<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
</TABLE>
Health Management Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 9, 1999
The Annual Meeting of Shareholders of Health Management Systems, Inc. (the
"Company") will be held at the offices of the Company, 401 Park Avenue South,
New York, New York, on March 9, 1999 at 11:00 a.m., Eastern Standard Time, for
the following purposes:
1. To elect one director to serve a one-year term expiring at the annual
meeting in 2000 and to elect four directors to serve for two-year terms
expiring at the annual meeting in 2001 and until their successors are
elected and qualified;
2. To consider and take action on a proposal to adopt the 1999 Long-Term
Incentive Stock Plan;
3. To consider and take action on the ratification of the selection of
KPMG LLP as the Company's independent certified public accountants for
1999; and
4. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on January 19, 1999
will be entitled to receive notice of and to vote at the meeting.
Shareholders are cordially invited to attend the meeting in person. Whether
or not you expect to attend, WE URGE YOU TO READ THE ACCOMPANYING PROXY
STATEMENT AND THEN COMPLETE, SIGN, DATE, AND RETURN THE ENCLOSED FORM OF PROXY
IN THE ACCOMPANYING POSTAGE-PREPAID ENVELOPE. It is important that your shares
be represented at the meeting by virtue of your executed proxies should you be
unable to attend the meeting in person. Your promptness in responding will
assist us to prepare for the meeting and to avoid the cost of a follow-up
mailing. If you receive more than one form of proxy because you own shares
registered in different names or at different addresses, each form of proxy
should be completed and returned.
Sincerely,
/s/ Felice Blanco
FELICE BLANCO
Secretary
February 8, 1999
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC.
401 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10016
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MARCH 9, 1999
GENERAL INFORMATION
This Proxy Statement is furnished to shareholders of Health Management
Systems, Inc., a New York corporation (the "Company"), in connection with the
solicitation by the Board of Directors of the Company of proxies for use at its
Annual Meeting of Shareholders (the "Meeting"). The Meeting is scheduled to be
held on Tuesday, March 9, 1999, at 11:00 a.m., Eastern Standard Time, at the
offices of the Company, 401 Park Avenue South, New York, New York, and at any
adjournments thereof. It is anticipated that the mailing to shareholders of this
Proxy Statement and the enclosed form of proxy will commence on or about
February 8, 1999.
At the Meeting, shareholders will be asked to vote upon: (1) the election
of five directors; (2) the adoption of the Company's 1999 Long-Term Incentive
Stock Plan; (3) the ratification of the selection of independent certified
public accountants for 1999; and (4) such other business as may properly come
before the Meeting and at any adjournments thereof.
VOTING RIGHTS AND VOTES REQUIRED
The close of business on January 19, 1999 has been fixed as the record date
(the "Record Date") for the determination of shareholders entitled to receive
notice of and to vote at the Meeting. As of the close of business on such date,
the Company had outstanding and entitled to vote 17,305,321 shares of common
stock, par value $0.01 per share (the "Common Stock").
A majority of the outstanding shares of Common Stock must be represented in
person or by proxy at the Meeting in order to constitute a quorum for the
transaction of business. The record holder of each share of Common Stock
entitled to vote at the Meeting will have one vote for each share so held.
Directors are elected by a plurality of the votes cast. Shareholders may
not cumulate their votes. The five candidates receiving the highest number of
votes will be elected. In tabulating the votes, votes withheld in connection
with the election of one or more nominees and broker nonvotes will be
disregarded and will have no effect on the outcome of the vote.
Approval of the adoption of the Company's 1999 Long-Term Incentive Stock
Plan will be determined by a majority of the votes cast at the Meeting. In
determining whether this proposal has received the requisite number of
affirmative votes, abstentions and broker nonvotes will be disregarded and will
have no effect on the outcome of the vote.
The affirmative vote of the holders of a majority of the shares of Common
Stock represented at the Meeting in person or by proxy and entitled to vote
thereat will be required to ratify the selection of the Company's independent
certified public accountants and to adopt any shareholder proposal duly
presented at the Meeting. In determining whether these proposals have received
the requisite number of affirmative
<PAGE> 4
votes, abstentions and broker nonvotes will be disregarded and will have no
effect on the outcome of the vote.
VOTING OF PROXIES
If the accompanying proxy is properly executed and returned, the shares
represented by the proxy will be voted at the Meeting as specified in the proxy.
If no instructions are specified, the shares represented by any properly
executed proxy will be voted FOR the election of the nominees listed below under
"Election of Directors", FOR the adoption of the Company's 1999 Long-Term
Incentive Stock Plan, and FOR the ratification of the selection of independent
certified public accountants.
REVOCATION OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by a
shareholder at any time before it is exercised by written notice to the
Secretary of the Company, by timely notice of a properly executed proxy bearing
a later date delivered to the Company, or by voting in person at the Meeting.
SOLICITATION OF PROXIES
The Company will bear the cost of this solicitation, including amounts paid
to banks, brokers, and other record owners to reimburse them for their expenses
in forwarding solicitation material regarding the Meeting to beneficial owners
of Common Stock. The solicitation will be by mail, with the material being
forwarded to the shareholders of record and certain other beneficial owners of
Common Stock by the Company's officers and other regular employees (at no
additional compensation). Such officers and employees may also solicit proxies
from shareholders by personal contact, by telephone, or by other means if
necessary in order to assure sufficient representation at the Meeting.
ChaseMellon Shareholder Services, L.L.C. has been retained to receive and
tabulate proxies and to provide representatives to act as inspectors of election
for the Meeting.
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<PAGE> 5
MATTERS SUBJECT TO SHAREHOLDER VOTE
1. ELECTION OF DIRECTORS
Pursuant to the Company's by-laws, the Board of Directors of the Company is
currently divided into two classes, with one class standing for election each
year for two-year terms. The terms of five directors, including one director
appointed in 1998 to replace a director who resigned during the year, will
expire at the Meeting. Accordingly, the term of one of the five nominees listed
below, if elected at the Meeting, will expire at the 2000 annual meeting and the
terms of four of the five nominees listed below, if elected at the Meeting, will
expire at the 2001 annual meeting. The terms of the other current directors
listed below will expire at the 2000 annual meeting.
The one person designated by the Board of Directors as nominee for election
as director with a term expiring at the 2000 annual meeting is Randolph G.
Brown. The four persons designated by the Board of Directors as nominees for
election as directors with terms expiring at the 2001 annual meeting are Paul J.
Kerz, William W. Neal, Ellen A. Rudnick, and Richard H. Stowe.
Unless a contrary direction is indicated, it is intended that proxies
received will be voted for the election as directors of the five nominees, one
nominee to serve for a one-year term expiring at the 2000 annual meeting, and
four nominees to serve for two-year terms expiring at the 2001 annual meeting,
and in each case until their successors are elected and qualified. In the event
any nominee for director declines or is unable to serve, the proxies may be
voted for a substitute nominee selected by the Board of Directors.
3
<PAGE> 6
The Board of Directors expects that each nominee named in the following table
will be available for election.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.
<TABLE>
<CAPTION>
SERVED AS
POSITION WITH THE COMPANY DIRECTOR
NAME OR PRINCIPAL OCCUPATION FROM
---- ------------------------- ---------
<S> <C> <C>
Nominee for director for a one-year term ending in 2000:
Randolph G. Brown.................... Independent business consultant 1998
Nominees for director for two-year terms ending in 2001:
Paul J. Kerz......................... Chairman, President and Chief 1974
Executive Officer of the Company
William W. Neal...................... Managing Principal of Piedmont Venture Partners, an 1989
investment firm
Ellen A. Rudnick..................... Chairman of Pacific Biometrics, Inc., a 1997
biotechnology company
Richard H. Stowe..................... General Partner of Welsh, Carson, Anderson & Stowe 1989
("WCAS"), an investment firm
Directors continuing in office until 2000:
Robert V. Nagelhout.................. Executive Vice President and Chief Operating Officer 1996
of the Company
Galen D. Powers...................... Senior Founder and President of Powers, Pyles, 1992
Sutter & Verville, P.C., a law firm
Donald J. Staffa..................... Senior Vice President of the Company 1996
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of January 19, 1999:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Paul J. Kerz......................... Chairman, President and Chief Executive Officer, and
Director
Robert V. Nagelhout.................. Executive Vice President and Chief Operating Officer,
and Director
Donald J. Staffa..................... Senior Vice President and Director
Thomas J. Kazamek.................... Senior Vice President
Lewis D. Levetown.................... Vice President
Randolph G. Brown.................... Director
William W. Neal...................... Director
Galen D. Powers...................... Director
Ellen A. Rudnick..................... Director
Richard H. Stowe..................... Director
</TABLE>
4
<PAGE> 7
PAUL J. KERZ, 57, a founder of the Company, has been its Chairman,
President and Chief Executive Officer, and a director since the Company's
inception in 1974. Mr. Kerz has also served as Acting Chief Financial Officer of
the Company since March 1998. From 1970 until 1973, he served as Senior Vice
President of Finance and Chairman of the Management Review Committee of the New
York City Health and Hospitals Corporation. Prior to 1970, Mr. Kerz served in
various capacities in state and federal Bureaus of the Budget.
ROBERT V. NAGELHOUT, 44, serves as President of Health Care microsystems,
Inc. ("HCm"), a position he held since HCm's acquisition by the Company in
February 1995, and became the Company's Executive Vice President and Chief
Operating Officer effective November 1997. Prior to co-founding HCm in 1983, he
served as a consultant at Ernst & Whinney (now Ernst & Young).
DONALD J. STAFFA, 53, has served as Senior Vice President in charge of the
Transfer Payment Services Division of the Company since November 1997. Prior to
that time, Mr. Staffa had served as Senior Vice President of Operations since
October 1994; he continues to serve as President of Quality Medi-Cal
Adjudication, Incorporated ("QMA"), a position he has held since QMA's
acquisition by the Company in 1990. From 1989 until September 1994, he served as
Vice President in charge of the Company's California operations, and from 1981
through 1988 served as Vice President of Operations of the Company. From 1979 to
1981, Mr. Staffa was the President of Western Bradford Trust Company, a division
of Bradford National Corporation, which he joined in 1975.
THOMAS J. KAZAMEK, 40, joined HCm in 1984 and currently holds the position
of Senior Vice President in charge of the Company's Software Systems and
Services Division. Prior to joining HCm, Mr. Kazamek was a Supervisor of the
National Systems Group of Ernst & Whinney (now Ernst & Young).
LEWIS D. LEVETOWN, 56, has been Vice President of Human Resources of the
Company since 1988. From 1982 until he joined the Company, he was Senior Vice
President, Human Resources for Automated Data Processing, Inc. ("ADP").
RANDOLPH G. BROWN, 56, was appointed a director of the Company in May 1998.
Mr. Brown has been an independent business consultant since November 1996. From
July 1987 through October 1996, Mr. Brown served in various senior executive
capacities, including President and Chief Executive Officer and Chairman, for
Medaphis Corporation, a provider of accounts receivable management services to
hospital-affiliated physicians and hospitals. From 1978 through 1987, Mr. Brown
was employed in various management positions by Humana, Inc., a provider of
managed healthcare products and services through the operation of health
maintenance organizations and preferred provider organizations.
WILLIAM W. NEAL, 66, has been Managing Principal of Piedmont Venture
Partners since its inception in July 1996. From 1989 to April 1996, he served as
Chairman and Chief Executive Officer of Broadway and Seymour, a company that
provides software and computer systems to the banking industry. From 1985
through July 1989, he was a partner of WCAS. Mr. Neal was Senior Vice
President-Marketing of ADP from 1984 to 1985 and a Group President of ADP from
1982 to 1984. He served as a director of ADP from 1982 until 1985.
GALEN D. POWERS, 62, is the senior founder and has served as President of
Powers, Pyles, Sutter & Verville P.C., a Washington, D.C. law firm specializing
in healthcare and hospital law, since he founded the firm in 1983. Mr. Powers
was the first chief counsel of the federal Health Care Financing Administration
and has served as a director and the President of the National Health Lawyers
Association.
5
<PAGE> 8
ELLEN A. RUDNICK, 48, since 1992 has served as Chairman of two
corporations: Pacific Biometrics, Inc., a publicly held healthcare
biodiagnostics company, and CEO Advisors, Inc., a privately held consulting
firm. From 1990 to 1992, she was President and Chief Executive Officer of
Healthcare Knowledge Resources ("HKR"), a privately held healthcare information
technology corporation, and subsequently served as President of HCIA, Inc.
("HCIA") following the acquisition of HKR by HCIA. From 1975 to 1990, Ms.
Rudnick served in various positions at Baxter Health Care Corporation, including
Corporate Vice President and President of its Management Services Division.
RICHARD H. STOWE, 55, has been a general partner of WCAS since 1979. Prior
to 1979, he was a Vice President in the venture capital and corporate finance
groups of New Court Securities Corporation (now Rothschild Inc.). Mr. Stowe is a
director of MedQuist, Inc., a provider of medical record transcription services,
New American Healthcare Corporation, an owner of non-urban hospitals, and The
Cerplex Group, Inc., a provider of outsourcing services for electronic
equipment, and several private companies.
DIRECTORS' FEES
Commencing Fiscal Year 1999, non-employee directors will be paid $1,500 for
each regularly scheduled Board of Directors meeting, $500 for each regularly
scheduled committee meeting, and $250 for each special Board of Directors or
committee meeting which they attend and will continue to be reimbursed for
expenses incurred in attending meetings. Prior to Fiscal Year 1999, non-employee
directors did not receive separate cash compensation. Each non-employee director
is also granted options annually to purchase 1,500 shares of Common Stock under
the Company's 1995 Non-Employee Director Stock Option Plan and may be awarded
additional options under the Company's Employee Stock Option and Restricted
Stock Purchase Plan. On November 13, 1998, each non-employee director was
granted options to purchase 7,500 shares of Common Stock at an exercise price of
$6.44 per share under the Company's Employee Stock Option and Restricted Stock
Purchase Plan.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held seven meetings during Fiscal Year 1998 and
there was one action taken by unanimous written consent. Each director attended
at least 75% of the aggregate of the total number of meetings of (a) the Board
of Directors, and (b) the committees on which the director served.
The committees of the Board of Directors consist of an Audit Committee and
a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the annual appointment of independent certified public accountants with whom the
Committee reviews audit fees, the scope and timing of the audit, the adequacy of
internal controls, and any other services rendered. The functions of the Audit
Committee also include review of corporate compliance and related matters. The
Audit Committee is comprised of Messrs. Powers and Brown. Mr. Brown was elected
a committee member in September 1998 to replace Mr. Stowe who had resigned. The
Audit Committee held four meetings during Fiscal Year 1998.
COMPENSATION COMMITTEE. The Compensation Committee reviews and recommends
the compensation and bonuses of the executives of the Company. The Compensation
Committee also administers the Company's Stock Option and Restricted Stock
Purchase Plan, Employee Stock Purchase Plan, and 1995 Non-Employee Director
Stock Option Plan. The Compensation Committee is comprised of Messrs. Neal and
Stowe and held four meetings during Fiscal Year 1998.
6
<PAGE> 9
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules issued thereunder, the Company's executive
officers and directors are required to file with the Securities and Exchange
Commission and the National Association of Securities Dealers, Inc. reports of
ownership and changes in ownership of Common Stock. Copies of such reports are
required to be furnished to the Company. Based solely on review of the copies of
such reports furnished to the Company, or written representations that no other
reports were required, the Company believes that during Fiscal Year 1998, all of
its executive officers and directors complied with the requirements of Section
16(a), except that Robert V. Nagelhout, an officer and director of the Company,
did not timely file a Form 4 for the month of January 1998 with respect of the
sale of 10,000 shares of Common Stock; and Donald J. Staffa, an officer and
director of the Company, did not timely file a Form 4 for the month of June 1998
with respect to the sale of 50,000 shares of Common Stock.
ADDITIONAL INFORMATION REGARDING COMPENSATION OF EXECUTIVE OFFICERS AND
DIRECTORS IS PROVIDED ON PAGES 15 THROUGH 19 OF THIS PROXY STATEMENT.
2. APPROVAL OF PROPOSAL TO ADOPT THE COMPANY'S 1999 LONG-TERM INCENTIVE STOCK
PLAN
GENERAL
The Board of Directors is proposing for shareholder approval the Health
Management Systems, Inc. 1999 Long-Term Incentive Stock Plan (the "1999 Plan").
The Board recommends approval of the 1999 Plan to replace the Health Management
Systems, Inc. Stock Option and Restricted Stock Purchase Plan (the "Prior
Plan"), which terminates in May 1999. The primary purposes of the 1999 Plan are
(i) to promote the interests of the Company and its shareholders by
strengthening the Company's ability to attract and retain highly competent
individuals to serve as officers and other key employees and (ii) to provide a
means to encourage stock ownership and proprietary interest by such persons in
the Company. Under the 1999 Plan, the Company may grant stock options, stock
appreciation rights ("SARs"), or stock awards, as discussed in greater detail
below. Awards may be granted singly, in combination, or in tandem and may be
evidenced by an agreement that sets forth the terms, conditions, and limitations
of such award. Awards may also be made in combination or in tandem with, in
replacement of, as alternatives to, or as the payment form for, grants or rights
under any other compensation plan of the Company, including the plan of any
entity acquired by (or whose assets are acquired by) the Company. All employees
of the Company and its subsidiaries are eligible to participate in the 1999
Plan. Currently, 362 employees participate in the Prior Plan. Reference is made
to Exhibit A to this Proxy Statement for the complete text of the 1999 Plan,
which is summarized below.
DESCRIPTION OF THE 1999 PLAN
ADMINISTRATION
The 1999 Plan will be administered by the Compensation Committee of the
Board of Directors (the "Committee"), which Committee shall consist of at least
two members, all of whom shall be "Non-Employee Directors" within the meaning of
Rule 16b-3 under the Exchange Act and "outside directors" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986 (the "Code").
The 1999 Plan is intended to provide participants with stock-based
incentive compensation that is not subject to the deduction limitations under
Section 162(m) of the Code. Section 162(m) of the Code
7
<PAGE> 10
generally limits to $1 million the amount that a publicly held corporation is
allowed each year to deduct for the compensation paid to its chief executive
officer and four most highly compensated executive officers other than the chief
executive officer. However, "qualified performance-based compensation" is not
subject to the $1 million deduction limit. To qualify as qualified
performance-based compensation, the following requirements must be satisfied:
(i) the performance goals are determined by a committee consisting solely of two
or more "outside directors;" (ii) the material terms under which the
compensation is to be paid, including the performance goals, are approved by a
majority of the corporation's shareholders; and (iii) if applicable, the
committee certifies that the applicable performance goals were satisfied before
payment of any performance-based compensation is made. As noted above, the
Committee will consist solely of "outside directors" for purposes of Section
162(m) of the Code. As a result, and based on regulations issued by the United
States Department of the Treasury, certain compensation under the 1999 Plan,
such as that payable with respect to stock options and SARs, is not expected to
be subject to the $1 million deduction limit, but other compensation payable
under the 1999 Plan, such as any restricted stock award which is not subject to
a performance condition to vesting, may be subject to such limit.
Subject to the express provisions of the 1999 Plan, the Committee will have
broad authority to administer and interpret the 1999 Plan as it deems necessary
and appropriate. This authority includes, but is not limited to, selecting award
recipients, establishing award terms and conditions, adopting procedures and
regulations governing awards, and making all other determinations necessary or
advisable for the administration of the 1999 Plan. The Committee may provide for
the transferability of an award, including transfers to immediate family members
of a participant. Except with respect to grants to persons who are subject to
Section 16 of the Exchange Act, or who are or are likely to be "covered
employees" within the meaning of Section 162(m) of the Code, the Committee may
delegate some or all of its authority to administer the 1999 Plan to the
Chairman and Chief Executive Officer or another executive officer of the
Company.
AVAILABLE SHARES
The 1999 Plan authorizes the issuance, in the aggregate, of up to 4,751,356
shares of Common Stock, comprised of 1,383,906 shares under the Prior Plan which
were not subject to awards under the Prior Plan as of the Record Date, plus
3,367,450 shares subject to outstanding awards under the Prior Plan as of the
Record Date which thereafter lapse, expire or are otherwise terminated without
the issuance of such shares; provided, that the number of shares subject to
awards that are granted in substitution of awards issued by an entity acquired
by (or whose assets are acquired by) the Company will not reduce the number of
shares available under the 1999 Plan. To the extent shares subject to
outstanding awards under the 1999 Plan are not issued by reason of the
expiration, termination, cancellation, or forfeiture of such award or by reason
of the tendering or withholding of shares of Common Stock to pay all or a
portion of the purchase price, or to satisfy all or a portion of the tax
withholding obligations relating to such award, and to the extent shares
acquired pursuant to the exercise of an option or other award are repurchased by
the Company, then such shares of Common Stock will again be available under the
1999 Plan. In the event of a stock dividend, stock split, merger, consolidation,
recapitalization, spin-off, or other similar change or event, the number of
available shares may be adjusted, as the Committee in its discretion deems
appropriate.
The maximum number of shares of Common Stock for which awards may be
granted to any person in any fiscal year is 150,000.
8
<PAGE> 11
CHANGE OF CONTROL
The Committee may make appropriate adjustments (including acceleration of
vesting and settlements of or substitutions for awards) in the event that (i) a
person (subject to certain exceptions) becomes the beneficial owner of 20% or
more of the voting power of the Company's outstanding stock which may be voted
on all matters submitted to shareholders generally, (ii) individuals who
immediately after the Meeting constitute the Board of Directors, and any new
director whose nomination for election or election is recommended or approved by
a majority of the directors who were directors immediately after the Meeting or
whose nomination or election was previously so recommended or approved, cease to
constitute a majority of the Board of Directors, or (iii) the shareholders
approve a reorganization, merger, or consolidation or the Company sells or
disposes of all or substantially all of its property and assets (unless the
Company's shareholders receive 50% or more of the voting power of the resulting
entity) or the Company liquidates or dissolves, or in contemplation of any such
event.
EFFECTIVE DATE, TERMINATION AND AMENDMENT
If approved by shareholders, the 1999 Plan will become effective as of the
date of such approval. No stock options, SARs or other awards may be granted
under the 1999 Plan after January 10, 2009, which is the day before the tenth
anniversary of the date of the 1999 Plan's adoption by the Board of Directors.
The Board of Directors may amend the 1999 Plan at any time, subject to any
requirement of shareholder approval required by applicable law, rule, or
regulation and provided that no amendment may be made without shareholder
approval if such amendment would (i) increase the maximum number of shares of
Common Stock available under the 1999 Plan or (ii) effect any change
inconsistent with Section 422 of the Code.
STOCK OPTIONS
A stock option represents the right to purchase a specified number of
shares of Common Stock during a specified period, typically up to ten years, as
determined by the Committee. The purchase price per share for each stock option
may not be less than 100% of the fair market value on the date of grant;
provided, that a stock option granted in substitution of an award granted by an
entity acquired by (or whose assets are acquired by) the Company may be granted
with a purchase price that preserves the economic value of the award and with
respect to a stock option granted retroactively in substitution for an option or
SAR, the purchase price per share may be the fair market value on the grant date
of the option or SAR. A stock option may be in the form of an incentive stock
option or a non-qualified stock option. In the case of an incentive stock option
granted to an optionee who, at the time of grant, owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or its parent or subsidiaries, as defined in the Code, the exercise
price per share may not be less than 110% of the fair market value on the date
of grant and the option may not be exercisable more than five years after the
date granted. The shares covered by a stock option may be purchased, in
accordance with the applicable award agreement, by cash payment or other method
permitted by the Committee, including (i) tendering shares of Common Stock, (ii)
authorizing third party exercise transactions, or (iii) any combination of the
above.
9
<PAGE> 12
SARS
An SAR represents a right to receive a payment, in cash, shares of Common
Stock, or a combination thereof, equal to the excess of the fair market value of
a specified number of shares of Common Stock on the date the SAR is exercised
over the fair market value of such shares on the date the SAR was granted.
However, if an SAR is granted retroactively in substitution for a stock option,
the fair market value may be the fair market value on the date the stock option
was granted. The Committee may grant SARs alone or together with stock options.
The Committee has not awarded SARs in the past and has no current intention of
making this type of award in the future.
STOCK AWARDS
A stock award represents an award made in or valued, in whole or in part,
by reference to shares of Common Stock. All or part of a stock award may be
payable in shares of Common Stock and may be subject to conditions and
restrictions established by the Committee. Such conditions may include, but are
not limited to, continuous service with the Company and its subsidiaries and/or
the achievement of performance goals. The performance criteria that may be used
by the Committee in granting stock awards contingent on performance goals
consist of total shareholder return, net sales, operating income, income before
taxes, net income, net income per share (basic or diluted), profitability as
measured by return ratios, including return on invested capital, return on
equity and return on investment, cash flows, market share, or cost reduction
goals. The Committee may select one criterion or multiple criteria for measuring
performance, and the measurement may be based on Company or business unit
performance, or on comparative performance with other companies. The Committee
has not awarded stock awards in the past and has no current intention of making
this type of award in the future.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of certain federal income tax consequences
generally arising with respect to awards under the 1999 Plan.
A participant will not recognize taxable income at the time a stock option
is granted and the Company will not be entitled to a tax deduction at such time.
A participant will recognize compensation taxable as ordinary income (and
subject to income tax withholding) upon exercise of a non-qualified stock option
equal to the excess of the fair market value of the shares purchased over their
exercise price, and the Company will be entitled to a corresponding deduction,
except to the extent the deduction limits of reasonable compensation and Section
162(m) of the Code apply. A participant will not recognize income (except for
purposes of the alternative minimum tax) upon exercise of an incentive stock
option. If the shares acquired by exercise of an incentive stock option are held
for the longer of two years from the date the stock option was granted and one
year from the date it was exercised, any gain or loss arising from a subsequent
disposition of such shares will be taxed as long-term capital gain or loss, and
the Company will not be entitled to any deduction. If, however, such shares are
disposed of within the above-described period, then in the year of such
disposition the participant will recognize compensation taxable as ordinary
income equal to the excess of the lesser of (i) the amount realized upon such
disposition and (ii) the fair market value of such shares on the date of
exercise over the exercise price, and the Company will be entitled to a
corresponding deduction.
A participant will not recognize taxable income at the time SARs are
granted and the Company will not be entitled to a tax deduction at such time.
Upon exercise, the participant will recognize compensation
10
<PAGE> 13
taxable as ordinary income (and subject to income tax withholding) in an amount
equal to the fair market value of any shares delivered and the amount of cash
paid by the Company. This amount will be deductible by the Company as
compensation expense, except to the extent the deduction limits of reasonable
compensation and Section 162(m) of the Code apply.
A participant will not recognize taxable income at the time restricted
stock is granted and the Company will not be entitled to a tax deduction at such
time, unless the participant makes an election to be taxed at such time. If such
election is not made, the participant will recognize compensation taxable as
ordinary income (and subject to income tax withholding) at the time the
restrictions lapse in an amount equal to the excess of the fair market value of
the shares at such time over the amount, if any, paid for such shares. The
amount of ordinary income recognized by making the above-described election or
upon the lapse of restrictions will be deductible by the Company as compensation
expense, except to the extent the deduction limits of reasonable compensation
and Section 162(m) of the Code apply. In addition, a participant receiving
dividends with respect to restricted stock for which the above-described
election has not been made and prior to the time the restrictions lapse will
recognize compensation taxable as ordinary income (and subject to income tax
withholding), rather than dividend income, in an amount equal to the dividends
paid and the Company will be entitled to a corresponding deduction, except to
the extent the deduction limits of reasonable compensation and Section 162(m) of
the Code apply.
A participant will recognize compensation taxable as ordinary income (and
subject to income tax withholding) at the time bonus stock (i.e., stock not
subject to restriction) is granted in an amount equal to the then fair market
value of such stock. This amount will be deductible by the Company as
compensation expense, except to the extent the deduction limits of reasonable
compensation and Section 162(m) of the Code apply.
A participant will not recognize taxable income at the time performance
restricted units (i.e., stock awards which are subject to performance criteria)
are granted and the Company will not be entitled to a tax deduction at such
time. Upon the settlement of units, the participant will recognize compensation
taxable as ordinary income (and subject to income tax withholding) in an amount
equal to the fair market value of any shares delivered and the amount of cash
paid by the Company. This amount will be deductible by the Company as
compensation expense, except to the extent the deduction limits of reasonable
compensation and Section 162(m) of the Code apply.
STOCK PRICE
On January 19, 1999, the closing price of the Common Stock on the
Nasdaq-Amex National Market System was $7.69.
NEW PLAN BENEFITS
As of the date of this Proxy Statement, no awards have been made under the
1999 Plan. Since awards will be authorized by the Committee in its sole
discretion, it is not possible to determine the benefits or amounts that will be
received by any particular employee or group of employees in the future. Stock
options have been awarded during Fiscal Year 1998 under the Prior Plan.
Information about these stock options awarded to the executive officers named in
the Summary Compensation Table appears at page 15 of this Proxy Statement under
the heading "Option Grants in Last Fiscal Year."
11
<PAGE> 14
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
HEALTH MANAGEMENT SYSTEMS, INC. 1999 LONG-TERM INCENTIVE STOCK PLAN.
3. RATIFICATION OF THE SELECTION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors, in accordance with the recommendation of the Audit
Committee, has selected, subject to ratification by the shareholders, KPMG LLP,
independent certified public accountants, to audit the consolidated financial
statements of the Company and its subsidiaries for 1999. KPMG LLP has audited
the Company's financial statements since 1981.
The Company expects representatives of KPMG LLP to attend the Meeting, to
be available to respond to appropriate questions from shareholders, and to have
the opportunity to make a statement if so desired.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO RATIFY THE
SELECTION OF KPMG LLP AS INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR 1999.
12
<PAGE> 15
ADDITIONAL INFORMATION
STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of January 19, 1999 by (a) each person known by the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (b) each executive officer identified in the Summary Compensation
Table below, (c) each director and nominee for director, and (d) all executive
officers and directors as a group. Except as otherwise noted, the named
shareholder had sole voting and investment power with respect to such
securities.
<TABLE>
<CAPTION>
NAME AMOUNT PERCENTAGE
- ---- --------- ----------
<S> <C> <C>
American Express Financial Advisors......................... 1,250,000 7%
IDS Tower 10
Minneapolis, MN 55440
The Kaufman Fund............................................ 1,000,000 6%
140 East 45 Street
New York, NY 10017
Paul J. Kerz(a)............................................. 1,079,317 6%
Robert V. Nagelhout(b)...................................... 273,785 2%
Donald J. Staffa(c)......................................... 183,372 1%
Thomas J. Kazamek(d)........................................ 210,762 1%
Lewis D. Levetown(e)........................................ 10,738 *
Randolph G. Brown(f)........................................ 375 *
William W. Neal(g).......................................... 56,921 *
Galen D. Powers(h).......................................... 14,435 *
Ellen A. Rudnick(i)......................................... 3,125 *
Richard H. Stowe(j)......................................... 60,864 *
All executive officers and directors as a group (ten
persons)(k)............................................... 1,929,194 11%
</TABLE>
- ---------------
* denotes percentage of ownership is less than 1%
(a) Includes (i) 84,828 shares of Common Stock owned by members of the family of
Mr. Kerz or trusts for the benefit of such family members, as to which Mr.
Kerz disclaims beneficial ownership, and (ii) outstanding options to
purchase 299,019 shares of Common Stock that are currently exercisable or
will become exercisable before April 15, 1999.
(b) Includes (i) 6,000 shares of Common Stock held in trusts for the benefit of
family members, as to which Mr. Nagelhout disclaims beneficial ownership,
and (ii) outstanding options to purchase 64,916 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
(c) Includes outstanding options to purchase 130,655 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
(d) Includes outstanding options to purchase 78,713 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
13
<PAGE> 16
(e) Includes outstanding options to purchase 3,000 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
(f) Includes outstanding options to purchase 375 shares of Common Stock that are
currently exercisable or will become exercisable before April 15, 1999.
(g) Includes 20,000 shares of Common Stock owned by members of the family of Mr.
Neal, as to which Mr. Neal disclaims beneficial ownership. Also includes
outstanding options to purchase 4,500 shares of Common Stock that are
currently exercisable or will become exercisable before April 15, 1999.
(h) Includes 237 shares of Common Stock owned by members of the family of Mr.
Powers, as to which Mr. Powers disclaims beneficial ownership. Also includes
outstanding options to purchase 14,198 shares of Common Stock that are
currently exercisable or will become exercisable before April 15, 1999.
(i) Includes outstanding options to purchase 1,125 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
(j) Includes outstanding options to purchase 4,500 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
(k) Includes outstanding options to purchase 603,813 shares of Common Stock that
are currently exercisable or will become exercisable before April 15, 1999.
14
<PAGE> 17
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for the
Fiscal Years ended October 31, 1998, 1997, and 1996 awarded to or earned by the
Chief Executive Officer and by each of the other four most highly compensated
executive officers of the Company.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- -------------
FISCAL STOCK OPTIONS
NAME AND PRINCIPAL POSITION YEARS SALARY BONUS OTHER(a) AWARDED(b)
- --------------------------- ------ -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Paul J. Kerz........................... 1998 $364,000 $75,000 $ 6,867 0
Chairman, President and 1997 380,667 0 11,029 0
Chief Executive Officer 1996 414,000 65,500 14,943 0
Robert V. Nagelhout.................... 1998 312,000 65,000 4,911 86,170
Executive Vice President and 1997 185,000 75,000 1,997 32,580
Chief Operating Officer 1996 185,000 50,000 2,538 0
Donald J. Staffa....................... 1998 228,000 50,000 5,187 0
Senior Vice President 1997 241,333 0 12,211 32,250
1996 268,000 56,500 14,852 0
Thomas J. Kazamek...................... 1998 225,000 50,000 4,367 20,000
Senior Vice President 1997 180,000 60,000 4,367 126,213
1996 165,000 45,000 2,268 0
Lewis D. Levetown...................... 1998 165,000 14,000 7,112 4,000
Vice President 1997 175,000 0 11,799 15,386
1996 195,000 25,000 14,344 0
</TABLE>
- ---------------
(a) Includes matching contributions under the Company's 401(k) and Profit
Sharing Plans.
(b) On November 13, 1998, Messrs. Kerz, Nagelhout, Staffa, Kazamek, and Levetown
were granted 95,000, 80,000, 35,000, 75,000, and 20,000 options,
respectively, to purchase Common Stock at an exercise price of $6.44 per
share.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The following table sets forth selected option grant information for the
Fiscal Year ended October 31, 1998 with respect to options awarded to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company.
15
<PAGE> 18
OPTION GRANTS IN LAST FISCAL YEAR(a)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
NUMBER % OF TOTAL APPRECIATION
TYPE OF OF OPTIONS EXERCISE FOR OPTION TERM
OPTION OPTIONS GRANTED TO PRICE PER EXPIRATION --------------------------
NAME GRANTED GRANTED EMPLOYEES(b) SHARE DATE 5%(c) 10%(c)
- ---- ------- ------- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul J. Kerz............... -- 0 n/a $ n/a n/a $ 0 $ 0
Robert V. Nagelhout........ ISO 53,110 10% 6.32 11/24/07 211,092 534,948
NQ 33,060 6% 6.32 11/24/07 131,401 332,995
Donald J. Staffa........... -- 0 n/a n/a n/a 0 0
Thomas J. Kazamek.......... ISO 20,000 4% 6.32 11/24/07 79,492 201,449
Lewis D. Levetown.......... ISO 4,000 1% 6.32 11/24/07 15,898 40,290
</TABLE>
- ---------------
(a) On November 13, 1998, Messrs. Kerz, Nagelhout, Staffa, Kazamek, and Levetown
were granted 95,000, 80,000, 35,000, 75,000, and 20,000 options,
respectively, to purchase Common Stock at an exercise price of $6.44 per
share.
(b) Represents individual option grant as a percentage of total options issued
in Fiscal Year 1998.
(c) The hypothetical potential appreciation shown in these columns reflects the
required calculations at compounded annual rates of 5% and 10% set by the
Securities and Exchange Commission, and therefore is not intended to
represent either historical appreciation or anticipated future price
appreciation of the Common Stock.
The following table sets forth selected stock option exercise information
as of October 31, 1998 and for the Fiscal Year then ended relating to the Chief
Executive Officer and each of the other four most highly compensated executive
officers of the Company.
STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END STOCK OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END(a)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul J. Kerz................... 0 0 289,519 0 $33,825 $ 0
Robert V. Nagelhout............ 0 0 35,373 64,627 30,139 43,946
Donald J. Staffa............... 0 0 130,655 6,530 15,120 0
Thomas J. Kazamek.............. 0 0 41,213 90,000 43,959 94,200
Lewis D. Levetown.............. 13,949 67,988 0 3,000 0 2,040
</TABLE>
- ---------------
(a) Value of unexercised "in-the-money" options is determined by multiplying the
number of shares subject to such options by the difference between the
exercise price per share and $7.00, the average of the high and low price
per share of the Common Stock on the Nasdaq-Amex National Market System on
October 30, 1998.
16
<PAGE> 19
The following table sets forth selected information regarding the Company's
Employee Stock Purchase Plan as of October 31, 1998.
<TABLE>
<CAPTION>
EMPLOYEE STOCK PURCHASE PLAN
-----------------------------------
NUMBER OF SHARES VALUE OF SHARES
NAME OF INDIVIDUAL OR GROUP PURCHASED(a) PURCHASED(b)
- --------------------------- ---------------- ---------------
<S> <C> <C>
Paul J. Kerz(c)............................................. 0 $ 0
Robert V. Nagelhout......................................... 6,835 (10,278)
Donald J. Staffa............................................ 7,682 (9,953)
Thomas J. Kazamek........................................... 3,176 (6,406)
Lewis D. Levetown........................................... 7,682 (9,953)
All current executive officers as a group................... 25,375 (36,589)
All employees, other than executive officers, as a group.... 610,065 $(1,081,638)
</TABLE>
- ---------------
(a) Represents the cumulative number of shares of Common Stock purchased by
employee.
(b) Calculated as the difference between the purchase price per share paid by
employees and $7.00, the closing price of the Common Stock on the
Nasdaq-Amex National Market System on October 30, 1998, multiplied by the
cumulative number of shares purchased by the employees. Amounts in
parentheses indicate the market value at October 30, 1998 exceeded the
purchase price.
(c) Mr. Kerz is not eligible to participate in this plan because his beneficial
ownership of the outstanding Common Stock exceeds 5%.
PROFIT SHARING PLAN
The Company had maintained a discretionary Profit Sharing Plan since 1974
in which all of its employees were eligible to participate after one year of
service. Contributions by the Company to the plan were discretionary in the
judgment of the Board of Directors.
Effective October 31, 1997, the Company terminated its profit sharing plan,
including the 401(k) plan discussed below. A replacement, but identical, 401(k)
plan was established as of November 1, 1997. In December 1998, the Company, upon
receipt of approval from the Internal Revenue Service, made an initial
distribution of the assets of the terminated profit sharing plan. The Company
intends to distribute the balance of the plan's assets in March 1999.
401(K) PLAN
As of January 1, 1992, the Company adopted an Employee Savings Plan under
Section 401(k) of the Code which permits an employee to contribute to that plan
a portion of such employee's compensation, subject to certain limitations. In
its discretion, the Company may make an annual contribution to the plan for the
benefit of participating employees. For the Fiscal Years ended October 31, 1998,
1997, and 1996, 401(k) Plan expense was $959,000, $804,000, and $611,000,
respectively. For the Fiscal Year ended October 31, 1998, $3,360 was contributed
on behalf of Mr. Kerz, $1,680 was contributed on behalf of Mr. Staffa, and
$3,605 was contributed on behalf of Mr. Levetown.
Mr. Nagelhout and Mr. Kazamek participate under the 401(k) plan of the
Company's HCm subsidiary, which is valued at the end of each calendar year. For
the calendar year ending December 31, 1997, $4,911 and $4,367 was contributed on
behalf of Mr. Nagelhout and Mr. Kazamek, respectively.
17
<PAGE> 20
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
Effective May 31, 1989, the Company adopted the Health Management Systems,
Inc. Stock Option and Restricted Stock Purchase Plan under which: (a) options
can be granted to purchase shares of Common Stock at an exercise price equal to
(incentive stock options) or less than (non-qualified stock options) the
estimated fair market value of the Company's Common Stock, or (b) rights can be
granted in the form of an award to purchase shares of Common Stock at a price
equal to, more than, or less than the estimated fair market value of the Common
Stock. Subsequent amendments to the Prior Plan, which have been approved by
shareholders, have increased the number of shares available to be issued under
the Prior Plan to 6,750,000 shares. The Prior Plan expires in May 1999.
The stock options become exercisable and expire at various dates through
November 2008. As of October 31, 1998, no stock appreciation rights or stock
purchase awards had been granted. On November 13, 1998, the Company awarded
1,655,850 stock options to its employees (including the options granted to
Messrs. Kerz, Nagelhout, Staffa, Kazamek, and Levetown discussed in footnote (a)
to the table entitled "Option Grants in Last Fiscal Year" above). Of the total
options, 1,418,500 options are subject to a performance-based accelerated
vesting schedule and 237,350 options vest over three years. The
performance-based options are subject to accelerated vesting of all or a portion
of the total options upon realization of certain annual performance measures.
All options whose vesting has not otherwise been accelerated pursuant to the
foregoing will vest on October 31, 2003, subject only to the continued
employment in good standing by the Company of the optionee.
EMPLOYEE STOCK PURCHASE PLAN
On May 28, 1993, the Board of Directors adopted the Health Management
Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently
approved by the shareholders at the Annual Meeting of Shareholders held on
February 28, 1994. The Company has reserved for issuance 1,125,000 shares of
Common Stock pursuant to the ESPP, which is intended to qualify as an "employee
stock purchase plan" within the meaning of Section 423 of the Code. The plan
provides that all full-time employees of the Company and its subsidiaries may
elect to participate in the ESPP without regard to length of service if their
customary employment is a minimum of 20 hours per week.
For the Fiscal Years ended October 31, 1998, 1997, and 1996, the Company
sold 118,531, 95,332, and 163,426 shares of Common Stock pursuant to the ESPP,
respectively, for aggregate consideration of $516,000, $709,000, and $2,337,000.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP") was
adopted by the Board of Directors on November 30, 1994, which action was
subsequently approved by shareholders at the Annual Meeting of Shareholders held
on March 7, 1995. The purpose of the NEDP is to provide compensation in the form
of equity participation in the Company, in consideration of the services
provided by directors not employed by the Company. Under the NEDP, a grant of
options to purchase 1,500 shares of Common Stock is made to each non-employee
director during the fourth fiscal quarter of each Fiscal Year. The exercise
price of options issued under the NEDP is the fair market value of the Common
Stock on the date of grant. The 1998 option grants were issued on October 30,
1998 with an exercise price of $7.00 per share. Options granted under the NEDP
have a term of ten years, with 25% of the options
18
<PAGE> 21
exercisable immediately upon grant and an additional 25% exercisable at the end
of each of the three subsequent fiscal years. The NEDP is administered by the
Compensation Committee.
EXECUTIVE DEFERRED COMPENSATION PLAN
As of November 1, 1994, the Company adopted an unfunded Executive Deferred
Compensation Plan ("Executive Plan") for a select group of management or other
highly compensated employees, defined as employees who receive at least $150,000
in total compensation in a fiscal year. The purpose of the Executive Plan is (i)
to provide certain key executive employees of the Company with benefits to
replace the benefits to which they would be entitled under the Health Management
Systems, Inc. Profit Sharing Plan but for the application of various limitations
on contributions including the limitation under Section 401(a)(17) of the Code,
and (ii) to provide the ability to replace the benefits previously available
under the Company's Profit Sharing and 401(k) Plans that may have been limited
because of any other future changes in the Code or other applicable laws. For
the Fiscal Years ended October 31, 1998, 1997, and 1996, the Executive Plan
expense was $0, $0, and $12,000, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of Richard H. Stowe and William W.
Neal, both of whom are non-employee directors of the Company.
Notwithstanding contrary statements set forth in any of the Company's
previous filings under the Securities Act of 1933 (the "Securities Act") or the
Exchange Act that might incorporate future filings, including this Proxy
Statement, the Compensation Committee report, and the performance graph set
forth below shall not be incorporated by reference into such future filings.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report provides an explanation of the philosophy underlying the
Company's executive compensation program and details on how decisions were
implemented during Fiscal Year 1998 regarding the compensation paid to the
Company's executive officers.
The Company's mission is to be a significant provider of quality products
and services in the markets it serves. To support this and other strategic
objectives as approved by the Board of Directors and to provide adequate returns
to the shareholders, the Company must compete for, attract, develop, motivate,
and retain top quality executive talent at the corporate office and operating
business units of the Company during periods of both favorable and unfavorable
business conditions.
The Company's executive compensation program is a critical management tool
in achieving this goal. 'Pay for performance' is the underlying philosophy for
the Company's executive compensation program. Consistent with this philosophy,
the program has been carefully conceived and is independently administered by
the Compensation Committee (the "Committee") of the Board of Directors, which is
comprised entirely of non-employee directors. The program is designed to link
executive pay to corporate performance, including share price, recognizing that
there is not always a direct correlation in the short-term between executive
performance and share price.
The program is designed and administered to:
- reward individual and team achievements that contribute to the attainment
of the Company's business goals; and
19
<PAGE> 22
- provide a balance of total compensation opportunities, including salary,
bonus, and longer-term cash and equity incentives, that are competitive
with similarly situated companies and reflective of the Company's
performance.
In seeking to link executive pay to corporate performance, the Committee
believes that the most appropriate measure of corporate performance is the
increase in long-term shareholder value, which involves improving such
quantitative performance measures as revenue, net income, cash flow, operating
margins, earnings per share, and return on shareholders' equity. The Committee
may also consider qualitative corporate and individual factors which it believes
bear on increasing the long-term value of the Company to its shareholders. These
include: (i) the development of competitive advantages; (ii) the ability to deal
effectively with the growing complexity of the Company's businesses; (iii)
success in developing business strategies, managing costs, and improving the
quality of the Company's products and services as well as customer satisfaction;
and (iv) the general performance of individual job responsibilities.
The Company's executive compensation program consists of: (i) a base
salary; (ii) an annual bonus; and (iii) a long-term incentive represented by
stock options.
COMPENSATION OF EXECUTIVE OFFICERS
Salary. In determining the amount of compensation to be paid to the
executive officers of the Company, the Committee adheres to long established
compensation policies of the Company pursuant to which executive compensation is
determined. Base salary determinants include the prevailing rate of compensation
for positions of like responsibility in the particular geographic area, the
level of the executive's compensation in relation to other executives of the
Company with the same, more, or less responsibilities, and the tenure of the
individual. To ensure both competitiveness and appropriateness of base salaries,
the Company retains professional consultants on a periodic basis to update the
job classification and pay scale structure pursuant to which individual
executives (and the remainder of the Company's employees) are classified and the
pay ranges with which their jobs are associated.
Bonus. Bonuses are intended to reward both overall corporate performance
and an individual's participation in attaining such performance. From time to
time, bonuses are also awarded to augment base salary when a determination has
been made that an executive's salary is not competitive in light of the factors
discussed above.
Stock Options. The longer-term component of the Company's executive
compensation program consists of stock options. The options generally permit the
option holder to buy the number of shares of the underlying Common Stock (an
"option exercise") at a price equal to or greater than the market price of the
stock at the time of grant. Thus, the options generally gain value only to the
extent the stock price exceeds the option exercise price during the life of the
option. Generally a portion of the options vest over a period of several years
and expire no later than ten years after grant. Stock options are granted upon
the recommendation of management and approval of the Committee based upon their
subjective evaluation of the appropriate amount for the level and amount of
responsibility of each executive officer. On November 13, 1998, certain stock
options that were awarded to four of the five executive officers are subject to
a performance-based vesting schedule. These options are to vest 100 percent on
October 31, 2003, subject to accelerated vesting of 10 percent of the total
options award to October 31 of the applicable year upon realization of budgeted
revenue and operating margin as approved by the Company's Board of Directors:
realization by the Company of $105,000,000 in revenue for Fiscal Year 1998
(which goal has been attained) will result in accelerated vesting of 10 percent
of the award; realization by the
20
<PAGE> 23
Company of the revenue budget for each of Fiscal Years 1999, 2000, 2001, and
2002, respectively, will accelerate vesting of additional increments of 10
percent of the award on each of October 31, 1999, 2000, 2001, and 2002,
respectively; and realization by the Company of the operating margin budget for
each of Fiscal Years 1999, 2000, 2001, and 2002, respectively, will accelerate
vesting of additional increments of 10 percent of the award on each of October
31, 1999, 2000, 2001, and 2002, respectively. All options whose vesting has not
otherwise been accelerated pursuant to the foregoing will vest on October 31,
2003, subject only to the continued employment in good standing by the Company
of the optionee.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Determination of the Company's compensation of Paul J. Kerz, the Company's
Chief Executive Officer and founder, takes into account the factors described
above as pertinent to the remainder of the Company's executives and employees,
while also taking into consideration the proprietary nature of the Company's
business and efforts expended in connection with development of the Company's
strategy and product development activities. The Committee also took into
account (i) Mr. Kerz's strategic contributions to the Company, (ii) Mr. Kerz's
participation in the Company's improving financial results, and (iii) the amount
of Mr. Kerz's compensation relative to chief executive officers of comparable
companies.
OTHER
Section 162(m) of the Code prohibits the Company from deducting any
compensation in excess of $1,000,000 paid to certain of its executive officers,
except to the extent that such compensation is paid pursuant to a shareholder
approved plan upon the attainment of specified performance objectives. The
Committee believes that tax deductibility is an important factor, but not the
sole factor, to be considered in setting executive compensation policy.
Accordingly, the Committee generally intends to take such reasonable steps as
are required to avoid the loss of a tax deduction due to Section 162(m), but
reserves the right, in appropriate circumstances, to pay amounts which are not
deductible.
COMPENSATION COMMITTEE
RICHARD H. STOWE
WILLIAM W. NEAL
SHAREHOLDER RETURN PERFORMANCE GRAPHS
The graph presented below provides a comparison between the cumulative
total shareholder return (assuming the reinvestment of dividends) on the Common
Stock since the Company's initial public offering on December 17, 1992 and the
Nasdaq-Amex U.S. companies index, the Nasdaq-Amex computer and data processing
service companies index, and the Nasdaq-Amex health service companies index,
over
21
<PAGE> 24
the same period. The graph assumes the investment of $100 in the Common Stock
and each of the indices.
<TABLE>
<CAPTION>
HMSY Nasdq Comp Nasdaq HC Nasdaq Info
<S> <C> <C> <C> <C>
1992 100.00 100.00 100.00 100.00
1993 141.53 115.10 102.14 107.12
1994 189.06 115.73 129.75 128.98
1995 319.79 155.89 133.39 196.81
1996 352.32 183.96 153.17 228.22
1997 97.45 242.11 166.17 307.93
1998 104.95 271.42 130.37 398.22
</TABLE>
CERTAIN TRANSACTIONS
LOAN TO PAUL J. KERZ
During October 1998, the Company's HSA Managed Care Systems, Inc. ("HSA")
subsidiary, a Delaware corporation, made two loans to Paul J. Kerz, an officer
and director of HSA, who is also the Company's Chairman and Chief Executive
Officer. One loan, in the principal amount of $500,000, is secured by a pledge
of 162,666 shares of Common Stock owned by Mr. Kerz, while the other loan, in
the principal amount of $250,000, is unsecured. Both loans bear interest at the
rate of 5.3125% per annum, payable semi-annually commencing April 30, 1999, and
are due as to principal and all then accrued but unpaid interest on October 31,
2000. The loans were unanimously approved by the Board of Directors of HSA and
the Company as a sole stockholder of HSA, following the recommendation of the
Compensation Committee of the Company's Board of Directors that the loans were
in the best interest of HSA and the Company, and the unanimous approval of the
loans by the independent members of the Company's Board of Directors. As of the
date of this Proxy Statement, the entire principal amount of both loans is
outstanding.
GUARANTEE OF LOAN TO ROBERT V. NAGELHOUT
In April 1997, the Company guaranteed a loan by the Chase Manhattan Bank
(the "Bank") in the original principal amount of $1,600,000 to Robert V.
Nagelhout, the Chief Operating Officer and a
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director of the Company. Mr. Nagelhout granted the Company a security interest
in 500,000 shares of Common Stock as collateral for its guarantee. On June 11,
1998, Mr. Nagelhout repaid the loan in its entirety, and the Bank released the
Company's guaranty.
OTHER RELATIONSHIPS
The Company occasionally transacts business with companies for which
members of its Board of Directors serve as executive officers and/or directors.
In Fiscal Year 1998, none of these transactions was individually significant or
reportable.
LEGAL
In April and May 1997, five purported class action lawsuits were commenced
in the United States District Court for the Southern District of New York
against the Company and certain of its present and former officers and directors
alleging violations of the Exchange Act in connection with certain allegedly
false and misleading statements. These lawsuits, which sought damages in an
unspecified amount, were consolidated into a single proceeding captioned In re
Health Management Systems, Inc., Securities Litigation (97 CIV-1965 (HB)) and a
Consolidated Amended Complaint was filed. Defendants made a motion to dismiss
the Consolidated Amended Complaint, which was submitted to the Court on December
18, 1997 following oral argument. On May 27, 1998, the Consolidated Amended
Complaint was dismissed by the Court for failure to state a claim under the
federal securities laws, with leave for the plaintiffs to replead. On July 17,
1998, a Second Consolidated Amended Complaint was filed in the United States
District Court of the Southern District of New York, which reiterates
plaintiffs' allegations in their prior Complaint. On September 11, 1998, the
Company and the other defendants filed a motion to dismiss the second Complaint.
The motion was fully briefed in late November 1998, at which time the motion was
submitted to the Court. The Company intends to continue to vigorously defend the
lawsuit.
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors knows of no
business to be presented at the Meeting other than as set forth herein. If other
matters properly come before the Meeting, the persons named as proxies will vote
on such matters in their discretion.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder proposals intended to be presented at the Company's 2000
Annual Meeting of Shareholders must be received by the Secretary, Health
Management Systems, Inc., 401 Park Avenue South, New York, New York 10016, no
later than October 9, 1999, in order to be considered for inclusion in the
Company's Proxy Statement and form of proxy relating to such Meeting. Moreover,
with regard to any proposal by a shareholder not seeking to have such proposal
included in the Proxy Statement but seeking to have such proposal considered at
the 2000 Annual Meeting, if such shareholder fails to notify the Company in the
manner set forth above of such proposal no later than December 27, 1999, then
the persons appointed as proxies may exercise their discretionary voting
authority if the proposal is considered at the 2000 Annual Meeting
notwithstanding that shareholders have not been advised of the proposal in the
Proxy Statement for the 2000 Annual Meeting. Any proposals submitted by
shareholders must comply in all respects with (i) the rules and regulations of
the Securities and Exchange Commission, (ii) the provisions of the Company's
Certificate of Incorporation and by-laws, and (iii) New York law.
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ANNUAL REPORT
The Company's 1998 Annual Report on Form 10-K is concurrently being mailed
to shareholders. The Annual Report contains consolidated financial statements of
the Company and its subsidiaries and the report thereon of KPMG LLP, independent
certified public accountants.
BY ORDER OF THE BOARD OF DIRECTORS
FELICE BLANCO
Secretary
Dated: February 8, 1999
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, SHAREHOLDERS ARE
URGED TO COMPLETE, SIGN, DATE, AND RETURN THE ACCOMPANYING FORM OF PROXY IN THE
ENCLOSED ENVELOPE.
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<PAGE> 27
EXHIBIT A
HEALTH MANAGEMENT SYSTEMS, INC.
1999 LONG-TERM INCENTIVE STOCK PLAN
ARTICLE I -- PURPOSES
The purposes of the Health Management Systems, Inc. 1999 Long-Term
Incentive Stock Plan are to promote the interests of the Corporation and its
shareholders by strengthening the Corporation's ability to attract and retain
highly competent officers and other employees, and to provide a means to
encourage stock ownership and proprietary interest in the Corporation by such
persons. The 1999 Long-Term Incentive Stock Plan is intended to provide plan
participants with stock-based incentive compensation which is not subject to the
deduction limitation rules prescribed under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), and should be construed to the
extent possible as providing for remuneration which is "performance-based
compensation" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.
ARTICLE II -- DEFINITIONS
Unless the context clearly indicates otherwise, the following terms shall
have the following meanings:
a. "AWARD" means, individually or in the aggregate, an award granted
to a Participant under the Plan in the form of an Option, a Stock Award, or
an SAR, or any combination of the foregoing.
b. "BOARD" means the Board of Directors of Health Management Systems,
Inc.
c. "COMMITTEE" means the Compensation Committee of the Board of
Directors, a subcommittee thereof, or such other committee as may be
appointed by the Board of Directors. The Committee shall be comprised of
two or more members of the Board of Directors who shall be "non-employee
directors" under Rule 16b-3 of the Exchange Act and "outside directors"
under Section 162(m) of the Code.
d. "CORPORATION" means Health Management Systems, Inc., or any entity
that is directly or indirectly controlled by Health Management Systems,
Inc., and its subsidiaries.
e. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
f. "FAIR MARKET VALUE" means the fair market value of a Share as of
the relevant date of determination, as determined in accordance with a
valuation methodology approved by the Committee. In the absence of any
alternative valuation methodology approved by the Committee, the Fair
Market Value of a Share shall equal the average of the highest and the
lowest quoted selling price of a Share as reported on the composite tape
for the principal national securities exchange on which the Shares are
traded on that date, or, in the event that the Shares are not listed for
trading on a national securities exchange but are quoted on an automated
system, on such automated system, in any such case on the valuation date
(or, if there were no sales on the valuation date, the average of the
highest and the lowest quoted selling prices as reported on said composite
tape or automated system for the most recent day before the valuation date
during which a sale occurred).
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g. "INCENTIVE STOCK OPTION" means a stock option that complies with
Section 422 of the Code, or any successor law.
h. "NON-QUALIFIED STOCK OPTION" means a stock option that does not
meet the requirements of Section 422 of the Code, or any successor law.
i. "OPTION" means an option awarded under Article VI to purchase
Shares. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option, as determined by the Committee in its sole
discretion.
j. "PARTICIPANT" means, (i) with respect to an Incentive Stock
Option, any full-time employee of the Corporation, including an officer or
director of the Corporation and (ii) with respect to all other Awards which
may be granted under the Plan, any individual employed by, or performing
services for, the Corporation, including, without limitation, officers and
directors of the Corporation.
k. "PLAN" means this Health Management Systems, Inc. 1999 Long-Term
Incentive Stock Plan, as amended and restated from time to time.
l. "PRIOR PLAN" means the Health Management Systems, Inc. Stock
Option and Restricted Stock Purchase Plan, as amended and restated from
time to time.
m. "SAR" means a stock appreciation right.
n. "SHARES" means shares of the Corporation's common stock, $.01 par
value per share.
o. "STOCK AWARD" means an Award made under Article VI in Shares.
p. "SUBSTITUTE AWARD" has the meaning set forth in Article V(b).
The term "CHANGE OF CONTROL" has the meaning set forth in Article X.
ARTICLE III -- EFFECTIVE DATE AND DURATION
The Plan shall become effective upon its approval by the shareholders of
the Corporation. Prior to such shareholder approval, the Committee may grant
Awards conditioned on shareholder approval. If such shareholder approval is not
obtained at or before the first annual meeting of shareholders to occur after
the adoption of the Plan by the Board (including any adjournment or adjournments
thereof), the Plan and any Awards made thereunder shall terminate ab initio and
be of no further force and effect. In no event shall any Awards be made under
the Plan after January 10, 2009, which is the day before the tenth anniversary
of the date of the Plan's adoption by the Board.
ARTICLE IV -- ADMINISTRATION
The Committee shall be responsible for administering the Plan, and shall
have full power to interpret the Plan and to adopt such rules, regulations and
guidelines for carrying out the Plan as it may deem necessary or appropriate.
This power includes, but is not limited to, selecting Award recipients,
establishing all Award terms and conditions, adopting procedures and regulations
governing Awards, and making all other determinations necessary or advisable for
the administration of the Plan. All decisions made by the Committee shall be
final and binding on all persons.
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The Committee may delegate some or all of its power to the Chairman and
Chief Executive Officer or other executive officer of the Corporation as the
Committee deems appropriate; provided, that (i) the Committee may not delegate
its power with regard to the grant of an Award to any person who is a "covered
employee" within the meaning of Section 162(m) of the Code, or any successor
law, or who, in the Committee's judgment, is likely to be a covered employee at
any time during the period an Award to such employee would be outstanding and
(ii) the Committee may not delegate its power with regard to the selection for
participation in the Plan of an officer or other person subject to Section 16 of
the Exchange Act or decisions concerning the timing, pricing or amount of an
Award to such an officer or other person.
ARTICLE V -- AVAILABLE SHARES
a. General. Subject to adjustment as provided in Article V(d) of the
Plan, the number of Shares that may be issued under the Plan shall not exceed,
in the aggregate, 4,751,356 shares, comprised of:
(i) 1,383,906 shares of Common Stock that remain available for
issuance under the Prior Plan as of January 19, 1999; plus
(ii) 3,367,450 shares of Common Stock subject to any award outstanding
under the Prior Plan on such date which thereafter lapses, expires or is
otherwise terminated without the issuance of such shares.
Shares issued under this Plan may be either authorized but unissued shares,
treasury shares or any combination thereof. No fractional Shares shall be
issued. Cash may be paid in lieu of any fractional Shares in settlement of
Awards.
b. Rules Applicable to Determining Shares Available for Issuance. For
purposes of determining the number of Shares that remain available for issuance,
the following shares shall be added back to the limit set forth in Article V(a)
above and again be available for Awards:
(i) The number of Shares tendered to pay the exercise price of an
Option or other Award;
(ii) The number of Shares withheld from any Award to satisfy a
Participant's tax withholding obligations or, if applicable, to pay the
exercise price of an Option or other Award;
(iii) The number of Shares subject to an Option or other outstanding
Award which are not issued by reason of the expiration, termination,
cancellation or forfeiture of such Award; and
(iv) Any Shares acquired pursuant to the exercise of an Option or
other Award which thereafter are repurchased by the Corporation.
In addition, the number of Shares subject to Awards that are granted in
substitution of an option or other award (a "Substitute Award") issued by an
entity acquired by (or whose assets are acquired by) the Corporation shall not
reduce the number of Shares available under the Plan.
c. Special Limits. The number of Shares for which Awards may be granted
to any person in any fiscal year shall not exceed 150,000.
d. Adjustments. In the event of any stock dividend, stock split,
combination or exchange of securities, merger, consolidation, recapitalization,
spin-off or other distribution (other than normal cash dividends) of any or all
of the assets of the Corporation to shareholders, or any other similar change or
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event, such proportionate adjustments, if any, as the Committee in its
discretion may deem appropriate to reflect such change or event shall be made
with respect to the number and class of securities available under the Plan, the
number and class of securities subject to each outstanding Option and the
purchase price per security, the terms of each outstanding SAR, and the number
and class of securities subject to each outstanding Stock Award shall be
appropriately adjusted by the Committee, such adjustments to be made in the case
of outstanding Options without an increase in the aggregate purchase price. If
any such adjustment would result in a fractional security being (a) available
under the Plan, such fractional security shall be disregarded, or (b) subject to
an Award, the Corporation shall pay the holder of such Award, in connection with
the first vesting, exercise or settlement of such Award in whole or in part
occurring after such adjustment, an amount in cash determined by multiplying (i)
the fraction of such security (rounded to the nearest hundredth) by (ii) the
excess, if any, of (A) the Fair Market Value on the vesting, exercise or
settlement date over (B) the exercise price, if any, of such Award.
ARTICLE VI -- AWARDS
a. General. The Committee shall determine the type or types of Award(s)
to be made to each Participant. Awards may be granted singly, in combination or
in tandem. In the sole discretion of the Committee, Awards also may be made in
combination or in tandem with, in replacement of, as alternatives to, or as the
payment form for grants or rights under any other compensation plan of the
Corporation including a plan of any entity acquired by (or whose assets are
acquired by) the Corporation. The Committee shall have full authority to
determine and specify in the applicable agreement reflecting an Award the
effect, if any, that a Participant's termination of employment for any reason
will have on the vesting, exercisability, payment or lapse of restrictions
applicable to an Award. With respect to the foregoing, the terms and conditions
of an Incentive Stock Option may (but need not) include any of the following
provisions:
(i) In the event the full-time employment of a Participant is
terminated by the Corporation or any parent or subsidiary (as those terms
are defined in Sections 424(e) and 424(f) of the Code, or any successor
law) of the Corporation for any reason other than "for cause," as
determined by the Board, the unexercised portion of any Incentive Stock
Option held by such Participant at that time may only be exercised within
three months after the date on which the Participant ceased to be so
employed, and only to the extent that the Participant could have otherwise
exercised such Incentive Stock Option as of the date on which he ceased to
be so employed.
(ii) In the event the full-time employment of a Participant is
terminated by the Corporation or any parent or subsidiary (as those terms
are defined in Sections 424(e) and 424(f) of the Code, or any successor
law) of the Corporation "for cause," as determined by the Board, or if such
employment is terminated voluntarily by the Participant, the unexercised
portion of any Incentive Stock Option held by such Participant shall
terminate immediately effective the date the Participant ceased to be so
employed.
(iii) In the event a Participant shall cease to be employed by the
Corporation or any parent or subsidiary (as those terms are defined in
Sections 424(e) and 424(f) of the Code, or any successor law) of the
Corporation on a full time basis by reason of his "disability" (within the
meaning of Section 422 of the Code or any successor law) or on account of
death or retirement, the unexercised portion of any Incentive Stock Option
held by such Participant at that time may only be exercised within one year
after the date on which the Participant ceased to be so employed (or for
such shorter
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exercise periods that may apply for purposes of Section 422 of the Code, or
any successor law), and only to the extent that the Participant could have
otherwise exercised such Incentive Stock Option as of the date on which the
Participant ceased to be so employed.
b. Types of Awards. The types of Awards that may be granted under the
Plan are:
(i) Options. An Option shall represent the right to purchase a
specified number of Shares during a specified period up to ten years as
determined by the Committee. The purchase price per Share for each Option
shall not be less than 100% (110% in the case of an Incentive Stock Option
granted to an optionee ("10% Stockholder") who, at the time of grant, owns
stock possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation or its parent (as defined in Section
424(e) of the Code, or any successor law) or its subsidiaries) of the Fair
Market Value on the date of grant; provided, that a Substitute Award may be
granted with a purchase price per Share that is intended to preserve the
economic value of the award which the Substitute Award replaced. The term
of each Option shall be fixed by the Committee, but no Incentive Stock
Option shall be exercisable more than ten years (five years, in the case of
an Incentive Stock Option granted to a 10% Stockholder) after the date on
which the Option is granted. If an Option is granted retroactively in
substitution for an SAR, the Fair Market Value in the Award agreement may
be the Fair Market Value on the grant date of the SAR. An Option may be in
the form of an Incentive Stock Option or a Non-Qualified Stock Option, as
determined by the Committee. The Shares covered by an Option may be
purchased, in accordance with the applicable Award agreement, by cash
payment or such other method permitted by the Committee, including (i)
tendering Shares valued at the Fair Market Value at the date of exercise;
(ii) authorizing a third party to sell the Shares (or a sufficient portion
thereof) acquired upon exercise of an Option, and assigning the delivery to
the Corporation of a sufficient amount of the sale proceeds to pay for all
the Shares acquired through such exercise and any tax withholding
obligations resulting from such exercise; or (iii) any combination of the
above. In the case of an Incentive Stock Option, the aggregate Fair Market
Value of Shares (determined at the time of grant of the Option) with
respect to which Incentive Stock Options are exercisable for the first time
by an optionee during any calendar year (under all such plans of optionee's
employer corporation and its parent and subsidiaries (as those terms are
defined in Sections 424(e) and 424(f) of the Code, or any successor law))
shall not exceed $100,000.
(ii) SARs. An SAR shall represent a right to receive a payment, in
cash, Shares or a combination, equal to the excess of the Fair Market Value
of a specified number of Shares on the date the SAR is exercised over the
Fair Market Value on the grant date of the SAR as set forth in the Award
agreement, except that if an SAR is granted retroactively in substitution
for an Option, the designated Fair Market Value in the Award agreement may
be the Fair Market Value on the grant date of the Option. An SAR may be
granted alone or in addition to other Awards, or in tandem with an Option.
An SAR granted in tandem with an Option may be granted either at the same
time as such Option or subsequent thereto. If granted in tandem with an
Option, an SAR shall cover the same number of Shares as covered by the
Option (or such lesser number of shares as the Committee may determine) and
shall be exercisable only at such time or times and to the extent the
related Option shall be exercisable, and shall have the same term and
exercise price as the related Option (which, in the case of an SAR granted
after the grant of the related Option, may be less than the Fair Market
Value per Share on the date of grant of the tandem SAR). Upon exercise of
an SAR granted in tandem with an Option, the related Option shall be
canceled automatically to the extent of
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the number of Shares covered by such exercise; conversely, if the related
Option is exercised as to some or all of the Shares covered by the tandem
grant, the tandem SAR shall be canceled automatically to the extent of the
number of Shares covered by the Option exercise.
(iii) Stock Awards. A Stock Award shall represent an Award made in or
valued in whole or in part by reference to Shares, such as performance or
phantom shares or units. Stock Awards may be payable in whole or in part in
Shares. All or part of any Stock Award may be subject to conditions and
restrictions established by the Committee, and set forth in the Award
agreement or other plan or document, which may include, but are not limited
to, continuous service with the Corporation, and/or the achievement of one
or more performance goals. The performance criteria that may be used by the
Committee in granting Stock Awards contingent on performance goals shall
consist of total shareholder return, net sales, operating income, income
before income taxes, net income, net income per share (basic or diluted),
profitability as measured by return ratios, including return on invested
capital, return on equity and return on investment, cash flows, market
share or cost reduction goals. The Committee may select one criterion or
multiple criteria for measuring performance, and the measurement may be
based on Corporation or business unit performance, or based on comparative
performance with other companies.
ARTICLE VII -- DIVIDENDS AND DIVIDEND EQUIVALENTS
The Committee may provide that any Awards under the Plan earn dividends or
dividend equivalents. Such dividends or dividend equivalents may be paid
currently or may be credited to a Participant's Plan account. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and
conditions as the Committee may establish, including reinvestment in additional
Shares or Share equivalents.
ARTICLE VIII -- PAYMENTS AND PAYMENT DEFERRALS
Payment of Awards may be in the form of cash, Shares, other Awards or
combinations thereof as the Committee shall determine, and with such
restrictions as it may impose. The Committee, either at the time of grant or by
subsequent amendment, may require or permit Participants to elect to defer the
issuance of Shares or the settlement of Awards in cash under such rules and
procedures as it may establish under the Plan. It also may provide that deferred
settlements include the payment or crediting of interest on the deferral
amounts, or the payment or crediting of dividend equivalents where the deferral
amounts are denominated in Share equivalents.
ARTICLE IX -- TRANSFERABILITY
a. Unless otherwise specified in an Award agreement, Awards shall not be
transferable or assignable other than by will or the laws of descent and
distribution or pursuant to beneficiary designation procedures approved by the
Company. The interests of Participants under the Plan are not subject to their
debts or other obligations and, except as may be required by the tax withholding
provisions of Code or any state's income tax act, or pursuant to an agreement
between a Participant and the Corporation, may not be voluntarily sold,
transferred, alienated, assigned or encumbered.
b. Notwithstanding the foregoing, the Committee, in its discretion and
subject to such limitations and conditions as the Committee deems appropriate,
may (i) amend Awards of Incentive Stock Options
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to convert the Options granted thereby to Non-Qualified Stock Options, or (ii)
grant Non-Qualified Stock Options, in each case on terms which permit the
Participant to transfer all or a part of the Option, for estate or tax planning
purposes or for donative purposes, and without consideration, to a member of the
Participant's immediate family (as defined by the Committee), a trust for the
exclusive benefit of such immediate family members, or a partnership,
corporation or limited liability company the equity interests of which are owned
exclusively by the Participant and/or one or more members of the Participant's
family.
ARTICLE X -- CHANGE OF CONTROL
Either in contemplation of or in the event of a Change of Control (as
defined below), the Committee may provide for appropriate adjustments (including
acceleration of vesting and settlements of or substitutions for Awards either at
the time an Award is granted or at a subsequent date).
A "Change of Control" shall occur when:
a. a "Person" (which term, when used in this Article X, shall have
the meaning it has when it is used in Section 13(d) of the Exchange Act,
but shall not include the Corporation, any trustee or other fiduciary
holding securities under an employee benefit plan of the Corporation, or
any corporation owned, directly or indirectly, by the shareholders of the
Corporation in substantially the same proportions as their ownership of
Voting Stock (as defined below) of the Corporation) is or becomes, without
the prior consent of a majority of the Continuing Directors of the
Corporation (as defined below), the Beneficial Owner (as defined in Rule
13d-3 promulgated under the Exchange Act), directly or indirectly, of
Voting Stock (as defined below) representing twenty percent or more of the
combined voting power of the Corporation's then outstanding securities; or
b. the shareholders of the Corporation approve a reorganization,
merger or consolidation or the Corporation sells, or otherwise disposes of,
all or substantially all of the Corporation's property and assets, or the
Corporation liquidates or dissolves (other than a reorganization, merger,
consolidation or sale which would result in all or substantially all of the
beneficial owners of the Voting Stock of the Corporation outstanding
immediately prior thereto continuing to beneficially own, directly or
indirectly (either by remaining outstanding or by being converted into
voting securities of the resulting entity), more than fifty percent of the
combined voting power of the voting securities of the Corporation or such
entity resulting from the transaction (including, without limitation, an
entity which as a result of such transaction owns the Corporation or all or
substantially all of the Corporation's property or assets, directly or
indirectly) outstanding immediately after such transaction in substantially
the same proportions relative to each other as their ownership immediately
prior to such transaction); or
c. the individuals who are Continuing Directors of the Corporation
(as defined below) cease for any reason to constitute at least a majority
of the Board of the Corporation.
The term "Continuing Director" means (i) any member of the Board who is a
member of the Board immediately after the 1999 annual meeting of shareholders,
or (ii) any person who subsequently becomes a member of the Board whose
nomination for election or election to the Board is recommended or approved by a
majority of the Continuing Directors. The term "Voting Stock" means all capital
stock of the Corporation which by its terms may be voted on all matters
submitted to shareholders of the Corporation generally.
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ARTICLE XI -- AWARD AGREEMENTS
Awards may be evidenced by an agreement that sets forth the terms,
conditions and limitations of such Award. Such terms may include, but are not
limited to, the term of the Award, the provisions applicable in the event the
Participant's employment terminates, and the Corporation's authority to
unilaterally or bilaterally amend, modify, suspend, cancel or rescind any Award.
The Committee need not require the execution of any such agreement by a
Participant, in which case acceptance of the Award by the respective Participant
shall constitute agreement by the Participant to the terms of the Award.
ARTICLE XII -- AMENDMENTS
The Board may amend the Plan at any time as it deems necessary or
appropriate, subject to any requirement of shareholder approval required by
applicable law, rule or regulation, including Section 162(m) and Section 422 of
the Code, or any successor law; provided, however, that no amendment shall be
made without shareholder approval if such amendment would increase the maximum
number of Shares available under the Plan (subject to Article V(d)), or effect
any change inconsistent with Section 422 of the Code, or any successor law. No
amendment may impair the rights of a holder of an outstanding Award without the
consent of such holder. The Board may suspend the Plan or discontinue the Plan
at any time; provided, that no such action shall adversely affect any
outstanding Award.
ARTICLE XIII -- MISCELLANEOUS PROVISIONS
a. Employment Rights. The Plan does not constitute a contract of
employment and participation in the Plan will not give a Participant the right
to continue in the employ of the Corporation on a full-time, part-time, or any
other basis. Participation in the Plan will not give any Participant any right
or claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan.
b. Governing Law. Except to the extent superseded by the laws of the
United States, the laws of the State of New York, without regard to its conflict
of laws principles, shall govern in all matters relating to the Plan.
c. Severability. In the event any provision of the Plan shall be held to
be illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if such illegal or invalid provisions had never been contained in
the Plan.
d. Withholding. The Corporation shall have the right to withhold from any
amounts payable under the Plan all federal, state, foreign, city and local taxes
as shall be legally required.
e. Effect on Other Plans or Agreements. Payments or benefits provided to
a Participant under any stock, deferred compensation, savings, retirement or
other employee benefit plan are governed solely by the terms of such plan.
f. Foreign Employees. Without amending the Plan, the Committee may grant
awards to eligible persons who are foreign nationals on such terms and
conditions different from those specified in the Plan as may, in the judgment of
the Committee, be necessary or desirable to foster and promote achievement of
the purposes of the Plan and, in furtherance of such purposes, the Committee may
make such modifications, amendments, procedures, subplans and the like as may be
necessary or advisable to comply with provisions of laws in other countries or
jurisdictions in which the Corporation or its subsidiaries operates or has
employees.
A-8
<PAGE> 35
HEALTH MANAGEMENT SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Paul J. Kerz and Felice Blanco, and any one of
them, as proxies, to vote all shares of Common Stock of Health Management
Systems, Inc. (the "Company") held of record by the undersigned as of January
19, 1999, the record date with respect to this solicitation, at the Annual
Meeting of Shareholders of the Company to be held at 401 Park Avenue South, New
York, New York 10016 on Tuesday, March 9, 1999, at 11:00 A.M. and any
adjournments thereof, upon the following matters:
OVER
FOLD AND DETACH HERE
<PAGE> 36
Please mark
your vote as [X]
indicated in
this example
<TABLE>
<S> <C> <C>
ELECTION OF DIRECTORS NOMINEES: Randolph G. Brown, Paul J. Kerz, William W. Neal, 2. Adoption of the Company's 1999 Long-Term
Ellen A. Rudnick, Richard H. Stowe Incentive Stock Plan.
FOR all nominees WITHHOLD
listed to the right AUTHORITY
(except as marked to the to vote for all nominees --------------------
contrary) listed to the right FOR, except for the FOR AGAINST ABSTAIN
following nominee(s)
/ / / / / / / / / /
3. Ratification of the selection of KPMG LLP 4. TO TRANSACT such other business as may THIS PROXY WHEN PROPERLY EXECUTED WILL BE
as the Company's independent certified properly come before the Meeting or any VOTED IN THE MANNER DIRECTED BY THE UNDER-
accountants for the Fiscal Year ending adjournment thereof. SIGNED SHAREHOLDER. IF NO DIRECTION IS
October 31, 1999. GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS (1), (2) AND (3) ABOVE. IF ANY
FOR AGAINST ABSTAIN NOMINEE DECLINES OR IS UNABLE TO SERVE AS
A DIRECTOR, THEN THE PERSONS NAMED AS
/ / / / / / PROXIES SHALL HAVE FULL DISCRETION TO
VOTE FOR ANY OTHER PERSON DESIGNATED BY
THE BOARD OF DIRECTORS.
SIGNATURE----------------------------------SIGNATURE--------------------------------------------------DATE-------------------------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such.
FOLD AND DETACH HERE
</TABLE>
Annual
Meeting Of
HEALTH MANAGEMENT SYSTEMS, INC. Shareholders
March 9, 1999, 11:00 am
401 Park Avenue South
New York, New York 10016
