELATED PARTIES
Effective April 16, 1997, the Company guaranteed all of the obligations of
Robert V. Nagelhout to The Chase Manhattan Bank (the "Bank") arising under
a $1,600,000 loan made by the Bank to Mr. Nagelhout. Mr. Nagelhout is a
director of the Company and the Chief Executive Officer of the Company's
Health Care microsystems, Inc. ("HCm") subsidiary. The loan is payable on a
monthly basis as to interest only, at an interest rate equal to the prime
rate announced from time to time by the Bank. The loan will mature on April
16, 1999, at which time the entire unpaid principal balance of the Loan,
together with accrued and unpaid interest, will become due and payable.
Mr. Nagelhout has granted the Company a first security interest in 500,000
shares of HMS Common Stock owned by him to secure the Company's guaranty of
his loan obligations to the Bank.
6. SUBSEQUENT EVENTS
On May 28, 1997, the Board of Directors authorized the Company to
repurchase such number of shares of its Common Stock that have an aggregate
purchase price not in excess of $10,000,000. The Company would repurchase
these shares from time to time on the open market or in negotiated
transactions at prices deemed appropriate by the Company. Repurchased
shares will be deposited in the Company's treasury and used for general
corporate purposes.
On the same date, the Board of Directors also authorized a stock option
exchange program for employee participants in the Company's Stock Option
and Restricted Stock Purchase Plan. Eligible employees who hold options
("Old Options") with exercise prices in excess of $10.00 per share will be
able to exchange them for options ("New Options") exercisable for a lesser
number of shares with an exercise price equal to the average price of the
Company's Common Stock on the Nasdaq National Market System on June 2,
1997. The exact number of shares of Common Stock underlying each New Option
will depend on the exercise price of the Old Option exchanged.
Approximately 1,600,000 Old Options are eligible to be exchanged for New
Options. If all eligible Old Options are exchanged approximately 900,000
New Options will be issued. Certain executive officers of the Company are
either ineligible to participate, or have limitations on their ability to
participate, in the option exchange.
6
<PAGE> 9
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION -- THREE MONTH AND SIX MONTH PERIODS ENDED APRIL 30, 1997
AND 1996
OPERATING RESULTS
THREE MONTHS ENDED APRIL 30, 1997
Revenue for the quarter ended April 30, 1997 was $20,108,000, a decrease of
$5,599,000 or 22% from the comparable period in 1996. The Company's Revenue
Enhancement Services, previously referred to as the Company's proprietary
services which included Retroactive Claims Reprocessing ("RCR") Services, Third
Party Liability Recovery ("TPLR") Services and Comprehensive Account Management
Services ("CAMS"), accounted for $10,686,000 or 53% of the Company's
consolidated revenue for the second quarter of 1997, compared to $18,988,000 or
74% of consolidated revenue for the comparable period in 1996. Revenue from
Revenue Enhancement Services decreased 44% from the comparable period
principally due to the non-recurrence in 1997 of one-time projects in 1996 and
the expiration of a major contact. This contract is in the process of being
renewed at a lower rate and with a smaller scope. Revenue from Managed Care
Support ("MCS") services was $6,102,000, an increase of $1,631,000 or 36% over
the comparable period in 1996. Revenue from HSA was $1,794,000 for the second
quarter of 1997. There is no comparable prior period revenue for HSA because HSA
was acquired on March 18, 1997 in a transaction accounted for under the purchase
method of accounting. The Company's Electronic Data Interchange ("EDI") services
revenue was $1,526,000 for the second quarter of 1997, a decrease of $722,000 or
32% from the comparable period in 1996.
Cost of services for the second quarter of 1997 was $22,319,000, an increase of
$2,081,000 or 10% from the comparable period in 1996.
Compensation expense, the Company's largest expense component, totaled
$13,505,000, an increase of $1,613,000 or 14% over the comparable prior period.
Salaries increased by 24% due to the acquisition of HSA, which increased
compensation expense by $1,102,000, and a 17% growth in the average number of
employees in other operations. Increases in the salary component were partially
offset by lower bonus and profit sharing expense accruals.
Data processing expense for the second quarter of 1997 was $1,795,000, a
decrease of $317,000 or 15% from the comparable period in 1996. This decrease
was attributable to lower levels of variable cost associated with a reduction in
revenue from Revenue Enhancement Services and other general cost savings.
Occupancy expense for the second quarter of 1997 was $2,416,000, an increase of
$641,000 or 36% over the comparable period in 1996. This increase reflects the
additional rent and depreciation expense for expansion at the New York corporate
facility and expansion in satellite offices.
Other operating expense for the second quarter of 1997 was $4,603,000, an
increase of $144,000 or 3% from the comparable period in 1996. This increase was
principally attributable to the timing of certain unbilled expenses related to
revenue producing projects, and was offset by lower direct project costs and bad
debt expense.
Operating loss before amortization of intangible assets for the quarter ended
April 30, 1997 was $2,211,000, a decrease of $7,680,000 or 140% from the
$5,469,000 of operating margin before amortization of intangible assets realized
in the comparable period in 1996.
7
<PAGE> 10
Net interest income of $1,331,000 in the second quarter of 1997 increased by
$1,103,000 from $228,000 in the comparable period in 1996. The increase in
interest income was primarily attributable to a reversal of interest expense of
$887,000 as a result of a favorable resolution to an Internal Revenue Services
audit ("IRS audit resolution"). The Company reported equity in the loss of
affiliate of $294,000 during the second quarter of 1997 as compared to earnings
of $174,000 for the comparable period in 1996.
The Company's income tax benefit for the second quarter of 1997 was $1,731,000,
of which $1,093,000 resulted from the IRS audit resolution. This compares to
income tax expense of $2,225,000 for the comparable period in 1996. The
Company's effective tax rate, exclusive of the effect of the IRS audit
resolution, for the second quarter 1997 and 1996 were approximately 44.0% and
41.8%, respectively.
Net income for the three month period ended April 30, 1997 was $281,000 a
decrease of $2,821,000, or 91% compared to $3,102,000 reported in the comparable
prior year period.
The Company's earnings per share for the three month period ended April 30, 1997
was $0.02, a decrease of $0.15 or 88% from the $0.17 per share reported in the
comparable period in 1996. Excluding all one-time events, the Company
experienced a loss per share of $0.07 compared to an earnings per share of $0.19
for the comparable prior period.
SIX MONTHS ENDED APRIL 30, 1997
Revenue for the six months ended April 30, 1997 was $42,380,000, a decrease of
$8,946,000 or 17% from the comparable period in 1996. Revenue from Revenue
Enhancement Services was $25,198,000, a decrease of $13,175,000 or 34%,
principally due to the non-recurrence in 1997 of one-time projects in 1996 and
the expiration of a major contract. Revenue from MCS services was $12,018,000,
an increase of $3,310,000 or 38% over the comparable prior year period. Revenue
from HSA was $1,794,000. There are no comparable prior year figures since HSA
was acquired on March 18, 1997 in a transaction accounted for under the purchase
method of accounting. Revenue from EDI services was $3,370,000, a decrease of
$875,000 or 21% from the comparable period in 1996.
Cost of services for the six months ended April 30, 1997 was $41,264,000, an
increase of $1,106,000 or 3% over the comparable period in 1996.
Compensation expense of $25,164,000 increased $1,517,000 or 6% over the
comparable period in 1996. This increase is primarily due to the acquisition of
HSA which increased salary expense by $1,102,000. Increased average headcount in
other operations was partially offset by lower bonus and profit sharing
accruals.
Data processing expense was $3,588,000, a decrease of $689,000 or 16% from the
comparable period in 1996. This decrease was attributable to lower variable
costs associated with a reduction in revenue from Revenue Enhancement Services
and other general cost savings.
Occupancy expense was $4,559,000, an increase of $1,076,000 or 31% over the
comparable period in 1996. This increase reflects the additional rent and
depreciation expense for the expansion of the New York corporate facility and
expansion in satellite offices.
Other operating expense was $7,953,000, a decrease of $798,000 or 9% from the
comparable period in 1996. This decrease was principally attributable to lower
levels of direct project costs and bad debt expense.
8
<PAGE> 11
Operating margin before amortization of intangible assets for the six months
ended April 30, 1997 was $1,116,000, a decrease of $10,052,000 or 90% from the
$11,168,000 amount realized in the comparable period in 1996. The Company's
operating margin rate before amortization of intangible assets was 2.6%,
compared to 21.8% in 1996.
Net interest income of $1,772,000 in the six months ended April 30, 1997
increased by $1,293,000 from $479,000 in the comparable period in 1996,
primarily due to a reversal of accrued interest expense resulting from the IRS
audit resolution. Merger related costs of $537,000 were incurred in the six
months ended April 30, 1997 related to the merger with QSM in November 1996 as
compared to $489,000 in the six months ended April 30, 1996 related to the
Company's merger with CDR Associates, Inc. ("CDR") in April 1996.
The Company's income tax benefit for the six months ended April 30, 1997 was
$328,000, resulting primarily from the IRS audit resolution of $1,093,000. The
Company's effective tax rate, exclusive of the effect of the IRS audit
resolution, for the six months ended April 30, 1997 was approximately 43.6%.
This compares to income tax expense of $4,633,000 and an effective tax rate of
approximately 40.8% for the comparable period in 1996. The effective tax rate
has increased from the comparable prior period due to non-taxable income in the
first six months of 1996 resulting from the CDR merger and non-taxable income
from the equity in earnings of an affiliate.
Net income for the six month period ended April 30, 1997 was $2,084,000, a
decrease of $4,628,000 or 69% to from the comparable prior period.
The Company's earnings per share for the six month period ended April 30, 1997
was $0.12, a decrease of $0.25 or 68% compared to $0.37 in the comparable prior
period. Excluding all one-time events, the Company's earnings per share of $0.06
compared to $0.39 for the comparable prior period.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company had $58,310,000 in net working capital, an
increase of $3,557,000 over the level at October 31, 1996. The Company's
principal sources of liquidity at April 30, 1997 consisted of cash, cash
equivalents, and short-term investments aggregating $36,050,000, net accounts
receivable of $41,670,000, and an available balance of $38,400,000 under a line
of credit. Accounts receivable at April 30, 1997 reflected a decrease of
$1,060,000 or 2.5% from the October 31, 1996 balance. There has been no
significant change in the nature, age, or composition of the Company's accounts
receivable portfolio.
On May 28, 1997, the Board of Directors authorized the Company to repurchase
such number of shares of its Common Stock that have an aggregate purchase price
not in excess of $10,000,000. The Company would repurchase these shares from
time to time on the open market or in negotiated transactions at prices deemed
appropriate by the Company. Repurchased shares will be deposited in the
Company's treasury and used for general corporate purposes.
* * * * *
This document contains forward-looking statements. Such statements by their
nature entail various risks, reflecting the dynamic, complex, and rapidly
changing nature of the health care industry. Results actually achieved may
differ materially from those currently anticipated. The various risks include
but are not necessarily limited to: (i) the ability of HMS to contain costs, to
grow internally or by acquisition and to integrate acquired businesses into the
HMS group of companies, (ii) the uncertainties of litigation, (iii) changing
conditions in the health care industry which could simplify the reimbursement
process and/or data management requirements associated with the health care
transfer payment process and adversely affect HMS's business, (iv) government
regulatory and political pressures which could reduce the rate of growth of
health care expenditures, (v) competitive actions by other companies, and (vi)
other risks, as noted in HMS's registration statements and periodic reports
filed with the Commission.
10
<PAGE> 13
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1 Legal Proceedings -- Four purported class action lawsuits have been filed against the
Company and certain of its present and former officers and directors:
1) Baker v. Health Management Systems. Inc., et al., No. 97-CIV-1865;
2) Zola v. Health Management Systems, Inc., et. al., No. 97-CIV-2112;
3) Ronis v. Health Management Systems, Inc., et. al., No. 97-CIV-2535; and
4) Korsinky v. Health Management Systems, Inc., et. al., No. 97-CIV-3637
The Complaints in these lawsuits, which are pending in the United States Court for
the Southern District of New York, allege violations of the Securities Exchange Act
of 1934 in connection with certain allegedly false and misleading statements and seek
damages in an unspecified amount. The Company intends to vigorously defend these
lawsuits.
Item 2 Changes in Securities -- None
Item 3 Defaults Upon Senior Securities -- Not applicable
Item 4 Submission of Matters to a Vote of Security Holders -- None
Item 5 Other Information -- None
Item 6 Exhibits and Reports on Form 8-K -- None
</TABLE>
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 13, 1997 HEALTH MANAGEMENT SYSTEMS, INC.
-------------------------------
(Registrant)
/s/ Phillip Siegel
------------------------------------------
Phillip Siegel
Vice President and Chief Financial Officer
12
<PAGE> 15
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
<S> <C>
2.1 Agreement and Plan of Merger, dated as of March 18, 1997, by and among
Health Management Systems, Inc., HISCo Acquisition Corp., Health
Information Systems Corporation and HSA Managed Care Systems, Inc.
10.1 Guaranty Agreement, dated as of April 16, 1997, between Health Management
Systems, Inc. and The Chase Manhattan Bank.
10.2 Second Amendment to Credit Agreement and Guaranty, dated as of April 16,
1997, among Health Management Systems, Inc., Accelerated Claims
Processing, Inc., Quality Medical Adjucation, Incorporated, Health Care
microsystems, Inc., CDR Associates, Inc., and The Chase Manhattan Bank.
10.3 Security Agreement, dated as of April 16, 1997, by and between Robert V.
Nagelhout and Health Management Systems, Inc.
10.4 Promissory note, dated as of April 16, 1997, by and between Robert V.
Nagelhout and The Chase Manhattan Bank.
11 Computations of Earnings Per Share
27 Financial Data Schedule (Submitted for informational purposes only and not
deemed to be filed)
</TABLE>
13
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
Among
HEALTH MANAGEMENT SYSTEMS, INC.,
HISCO ACQUISITION CORP.
And
HEALTH INFORMATION SYSTEMS CORPORATION
And HSA MANAGED CARE SYSTEMS, INC.
<PAGE> 2
<TABLE>
<CAPTION>
Page
TABLE OF CONTENTS
<S> <C> <C>
RECITALS ............................................................................................................1
ARTICLE 1. DEFINITIONS........................................................................................1
1.1 Certain Definitions.......................................................................1
1.2 Other Definitions.........................................................................3
ARTICLE 2. THE MERGER.........................................................................................3
2.1 Effective Time of the Merger..............................................................3
2.2 Effects of the Merger.....................................................................3
2.3 Effect on HISCo Securities................................................................3
2.4 Conversion of Sub Capital Stock...........................................................5
2.5 Cancellation of HSA Capital Stock. ......................................................5
2.6 Payment of Per Share Purchase Price.......................................................5
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF HISCo and HSA....................................................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.....................................................................8
3.6 Financial Statements......................................................................8
3.7 Absence of Changes........................................................................9
3.8 Properties...............................................................................11
3.9 Taxes....................................................................................12
3.10 Compliance with Law......................................................................12
3.11 Litigation...............................................................................12
3.12 Material Agreements......................................................................12
3.13 Certificate Proprietary Rights...........................................................14
3.14 No Conflict..............................................................................14
3.15 No Default...............................................................................15
3.16 Information Supplied.....................................................................15
3.17 Labor Relations; Employees...............................................................16
3.18 Customers and Suppliers..................................................................16
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HMS AND SUB.....................................................16
4.1 Organization.............................................................................16
4.2 Capital Structure of Sub.................................................................17
4.3 Authority................................................................................17
4.4 Governmental Consents....................................................................17
4.5 No Conflict..............................................................................18
4.6 No Prior Activities......................................................................18
</TABLE>
i
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<TABLE>
<CAPTION>
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<S> <C> <C>
ARTICLE 5. COVENANTS RELATING TO CONDUCT OF BUSINESS.........................................................18
5.1 Ordinary Course..........................................................................18
5.2 Dividends; Changes in Stock..............................................................19
5.3 Issuance of Securities...................................................................19
5.4 Governing Documents......................................................................19
5.5 No Acquisitions..........................................................................19
5.6 No Dispositions..........................................................................19
5.7 Indebtedness.............................................................................20
5.8 Benefit Plans, Etc.......................................................................20
5.9 Accounting Practices.....................................................................20
5.10 Other Agreements.........................................................................20
ARTICLE 6. ADDITIONAL AGREEMENTS.............................................................................20
6.1 Access to Information....................................................................20
6.2 Legal Conditions to the Merger...........................................................21
6.3 HISCo Stockholders' Approval.............................................................21
6.4 Dissenting Shares........................................................................21
6.5 Employee Benefits........................................................................21
6.6 Communications...........................................................................21
6.7 Notification of Certain Matters..........................................................22
6.8 Sub Sole Stockholder's Approval..........................................................22
6.9 Repurchase of HISCo Founders Shares......................................................22
6.10 Cancellation of HISCo Options............................................................22
ARTICLE 7. CONDITIONS PRECEDENT..............................................................................23
7.1 Conditions to Each Party's Obligations
to Effect the Merger.....................................................................23
7.2 Conditions to Obligations of HMS and Sub.................................................24
7.3 Conditions to Obligations of HISCo and HSA...............................................25
ARTICLE 8. CLOSING...........................................................................................25
8.1 Closing Date.............................................................................25
8.2 Filing Date..............................................................................26
ARTICLE 9. TERMINATION OF REPRESENTATIONS, WARRANTIES
AND COVENANTS............................................................................26
ARTICLE 10. PAYMENT OF EXPENSES...............................................................................26
</TABLE>
ii
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<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE 11. TERMINATION, AMENDMENT AND WAIVER.................................................................26
11.1 Termination..............................................................................26
11.2 Effect of Termination....................................................................27
11.3 Amendment................................................................................27
11.4 Extension; Waiver........................................................................28
ARTICLE 12. GENERAL...........................................................................................28
12.1 Notices..................................................................................28
12.2 Headings.................................................................................29
12.3 Counterparts.............................................................................29
12.4 Binding Nature...........................................................................29
12.5 Other Agreements.........................................................................29
12.6 Good Faith...............................................................................29
12.7 Applicable Law...........................................................................29
</TABLE>
iii
<PAGE> 5
Exhibits
Exhibit A - List of Directors and Officers of Surviving
Corporation
iv
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is made and entered into as of the 18th day of March
1997, by and among HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation
("HMS"), HISCO ACQUISITION CORP., a Delaware corporation and a wholly-owned
subsidiary of HMS ("Sub"), HEALTH INFORMATION SYSTEMS CORPORATION ("HISCo"), a
Delaware corporation, and HSA MANAGED CARE SYSTEMS, INC. (formerly HEALTH
SYSTEMS ARCHITECTS, INC.) ("HSA"), a Delaware corporation and a wholly-owned
subsidiary of HISCo.
RECITALS
A. The parties wish to provide for the merger (the "Merger") of Sub and HSA into
HISCo, whereby it is contemplated, among other things, that all shares of common
stock, $0.01 par value, of HISCo issued and outstanding ("HISCo Common Stock")
immediately prior to the Effective Time of the Merger, as hereinafter defined,
other than (1) HISCo Common Stock held by HMS and (2) Dissenting Shares, if any,
as defined, will be converted into the right to receive $11.96 per share (the
"Per Share Purchase Price") in cash, subject to adjustment as provided for in
Section 2.3(e) of this Agreement.
B. The parties hereto desire to set forth certain representations, warranties
and covenants made by HMS and Sub to HISCo and HSA, and by HISCo and HSA to HMS
and Sub, and the conditions precedent to the consummation of the Merger.
C. The Boards of Directors of HMS, Sub, HISCo and HSA, respectively, have
approved and adopted this Agreement and the Merger;
NOW, THEREFORE, in consideration of the premises and of the mutual
provisions, agreements and covenants herein contained, HMS, Sub, HISCo and HSA
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) "Dissenting Shares" shall mean shares of HISCo Common Stock which
shall be owned by stockholders who shall duly perfect appraisal rights in
accordance with Section 262 of the Delaware General Corporation Law (the "GCL").
<PAGE> 7
(b) "Dissenting Stockholders" shall mean those stockholders of HISCo
who are holders of Dissenting Shares and are entitled to appraisal rights.
(c) "HISCo Founders Shares" shall mean the shares of HISCo Common Stock
purchased in connection with the formation of HSA (then known as "Health
Information Systems Corporation") for a cash purchase price of $0.01 per share,
as set forth on Schedule 3.2 attached hereto.
(d) "HISCo Stockholders" shall mean all holders of HISCo Common Stock
immediately prior to the Effective Time of the Merger.
(e) "HISCo Stockholders' Meeting" shall mean the meeting, and any
adjournments thereof, of the holders of HISCo Common Stock called and convened
for the purpose of their consideration of and voting upon the transactions
contemplated by this Agreement and the Merger (the parties hereto agreeing that
approval of this Agreement and the Merger may instead be obtained by means of
written consents in accordance with Section 228(a) of the GCL).
(f) "Material Adverse Effect" on any entity (or group of entities taken
as a whole) shall mean an effect that is materially adverse to the consolidated
financial condition, assets, liabilities, business or results of operations of
such entity (or, if with respect thereto, of such group of entities taken as a
whole).
(g) "Material Agreements," as used in relation to HISCo and HSA, shall
have the meaning ascribed to such term in Section 3.12.
(h) "Subsidiary" means a corporation whose voting securities are owned
directly or indirectly by a "parent" corporation in such amounts as are
sufficient to elect at least a majority of the Board of Directors of the
Subsidiary.
(i) "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.
2
<PAGE> 8
1.2 Other Definitions. In addition to the terms defined in Section 1.1,
certain other terms are defined elsewhere in this Agreement; whenever such terms
are used in this Agreement they shall have their respective defined meanings,
unless the context expressly or by necessary implication otherwise requires.
ARTICLE 2.
THE MERGER
2.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, a Certificate of Merger, together with all other required
certificates, shall be filed in accordance with the requirements of Section 251
of the GCL as soon as practicable on or after the Closing Date. The Merger shall
become effective upon the filing of such certificate with the Secretary of State
of the State of Delaware (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 and HSA shall cease and Sub and HSA
shall be merged with and into HISCo as the surviving corporation (the "Surviving
Corporation");
(b) HISCo's Certificate of Incorporation, as amended by the Certificate
of Merger, and By-laws shall be the Certificate of Incorporation and By-laws of
the Surviving Corporation; and
(c) the persons listed on Exhibit A shall be the directors and officers
of the Surviving Corporation, and such officers shall continue to act as such
and hold such offices in the Surviving Corporation, until their respective
successors are duly elected and qualified.
2.3 Effect on HISCo Securities. As of the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of the holder of any
shares of the issued and outstanding shares of HISCo Common Stock:
(a) Cancellation of HISCo Common Stock Owned by HISCo. All shares of
HISCo Common Stock that are owned directly or indirectly by HISCo or any
Subsidiary of HISCo shall be cancelled, and no cash or other consideration shall
be delivered in exchange therefor.
(b) Conversion of HISCo Common Stock Owned by HMS. All shares of HISCo
Common Stock, if any, that are owned directly or indirectly by HMS or any
Subsidiary of HMS shall be converted into
3
<PAGE> 9
shares of issued and outstanding common stock of the Surviving Corporation on
the basis of 1,600 shares of HISCo Common Stock for each share of capital stock
of the Surviving Corporation.
(c) Conversion of HISCo Common Stock Owned by HISCo Stockholders Other
Than HMS. Other than shares of HISCo Common Stock owned directly or indirectly
by HMS or any Subsidiary of HMS to be converted pursuant to Section 2.3(a) and
Dissenting Shares, each share of HISCo Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall be converted,
without any action on the part of the holders thereof, into the right to receive
the Per Share Purchase Price.
(d) Adjustments of Price. If, after the date of this Agreement, the
outstanding shares of HISCo Common Stock 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 a stock dividend thereon shall be declared with a record date
within said period, then, in addition to all other rights and remedies that HMS
and Sub may have by reason of such event, HMS and Sub, in their sole discretion,
may elect that the Per Share Purchase Price shall be correspondingly adjusted.
(e) Dissenters' Rights of HISCo Stockholders. Any Dissenting Shares
shall not be converted into the right to receive the Per Share Purchase Price
but shall be converted into the right to receive such consideration as may be
determined to be due with respect to such Dissenting Shares pursuant to the GCL.
HISCo shall give HMS prompt notice of any demand received by HISCo for the right
to receive payment of the fair market value for the HISCo Common Stock, and HMS
shall have the right to participate in all negotiations and proceedings with
respect to such demand. HISCo agrees that, except with the prior written consent
of HMS, or as required under the GCL, HISCo will not voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
appraisal. Each Dissenting Stockholder who, pursuant to Section 262 of the GCL,
becomes entitled to payment of the value of shares of HISCo Common Stock shall
receive payment therefor (but only after the value therefor shall have been
agreed upon or finally determined pursuant to such provisions). In the event of
the legal obligation, after the Effective Time of the Merger, to deliver the Per
Share Purchase Price to any Dissenting Stockholder who shall have failed to make
an effective demand for appraisal or shall have lost his status as a Dissenting
Stockholder, HMS shall issue and deliver, upon surrender by such Dissenting
Stockholder of his certificate or certificates representing shares of HISCo
Common Stock, the aggregate Per Share Purchase Price to which such
4
<PAGE> 10
Dissenting Stockholder is then entitled under this Section 2.3, and Section 262
of the GCL.
2.4 Conversion of Sub Capital Stock. Each share of Sub capital stock
issued and outstanding immediately prior to the Effective Time of the Merger
shall be converted, without any action on the part of the holder thereof, into
one share of issued and outstanding capital stock of the Surviving Corporation.
2.5 Cancellation of HSA Capital Stock. Each share of HSA capital stock
issued and outstanding immediately prior to the Effective Time of the Merger
shall be cancelled, and no cash or other consideration shall be delivered in
exchange therefor.
2.6 Payment of Per Share Purchase Price.
(a) As soon as practicable after the Effective Time of the Merger, HMS
shall mail to each holder (other than HMS or any Subsidiary of HMS) of record of
a certificate or certificates representing then outstanding shares of HISCo
Common Stock (the "Certificates"), a Letter of Transmittal or similar instrument
for use in effecting the surrender of the Certificates in exchange for the Per
Share Purchase Price pursuant to Section 2.3 hereunder. Upon surrender to HMS of
a Certificate for cancellation after the Effective Time of the Merger, the
holder of such Certificate shall be entitled to receive in exchange therefor the
aggregate Per Share Purchase Price to which the holder of HISCo Common Stock is
entitled pursuant to Section 2.3 of this 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 HISCo Common Stock which is
not registered in the transfer records of HISCo, the aggregate Per Share
Purchase Price may be paid to a transferee if the Certificate representing the
right to receive such aggregate Per Share Purchase Price is presented to HMS and
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid. Until
surrendered as contemplated by this Section 2.4, each Certificate shall be
deemed at any time after the Effective Time of the Merger to represent the right
to receive upon such surrender the aggregate Per Share Purchase Price as
provided by Section 2.3 and the provisions of the GCL.
(b) No Further Ownership Rights in HISCo Common Stock. Payment of the
aggregate Per Share Purchase Price upon the surrender for exchange of shares of
HISCo Common Stock in accordance with the terms hereof shall be deemed to have
been paid in full satisfaction of all rights pertaining to such shares of
5
<PAGE> 11
HISCo Common Stock. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of HISCo Common
Stock which were outstanding immediately prior to the Effective Time of the
Merger. If, after the Effective Time of the Merger, Certificates, with respect
to shares of HISCo Common Stock owned by HISCo Stockholders other than HMS or
any Subsidiary of HMS are presented to the Surviving Corporation for any reason,
they shall be canceled and the aggregate Per Share Purchase Price or Per Option
Purchase Price, as the case may be, shall be paid therefor as provided in this
Article 2.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF HISCo and HSA
Each of HISCo and HSA 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. Each of HISCo and HSA 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.
3.2 Capital Structure. The authorized capital stock of HISCO consists
of 17,000,000 shares of Common Stock, $.01 par value, of which 3,894,396 shares
are issued and outstanding, inclusive of 2,500,000 HISCo Founders Shares,
1,500,000 shares of which are to be repurchased by HISCo immediately prior to
the Effective Time of the Merger as provided in Section 6.09, and 5,000,000
shares of Preferred Stock, $.01 par value, of which no shares are issued and
outstanding. All of the issued and outstanding HISCo Common Stock is owned of
record and beneficially by the stockholders as set forth on Schedule 3.2
attached hereto. All of the outstanding shares of HISCo Common 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 HISCo Common Stock are validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, HISCo's Certificate of Incorporation or By-laws or any
agreement to which HISCo is a party or is bound. There are 312,829 HISCo Options
outstanding, which are owned of record and beneficially by the holders thereof
as set forth on Schedule 3.2 attached hereto, all of which HISCo Options are to
be cancelled immediately prior to the
6
<PAGE> 12
Effective Time of the Merger as provided in Section 6.10. The authorized capital
stock of HSA consists of 1,000 shares of common stock, $.01 par value, of which
1,000 shares are issued and outstanding, all of which are owned by HISCo. Except
for the foregoing, there are no equity securities of any class of HISCo or HSA
or any security exchangeable or convertible into or exercisable for such equity
securities, issued, reserved for issuance or outstanding. There are no other
options, warrants, calls, rights, commitments or agreements of any character to
which HISCo or HSA is a party or by which they are bound obligating HISCo or HSA
to issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of HISCo or HSA or obligating HISCo or HSA to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. There are no voting trusts or other agreements or understandings with
respect to the shares of capital stock of HISCo or HSA.
3.3 Equity Investments. Neither HISCo nor HSA owns, directly or
indirectly, any equity interest in any corporation, partnership, joint venture,
trust or other business entity; provided, however, that HISCo owns all of the
outstanding capital stock of HSA.
3.4 Authority. Each of HISCo and HSA has all requisite corporate power
and authority to enter into this Agreement and, subject to approval of this
Agreement by the stockholders of HISCo and by HISCo in its capacity as the sole
stockholder of HSA, 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 each of HISCo and HSA, subject to such approval by the stockholders
of each of HISCo and HSA. This Agreement has been duly executed and delivered by
each of HISCo and HSA and, subject to such approval by the stockholders of each
of HISCo and HSA, constitutes a valid and binding obligation of each of HISCo
and HSA, enforceable against each of HISCo and HSA in accordance with its terms,
except as such terms may be (i) limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
(including fraudulent transfer laws), and (ii) subject to general principles of
equity, including without limitation, concepts of materiality, reasonableness,
good faith and fair dealing (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Subject to satisfaction of the
conditions set forth in Sections 7.1 and 7.3, 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
7
<PAGE> 13
acceleration of any obligation or to loss of a material benefit under (i) any
provision of the Certificate of Incorporation or Bylaws of HISCo or HSA or (ii)
any Material Agreement or permit, license, judgment, order, statute, rule or
regulation applicable to either HISCo or HSA 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 HISCo or HSA.
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 HISCo or HSA in
connection with the execution and delivery of this Agreement by HISCo and HSA or
the consummation by HISCo and HSA of the transactions contemplated hereby,
except for (i) the filing of a Certificate of Merger with the Secretary of State
of the State of Delaware, and appropriate documents with the relevant
authorities of other states in which HISCo or HSA 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 HISCo or HSA.
3.6 Financial Statements. HISCo has furnished to HMS: (i) the
consolidated balance sheet of HISCo as of October 31, 1996 (the "1996
Consolidated Balance Sheet") and the related consolidated statements of
earnings, stockholders' equity and cash flows for the year then ended (together
with the 1996 Consolidated Balance Sheet, the "1996 Consolidated Financial
Statements"), certified by Ernst & Young LLP, (ii) the unaudited balance sheet
of HSA as of October 31, 1996 (the "1996 HSA Balance Sheet") and the related
statements of earnings of HSA for the year then ended, certified by Controller
of HSA (together with the 1996 HSA Balance Sheet, the "1996 HSA Financial
Statements"), and (iii) the unaudited balance sheet of HSA as of January 31,
1997 (the "January Balance Sheet"), and the related statement of earnings of HSA
for the three months then ended, certified by the Controller of HSA (together
with the January Balance Sheet, the "Interim Financial Statements"). The 1996
Consolidated Financial Statements and 1996 HSA Financial Statements (including
any related schedules and/or notes, if any) and the Interim Financial Statements
are complete and correct in all material respects and have been prepared in
accordance with generally accepted accounting principles, consistently applied
("GAAP") and, in the case of the Interim Financial Statements, subject to normal
year-end adjustments. The 1996 Consolidated
8
<PAGE> 14
Balance Sheet and 1996 HSA Balance Sheet fairly present the consolidated
financial position of HISCo and the financial position of HSA as of their
respective dates, and the 1996 Consolidated Financial Statements and the 1996
HSA Financial Statements fairly present the consolidated results of operations
of HISCo and the unconsolidated results of operations of HSA, respectively, for
the period then ended. Except as described in Schedule 3.6 hereto, the Interim
Financial Statements are complete and correct in all material respects, fairly
present the financial position and earnings of HSA at the dates and for the
periods presented, and have been compiled in accordance with GAAP (except that
the Interim Financial Statements are subject to normal year-end adjustments
which, both individually and in the aggregate, will not differ materially and
adversely from the Interim Financial Statements). Except as described in
Schedule 3.6 hereto, there has been no material adverse change in the operations
or condition (financial or other) of HISCo since October 31, 1996 or HSA since
January 31, 1997. Except as reflected in the 1996 Consolidated Financial
Statements or the Interim Financial Statements, neither HISCo nor HSA had any
obligations or liabilities, absolute, accrued or contingent, as of October 31,
1996 and January 31, 1997, respectively, that are material to the business or
assets of either HISCo or HSA taken as a whole other than performance
obligations under contracts or agreements with customers.
3.7 Absence of Changes. Since October 31, 1996 and January 31, 1997,
respectively, neither HISCo nor HSA have, except as disclosed on Schedule 3.7
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 HISCo or HSA 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 HISCo or HSA,
except for those stock options set forth on Schedule 3.7 attached hereto;
(c) incurred additional debt for borrowed money, except in the ordinary
and usual course of business;
(d) paid any obligation or liability, or discharged, settled or
satisfied any claim, lien or encumbrance, except for current liabilities in the
ordinary and usual course of business;
9
<PAGE> 15
(e) declared, promised, or paid any dividend, payment or other
distribution on or with respect to any share of HISCo Common Stock;
(f) purchased, redeemed or otherwise acquired or committed itself to
acquire, directly or indirectly, any share or shares of HISCo Common Stock,
except as contemplated in this Agreement;
(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 HISCo or HSA;
(k) made any expenditure or commitment for the purchase, acquisition,
construction or improvement of a capital asset, except in the ordinary and usual
course of business consistent with past practices;
(l) sold, assigned, transferred or conveyed, or committed itself to
sell, assign, transfer or convey, any Proprietary Rights (as defined in Section
3.14), except in the ordinary course of business consistent with past practices
(including non-exclusive licensing in connection with the sale of equipment);
(m) effected or agreed to effect any amendment or supplement to any
employee benefit plan or arrangement or paid, agreed to pay or incurred any
obligation for any payment for, any contribution or other amount to or with
respect to, any employee benefit plan, or paid any bonus to, or granted any
increase in the compensation of, its officers, agents or employees, or made any
increase in the pension, retirement or other benefits of its directors,
officers, agents or other employees;
10
<PAGE> 16
(n) paid or committed itself to pay to or for the benefit of any of its
directors, officers, employees or stockholders any compensation of any kind
other than wages, salaries and benefits at times and rates in effect prior to
October 31, 1996 or January 31, 1997, respectively, except for increases and
bonuses to employees in the ordinary course of business consistent with past
practices;
(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
HISCo or HSA;
(p) 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
(q) received any notices, or has reason to believe, that any supplier
or customer of HISCo or HSA has taken or contemplates any steps which could
disrupt the business relationship of HISCo or HSA with said supplier or customer
or could result in the diminution in the value of HISCo or HSA as a going
concern.
3.8 Properties. Neither HISCo nor HSA owns any fee interest in real
property. The 1996 Consolidated Financial Statements and the Interim Financial
Statements reflect all of the personal property used by HISCo or HSA in its
business or otherwise held by HISCo or HSA, as of their respective dates, except
for (i) property acquired or disposed of in the ordinary and usual course of the
business of HISCo or HSA since the dates of the 1996 Consolidated Balance Sheet
and the January Balance Sheet, and (ii) property not required under generally
accepted accounting principles to be reflected thereon. Each of HISCo and HSA
has good and marketable title to all assets and properties listed on the 1996
Consolidated Balance Sheet and the January Balance Sheet and thereafter
acquired, free and clear of any imperfections of title, security interests,
liens, pledges, claims, charges, escrows, encumbrances, options, rights of first
refusal, mortgages, indentures, easements, licenses, security agreements or
other agreements, arrangements, contracts, commitments, understandings or
obligations (collectively, the "Encumbrances"), except (i) liens for current
taxes not yet due and payable or (ii) Encumbrances referred to in the 1996
Consolidated Balance Sheet, the January Balance Sheet or in Schedule 3.8
attached hereto (provided that the foregoing representation does not extend to
Proprietary Rights as to which Section 3.13 applies).
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3.9 Taxes. Each of HISCo and HSA has duly filed or caused to be filed
with the appropriate United States, state, local and foreign governmental
agencies all tax returns and reports required to be filed, and all such reports
are true, correct and complete in all material respects. Each of HISCo and HSA
has paid all Taxes shown thereon as owing. All Taxes due through the date of the
Closing will have been fully paid by that date or provided for by adequate
reserves. The 1996 Consolidated Financial Statements and the Interim Financial
Statements reflect all Taxes accrued through the period indicated thereon.
Neither HISCo nor HSA is 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 HISCo or HSA. 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 HISCo
or HSA.
3.10 Compliance with Law. Except for possible minor exceptions, the
curing or non-curing of which would not have a Material Adverse Effect on HISCo
or HSA, the business of HISCo and HSA has been conducted in accordance with all
applicable laws, regulations, orders and other requirements of governmental
authorities.
3.11 Litigation. Except as otherwise set forth on Schedule 3.11
attached hereto, there is no claim, dispute, action, proceeding, suit or appeal,
or investigation, at law or in equity, pending against HISCo or HSA or affecting
any of its assets or properties (including the Proprietary Rights), before any
court, agency, authority, arbitration panel or other tribunal and none has been
threatened against HISCo or HSA. There are no facts which, if known to
stockholders, customers, governmental authorities or other persons, would be a
basis for any such claim, dispute, action, proceeding, suit or appeal or
investigation which would have a Material Adverse Effect on HISCo or HSA.
Neither HISCo nor HSA is subject to any order, writ, injunction or decree of any
court, agency, authority, arbitration panel or other tribunal.
3.12 Material Agreements. Schedule 3.12 attached hereto consists of a
true and complete list of all Material Agreements relating to HISCo or HSA, and
not listed on another schedule hereto, to which HISCo or HSA is a party and
which have been entered into by HISCo or HSA after June 30, 1995. Schedule 3.12
further identifies each of the Material Agreements which contain change of
control provisions. Prior to the execution of this Agreement, HISCo and HSA have
delivered or made available to HMS a true and complete copy of each such
Material Agreement. Except as
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set forth on Schedule 3.12 attached hereto or any other schedule to this
Agreement, neither HISCo nor HSA is 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 HISCo or
HSA with a third person;
(b) each contract or agreement under which HISCo or HSA 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 HISCo or
HSA 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 HISCo or HSA of more than
$25,000;
(d) 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 HISCo or HSA, without regard to
the value thereof;
(e) all leases and subleases from any third person to HISCo or HSA;
(f) each contract or agreement to which HISCo, HSA or their affiliates
is a party limiting, in any material respect, the right of HISCo or HSA prior to
the Effective Date of the Merger, or the Surviving Corporation or any of its
subsidiaries or affiliates at or after the Effective Time of the Merger (i) to
engage in, or to compete with any person in, any business, including each
contract or agreement containing exclusivity provisions restricting the
geographical area in which, or the method by which, any business may be
conducted by HISCo, HSA or any of their affiliates prior to the Effective Time
of the Merger, or the Surviving Corporation or any of its subsidiaries or
affiliates after the Effective Date or (iii) to solicit any customer or client;
(g) all material licenses, licensing agreements and other agreements
pertaining to any Proprietary Rights;
(h) all distribution and development agreements; and
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(i) all other contracts or agreements which are material to HISCo or
HSA or the conduct of its business, other than those made in the ordinary and
usual course of business or those which are terminable by HISCo or HSA upon no
greater than sixty (60) days prior notice and without penalty or other adverse
consequences.
Except for those matters which, individually or in the aggregate, do
not and will not have a Material Adverse Effect on HISCo or HSA, no third party
has made or raised any claim, dispute or controversy with respect to any of the
Material Agreements nor has HISCo or HSA received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by HISCo or HSA 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.
3.13 Proprietary Rights. HISCo or HSA 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
HISCo or HSA, and the same are sufficient to conduct HISCo's or HSA'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, HISCo, HSA 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 HISCo and HSA do not conflict
with or infringe, and no one has asserted to HISCo or HSA that such operations
conflict with or infringe, any Proprietary Rights owned, possessed or used by
any third party.
3.14 No Conflict. The execution and delivery of this Agreement by HISCo
and HSA, and the performance of each of their obligations hereunder, (i) are not
in violation or breach of, and
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will not conflict with or constitute a default under, any of the terms of the
Certificate of Incorporation or By-laws of HISCo or HSA or any Material
Agreement; (ii) will not give rise to a right by any party to terminate its
obligations under any Material Agreement; (iii) will not result in 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 HISCo or HSA; and
(iv) will not conflict with or violate any applicable law, rule, regulation,
judgment, order or decree of any government, governmental instrumentality or
court having jurisdiction over HISCo or HSA or any of its assets or properties.
Schedule 3.14 attached hereto contains a full and complete list of all necessary
consents, waivers and approvals required in connection with the execution and
delivery of this Agreement by HISCo and HSA and the performance of HISCo's and
HSA's obligations hereunder.
3.15 No Default. Each of HISCo and HSA 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 HISCo or HSA, assuming in the
case of any such agreement, that it is a legal, binding and enforceable
obligation of the other party(ies) thereto, enforceable in accordance with its
terms, except as such terms may be (i) limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally (including fraudulent transfer laws), and (ii) subject to
general principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
3.16 Information Supplied. None of the information provided or to be
provided by HISCo and HSA to HMS in writing in connection with the transactions
contemplated by this Agreement contains or will contain, at the time such
information was or is provided, any untrue statement of a material fact or omits
or will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. To the extent facts or circumstances
occur subsequent to the provision by HISCo or HSA of any written information to
HMS which causes such information to become materially misleading, HISCo and HSA
will update such information in order to make the statements made, in light of
the circumstances under which they were made, not misleading. HISCo's and HSA's
obligation to update hereunder shall commence as of the
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date of this Agreement and shall continue thereafter until the Closing Date.
3.17 Labor Relations; Employees. No past or current HISCo or HSA
employee has made a claim before any government agency or in any court against
HISCo or HSA or threatened to make such a claim. Each of HISCo and HSA 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 their respective employees through the
Closing Date (whether or not payable by such date). Upon termination of the
employment of any HISCo or HSA employee by HMS, HMS will not incur any liability
for any severance or termination pay or other similar payment except as
expressly provided in employment agreements listed on Schedule 3.12. Each of
HISCo and HSA 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. There is no unfair labor practice
complaint against HISCo or HSA pending before the National Labor Relations Board
or strike, dispute, slowdown or stoppage pending or threatened against or
involving HISCo or HSA, and none has occurred since October 31, 1996. No
representation question exists respecting the employees of HISCo or HSA and no
collective bargaining agreement is currently being negotiated by HISCo or HSA.
3.18 Customers and Suppliers. Schedule 3.18 is a true and complete list
of each of HSA's 10 largest customers and suppliers (measured by dollar volume
in each case) during fiscal year 1996 and the first quarter of fiscal year 1997
showing, with respect to each, the name and address, dollar volume involved and
nature of the relationship (including the principal categories of products or
services bought and sold).
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF HMS AND SUB
HMS represents and warrants to HISCo and HSA as of the date hereof and
as of the Closing Date as follows:
4.1 Organization. Each of HMS and Sub is a corporation duly
incorporated, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has the full power and authority
(corporate or otherwise) to carry on its business in the places and as it is now
being conducted and to own and lease the properties which it now owns and
leases.
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4.2 Capital Structure of Sub. The authorized capital stock of Sub
consists of 200 shares of Common Stock, $.01 par value ("Sub Common"). Upon the
execution of this Agreement, 200 shares of Sub Common were validly issued and
outstanding and were and, as of the Effective Time of the Merger will be, held
by HMS of record and beneficially.
4.3 Authority. HMS and Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by the Board of Directors of HMS and Sub. This Agreement has been duly executed
and delivered by HMS and Sub and constitutes valid and binding obligations of
HMS and Sub, enforceable against them in accordance with its terms, except as
such terms may be (i) limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
(including fraudulent transfer laws), and (ii) subject to general principles of
equity, including without limitation, concepts of materiality, reasonableness,
good faith and fair dealing (regardless of whether such enforceability is
considered in a proceeding in equity or at law). Subject to satisfaction of the
conditions set forth in Sections 7.1 and 7.2, the execution and delivery of this
Agreement do not, and the consummation of the transactions contemplated hereby
will not, conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to loss of a
material benefit under (i) any provision of the Certificate of Incorporation or
Bylaws of HMS, (ii) any provision of the 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 and HMS's Subsidiaries.
4.4 Governmental Consents. No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity is
required by or with respect to HMS or Sub in 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 Secretary of State of the State of Delaware and appropriate
documents with the relevant authorities of other states in which HMS or Sub is
qualified to do business, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state
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securities laws and the laws of any foreign country, (iii) the filing of such
reports under Section 13 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as may be required in connection with this Agreement and the
transactions contemplated hereby, and (iv) such other consents, authorizations,
filings, approvals and registrations which if not obtained or made would not
have a Material Adverse Effect on HMS, Sub and Subsidiaries.
4.5 No Conflict. The execution and delivery of this Agreement and the
Merger Agreement by HMS, and the performance of its obligations hereunder or
thereunder, (i) are not in violation or breach of, and will not conflict with or
constitute a default under, any of the terms of the Certificate of Incorporation
or Bylaws of HMS or any of its Subsidiaries, or any material contract, agreement
or commitment binding upon HMS or any of its Subsidiaries or any of their assets
or properties; (ii) will not give rise to a right by any party to terminate its
obligations under any HMS material agreement; (iii) will not result in the
creation or imposition of any lien, encumbrance, equity or restriction in favor
of any third party upon any of the material assets or properties of HMS or any
of its Subsidiaries; and (iv) will not conflict with or violate any applicable
law, rule, regulation, judgment, order or decree of any government, governmental
instrumentality or court having jurisdiction over HMS or any of its Subsidiaries
or any of their assets or properties.
4.6 No Prior Activities. Sub has not incurred any liabilities or
obligations, except those incurred in connection with its incorporation or with
the negotiation and consummation of this Agreement and the transactions
contemplated hereby. Sub has not engaged in any business or activities of any
type or kind whatsoever, or entered into any agreements or arrangements with any
person or entity, and is not subject to or bound by any obligation or
undertaking which are not contemplated by this Agreement or incurred in
connection with its incorporation.
ARTICLE 5.
COVENANTS RELATING TO CONDUCT OF BUSINESS
During the period from the date of this Agreement and continuing until
the Effective Time of the Merger, each of HISCo and HSA agrees (except as
expressly contemplated by this Agreement or to the extent that HMS shall
otherwise consent in writing) that:
5.1 Ordinary Course. It 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
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the same manner as heretofore conducted and, to the extent consistent with such
business; (ii) to preserve intact its present business organization; (iii) keep
available the services of its present officers and key employees and preserve
its relationship with customers, suppliers and others having business dealings
with it; and (iv) maintain continuously insurance coverage substantially
equivalent to the insurance coverage in existence on the date of this Agreement.
In addition, neither HISCo nor HSA will engage in any transaction not in the
ordinary course consistent with its past practices, nor will HISCo or HSA 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. Neither HISCo nor HSA shall: (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 HISCo
or HSA or (iii) repurchase or otherwise acquire any shares of its capital stock,
except for the repurchase of HISCo Founders Shares as provided in Section 6.09
and the cancellation of the HISCo Options as provided in Section 6.10.
5.3 Issuance of Securities. Neither HISCo nor HSA shall 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. Neither HISCo nor HSA shall amend its
Certificate of Incorporation or By-laws, except as contemplated in this
Agreement.
5.5 No Acquisitions. Neither HISCo nor HSA shall 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 either HISCo or HSA taken as a whole,
except with the prior written consent of HMS.
5.6 No Dispositions. Neither HISCo nor HSA shall sell, lease or
otherwise dispose of any of its assets, which are material,
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individually or in the aggregate, to either HISCo or HSA, except in the ordinary
course of business consistent with prior practice.
5.7 Indebtedness. Neither HISCo nor HSA shall 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 HISCo or HSA or guarantee any
debt securities of others.
5.8 Benefit Plans, Etc. Neither HISCo nor HSA shall adopt or amend in
any material respect any agreement with employees, other than as provided in
this Agreement.
5.9 Accounting Practices. Neither HISCo nor HSA shall alter the manner
of keeping its books, accounts or records, or change in any manner the
accounting practices therein reflected.
5.10 Other Agreements. Neither HISCo nor HSA shall agree, in writing or
otherwise, to do any of the foregoing.
ARTICLE 6.
ADDITIONAL AGREEMENTS
6.1 Access to Information. Each of HISCo and HSA 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 HISCo's and HSA's properties, books, contracts, commitments
and records and, during such period, HISCo and HSA shall use all reasonable
efforts to furnish promptly to HMS all other information concerning the
business, properties and personnel of HISCo and HSA as HMS may reasonably
request. 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 HISCo and HSA all nonpublic documents
obtained from HISCo and HSA which it would not otherwise have been entitled to
obtain, and any copies made of such documents, extracts and copies thereof, as
well as schedules, exhibits or other documents contained in or derived from such
information. Notwithstanding the foregoing, HMS shall be permitted to disclose
such information in its filings with the Securities and Exchange Commission as
and to the extent required under applicable federal securities laws.
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6.2 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.
6.3 HISCo Stockholders' Approval. HISCo agrees to submit this Agreement
and any related matters to its stockholders for approval, as provided by law and
its Certificate of Incorporation and By-laws, immediately following the
execution of this Agreement. The Board of Directors of HISCo will, subject to
its fiduciary duties, unanimously recommend to the HISCo stockholders that such
stockholders approve the transactions contemplated by this Agreement. In
addition, HISCo shall approve this Agreement and the transactions contemplated
hereby in its capacity as the sole stockholder of HSA. HMS agrees to vote its
shares in HISCo in favor of the transactions contemplated by this Agreement.
6.4 Dissenting Shares. As promptly as practicable after the date of the
HISCo Stockholders' Meeting, or the approval of this Agreement and the Merger by
means of written consents in accordance with Section 228(a) of the GCL, HISCo
shall furnish HMS with the name, address and number of Dissenting Shares owned
by each Dissenting Stockholder.
6.5 Employee Benefits. HMS agrees that, after the Closing Date, HSA
employees will be afforded the opportunity to continue to participate in
benefits programs that are currently available to them. In addition, they will
be afforded the opportunity to participate in equity acquisition programs that
are currently available to all HMS employees. For purposes of participating in
all such programs, HSA employees will be given length of service credit, to the
extent applicable, for the period of their employment by HSA and its
predecessors in interest.
6.6 Communications. Between the date hereof and the Effective Time of
the Merger, neither HISCo, HSA nor HMS will furnish any communication to its
stockholders 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 parties as to the content hereof, which
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approval shall not be unreasonably withheld; provided, however, that HMS shall
be entitled to make any disclosure to the public as it shall reasonably believe
to be necessary to comply with the requirements of federal or state securities
laws or the Nasdaq National Market System (provided that, in such event, HMS
shall make reasonable efforts to advise HISCo and HSA in advance of such
disclosure).
6.7 Notification of Certain Matters. HISCo and HSA shall give prompt
notice to HMS and HMS shall give prompt notice to HISCo and HSA, 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 HISCo, HSA, 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 6.9 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
6.8 Sub Sole Stockholder's Approval. HMS agrees, in its capacity as the
sole stockholder of Sub, to approve this Agreement and any related matters, as
provided by law and Sub's Certificate of Incorporation and By-laws, immediately
following the execution of this Agreement.
6.9 Repurchase of HISCo Founders Shares. Prior to the Effective Time of
the Merger, HISCo shall repurchase the HISCo Founders Shares owned by HISCo
Stockholders other than HMS or any Subsidiary of HMS for $0.01196 in cash per
share.
6.10 Cancellation of HISCo Options. Prior to the Effective Time of the
Merger, HISCo shall cancel all of the HISCo Options then issued and outstanding
upon HSA's payment to the respective HSA employee optionholders and HMS's
payment to the remainder of the optionholders an amount in cash in respect of
each share issuable under such HISCo Options equal to the difference between (i)
the Per Share Purchase Price and (11) the exercise price of such HISCo Options.
Holders of HISCo Options cancelled as provided herein shall be afforded the
right to exercise dissenters' rights pursuant to Section 262 of the GCL as if
they had elected to exercise their respective HISCo Options immediately prior to
the
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cancellation thereof. Holders of HISCo Options that exercise dissenters' rights
shall be entitled to retain the payments provided in this Section 6.10 in
respect of cancelled HISCo Options regardless of whether the appraised value of
such HISCo Options turns out to be less than such payments.
ARTICLE 7.
CONDITIONS PRECEDENT
7.1 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) Stockholder Approval. This Agreement shall have been approved and
adopted by the required affirmative vote of (i) the holders of the outstanding
shares of HISCo Common Stock, (ii) HISCo in its capacity as the sole stockholder
of HSA and (iii) HMS in its capacity as the sole stockholder of Sub.
(b) Government Approvals. All authorizations, consents, orders or
approvals of, or declarations or filings with, or expiration of waiting periods
imposed by, any Governmental Entity necessary for the consummation of the
transactions contemplated by this Agreement shall have been filed, occurred or
been obtained, other than filings with and approvals by any Governmental Entity
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,
HISCo or HSA.
(c) Third-Party Approvals. Any and all consents or approvals required
from third parties that if not obtained would have a Material Adverse Effect on
HISCo or HSA shall have been obtained.
(d) Legal Action. No temporary restraining order, preliminary
injunction or permanent injunction or other order preventing the consummation of
the Merger shall have been issued by any federal or state court and remain in
effect, and no litigation seeking the issuance of such an order or injunction,
or seeking the imposition against HISCo, HSA or HMS of substantial damages if
the Merger is consummated, shall be pending or threatened which, in the good
faith judgment of HISCo's, HSA'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.
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(e) Statutes. No statute, rule or regulation shall have been enacted by
the government of the United States or any state or agency thereof which would
make the consummation of the Merger illegal.
7.2 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 HISCo and HSA 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 Acting President of HISCo and the Chief Executive Officer and Controller
of HSA.
(b) Performance of Obligations of HISCo and HSA. HISCo and HSA shall
have performed in all material respects all obligations required to be performed
by them under this Agreement prior to the Closing Date, and HMS shall have
received a certificate signed by the Acting President of HISCo and the Chief
Executive Officer of HSA to such effect.
(c) No Adverse Change in the Business of HISCo and HSA. HMS shall have
received a certificate signed by the Acting President of HISCo and the Chief
Executive Officer and Controller of HSA that since the date of the 1996
Consolidated Financial Statements and the Interim Financial Statements,
respectively, there has been no Material Adverse Change in the business of HISCo
and HSA.
(d) Corporate Action. HMS shall have received from HISCo and HSA
certified copies of resolutions of HISCo's and HSA's stockholders 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 HISCo and HSA by the corporate secretaries or other authorized officers of
HISCo and HSA to such effect.
(e) Repurchase of HISCo Founders Shares. Immediately prior to the
Effective Time of the Merger, HISCo shall have repurchased the HISCo Founders
Shares (except for HISCo Founders Shares owned by HMS or any Subsidiary of HMS)
for a cash price of $0.01196 per share.
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<PAGE> 30
(f) Cancellation of HISCo Options. Immediately prior to the Effective
Time of the Merger, HISCo shall have cancelled the HISCo Options.
7.3 Conditions to Obligations of HISCo and HSA. The obligations of
HISCo and HSA to effect the Merger are subject to the satisfaction on or prior
to the Closing Date of the following conditions unless waived by HISCo and HSA:
(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 HISCo and HSA shall have received a certificate signed by the Chief
Executive and Chief Financial Officers of HMS to such effect.
(b) Performance of Obligations of HMS and Sub. HMS and Sub shall have
performed all obligations required to be performed by them under this Agreement
prior to the Closing Date, and HISCo and HSA shall have received a certificate
signed by the Chief Executive Officer of HMS to such effect.
(c) Corporate Action. HISCo and HSA shall have received from HMS
certified copies of resolutions of Sub's sole stockholder and of HMS's and Sub's
Boards of Directors approving and adopting this Agreement and the transactions
contemplated hereby, and HISCo and HSA shall have received a certificate signed
on behalf of each of HMS and Sub by the corporate secretary or other authorized
officer of each such company to such effect.
ARTICLE 8.
CLOSING
8.1 Closing Date. The Closing under this Agreement (the "Closing")
shall be held not more than five (5) business days 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 before March 18, 1997. In any
event, if the Closing has not occurred on or before April 17, 1997, this
Agreement may be terminated as provided in Article 11. 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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<PAGE> 31
8.2 Filing Date. Subject to the provisions of this Agreement, on the
Closing Date, a fully-executed and acknowledged copy of this Agreement, if
required, along with required related certificates of HISCo, HSA and Sub meeting
the requirements of the GCL, shall be filed with the Secretary of State of the
State of Delaware, all in accordance with the provisions of this Agreement.
ARTICLE 9.
TERMINATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties and covenants contained in this
Agreement shall terminate simultaneously with the Effective Time of the Merger.
ARTICLE 10.
PAYMENT OF EXPENSES
HMS, Sub HISCo and HSA shall each pay their own out-of-pocket expenses
incurred incident to the preparation and carrying out of the transactions herein
contemplated, whether or not such transactions are consummated; provided,
however, that if the Merger is consummated, HISCo's and HSA's out-of pocket
expenses (including reasonable attorneys fees) will be paid one-half by HMS and
one-half by Welsh, Carson, Anderson & Stowe VI, L.P.
ARTICLE 11.
TERMINATION, AMENDMENT AND WAIVER
11.1 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 stockholders of HISCo:
(a) by mutual written consent of HISCo and HMS;
(b) by HMS or HISCo, 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 HISCo if the Merger shall not have been
consummated on or before April 17, 1997; provided, however, that if the Merger
shall not be consummated on or before April 17, 1997,
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<PAGE> 32
because of a party's failure to satisfy any of the conditions set forth in
Sections 7.2 or 7.3, neither HMS nor HISCo may rely upon its own actions or lack
thereof to terminate the Agreement.
(d) by either HMS or HISCo 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 HISCo 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, HISCo's or HSA's ownership or operation of all or a material portion of
the business or assets of HISCo, HSA or HMS and its Subsidiaries taken as a
whole, or compel HMS, HISCo or HSA to dispose of or hold separate all or a
material portion of the business or assets of HISCo and its Subsidiaries taken
as a whole or HMS and its Subsidiaries taken as a whole, as a result of the
Merger or (B) render HMS, HISCo or HSA unable to consummate the Merger, except
for any waiting period provisions;
Where action is taken to terminate this Agreement pursuant to this
Section 11.01, it shall be sufficient for such action to be authorized by the
Board of Directors of the party taking such action.
11.2 Effect of Termination. In the event of termination of this
Agreement by either HISCo or HMS as provided in Section 11.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of HMS, HISCo or HSA or their respective officers or directors 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.
11.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective Board of Directors, at any time before or after
approval of matters presented in connection with the Merger by the stockholders
of HISCo, HSA and Sub but, after any such stockholder approval, no amendment
shall be made which by law requires the further approval of stockholders 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.
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<PAGE> 33
11.4 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 12.
GENERAL
12.1 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the other shall be in writing and delivered
personally or sent by certified mail, postage prepaid, as follows:
If to HMS or Sub:
Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Attention: President
with a copy to
Coleman & Rhine LLP
1120 Avenue of the Americas
New York, New York 10036
Attention: Bruce S. Coleman, Esq.
If to HISCo or HSA:
Health Information Systems Corporation
401 Park Avenue South
New York, New York 10016
Attention: Acting President
with a copy to
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attention: Robert A. Schwed, Esq.
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<PAGE> 34
for to such other persons as may be designated in writing by the parties, by a
notice given as aforesaid.
12.2 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.
12.3 Counterparts. This Agreement may be executed in counter parts, and
when so executed each counterpart shall be deemed to be an original, and said
counterparts together shall constitute one and the same instrument.
12.4 Binding Nature. This Agreement shall be binding upon and inure to
the benefit of the parties hereto. Neither HMS, Sub, HISCo nor HSA may assign or
transfer any rights under this Agreement.
12.5 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.
12.6 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.
12.7 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.
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<PAGE> 35
IN WITNESS WHEREOF, HMS, Sub, HISCo and HSA have caused this Agreement
to be duly signed all as of the date first written
HEALTH MANAGEMENT SYSTEMS, INC.
By:_____________________________________
HISCO ACQUISITION CORP.
By:_____________________________________
HEALTH INFORMATION SYSTEMS CORPORATION
By:_____________________________________
HSA MANAGED CARE SYSTEMS, INC.
By:_____________________________________
<PAGE> 36
Agreed And Accepted
With Respect To Article 10 Only:
WELSH, CARSON, ANDERSON & STOWE
By:_____________________________
<PAGE> 1
Exhibit 10.1
GUARANTY AGREEMENT ("Guaranty") dated as of April 16, 1997, between
HEALTH MANAGEMENT SYSTEMS, INC. (the "Guarantor") and THE CHASE MANHATTAN BANK
(the "Bank").
PRELIMINARY STATEMENT. The Bank has agreed to provide a One Million
Six Hundred Thousand Dollar ($1,600,000) loan (the "Loan") to Robert V.
Nagelhout (the "Borrower") pursuant to a Note dated the date hereof between the
Bank and the Borrower and any and all documentation executed in connection
therewith (as the same may be amended from time to time, the "Note"). It is a
condition precedent to the obligation of the Bank to provide the Loan that the
Guarantor shall have guaranteed the obligations of the Borrower under the Note
to the extent and in the manner herein set forth.
NOW, THEREFORE, in consideration of the premises and in order to
induce the Bank to provide the Loan to the Borrower as provided in the Note, the
Guarantor hereby agrees as follows:
SECTION 1. Loan Guaranty. The Guarantor hereby irrevocably,
absolutely and unconditionally guarantees to the Bank and its successors,
endorsees, transferees and assigns the prompt and complete payment by the
Borrower, as and when due and payable (whether on a scheduled payment date, on
acceleration or otherwise), of all indebtedness, obligations and liabilities of
the Borrower to the Bank now existing or hereafter incurred under or arising out
of or in connection with the Loan, whether for principal, interest, fees,
expenses or otherwise (all such indebtedness, obligations, and liabilities being
herein called the "Loan Obligations"); and agrees to pay any and all expenses
(including reasonable counsel fees and expenses) which may be paid or incurred
by the Bank by reason of Borrower's default under the Note in collecting any or
all of the Loan Obligations and/or enforcing any rights under the Note or under
the Loan Obligations (the "Loan Guaranty").
SECTION 2. Guarantor's Obligations Unconditional. The Guarantor
hereby guarantees that the Loan Obligations will be paid strictly in accordance
with the terms of the Note, regardless of any law, now or hereafter in effect in
any jurisdiction affecting any such terms or the rights of the Bank with respect
thereto. The obligations and liabilities of the Guarantor under this Guaranty
shall be absolute and unconditional irrespective of: (1) any lack of validity or
enforceability of any of the Loan Obligations, the Note, or any agreement or
instrument relating thereto; (2) any change in the time, manner or place of
payment of, or in any other term in respect of, all or any of the Loan
Obligations, or any other amendment or waiver of or consent to any departure
from the Note; or (3) any other circumstances which might otherwise constitute a
defense available to, or a discharge of, a guarantor in respect of the Loan
Obligations.
<PAGE> 2
This Guaranty is a continuing guaranty and shall remain in full
force and effect until: (1) the payment in full of all the Loan Obligations, and
(2) the payment of the other expenses to be paid by the Guarantor pursuant
hereto. This Guaranty shall continue to be effective or shall be reinstated, as
the case may be, if at any time any payment, or any part thereof, of any of the
Loan Obligations is rescinded or must otherwise be returned by the Bank upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of the
Borrower or otherwise, all as though such payment had not been made.
The obligations and liabilities of the Guarantor under this Guaranty
shall not be conditioned or contingent upon the pursuit by the Bank or any other
person at any time of any right or remedy against the Borrower or any other
person which may be become liable in respect of all or any part of the Loan
Obligations or against any collateral or security or guarantee therefor or right
of setoff with respect thereto.
The Guarantor hereby consents that, without the necessity of any
reservation of rights against the Guarantor and without notice to or further
assent by the Guarantor, any demand for payment of any of the Loan Obligations
made by the Bank may be rescinded by the Bank and any of the Loan Obligations
continued after such rescission.
SECTION 3. Waivers. The Guarantor hereby waives: (a) promptness and
diligence; (b) notice of or proof of reliance by the Bank upon this Guaranty or
acceptance of this Guaranty; (c) notice of the incurrence of any Loan
Obligations by the Borrower or the renewal, extension or accrual of any Loan
Obligation; (d) notice of any actions taken by the Bank or the Borrower or any
other party under the Note or any other agreement or instrument relating
thereto; (e) all other notices, demands and protests, and all other formalities
of every kind in connection with the enforcement of the Loan Obligations or of
the obligations of the Guarantor hereunder, the omission of or delay in which,
but for the provisions of this Section 3, might constitute grounds for relieving
the Guarantor of its obligations hereunder; and (f) any requirement that the
Bank protect, secure, perfect or insure any lien or security interest, or any
property subject thereto or exhaust any right or take any action against the
Borrower or any other person or any collateral.
SECTION 4. Subrogation. The Guarantor will not exercise any rights
which it may acquire by way of subrogation under this Guaranty, whether acquired
by any payment made hereunder, by any setoff or application of funds of such
Guarantor by the Bank or otherwise, until (a) the payment in full of the Loan
Obligations, and (b) the payment of all other expenses to be paid by the
Guarantor pursuant hereto. If any amount shall be paid to the Guarantor on
account of such subrogation rights at any time when all of the Loan Obligations
and all such other
2
<PAGE> 3
expenses shall not have been paid in full, such amount shall be held in trust
for the benefit of the Bank, shall be segregated from the other funds of the
Guarantor and shall forthwith be paid over to the Bank to be credited and
applied in whole or in part by the Bank against the Loan Obligations, whether
matured or unmatured, and all such other expenses in accordance with the terms
of this Guaranty.
SECTION 5. Representations and Warranties. The Guarantor represents
and warrants as follows as of the date of this Guaranty:
(a) The Guarantor is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its assets and
to transact the business in which it is engaged or proposed to be engaged,
and is duly qualified as a foreign corporation and in good standing under
the laws of each other jurisdiction in which such qualification is
required except where failure to qualify would not have a material adverse
effect on Guarantor, its assets or properties.
(b) The execution, delivery and performance by the Guarantor of the
Guaranty has been duly authorized by all corporate action and does not and
will not: (i) require any consent or approval of its stockholders; (ii)
contravene its charter or by-laws; (iii) violate any provisions of any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect applicable to it; (iv) result
in a breach of, constitute a default under or otherwise contravene any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which it is a party or by which it or its properties may be
bound or affected; (v) result in, or require, the creations or imposition
of any lien, security interest or other charge or encumbrance upon or with
respect to any of its properties now owned or hereafter acquired: or (vi)
cause it to be in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
(c) No authorization or approval or other action by, and no notice
to or filing with, any governmental authority or other regulatory body is
required for the due execution, delivery and performance by the Guarantor
of this Guaranty.
(d) This Guaranty constitutes a legal valid and binding obligation
of the Guarantor enforceable in accordance with its terms, except to the
extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditor's rights generally.
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<PAGE> 4
(e) Other than as disclosed on Schedule A attached hereto, there is
no action, suit or proceeding pending or to Guarantor's knowledge
threatened against or otherwise affecting the Guarantor before any court
or other governmental authority or any arbitrator which may, in any one
case or in the aggregate, materially adversely affect the financial
condition, operations, properties or business of the Guarantor or the
ability of the Guarantor to perform its obligations under this Guaranty.
SECTION 6. Right of Set-Off. If the Borrower defaults in the
payments or performance of any of its Loan Obligations the Bank may, and is
hereby authorized, at any time and from time to time, without notice to the
Guarantor (any such notice being expressly waived by the Guarantor), to set-off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by the Bank
to or for the credit or the account of the Guarantor against any and all
obligations of the Guarantor now or hereafter existing under this Guaranty,
irrespective of whether or not the Bank shall have made any demand under this
Guaranty and although such obligations may be contingent or unmatured. The Bank
agrees promptly to notify the Guarantor after any such set-off and application,
provided that the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Bank under this Section 6 are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) which the Bank may have.
SECTION 7. Indemnity and Expenses. (a) The Guarantor agrees to
indemnify the Bank from and against any and all claims, losses and liabilities
growing out of or resulting from this Guaranty to the extent of such claim, loss
or liability (including, without limitation, enforcement of this Guaranty
against the Guarantor), except claims, losses or liabilities resulting from the
Bank's gross negligence or willful misconduct.
(b) The Guarantor will upon demand and proof of the expenses being
incurred, pay to the Bank the amount of any and all expenses, including the
reasonable fees and disbursements of counsel to the Bank and of any experts and
agents, which the Bank may incur in connection with the enforcement of this
Guaranty. The Guarantor will upon demand and proof of the expenses being
incurred, pay to the Bank the amount of any and all expenses, including the
reasonable fees and disbursements of counsel to the Bank and of any experts and
agents, which the Bank may incur in connection with (i) the exercise or
enforcement of any of the rights of the Bank hereunder against the Guarantor, or
(ii) the failure by the Guarantor to perform or observe any of the provisions
hereof.
SECTION 8. Amendments, Etc. No amendment or waiver of any provision
of this Guaranty nor consent to any departure by the Guarantor herefrom
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<PAGE> 5
shall in any event be effective unless the same shall be in writing and signed
by the Bank, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.
SECTION 9. Addresses for Notices. All notices and other
communications provided for hereunder shall be in writing (including telegraphic
and telecopied communication) and, if to the Guarantor, mailed, telegraphed,
telecopied or delivered to the Guarantor, addressed to the Guarantor at 401 Park
Avenue South, New York, New York 10016, Attention: Phillip Siegel; with a copy
to the Guarantor's counsel at Coleman & Rhine, LLP, 1120 Avenue of the Americas,
New York, New York 10036, Attention: Kenneth S. Goodwin; if to the Bank, mailed,
telegraphed, telecopied or delivered to the Bank, addressed to the Bank at the
Manhattan Middle Market Division, 1411 Broadway, Fifth Floor, New York, New York
10018, Attention: Maria Florez; with a copy to Rodger Tighe, Esq., Dewey
Ballantine, 1301 Avenue of the Americas, New York, New York 10019; or as to
either party at such other address as shall be designated by such party in a
written notice to each other party complying as to delivery with the terms of
this Section. All such notices and other communications shall, when mailed,
telegraphed, telecopied or delivered, respectively, be effective when deposited
in the mails, telecopied, delivered to the telegraph company or delivered,
respectively, addressed as aforesaid.
SECTION 10. Assignment. The Bank may upon notice to Guarantor assign
or otherwise transfer the Loan Obligations held by it to any other person, and
such other person shall thereupon become vested with all the benefits in respect
thereof granted to the Bank herein or otherwise; provided, however, failure of
the Bank to deliver notice of assignment in no way limits the obligations of the
Guarantor under this Guaranty.
SECTION 11. Severability of Provisions. Any provision of this
Guaranty which is prohibited or unenforceable in any jurisdiction, shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
SECTION 12. Headings. Section headings in this Guaranty are
included in this Guaranty for the convenience of reference only and shall not
constitute a part of the Guaranty for any other purpose.
SECTION 13. Governing Law. This Guaranty shall be governed by
and construed in accordance with the laws of the State of New York.
THE GUARANTOR WAIVES ANY RIGHT IT MAY HAVE TO A JURY
TRIAL.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Guaranty to
be duly executed and delivered by their officer thereunto duly authorized as of
the date first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By___________________________________
Name:
Title:
THE CHASE MANHATTAN BANK
By___________________________________
Name:
Title:
6
<PAGE> 1
Exhibit 10.2
SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of April
16, 1997 (the "Second Amendment") among HEALTH MANAGEMENT SYSTEMS, INC. (the
"Borrower"), ACCELERATED CLAIMS PROCESSING, INC. ("ACP"), QUALITY MEDI- CAL
ADJUDICATION, INCORPORATED ("QMA"), HEALTH CARE MICROSYSTEMS, INC. ("HCM"), CDR
ASSOCIATES INC. ("CDR"), and THE CHASE MANHATTAN BANK (the "Bank").
PRELIMINARY STATEMENT. The Borrower, ACP, QMA, HCM, CDR and the Bank
have entered into a Credit Agreement and Guaranty dated as of July 15, 1996, as
amended by First Amendment to Credit Agreement and Guaranty dated as of
September 9, 1996 (as it may be further amended, supplemented or modified, the
"Credit Agreement"). Any term used herein and not otherwise defined herein shall
have the meaning assigned to such term in the Credit Agreement.
The Borrower, ACP, QMA, HCM, CDR and the Bank have agreed to amend
the Credit Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement is,
effective as of the date hereof and subject to the satisfaction of the
conditions precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The following definitions shall be added in its proper
alphabetical order:
"Nagelhout Guaranty" means the Guaranty dated April 16, 1997
pursuant to which the Borrower guarantees a One Million Six Hundred Thousand
Dollar ($1,600,000) loan made by the Bank to Mr. Robert V. Nagelhout.
"Second Amendment" means the Second Amendment to Credit Agreement
and Guaranty dated as of April 16, 1997 among the Borrower, each of the
Guarantors and the Bank.
(b) The definition of "Revolving Credit Facility" is amended by
inserting at the end thereof the following:
"less the principal amount of indebtedness outstanding under the
promissory note dated April 16, 1997 made by Robert V. Nagelhout in favor of the
Bank"
<PAGE> 2
(c) Section 8.07 Guaranties, Etc. is amended by inserting after the
word "Date" in the last line thereof the following:
"and (4) Nagelhout Guaranty"
(d) Section 10.01 Events of Default is amended by inserting after
paragraph (9) the following:
"(10) The Borrower shall fail to pay any obligations owing to the
Bank when due and payable under the Nagelhout Guaranty, the Borrower shall fail
to observe any term, covenant or agreement contained in such Guaranty on its
part to be performed or observed, or such Guaranty shall any time after its
execution and delivery and for any reason cease to be in full force and effect
or shall be declared null and void, or the validity or enforceability thereof
shall be contested by the Borrower, or the Borrower shall deny it has any
further liability or obligation under such Guaranty, or the Borrower shall fail
to perform any of its obligations under such Guaranty; or any representation or
warranty made by the Borrower in such Guaranty shall prove to have been
incorrect in any material respect on the date made;"
SECTION 2. Condition of Effectiveness. This Second Amendment shall
become effective as of the date on which each of the following conditions have
been fulfilled:
(1) Second Amendment. The Borrower, ACP, QMA, HCM, CDR and the Bank
shall each have executed and delivered this Second Amendment;
(2) Nagelhout Guaranty. The Borrower shall have executed and
delivered the Nagelhout Guaranty;
(3) Evidence of All Corporate Action by Borrower. The Bank shall
have received a certificate of the Secretary or Assistant Secretary of the
Borrower (dated as of the date of this Second Amendment) attesting to all
corporate action taken by the Borrower including resolutions of its Board of
Directors, authorizing the execution, delivery, and performance of this Second
Amendment, the Nagelhout Guaranty and each other document to be delivered
pursuant to or in connection with this Second Amendment or the Nagelhout
Guaranty.
SECTION 3. Reference to and Effect on the Loan Documents. (a) Upon
the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
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<PAGE> 3
(b) Except as specifically amended above, the Credit Agreement and
all other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Second
Amendment shall not operate as a waiver of any right, power or remedy of the
Bank under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents, and, except as specifically provided herein, the
Credit Agreement and each other Loan Document shall remain in full force and
effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Bank on demand for all out-of-pocket costs, expenses and charges
(including, without limitation, all fees and charges of legal counsel for the
Bank) incurred by the Bank in connection with the preparation, reproduction,
execution and delivery of this Second Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Second
Amendment and the other instruments and documents to be delivered hereunder, and
agrees to save the Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 5. Governing Law. This Second Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose.
SECTION 7. Counterparts. This Second Amendment may be executed in
any number of counterparts, all of which taken together shall constitute one and
the same instrument, and any party hereto may execute this Second Amendment by
signing any such counterpart.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be duly executed as of the day and year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By____________________________________
Name:
Title:
ACCELERATED CLAIMS PROCESSING,
INC.
By____________________________________
Name:
Title:
QUALITY MEDI-CAL ADJUDICATION,
INCORPORATED
By____________________________________
Name:
Title:
HEALTH CARE MICROSYSTEMS, INC.
By____________________________________
Name:
Title:
CDR ASSOCIATES, INC.
By____________________________________
Name:
Title:
THE CHASE MANHATTAN BANK
By____________________________________
Name:
Title:
4
<PAGE> 1
Exhibit 10.3
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Security Agreement") made as of the 15th day
of April, 1997 by and between ROBERT V. NAGELHOUT (the "Debtor") and HEALTH
MANAGEMENT SYSTEMS, INC. (the "Secured Party").
WITNESSETH:
WHEREAS, The Chase Manhattan Bank (the "Bank") has agreed to provide a
loan (the "Loan") to the Debtor in the amount of $1,600,000, which is to be
evidenced by a promissory note from Debtor to Bank (the "Note") which the Debtor
has agreed to pay with any costs or expenses which arise pursuant to the Note
(collectively, the "Loan Obligations"); and
WHEREAS, it is a condition precedent to the obligation of the Bank to
provide the Loan that the Secured Party shall have guaranteed all of the
Debtor's Loan Obligations to the Bank; and
WHEREAS, the Secured Party has entered into a Guaranty Agreement of even
date herewith (the "Guaranty") with the Bank pursuant to which the Secured Party
has guaranteed the prompt and complete payment of all Loan Obligations to the
Bank, as and when due and payable;
NOW, THEREFORE, to induce the Secured Party to enter into the Guaranty,
and in consideration thereof and for other good and valuable consideration, the
receipt and sufficiency of which being hereby acknowledged, the parties hereto
agree as follows:
1. Security Interest. The Debtor hereby grants, bargains, sells, assigns,
transfers and pledges to the Secured Party, its successors and assigns, a first
security interest (the "Security Interest") in and to 500,000 shares of the
common stock, $.01 par value, of the Secured Party, together with any and all
proceeds thereof (the "Collateral").
2. Obligations. This Security Agreement and the Security Interest shall
secure the Loan Obligations which the Secured Party has guaranteed pursuant to
the Guaranty.
3. Financing Statements and Other Action. The Debtor will do all lawful
acts which the Secured party deems necessary or desirable to protect the
Security Interest or otherwise to carry out the provisions of this Security
Agreement, including, but not limited to, the execution of Uniform Commercial
Code (the "Code") financing, continuation, amendment and termination statements
and similar instruments, the execution of such additional documents as may be
necessary to effectuate the purposes of this Security
<PAGE> 2
Agreement. The Debtor irrevocably appoints the Secured Party as its
attorney-in-fact (such power of attorney being coupled with an interest) during
the term of this Security Agreement to do all acts which it may be required to
do under this Security Agreement.
4. Representations and Warranties. The Debtor hereby represents and
warrants to the Secured Party as follows:
(a) The debtor is the sole owner of the Collateral. The Security
Interest created herein in the Collateral does not require the approval of any
other party.
(b) Except for the Security Interest created by this Security
Agreement, the Collateral is free and clear of all security interests, liens and
encumbrances.
(c) The debtor has the full power and authority to enter into this
Agreement and to pledge the Collateral. Entering into this Agreement does not
violate any material provision of any contract, license or agreement to which
the Debtor is a party.
5. Encumbrances. The Debtor warrants that it has good and marketable title
to the Collateral purportedly owned by it and that there are no sums owed or
claims, liens, security interests or other encumbrances against the Collateral.
The Debtor will notify the Secured Party of any lien, security interest or other
encumbrance adverse to the Secured Party, and will not create, incur, assume, or
suffer to exist any lien, security interest or other encumbrances against the
Collateral.
6. Default. In the case of the happening of any of the following events
(hereinafter called "Events of Default"):
(a) if the Debtor shall fail to pay any obligations owing under the
Note when due and payable;
(b) if the Debtor ceases to be actively involved in the daily
operations of the Secured Party or any of its subsidiaries;
(c) if the Credit Agreement and Guaranty dated as of July 15, 1996
among the Secured Party, the Guarantors name therein and the Bank ceases to be
in full force and effect or the Commitment (as defined therein) has been
cancelled thereunder or there has been an acceleration of payments due
thereunder;
2
<PAGE> 3
(d) if any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or more of the
outstanding shares of common stock of the Secured Party; or, during any period
of 12 consecutive calendar months, individuals who were directors of the Secured
Party on the first day of such period shall cease to constitute a majority of
the board of directors of the Secured Party;
(e) if the Debtor shall file a petition in bankruptcy or for an
arrangement or for reorganization pursuant to the Federal Bankruptcy Act or any
similar law, federal or state, or if, by decree of a court of competent
jurisdiction, the Debtor shall be adjudicated a bankrupt, or be declared
insolvent, or shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts generally as they become due, or
shall consent to the appointment of a receiver or receivers of all or any part
of its property;
(f) if any of the Debtor's creditors shall file a petition in
bankruptcy against it or for its reorganization pursuant to the Federal
Bankruptcy Act or any similar law, federal or state, and if such petition shall
not be discharged or dismissed within sixty (60) days after the date on which
such petition was filed;
(g) if the Debtor shall fail to observe or perform any covenant,
condition or agreement in the Note or in any other document that the Debtor
shall have executed or delivered in connection with the Loan;
(h) if any representation or warranty made by the Secured Party in
the Guaranty shall prove to have been incorrect in any material respect on or as
of the date made;
(i) if the Secured Party shall fail to perform or observe any term,
covenant, or agreement contained in the Guaranty on its part to be performed or
observed; or
(j) if the Guaranty shall at any time and for any reason cease to be
in full force and effect or shall be declared null and void, or the validity or
enforceability thereof shall be contested by the Secured Party, or the Secured
Party shall deny it has any further liability or obligation under the Guaranty,
or the Secured Party shall fail to perform any of its obligations under the
Guaranty.
3
<PAGE> 4
thereafter the Secured Party may declare all Loan Obligations secured hereby,
any other Obligations of the Debtor to the Secured Party, immediately due and
payable and shall have the remedies with respect to the Collateral of a secured
party under the Code. The Secured Party will give the Debtor reasonable notice
of the time and place of any public sale of the Collateral or of the time after
which any private sale or any other intended disposition thereof is to be made.
The requirements of reasonable notice shall be met if such notice is delivered
in the manner described in Section 9 of this Agreement, to the address of the
Debtor shown in such Section at least ten (10) days before the time of the sale
or disposition. Expenses of retaking, holding, preparing for sale, selling or
the like shall include the Secured Party's attorney's fees and legal expenses.
6. Waivers. To the extent permitted by law, the Secured Party may release,
supersede, exchange or modify any Collateral which it may from time to time
hold.
7. Termination. This Security Agreement and the Security Interest shall
terminate when all Loan Obligations have been paid and discharged in full by the
Debtor and the Secured Party, upon such termination, shall deliver to the Debtor
appropriate Code termination statements with respect to the Collateral so
released from the Security Interest, for filing with each filing office with
which Code financing statements have been filed by the Secured Party with
respect to the Collateral, and shall release the Collateral to the Debtor.
8. Modification. This Security Agreement may not be modified or amended
without the prior written consent of each of the parties hereto.
9. Notices. Except as otherwise provided in this Security Agreement, all
notices and other communications hereunder shall be deemed to have been
sufficiently given when sent by courier or faxed, return receipt requested, or
confirmation of receipt requested in the case of a fax, and the sender shall
have received such return receipt or confirmation, such notices or
communications to be addressed as follows:
4
<PAGE> 5
If to the Secured Party:
Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Attention: Chief Financial Officer
If to the Debtor:
Robert V. Nagelhout
1521 Nelson Avenue
Manhattan Beach, Ca. 90266
or at such other address or fax number, as the case may be, as the party to whom
such notice or demand is directed may have designated in writing to the other
party hereto by notice as provided in this Section 9, except that notices of
change of address shall be effective when actually received by the addressee.
Each of the parties hereto shall have the right to rely on as an original any
notice given hereunder by fax as aforesaid.
10. Rights; Merger. No course of dealing between the Debtor and the
Secured Party, nor any delay in exercising, on the part of the Secured Party,
any right, power or privilege hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies hereunder are cumulative and
are in addition to, and not exclusive of, any rights or remedies provided by law
or in equity, including, without limitation, the rights and remedies of a
secured party under the Code. It is understood and agreed that all
understandings and agreements heretofore had between the parties, if any, with
respect to the subject matter hereof are merged into this Security Agreement and
this Security Agreement represents the full and complete agreement of the
parties with respect to the subject matter hereof.
11. Governing Law, Binding Effect, Etc. This Security Agreement and the
rights and obligations of the parties hereunder shall be construed in accordance
with and governed by the laws of the State of New York. This Security Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
12. Statute Of Limitations. To the full extent permitted by law, the
Debtor waives the right to plead any statute of
5
<PAGE> 6
limitations as a defense to any indebtedness or obligation secured hereunder.
13. Survival of Provisions. All representations, warranties and covenants
of the Debtor contained herein shall survive the execution and delivery of this
Security Agreement and shall terminate only upon the termination of this
Security Agreement and the Security Interest created hereby in accordance with
the provisions of Section 7.
14. Counterparts. This security Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same instrument.
15. Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Security
Agreement as of the day and year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By:_____________________________
Phillip Siegel
Vice President and Chief Financial
Officer
________________________________
ROBERT V. NAGELHOUT
6
<PAGE> 1
Exhibit 10.4
NOTE
Date of Note: April 16, 1997
Amount of Note: $1,600,000
Borrower: Robert V. Nagelhout
Interest Rate: the prime commercial lending rate as announced from time to
time by The Chase Manhattan Bank at its principal office in New York
City (any change in said rate shall effect an adjustment of interest
payable hereunder as of the day of such change) to be computed on an
actual/360-day basis (i.e., interest for each day during which any
of the Principal Amount is outstanding shall be computed at the
Interest Rate divided by 360).
1. Borrower's Promise to Pay. In return for a loan (the "Loan") that
I have received, I promise to pay, in one lump sum payment on the maturity date
(defined below), U.S. $1,600,000 (this amount is called "principal"), plus
interest, to the order of the Lender. The "Lender" is THE CHASE MANHATTAN BANK.
I understand that the Lender may transfer this Note. The Lender or anyone who
takes this Note by transfer and who is entitled to receive payments under this
Note is called the "Note Holder".
2. Interest. Interest will be charged on principal until the full
amount of principal has been paid. I will pay interest at a yearly rate as
described above.
The interest rate required by this Section 2 is the rate I will pay
both before and after any default described in Section 6(b) of this Note.
3. Payments.
Time and Place of Payments. I will pay interest by making payments
every month.
I will make my monthly payments of interest only on the last day of
each month beginning on April 30,1997. I will make these payments every month
until I have paid all of the principal and interest and any other charges
described below that I may owe under this Note. My monthly payments will be
applied to interest before principal. I will pay all of the unpaid principal of
the Loan along with
<PAGE> 2
any accrued and unpaid interest related thereto on April 16, 1999 (the "maturity
date").
4. Borrowers Right to Prepay. I have the right to make payments of
principal at any time before they are due. A payment of principal only is known
as "prepayment". When I make a prepayment, I will tell the Note Holder in
writing that I am doing so.
I may make a full prepayment or partial prepayments without paying
any prepayment charge. The Note Holder will use all of my prepayments to reduce
the amount of principal that I owe under this Note. If I make a partial
prepayment, there will be no changes in the due date of my monthly payment
unless the Note Holder agrees in writing to those changes. Any amounts of the
Loan prepaid may not be reborrowed.
5. Loan Charges. If a law, which applies to this loan and which sets
maximum loan charges, is finally interpreted so that the interest or other loan
charges collected or to be collected in connection with this loan exceed the
permitted limits, then: (i) any such loan charge shall be reduced by the amount
necessary to reduce the charge to the permitted limit; and (ii) any sums already
collected from me which exceeded permitted limits will be refunded to me. The
Note Holder may choose to make this refund by reducing the principal I owe under
this Note or by making a direct payment to me. If a refund reduces principal,
the reduction will be treated as a partial prepayment.
6. Borrower's Failure to Pay as Required.
(a) Late Charge for Overdue Payments. Any amount of principal or
interest which is not paid when due, whether at stated maturity, by
acceleration, or otherwise, shall bear interest from the date when due until
said principal or interest amount is paid in full, payable on demand, at the
prime commercial lending rate specified above.
(b) Default. If I do not pay the full amount of each monthly payment
on the date it is due, I will be in default.
(c) Notice of Default. If I am in default, the Note Holder may send
me a written notice telling me that if I do not pay the overdue amount, the Note
Holder may require me to pay immediately the full amount of principal which has
not been paid and all the interest that I owe on that amount. That date must be
at least fifteen (15) days after the date on which the notice is delivered or
mailed to me.
2
<PAGE> 3
(d) No Waiver By Note Holder. Even if, at a time when I am in
default, the Note Holder does not require me to pay immediately in full as
described above, the Note Holder will still have the right to do so if I am in
default at a later time.
(e) Payment of Note Holder's Costs and Expenses. If the Note Holder
has required me to pay immediately in full as described above, the Note Holder
will have the right to be paid back by me for all of its costs and expenses in
enforcing this Note to the extent not prohibited by applicable law. Those
expenses include, for example, reasonable attorneys' fees.
7. Giving of Notices. Unless applicable law requires a different
method, any notice that must be given to me under this Note will be given by
delivering it or by mailing it by first class mail to me at my address noted
below or at a different address if I give the Note Holder a notice of my
different address.
Any notice that must be given to the Note Holder under this Note
will be given by mailing it by first class mail to the Note Holder at: The Chase
Manhattan Bank, 1411 Broadway, Fifth Floor, New York, New York 10018 Attention:
Randy Berini, or at a different address if I am given a notice of that different
address.
8. Waivers. I and any other person who has obligations under this
Note waive the rights of presentment and notice of dishonor. "Presentment" means
the right to require the Note Holder to demand payment of amounts due. "Notice
of dishonor" means the right to require the Note Holder to give notice to other
persons that amounts due have not been paid.
9. Uniform Secured Note. This Note is a uniform instrument with
limited variations in some jurisdictions. In addition to the protections given
to the Note Holder under this Note, the guaranty from Health Management Systems,
Inc. ("HMS") to the Lender dated the date hereof (the "Guaranty"), protects the
Note Holder from possible losses which might result if I do not keep the
promises which I make in this Note.
10. Events of Default. Notwithstanding anything to the contrary
provided herein, the occurrence of any one or more of the following shall be an
"Event of Default" hereunder and upon the occurrence of an Event of Default, any
and all principal and interest due hereunder shall be immediately due and
payable:
3
<PAGE> 4
(a) if I shall fail to pay any obligations owing under this Note
when due and payable;
(b) if I cease to be actively involved in the daily operations of
HMS or any of its subsidiaries;
(c) if the Credit Agreement and Guaranty dated as of July 15, 1996
among HMS, the Guarantors named therein and Lender ceases to be in full
force and effect or the Commitment (as defined therein) has been cancelled
thereunder or there has been an acceleration of payments due thereunder;
(d) if any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3
promulgated by the Securities and Exchange Commission under said Act) of
20% or more of the outstanding shares of common stock of HMS; or, during
any period of 12 consecutive calendar months, individuals who were
directors of HMS on the first day of such period shall cease to constitute
a majority of the board of directors of HMS;
(e) if I shall file a petition in bankruptcy or for an arrangement
or for reorganization pursuant to the Federal Bankruptcy Act or any
similar law, federal or state, or if, by decree of a court of competent
jurisdiction, I shall be adjudicated a bankrupt, or be declared insolvent,
or shall make an assignment for the benefit of creditors, or shall admit
in writing my inability to pay my debts generally as they become due, or
shall consent to the appointment of a receiver or receivers of all or any
part of my property;
(f) if any of my creditors shall file a petition in bankruptcy
against me or for my reorganization pursuant to the Federal Bankruptcy Act
or any similar law, federal or state, and if such petition shall not be
discharged or dismissed within sixty (60) days after the date on which
such petition was filed;
(g) if I shall fail to observe or perform any covenant, condition or
agreement in this Note or in any other document that I shall have executed
or delivered in connection with the Loan;
(h) if any representation or warranty made by HMS in the Guaranty
shall prove to have been incorrect in any material respect on or as of the
date made;
4
<PAGE> 5
(i) if HMS shall fail to perform or observe any term, covenant, or
agreement contained in the Guaranty on its part to be performed or
observed; or
(j) if the Guaranty shall at any time and for any reason cease to be
in full force and effect or shall be declared null and void, or the
validity or enforceability thereof shall be contested by HMS, or HMS shall
deny it has any further liability or obligation under the Guaranty, or HMS
shall fail to perform any of its obligations under the Guaranty.
IN WITNESS WHEREOF, I have executed and delivered this Note on the
day and year written.
------------------------
ROBERT V. NAGELHOUT
Address: _________________________________
_________________________________
_________________________________
Sworn to before me this
16th day of April, 1997
- -----------------------
Notary Public
My commission expires:
- -----------------------
5
<PAGE> 1
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 11--COMPUTATIONS OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended Six months ended
April 30, April 30,
-------------------- -------------------
1997 1996 1997 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Earnings data:
Net income $ 281 3,102 2,084 6,712
======= ====== ====== ======
Weighted average shares outstanding:
Average shares of common stock outstanding 17,688 17,076 17,660 16,904
Net effect of dilutive stock options--based on the
treasury stock method using average market price 144 1,401 374 1,425
------- ------ ------ ------
Weighted average shares outstanding 17,832 18,477 18,034 18,329
======= ====== ====== ======
Earnings per common share:
Net income $ 0.02 0.17 0.12 0.37
======= ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at April 30, 1997 (unaudited) and 1996 (unaudited)
and the Consolidated Statement of Operations for the six months ended April 30,
1997 (unaudited) and 1996 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> APR-30-1997 APR-30-1996
<CASH> 18,462 6,789
<SECURITIES> 17,588 19,790
<RECEIVABLES> 41,670 45,468
<ALLOWANCES> (1,556) (581)
<INVENTORY> 0 0
<CURRENT-ASSETS> 84,728 77,366
<PP&E> 23,620 16,817
<DEPRECIATION> (15,912) (10,560)
<TOTAL-ASSETS> 109,949 99,330
<CURRENT-LIABILITIES> 26,418 23,268
<BONDS> 0 0
0 0
0 0
<COMMON> 177 172
<OTHER-SE> 81,344 70,396
<TOTAL-LIABILITY-AND-EQUITY> 109,949 99,330
<SALES> 42,380 51,326
<TOTAL-REVENUES> 42,380 51,326
<CGS> 41,264 40,158
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (114) 356
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 1,756 11,345
<INCOME-TAX> (328) 4,633
<INCOME-CONTINUING> 1,756 11,345
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,084 6,712
<EPS-PRIMARY> 0.12 0.37
<EPS-DILUTED> 0.12 0.37
</TABLE>
