<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission File Number 0-20946
Health Management Systems, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2770433
- ---------------------- ---------------------------------------
State of Incorporation (I.R.S. Employer Identification Number)
401 Park Avenue South, New York, New York 10016
- --------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
(212) 685-4545
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 1, 1999
- ---------------------------- --------------------------------
Common Stock, $.01 Par Value 17,386,309 Shares
<PAGE> 2
HEALTH MANAGEMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
QUARTER ENDED JULY 31, 1999
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page No.
<S> <C>
Item 1 Interim Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 1999 (unaudited) 1
and October 31, 1998
Condensed Consolidated Statements of Operations (unaudited) for the 2
three month and nine month periods ended July 31, 1999 and July 31, 1998
Consolidated Statement of Comprehensive Income (unaudited) for the 3
three month and nine month periods ended July 31, 1999 and July 31, 1998
Consolidated Statement of Shareholders' Equity (unaudited) for the nine 4
month period ended July 31, 1999
Condensed Consolidated Statements of Cash Flows (unaudited) for the 5
nine month period ended July 31, 1999
Notes to Interim Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of 9
Operations
Item 3 None 13
PART II OTHER INFORMATION 14
SIGNATURES 15
EXHIBIT INDEX 16
</TABLE>
<PAGE> 3
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ In Thousands)
<TABLE>
<CAPTION>
July 31, October 31,
1999 1998
--------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,986 $ 13,883
Short-term investments 16,313 14,519
Accounts receivable, billed, net 24,057 28,792
Accounts receivable, unbilled, net 33,277 26,201
Other current assets 4,287 6,361
--------- ---------
Total current assets 90,920 89,756
Property and equipment, net 7,467 6,687
Capitalized software costs, net 6,462 4,203
Goodwill, net 12,930 11,742
Other assets 4,724 5,414
--------- ---------
Total assets $ 122,503 $ 117,802
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,240 $ 15,864
Deferred revenue 5,631 5,876
Deferred income taxes 13,085 11,307
--------- ---------
Total current liabilities 31,956 33,047
Other liabilities 1,357 1,486
--------- ---------
Total liabilities 33,313 34,533
--------- ---------
Shareholders' equity:
Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued
and outstanding 0 0
Common stock - $.01 par value; 45,000,000 shares authorized;
18,435,309 shares issued and 17,386,309 shares outstanding at July 31, 1999;
18,332,367 shares issued and 17,283,367 shares outstanding at October
31, 1998 184 183
Capital in excess of par value 71,654 71,134
Retained earnings 25,072 19,595
Accumulated other comprehensive income 30 107
--------- ---------
96,940 91,019
Less treasury stock, at cost (1,049,000 shares at July 31, 1999 and
October 31, 1998) (7,750) (7,750)
--------- ---------
Total shareholders' equity 89,190 83,269
--------- ---------
Total liabilities and shareholders' equity $ 122,503 $ 117,802
========= =========
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
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HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
--------------------- ---------------------
1999 1998 1999 1998
------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue $27,655 $26,736 $83,881 $77,412
------- ------- ------- -------
Cost of services:
Compensation 16,137 15,238 47,882 44,404
Data processing 1,598 2,086 5,137 6,827
Occupancy 2,333 2,312 6,730 6,980
Other 4,534 4,631 15,433 13,094
------- ------- ------- -------
24,602 24,267 75,182 71,305
------- ------- ------- -------
Operating margin before amortization of intangibles 3,053 2,469 8,699 6,107
Amortization of intangibles 209 509 609 1,538
------- ------- ------- -------
Operating income 2,844 1,960 8,090 4,569
Net interest and net other income 335 423 932 1,343
------- ------- ------- -------
Income before income taxes 3,179 2,383 9,022 5,912
Income tax expense 1,111 995 3,545 2,464
------- ------- ------- -------
Net income $ 2,068 $ 1,388 $ 5,477 $ 3,448
======= ======= ======= =======
Earnings per share data:
Basic:
Basic earnings per share $ 0.12 $ 0.08 $ 0.32 $ 0.20
======= ======= ======= =======
Weighted average common shares outstanding 17,376 17,468 17,349 17,431
======= ======= ======= =======
Diluted:
Diluted earnings per share $ 0.12 $ 0.08 $ 0.31 $ 0.19
======= ======= ======= =======
Weighted average common shares and common share equivalents 17,442 18,119 17,441 17,950
======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE> 5
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 31, July 31,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income $ 2,068 $ 1,388 $ 5,477 $ 3,448
Other comprehensive income, net of tax:
Change in net unrealized appreciation (depreciation)
on short-term investments (49) 44 (77) 94
------- ------- ------- -------
Comprehensive income $ 2,019 $ 1,432 $ 5,400 $ 3,542
======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE> 6
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Accumulated
--------------------- Capital In Other Total
# of Shares Par Excess Of Retained Comprehensive Treasury Shareholders'
Issued Value Par Value Earnings Income Stock Equity
----------- ------ --------- --------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1998 18,332,367 $ 183 $ 71,134 $ 19,595 $ 107 ($ 7,750) $ 83,269
Net income 0 0 0 5,477 0 0 5,477
Stock option activity 41,247 1 205 0 0 0 206
Employee stock purchase
plan activity 61,695 0 286 0 0 0 286
Disqualifying dispositions 0 0 29 0 0 0 29
Change in net unrealized
appreciation (depreciation)
on short-term investments 0 0 0 0 (77) 0 (77)
---------- ------ -------- -------- ----------- -------- --------
Balance at July 31, 1999 18,435,309 $ 184 $ 71,654 $ 25,072 $ 30 ($ 7,750) $ 89,190
========== ====== ======== ======== =========== ======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE> 7
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine
months ended
July 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 9,128 $ (1,930)
-------- --------
Investing activities:
Acquisition of net assets of Health Receivables Management, LLC, net of cash acquired (4,024) 0
Capital asset expenditures (1,651) (931)
Software capitalization (3,048) (2,266)
Net purchases of short-term investments (1,794) (981)
-------- --------
Net cash used in investing activities (10,517) (4,178)
-------- --------
Financing activities:
Proceeds from issuance of common stock 206 127
Proceeds from exercise of stock options 286 2,822
Common stock repurchases 0 (4,597)
-------- --------
Net cash provided by (used in) financing activities 492 (1,648)
-------- --------
Net decrease in cash and cash equivalents (897) (7,756)
Cash and cash equivalents at beginning of period 13,883 20,694
-------- --------
Cash and cash equivalents at end of period $ 12,986 $ 12,938
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE> 8
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Unaudited Interim Financial Information
The management of Health Management Systems, Inc. ("HMS" or the "Company")
is responsible for the accompanying unaudited interim consolidated
financial statements and the related information included in these notes to
the unaudited interim consolidated financial statements. In the opinion of
management, the unaudited interim consolidated financial statements reflect
all adjustments, consisting of normal recurring adjustments necessary for
the fair presentation of the Company's financial position and results of
operations and cash flows for the periods presented. Results of operations
of interim periods are not necessarily indicative of the results to be
expected for the entire year.
These unaudited interim consolidated financial statements should be read in
conjunction with: the audited consolidated financial statements of the
Company as of and for the fiscal year ended October 31, 1998 included in
the Company's Annual Report on Form 10-K for such year; and the unaudited
interim consolidated financial statements of the Company as of and for the
quarterly periods ended January 31, 1999 and April 30, 1999 included in the
Company's Quarterly Reports on Form 10-Q, all as filed with the Securities
and Exchange Commission (the "Commission").
2. Business Combinations
As of June 30, 1999, the Company's Quality Standards in Medicine, Inc.
("QSM") subsidiary acquired substantially all of the assets and specified
liabilities of Health Receivables Management, LLC for approximately $4
million, net of cash acquired and subject to certain purchase price
adjustments. In connection with the transaction, QSM changed its name to
Health Receivables Management Inc. ("HRM"). HRM currently furnishes
electronic billing, eligibility verification, accounts receivable
management and collection services to healthcare clients, principally in
the State of Illinois.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of HRM from the date of
acquisition through July 31, 1999 are included in the accompanying
unaudited interim consolidated financial statements. The excess purchase
price over the fair market value of the identifiable assets acquired is
recorded as goodwill and is being amortized over a period not to exceed 15
years. The Company is in the process of finalizing the allocation of the
excess of the purchase price over the fair market value of the identifiable
assets acquired. This process will be finalized when all information is
available and within the prescribed one year period.
3. Supplemental Cash Flow Disclosures
Cash paid for income taxes during the nine months ended July 31, 1999 and
1998 was $486,000 and $2,571,000, respectively.
The Company recorded $29,000 and $566,000 for the nine months ended July
31, 1999 and 1998, respectively, as disqualified dispositions related to
the sale of stock acquired through the exercise of certain compensatory
stock options, thereby reducing the Company's tax liability and increasing
shareholders' equity by like amounts.
6
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4. Earnings Per Share
Basic earnings per share is calculated as net income divided by the
weighted average common shares outstanding. Diluted earnings per share is
calculated as net income divided by the weighted average common shares
outstanding including the dilutive effects of potential common shares,
which include the Company's stock options. A reconciliation of the
numerator and denominator of the calculations for the three month periods
and nine month periods ended July 31, 1999 and 1998, respectively, is
presented below.
<TABLE>
<CAPTION>
($ and shares in 000's, except per share data)
Three months ended Nine months ended
July 31, July 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 2,068 $ 1,388 $ 5,477 $ 3,448
======= ======= ======= =======
Denominator:
Weighted average common shares 17,376 17,468 17,349 17,431
Potential common shares: stock options 66 651 92 519
------- ------- ------- -------
Weighted average common shares and
common share equivalents 17,442 18,119 17,441 17,950
======= ======= ====== ======
Basic earnings per share $ 0.12 $ 0.08 $ 0.32 $ 0.20
======= ======= ====== =======
Diluted earnings per share $ 0.12 $ 0.08 $ 0.31 $ 0.19
======= ======= ====== =======
</TABLE>
5. Legal Proceedings
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 Securities Exchange Act of 1934 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 consolidated
proceeding has been reassigned to another judge. Oral argument was heard by
the Court on the motion to dismiss on June 11, 1999 and the motion is now
sub judice. Prior to rendering its decision on the motion to dismiss, the
Court has ordered the parties to attempt settlement of the case. In the
event no settlement is reached and the motion to dismiss is denied, the
Company intends to continue its vigorous defense of this lawsuit.
On June 1, 1998, MedE America Corp. commenced a lawsuit against the Company
and others in the United States District Court for the Southern District of
New York. In its complaint, plaintiff alleges copyright infringement
7
<PAGE> 10
and other violations of its rights relating to the Company's development
and sale of certain computer software, known as the Universal Billing
Platform, which was developed for the Company by certain former employees
of plaintiff, who are also defendants in the action, acting as independent
contractors. Plaintiff, among other relief, seeks (i) to restrain the
Company from continuing to market and sell the alleged infringing software,
and (ii) monetary damages in excess of $10,000,000. Over a period of in
excess of nine months prior to the filing of the complaint, the parties
engaged in an extensive exchange of communications, as a result of which
the Company concluded, after investigation, that plaintiff's claims were
without merit. On July 22, 1998, the Company answered the complaint,
denying the material allegations of the complaint. Discovery has commenced
and the Company intends to vigorously contest plaintiff's claims. Pursuant
to the Rules of the Court, this matter has been referred to a
court-appointed mediator, who, in the context of non-binding mediation and
independent of the Court proceeding, has attempted to assist in settling
the matter or narrowing the issues between the parties. A number of
mediation sessions with counsel and the experts retained by both parties
have been held, progress has been made towards reaching a settlement and
discussions are continuing. Absent a settlement of this matter through
mediation, the Company intends to continue its vigorous defense of this
lawsuit.
On June 28, 1998, eight holders of promissory notes (the "Notes") of HHL
Financial Services, Inc. ("HHL") commenced a lawsuit against the Company
and others in the Supreme Court of the State of New York, County of Nassau,
alleging various breaches of fiduciary duty on the part of the defendants
against HHL. The complaint alleges that, as a result of these breaches of
duty, HHL was caused to make substantial unjustified payments to the
Company which, ultimately, led to defaults on the Notes and to HHL's filing
for Chapter 11 bankruptcy protection. On June 30, 1998, the same Note
holders commenced a virtually identical action (the "Adversary Proceeding")
in the United States Bankruptcy Court for the District of Delaware, where
HHL's Chapter 11 proceeding is pending. The Adversary Proceeding alleges
the same wrongdoing as the New York State Court proceeding and seeks the
same damages, i.e., $2,300,000 (the unpaid amount of the Notes) plus
interest. Plaintiffs have moved in the Bankruptcy Court to have the Court
abstain from hearing the Adversary Proceeding in deference to the New York
State Court action. The Company has opposed plaintiffs' motion for
abstention and on September 15, 1998, filed a motion in the Bankruptcy
Court to dismiss the Adversary Proceeding. This motion was briefed in
December 1998. Oral argument on the motions was heard by the Court on April
22, 1999 and the motions are now sub judice. The Company intends to
continue its vigorous defense of this lawsuit.
Other legal proceedings to which the Company is a party, in the opinion of
the Company's management, are not expected to have a material adverse
effect on the Company's financial position, results of operations or
liquidity.
8
<PAGE> 11
Certain statements in this document constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors which may cause the actual results,
performance, or achievements of HMS, or industry results, to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. The important factors that could
cause actual results to differ materially from those indicated by such
forward-looking statements include, but are not limited to (i) the information
being of a preliminary nature and therefore subject to further adjustment; (ii)
the ability of HMS to contain costs and to grow internally or by acquisition and
to integrate acquired businesses into the HMS group of companies; (iii) the
uncertainties of litigation; (iv) HMS's dependence on significant customers; (v)
changing conditions in the healthcare industry which could simplify the
reimbursement process and adversely affect HMS's business; (vi) government
regulatory and political pressures which could reduce the rate of growth of
healthcare expenditures; (vii) competitive actions by other companies, including
the development by competitors of new or superior services or products or the
entry into the market of new competitors; (viii) the ability of HMS to deal with
the Year 2000 Problem on a timely basis; (ix) all the risks inherent in the
development, introduction, and implementation of new products and services; and
other factors both referenced and not referenced in this document. When used in
this document, the words "estimate," "project," "anticipate," "expect,"
"intend," "believe," and similar expressions are intended to identify
forward-looking statements, and the above described risks inherent therein.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Consolidated revenue for the third quarter of fiscal year 1999 of $27,655,000
represents an increase of $919,000 or 3% from the comparable period in 1998. The
Company's Revenue Services division, which includes the Provider revenue
services group and Payor revenue services group, accounted for $16,921,000 or
61% of the Company's consolidated revenue for the third fiscal quarter of 1999,
an increase of $2,386,000 or 16% from the comparable period in 1998. Of these
amounts, the Provider revenue services group revenue totaled $10,918,000, an
increase of $2,275,000 or 26% from the comparable period in 1998 and the Payor
revenue services group revenue totaled $6,003,000, an increase of $111,000 or 2%
from the comparable period in 1998. Other than the $588,000 in revenue growth
attributable to the HRM acquisition, the balance of the revenue growth realized
by both groups in the Revenue Services Division was internally generated from
both (1) "new clients," defined as clients generating revenue in the third
quarter of fiscal year 1999 who were not revenue generating clients in the third
quarter of fiscal year 1998, and (2) delivery of services of expanded scope to
"existing clients," defined as clients who generated revenue in the prior year
comparable period.
Revenue from the Software Systems and Services ("Software") division, comprised
of the Decision Support group and the Payor Systems group, totaled $10,734,000
or 39% of the Company's consolidated revenue for the third fiscal quarter of
1999, a decrease of $1,467,000 or 12% from the comparable period in 1998.
Revenue from the Decision Support group was $5,368,000, a decrease of $989,000
or 16% from the comparable period in 1998, and revenue from the Payor Systems
group was $5,366,000, a decrease of $478,000 or 8% from the comparable period in
1998. The decrease in this Division's revenue is the result of an elongated
sales cycle, attributable to what is perceived as client reluctance to make
decisions regarding the implementation of new software in the year immediately
preceding their "Y2K" conversion, partially offset by the revenues earned from
the Company's recurring base of clients and implementation of its sales backlog.
Cost of services for the third fiscal quarter of 1999 of $24,602,000, increased
$335,000 or 1% from the comparable period in 1998. The increase in cost of
services reflects increases in Compensation and Occupancy expenses, partially
9
<PAGE> 12
offset by decreases in Data Processing and Other expenses. Compensation expense,
the Company's largest expense component, totaled $16,137,000 for the third
fiscal quarter of 1999, an increase of $899,000 or 6% over the comparable period
in 1998. This increase was principally attributable to the addition of
approximately 90 employees associated with the HRM acquisition, and increases in
average salaries to reflect prevailing market conditions. Data processing
expense decreased $488,000 to $1,598,000, a decrease of 23% from the comparable
period in 1998. This decrease was primarily attributable to: the continued
consolidation by the Company of its data processing platforms and reduced
support of older versions of the Company's systems, products and services; the
capitalization of additional software development costs incurred to enhance
existing products; and the timing differences associated with amortization of
multiple-period maintenance and software license fees. Other operating expense
for the third fiscal quarter of 1999 decreased to $4,534,000, a decrease of
$97,000 or 2% from the comparable period in 1998. The decrease was primarily
attributable to a savings in professional fees and employee related costs,
including recruiting fees, which were partially offset by increased direct
project costs for subcontractor expense incurred in connection with the Revenue
Services Division's realization of increased revenue.
As a result of the above factors, operating margin for the third fiscal quarter
of 1999, before amortization of intangible assets, increased to $3,053,000, an
increase of $584,000 or 24% from the comparable period in 1998.
Amortization of intangible assets for the third fiscal quarter of 1999 was
$209,000, a decrease of $300,000 or 59% from the comparable period in 1998. The
decrease was due primarily to completion, in fiscal year 1998, of the
amortization of software related to the Company's acquisition of HSA Managed
Care Systems, Inc. (now the Payor Systems Group) in 1997.
Net interest and net other income in the third fiscal quarter of 1999 was
$335,000, a decrease of $88,000 or 21% from the comparable period in 1998, based
upon both lower cash balances and interest rates.
Income tax expense for the third fiscal quarter of 1999 was $1,111,000, an
increase of $116,000 or 12% from the comparable period in 1998. The increase in
income tax expense was due primarily to the Company's higher pre-tax profit for
the third fiscal quarter of 1999, offset by a more favorable effective tax rate
realized from the Company's ability to file consolidated state tax returns in
specific jurisdictions and from the newly enacted provision of the tax code
pertaining to utilization of existing net operating tax loss carryforwards, for
which the company had previously provided a valuation allowance.
As a result of the above factors, net income for the third fiscal quarter of
1999 increased to $2,068,000, an increase of $680,000 or 49% from the comparable
period in 1998. Thus, fully diluted earnings per share for the third fiscal
quarter of 1999 was $0.12, an increase of $0.04 or 50% from the comparable
period in 1998.
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Consolidated revenue for the nine months ended July 31, 1999 of $83,881,000
represents an increase of $6,469,000 or 8% from the comparable period in 1998.
The Revenue Services division accounted for $47,390,000 or 56% of the
consolidated revenue for the nine months ended July 31, 1999, an increase of
$5,641,000 or 14% from the comparable period in 1998. Of these amounts, revenue
from the Provider revenue services group totaled $29,105,000, an increase of
$3,406,000 or 13% from the comparable period in 1998 and revenue from the Payor
revenue services group totaled $18,285,000, an increase of $2,235,000 or 14%
from the comparable period in 1998. Other than the $588,000 in revenue growth
attributable to the HRM acquisition, the balance of the revenue growth realized
by each of these two groups comprising the Revenue Services division was
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<PAGE> 13
internally generated from both (1) new clients, and (2) delivery of services of
expanded scope to existing clients.
Revenue from the Software Systems and Services division totaled $36,491,000 or
44% of the Company's consolidated revenue for the nine months ended July 31,
1999, an increase of $828,000 or 2% from the comparable period in 1998. Revenue
from the Decision Support group was $17,019,000, a decrease of $1,981,000 or 10%
from the comparable period in 1998, while revenue from the Payor Systems group
increased $2,809,000 to $19,472,000, an increase of 17% from the comparable
period in 1998. The decrease in the Decision Support group is attributable to
both what is perceived as client reluctance to make decisions regarding the
implementation of new software in the year immediately preceding the "Y2K"
conversion and a robust first quarter in the prior fiscal year. The decrease in
revenue from the Decision Support group was more than offset by the increased
revenue realized in the Payor Systems group, with approximately 40% of the
increased revenue in the Payor Systems group attributable to the group's earning
a non-recurring revenue incentive bonus from one client in the second quarter of
the Company's current fiscal year, with this Division expecting to continue to
face the Y2K marketplace-incurred slowdown in client spending for the near term.
Cost of services for the nine months ended July 31, 1999 of $75,182,000,
increased $3,877,000 or 5% from the comparable period in 1998. The increase in
cost of services reflects increases in Compensation and Other expenses,
partially offset by decreases in Data Processing and Occupancy expenses.
Compensation expense totaled $47,882,000 for the nine months ended July 31,
1999, an increase of $3,478,000 or 8% over the comparable period in 1998,
principally attributable to increases in personnel associated with the
generation of new revenue and the previously noted acquisition of HRM, and
increases in average salaries to reflect prevailing market conditions. Data
processing expense decreased $1,690,000 to $5,137,000, a decrease of 25% from
the comparable period in 1998. As noted previously, this favorable decrease was
primarily attributable to: the continued consolidation by the Company of its
data processing platforms and reduced support of older versions of the Company's
systems, products and services; the capitalization of additional software
development costs incurred to enhance existing products; and the timing
differences associated with amortization of multiple-period maintenance and
software license fees. Other operating expense for the nine months ended July
31, 1999 was $15,433,000, an increase of $2,339,000 or 18% over the comparable
period in 1998. Also as noted previously, this increase was primarily
attributable to direct project costs for subcontractor expense incurred in
connection with the Company's realization of increased revenue, while an
increase in the allowance for doubtful accounts was in line with increases in
revenue and accounts receivable and was more than offset by the savings in
professional fees and employee related costs, including recruiting fees.
As a result of the above factors, operating margin for the nine months ended
July 31, 1999, before amortization of intangible assets, increased to
$8,699,000, an increase of $2,592,000 or 42% from the comparable period in 1998.
Amortization of intangible assets for the nine months ended July 31, 1999 was
$609,000, a decrease of $929,000 or 60% from the comparable period in 1998. As
previously noted, the decrease was due primarily to completion, in fiscal year
1998, of the amortization of software related to the Company's acquisition of
HSA Managed Care Systems, Inc. (now the Payor Systems group) in 1997.
Net interest and net other income in the nine months ended July 31, 1999 was
$932,000, a decrease of $411,000 or 31% from the comparable period in 1998,
based upon the combination of lower cash balances, execution of the HRM
acquisition transaction and lower interest rates.
11
<PAGE> 14
Income tax expense for the nine months ended July 31, 1999 was $3,545,000, an
increase of $1,081,000 or 44% from the comparable period in 1998. The increased
income tax expense was due primarily to the Company's higher pre-tax profit for
the period, offset by a more favorable effective tax rate realized from the
Company's ability to file consolidated state tax returns in specific
jurisdictions and from the newly enacted provision of the tax code pertaining to
utilization of existing net operating tax loss carryforwards, for which the
company had previously provided a valuation allowance.
As a result of the above factors, net income for the nine months ended July 31,
1999 increased to $5,477,000, an increase of $2,029,000 or 59% from the
comparable period in 1998. Resultant fully diluted earnings per share for the
nine months ended July 31, 1999 was $0.31, an increase of $0.12 or 63% from the
comparable period in 1998.
Liquidity and Capital Resources
At July 31, 1999, the Company had $59.0 million in net working capital, an
increase of $2.3 million over the level at October 31, 1998. The Company's
principal sources of liquidity at July 31, 1999 consisted of cash, cash
equivalents, and short-term investments aggregating $29.3 million, net accounts
receivable of $57.3 million and $30 million available under a line of credit
with a major money center bank. Accounts receivable at July 31, 1999 increased
$2.3 million or 4% from the October 31, 1998 balance, of which approximately
$1.9 million is attributable to the previously noted HRM acquisition.
On July 15, 1999, the Company amended its unsecured revolving credit facility to
extend the existing term through September 30, 1999. No other terms of the
existing credit facility have changed. Although the Company intends to further
extend or secure a new credit facility, there can be no assurance that the
Company will be able to do so on acceptable terms.
On May 28, 1997, the Board of Directors authorized the Company to repurchase
such number of shares of its Common Stock that have an aggregate purchase price
not in excess of $10,000,000. The Company may repurchase these shares from time
to time on the open market or in negotiated transactions at prices deemed
appropriate by the Company. Repurchased shares are deposited in the Company's
treasury and used for general corporate purposes. Since the inception of the
repurchase program in June 1997, the Company has repurchased in the open market
1,049,000 shares having an aggregate purchase price of $7,750,000. No shares
were repurchased during the nine months ended July 31, 1999. The Company
utilized a portion of its excess capital to again become an opportunistic
acquirer, having completed the HRM acquisition transaction, and is reassessing
its capital requirements as it seeks to secure a new or renewed credit facility
while reconsidering the further purchase of shares pursuant to the original
authorization by the Board.
Year 2000
In common with many other organizations, the "Year 2000 ("Y2K") computer issue"
creates risks for the Company. To address these Y2K issues, the Company
formulated a plan and began work at the end of 1997. The Company put in place a
working committee to track implementation of the plan. Activities included in
this plan are intended to encompass all major categories of systems in use by
the Company, including those entailed in the performance of product development,
operations, sales, finance, and human resources. Interactions with major
suppliers of products and services have been identified and the Company is
working to ensure uninterrupted delivery to the Company of the requisite
products and services. The Company has purchased and installed Y2K compliant
security, elevator and fire alarm systems in its New York City office and is
currently implementing new financial and human resource information systems
12
<PAGE> 15
throughout the enterprise. These management information systems were purchased
in 1998 and were already Y2K compliant.
The Company is working with its clients to ensure a smooth transition to the
next millennium. As well, the Company responded to the enactment of the Y2K
Information and Readiness Disclosure Act ("Y2K Act") on October 19, 1998. The
purpose of the Y2K Act is to encourage and promote disclosure regarding Y2K
issues and to provide limitations for claims on tort liability.
Contingency plans for all potential single points of disruption have been or are
being developed and implemented. It is expected that assessment and redemption
will be completed in sufficient time to ensure the Company's provision of
service without interruption due to the onset of the year 2000. The Company is
seeking to complete its Y2K remediation work in accordance with a schedule which
is responsive to the time sensitivity of the clients, seeking first to complete
work on engagements where the Company's interactions with the clients are on a
concurrent (in contrast to a retrospective) basis. To the extent that the
Company has not developed an adequate plan for any particular contingency, the
Company believes its capacity to stage, resequence and reschedule much of its
operational processing work should enable mitigation, in whole or part, of the
potential long-term negative impact on its clients and the Company.
The Company has designed and tested the most current versions of its products
for Y2K compliance. The Company is now migrating to its most current versions
those of the Company's products running on versions not Y2K compliant. The
Company is utilizing the migration to Y2K compliant systems as the catalyst for
a consolidation of various of the Company's disparate systems -- thereby
reducing the number of product versions which require updating for the Y2K
problem. Each business group is scheduled to have Y2K remediation tested before
the Company's fiscal year end, with the exception of the Provider Revenue
Services Group. Progress continues to be made in the substantial conversion work
for the Provider Revenue Services Group, though not all of it must be concluded
by the end of 1999. As well, a number of the Company's customers are running
product versions that are not Y2K compliant. While the Company has provided its
clients with viable plans for migration to Y2K compliant versions and has been
encouraging such customers to adopt such plans, it is possible that various of
the Company's clients will not adopt the recommended plan of migration,
potentially entailing either increased costs to the Company or loss of revenue
by the Company. Moreover, the revenue stream and financial stability of existing
customers may be adversely impacted by Y2K problems, which could cause
fluctuations or diminution in the Company's revenue. In addition, there can be
no assurances that the Company's current products do not contain undetected
errors or defects associated with Y2K date functions that could result in
material, additional future costs to the Company. Moreover, assessment of
whether a complete system will operate correctly depends on the capabilities and
interoperability of the hardware and software components comprising the system;
for most end-users, this will include hardware and software provided by
companies other than the Company. Except as specifically provided for in the
limited warranty accompanying the current versions of its products, the Company
does not believe it is legally responsible for costs incurred by customers
related to ensuring customers Y2K capability. Nevertheless, the Company is
incurring various costs to provide customer support and customer satisfaction
services regarding Y2K issues and it is anticipated that these expenditures will
continue through 1999 and thereafter.
The costs incurred to date related to these programs are difficult to isolate
but are estimated at approximately $1,650,000. The Company currently expects
that the total cost of these programs, including both incremental spending and
redeployed resources, will not exceed $2,500,000. The total cost estimate does
not include potential costs related to any customer claims, other claims or the
cost of internal software and hardware replaced in the normal course of
business, nor does this estimate include the costs associated with the
consolidation (to the maximum practicable extent) by the two Revenue Services
groups of their respective product versions into a consolidated version for each
group. In some instances, the installation schedule of new software and hardware
in the normal course of business is being accelerated to afford a timely
13
<PAGE> 16
solution to Y2K capability issues. Because the factors involved are complex and
frequently not readily separable, it is difficult to determine which of the
Company's multiple development activities are properly allocable to the solution
of Y2K problems. The Company's cost estimates are based on an assessment of the
current situation and are subject to future revision.
The expenses incurred by the Company to identify and address the Y2K matters
discussed above, or the expenses or liabilities to which the Company may become
subject as a result of such matters, could have a material adverse effect on the
Company's business, financial condition and results of operation. In addition,
there can be no assurance that failure to ensure Y2K capability by a supplier,
client or another third party would not have a material adverse effect on the
Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk -- None
14
<PAGE> 17
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- See Note 5 of the Notes to Interim Consolidated
Financial Statements for discussion of certain pending legal
proceedings
Item 2. Changes in Securities -- None
Item 3. Defaults Upon Senior Securities -- Not applicable
Item 4. Submission of Matters to a Vote of Security Holders -- None
Item 5. Other Information -- None
Item 6. Exhibits and Reports on Form 8-K -- None
15
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 14, 1999 HEALTH MANAGEMENT SYSTEMS, INC.
(Registrant)
By: /s/ Paul J. Kerz
--------------------
Paul J. Kerz
President and Chief Executive Officer
By: /s/ Alan L. Bendes
--------------------
Alan L. Bendes
Senior Vice President and
Chief Financial Officer
16
<PAGE> 19
HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number DESCRIPTION OF EXHIBIT TO INTERIM CONSOLIDATED FINANCIAL
STATEMENTS
2 Asset Purchase Agreement, dated as of June 30, 1999, by and
among ARC Ventures, LLC, and Health Receivables Management, LLC
and Health Management Systems, Inc., and Quality Standards In
Medicine, Inc.
10 Fourth Amendment To Credit Agreement And Guaranty, dated as of
July 15, 1999 among Health Management Systems, Inc.,
Accelerated Claims Processing, Inc., Quality Medi-Cal
Adjudication, Incorporated, Health Care Microsystems, Inc., CDR
Associates Inc., HSA Managed Care Systems, Inc., Quality
Standards In Medicine, Inc. and The Chase Manhattan Bank
27 Financial Data Schedule (Submitted for informational purposes
only and not deemed to be filed)
17
<PAGE> 1
Exhibit 2
ASSET PURCHASE AGREEMENT
by and among
ARCVENTURES, LLC, and
HEALTH RECEIVABLES MANAGEMENT, LLC
and
HEALTH MANAGEMENT SYSTEMS, INC., and
QUALITY STANDARDS IN MEDICINE, INC.
Dated as of June 30, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
I. TRANSFERS, ADMINISTRATIVE SERVICES AND OFFICES ............................ 1
SECTION 1.01 Transfer of Assets ................................ 1
SECTION 1.02 Instruments of Conveyance and Transfer ............ 5
SECTION 1.03 Nonassignable Contracts ........................... 5
SECTION 1.04 Accounts Receivable ............................... 6
SECTION 1.05 Prepaid Expenses and Deposits ..................... 6
SECTION 1.06 Administrative Services; Offices .................. 6
II. CLOSING, PURCHASE PRICE, LIABILITIES, ETC. .............................. 7
SECTION 2.01 Closing ........................................... 7
SECTION 2.02 Payment to Sellers on the Closing Date ............ 7
SECTION 2.03 Assumption of Liabilities ......................... 10
SECTION 2.04 Non-Assumption of Certain Liabilities ............. 10
SECTION 2.05 Sellers' Interest and Repurchase Obligations
Regarding Accounts Receivable ..................... 11
SECTION 2.06 Change of Names ................................... 13
SECTION 2.07 Additional Deliveries by Sellers at Closing ....... 13
SECTION 2.08 Additional Deliveries by Buyers at Closing ........ 14
III. REPRESENTATIONS AND WARRANTIES .......................................... 15
SECTION 3.01 Representations and Warranties of Sellers ......... 15
SECTION 3.02 Representations and Warranties of Buyers .......... 30
IV. COVENANTS ............................................................... 32
SECTION 4.01 Amounts Due Retained Employees .................... 32
SECTION 4.02 Confidentiality ................................... 33
SECTION 4.03 Allocation of Purchase Price ...................... 33
SECTION 4.04 Certain Tax Matters ............................... 33
SECTION 4.05 Insurance ......................................... 34
SECTION 4.06 Retention of Employees; Benefits .................. 34
SECTION 4.07 Further Assurances ................................ 36
V. NON-COMPETITION AND NON-SOLICITATION .................................... 37
SECTION 5.01 Statement of Intent ............................... 37
SECTION 5.02 Definitions ....................................... 38
SECTION 5.03 Non-Competition ................................... 38
SECTION 5.04 Non-Solicitation .................................. 39
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
SECTION 5.05 Confidential Information .......................... 39
SECTION 5.06 Remedies .......................................... 40
VI. CONDITIONS PRECEDENT .................................................... 40
SECTION 6.01 Conditions Precedent to the Obligations of Buyers . 40
SECTION 6.02 Conditions Precedent to the Obligations
of Sellers ........................................ 41
VII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION ............................ 42
SECTION 7.01 Survival of Representations ....................... 42
SECTION 7.02 Tax Indemnity ..................................... 42
SECTION 7.03 General Indemnity ................................. 43
SECTION 7.04 Conditions of Indemnification ..................... 45
SECTION 7.05 Direct Claims ..................................... 46
SECTION 7.06 Certain Information ............................... 46
SECTION 7.07 Limitations on Liability of Sellers. .............. 46
SECTION 7.08 Anti-Sandbag Provisions ........................... 47
SECTION 7.09 No Special, Consequential or Punitive Damages ..... 48
SECTION 7.10 Limitation of Remedies ............................ 48
VIII. MISCELLANEOUS .......................................................... 48
SECTION 8.01 Bulk Transfer Laws ................................ 48
SECTION 8.02 Expenses, Etc. .................................... 48
SECTION 8.03 Execution in Counterparts ......................... 48
SECTION 8.04 Notices ........................................... 48
SECTION 8.05 Waivers ........................................... 50
SECTION 8.06 Amendments, Supplements, Etc. ..................... 50
SECTION 8.07 Entire Agreement .................................. 51
SECTION 8.08 Applicable Law .................................... 51
SECTION 8.09 Dispute Resolution; Arbitration ................... 51
SECTION 8.10 Binding Effect; Benefits .......................... 52
SECTION 8.11 Assignability ..................................... 53
</TABLE>
ii
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
<S> <C>
A Form of Bill of Sale
B Form of Rush Guaranty
</TABLE>
iii
<PAGE> 5
INDEX TO SCHEDULES
<TABLE>
<CAPTION>
Schedule Description
<S> <C>
1.01(a)(i) Accounts Receivable
1.01(a)(ii) Tangible Personal Property
1.01(a)(iv) Other Assets
1.01(a)(v) Intangible Personal Property
1.01(c)(vi) Other Excluded Assets
1.03 Non-Assignable Contracts
1.05 Pre-Paid Expenses and Deposits
2.03 Scheduled Liabilities
3.01(a) State Qualifications
3.01(c) Effect of Agreement
3.01(d) Government Licenses and Approval
3.01(e) Financial Statements
3.01(g) Certain Changes or Events
3.01(h) Liens and Encumbrances
3.01(i) List of Properties, Leases,
Proprietary Rights, Contracts
and Employment Arrangements
3.01(i)(i) Real and Personal Property Leases
3.01(i)(ii) Patents, Trademarks, Trade Names,
Servicemarks and Copyrights
3.01(i)(iii) Employment Agreements and Benefit Plans
3.01(j) Litigation
3.01(l) Employee Benefit Plans
3.01(n)(i)-1 Owned Software
3.01(n)(i)-2 Licensed Software
3.01(q) Customer Contracts
3.01(r) Taxes
4.06(a) Certain Retained Employees
</TABLE>
iv
<PAGE> 6
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of June 30, 1999,
by and among ARCVENTURES, LLC ("ARC"), a Delaware limited liability company,
HEALTH RECEIVABLES MANAGEMENT, LLC ("HRM"), a Delaware limited liability
company (ARC and HRM are sometimes hereinafter referred to collectively as the
"Sellers"), HEALTH MANAGEMENT SYSTEMS, INC. ("HMS"), a New York corporation, and
QUALITY STANDARDS IN MEDICINE, INC. ("Sub"), a Delaware corporation and a
wholly-owned subsidiary of HMS (HMS and Sub are sometimes hereinafter referred
to collectively as "Buyers").
W I T N E S S E T H:
WHEREAS, HRM provides electronic eligibility verification services,
electronic Medicaid billing and eligibility determination services, collection
management services and other receivables consulting services to healthcare
providers (the "Business"); and
WHEREAS, Sellers desire to sell to Buyers, and Buyers desire to
purchase from Sellers, substantially all the assets of HRM, excluding certain
specified assets, and to assume certain specified liabilities of HRM, all upon
the terms and conditions hereinafter set forth; and
WHEREAS, ARC holds more than a 90% membership interest in HRM;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants of the parties hereto, it is hereby agreed as follows:
I. TRANSFERS, ADMINISTRATIVE SERVICES AND OFFICES
SECTION 1.01 Transfer of Assets. (a) On the terms and subject to the
conditions hereinafter set forth, on the Closing Date (as hereinafter defined),
Sellers shall sell, convey, transfer, assign and deliver to Buyers, and Buyers
shall purchase from Sellers, for the aggregate purchase price set forth in
Article II hereof, the assets and properties of HRM relating to, and used
exclusively in, the Business listed in clauses (i)-(xi) below and those
additional assets referred to in Section 1.01(b) hereof, but excluding those
assets referred to in Section 1.01(c) below (all said assets and properties so
to be sold, conveyed, transferred, assigned and delivered being hereinafter
collectively called the "Assets"):
<PAGE> 7
(i) accounts receivable (without regard to reserves therefor) of not
less than $1.6 million set forth on Schedule 1.01(a)(i) hereto. Said Schedule
1.01(a)(i) shall indicate those accounts receivable which have not been invoiced
as of the Closing Date and the anticipated date of invoicing;
(ii) all of the furniture, fixtures and equipment of HRM used solely in
the Business which are set forth on Schedule 1.01(a)(ii) hereto;
(iii) all work stations and product specific applications software
owned by HRM (the "Owned Software") currently used in the conduct of the
Business, which are set forth on Schedule 3.01(n)(i)-1 hereto;
(iv) all other assets set forth in the Closing Balance Sheet of HRM, as
hereinafter defined, which are set forth in Schedule 1.01(a)(iv) hereto;
(v) the intangible personal property listed on Schedule 1.01(a)(v)
hereto;
(vi) the patents, trademarks and trade names, trademark and trade name
registrations, service marks and service mark registrations, copyrights and
copyright registrations, the applications therefor and the licenses and
franchises with respect thereto, in each case listed on Schedule 3.01(i)(ii)
hereto, together with the goodwill and the business appurtenant thereto; all
trade secrets and technology (including technology with respect to which HRM is
a licensee, in such case only insofar as permitted under the applicable license
agreement), processes, inventions, specifications, patterns, royalties,
privileges, permits and all other similar intangible personal property, in each
case as listed on Schedule 3.01(i)(ii) hereto;
(vii) all technical materials and guidelines (other than any such as
are included in the Owned Software), and all brochures, sales literature,
promotional material and other selling material used in the Business, wherever
situated;
2
<PAGE> 8
(viii) all papers, documents, instruments, books and records, files,
agreements, books of account and other records by which any of the Assets might
be identified or enforced, or otherwise pertaining to the Assets or the Business
that are located at the offices or other locations used in connection with the
Assets or the Business (including, without limitation, customer invoices,
customer lists, vendor and supplier lists, drafts and other documents and
materials relating to customer transactions and all such other documents as
shall be required to provide sufficient information to invoice all accounts
receivable set forth in Schedule 1.01(a)(i) hereto which have not been invoiced
as of the Closing Date and to collect all accounts receivable set forth in
Schedule 1.01(a)(i), including without limitation all required back-up
documentation);
(ix) the rights of HRM (other than rights to refunds arising prior to
the Closing Date) under all contracts, agreements, licenses, leases, sales
orders, purchase orders and other commitments relating to the Assets or the
Business listed on Schedules 3.01(i) and on Schedule 3.01(q) hereto, including
but not limited to all contracts between HRM and its customers, vendors and
lessors and not-to-compete and/or confidentiality agreements between HRM and
Retained Employees, as hereinafter defined;
(x) all rights of HRM to the computer software programs and the license
or other agreements conferring rights related thereto, in each case listed on
Schedule 3.01(n)(i)-2 hereto and in each case, only insofar as permitted under
the applicable license or other agreement (the "Licensed Software"); and
(xi) all of HRM's registrations with, or licenses granted by, any
governmental authority, including but not limited to all items listed on
Schedule 3.01(d) hereto, to the extent such registrations and licenses are
assignable without consent (or, if consent is required, Sellers will use their
commercially reasonable efforts to obtain such consent) and are necessary or
desirable in order for the Buyers to be able to continue to conduct the Business
after the Closing Date as it is currently being conducted; and
3
<PAGE> 9
(xii) all cash in banks, all cash on hand and short
term-investments as of the Closing Date.
Notwithstanding the foregoing, Sellers shall be obligated to value with
specificity on schedules to this Agreement only those Assets which were acquired
after June 30, 1996.
(b) In the event that Buyers shall reasonably establish to Sellers'
reasonable satisfaction and notify Sellers at any time or from time to time
during the six-month period following the Closing Date that any of the Schedules
describing the Assets as provided in Section 1.01(a) hereof failed to include
assets or properties of the Sellers' used exclusively in the Business prior to
the Closing (other than any such assets or properties specifically excluded
under Section 1.01(c) hereof), then Sellers shall promptly convey, transfer,
assign and deliver to Buyers or other such person as may be designated by
Buyers, and Buyers or such designee shall acquire from Sellers, without
additional consideration, all such assets and properties, which shall be deemed
for all purposes to be included in the definition of Assets hereunder as
provided in Section 1.01(a) hereof.
(c) Anything herein contained to the contrary notwithstanding, the
following assets and properties of HRM are specifically excluded from the Assets
and shall be retained by HRM and ARC ("Excluded Assets"):
(i) all claims or rights against third parties relating to
liabilities or obligations (including, without limitation, any such
liabilities or obligations referred to in clauses (ii) or (iv) of
Section 2.04) that are not assumed by Buyers hereunder;
(ii) all claims for the refund of Taxes (as hereinafter
defined) and other governmental charges of whatever nature for all
periods prior to the close of business on the Closing Date;
(iii) all rights and funds in connection with retirement and
profit sharing plans;
(iv) the minute books, tax records and related organizational
records of HRM and ARC;
4
<PAGE> 10
(v) those items listed on Schedule 1.01(c)(vi) hereto; and
(vi) Contracts, personnel files or agreements with employees
who are not Retained Employees.
(vii) Nothing in this Agreement shall be construed to be a
transfer of, assignment of or license to any trademarks, service marks
or trade names owned or used by ARC. The only trademarks, service marks
and trade names being transferred and assigned to Buyers pursuant to
this Agreement are those which are owned by HRM and listed on Schedule
3.01(i)(ii).
SECTION 1.02 Instruments of Conveyance and Transfer. On the Closing
Date, Sellers shall execute and deliver to Buyers (i) a bill of sale in the form
included in the form of the Bill of Sale, Assignment and Assumption Agreement
annexed hereto as Exhibit A (the "Bill of Sale") and (ii) such other documents
of transfer that Buyers may reasonably request, transferring to Buyers the
properties and assets to be acquired by Buyers under the terms of this
Agreement.
SECTION 1.03 Nonassignable Contracts. Nothing in this Agreement shall
be construed as an attempt or agreement to assign (i) any contract, agreement,
license, lease, sales order, purchase order or other commitment that is
nonassignable without the consent of the other party or parties thereto unless
such consent shall have been given, or (ii) any contract or claim as to which
all the remedies for the enforcement thereof enjoyed by Sellers would not pass
to Buyers as an incident of the assignments provided for by this Agreement. In
order, however, that the full value of every contract and claim of the character
described in clauses (i) and (ii) above, and all claims and demands on such
contracts may be realized, Sellers shall use all reasonable efforts to obtain
consent for the assignment thereof, other than any such consent with respect to
contracts and claims listed on Schedule 1.03 hereto. With respect to those
contracts and claims of which Sellers shall have failed to obtain consent for
the assignment thereof pursuant to their obligations under this Section 1.03
listed on Schedule 1.03 hereto, Sellers shall (a) at the request and expense and
under the direction of Buyers, in the name of Sellers or otherwise as Buyers
shall specify and
5
<PAGE> 11
as shall be permitted by law, take all action and do or cause to be done all
things as shall in the opinion of Buyers be reasonably necessary or proper (x)
in order that the rights and obligations of Sellers under such contracts shall
be preserved and (y) for, and to facilitate, the collection of the moneys due
and payable, and to become due and payable, to Sellers in and under every such
contract and claim and in respect of every such claim and demand, and Sellers
shall hold the same for the benefit of and shall pay the same over promptly to
Buyers, subject to due payment, performance and discharge by Buyers on behalf of
Sellers of all liabilities and obligations of Sellers with respect to any such
contracts and claims that have not been assigned hereunder but as to which
Sellers shall have obtained the full value thereof for the benefit of Buyers as
required hereunder (the "Subcontracted Contracts") or (b) otherwise provide to
Buyers the economic value of the Subcontracted Contracts on mutually acceptable
terms.
SECTION 1.04 Accounts Receivable. Sellers hereby appoint Buyers as
agent for collection of all accounts receivable being transferred to Buyers
pursuant to Section 1.01(a)(i) hereof for Buyers' own account, and hereby agree
to execute all such documents as shall be deemed necessary or desirable to
permit Buyers to obtain the benefits deriving from all such accounts receivable,
subject to possible reassignment to Sellers in connection with Sellers'
repurchase obligation set forth in Section 2.05(b) hereof.
SECTION 1.05 Prepaid Expenses and Deposits. Sellers shall provide to
Buyers on Schedule 1.05 hereto at the Closing a list of all prepaid expenses and
deposits of Sellers being transferred to Buyers pursuant to Section 1.01(a)(iv)
hereof.
SECTION 1.06 Administrative Services; Offices. Buyers shall be entitled
to continue on the same basis as currently provided, without cost for a period
of up to three months following the Closing all shared services (excluding legal
and insurance) provided to HRM either directly from, or from third party vendors
hired by, ARC, which services consist of all the services (the "Administrative
Services"), including use of ARC's computer network, set forth in Exhibit V to
the Letter of Intent, dated June 18, 1999 (the "Letter of Intent"), among the
parties; provided, however, that Buyers shall use their best efforts to
6
<PAGE> 12
discontinue use of HRM's payroll services and employee benefits services as soon
as possible, but not later than 45 days after the Closing. In addition, Buyers
shall be entitled to occupy HRM's current offices in Chicago up to October 31,
1999, with Buyers assuming all obligations as lessee effective as of the Closing
except that HMS shall not be required to pay base rent for the months of July,
August and September 1999. Buyers shall indemnify and hold Sellers harmless from
and against any Damages (as hereinafter defined) arising out of or in connection
with the provision of such services other than in respect of Sellers' own gross
negligence or willful misconduct.
II. CLOSING, PURCHASE PRICE, LIABILITIES, ETC.
SECTION 2.01 Closing. The closing of the transactions contemplated by
this Agreement shall take place at the offices of Coleman, Rhine & Goodwin LLP,
750 Lexington Avenue, New York, New York 10022, as of June 30, 1999, or such
later date as the parties may mutually agree in writing, after satisfaction of
all of the conditions set forth in Sections 6.01 and 6.02 hereof, and for all
purposes shall be deemed effective as of the close of business on such date
(such date and time of closing being herein called the "Closing Date").
SECTION 2.02 Payment to Sellers on the Closing Date. In full
consideration for the sale, conveyance, transfer, assignment and delivery to
Buyers of the Assets, subject to the assumption of liabilities provided for
herein, Buyers shall pay to Sellers an amount (the "Purchase Price") equal to
$5,293,576, subject to adjustment as provided below, in immediately available
funds payable to HRM as follows:
(i) $4,170,410 on the Closing Date; and
(ii) $1,123,166, which amount shall be paid on a
dollar-for-dollar basis from time to time immediately following receipt
by Buyers of proceeds with respect to accounts receivable
(collectively, the "Rush Receivables") owing from Rush-Presbyterian St.
Luke's Medical Center ("Rush") as included on the Balance Sheet.
(a) Delivery of Estimated Balance Sheet. On or prior to the Closing
Date, Sellers shall prepare an estimate of the
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Closing Balance Sheet described below (the "Estimated Balance Sheet"), based on
Sellers' books and records and other information then available. The Estimated
Balance Sheet shall be prepared in accordance with generally accepted accounting
principles, consistently applied except as provided in this Agreement, and shall
reflect the intercompany allocation of compensation (including compensation
subsidies and excluding accrued liabilities for PTO, severance, bonuses and
other related payroll liabilities accrued on ARC's balance sheet, none of which
liabilities are being assumed by Buyers hereunder) and other costs between ARC
and HRM in a manner consistent with that reflected on the May 31, 1999 balance
sheet (the "May Balance Sheet") and related financial statements (collectively,
with the May Balance Sheet, the "Financial Statements") of HRM previously
delivered to Buyers.
(b) Adjustments to the Purchase Price. Sellers shall transfer to Buyers
net Assets (i.e., Assets minus liabilities assumed pursuant to Section 2.03
hereof) ("Estimated Net Assets") having a value of not less than $2,700,000,
which shall consist of accounts receivable having an aggregate invoiced or
stated value, as set forth on Schedule 1.01(a)(i), of not less than $1,600,000,
and the other Assets being purchased hereunder; provided, that the aggregate
value of all non-current Assets, determined by reference to the Estimated
Balance Sheet and the Closing and Final Balance Sheets, as hereinafter defined,
shall not exceed $1,100,000. To the extent the value of the Estimated Net
Assets, determined by reference to the Estimated Balance Sheet and the Closing
and Final Balance Sheets and subject to the value limitation on non-current
Assets set forth above, is greater or less than $2,700,000, the Purchase Price
shall be increased or decreased, respectively, on a dollar-for-dollar basis.
(c) Delivery of Closing Balance Sheet. Within 45 days after the Closing
Date, Sellers shall prepare HRM's balance sheet as of the close of business on
the Closing Date (the "Closing Balance Sheet"), setting forth the actual net
Assets as of the Closing Date (the "Actual Net Assets") and the various
components thereof. The Closing Balance Sheet shall be prepared in accordance
with generally accepted accounting principles, consistently applied except as
provided in this Agreement, and shall reflect the intercompany allocation of
compensation
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(including compensation subsidies and excluding accrued liabilities for PTO,
severance, bonuses and other related payroll liabilities accrued on ARC's
balance sheet, none of which liabilities are being assumed by Buyers hereunder)
and other costs between ARC and HRM in a manner consistent with that reflected
on the May Balance Sheet. The Closing Balance Sheet shall be accompanied by a
certificate of appropriate officers of Sellers to the effect that the Closing
Balance Sheet fairly presents the financial position of HRM at the date thereof
in conformity with generally accepted accounting principles applied on a
consistent basis.
(d) Final Balance Sheet. Buyers shall have 30 days after receipt of the
Closing Balance Sheet to approve or disapprove of the same, and any disputes
that Sellers and Buyers cannot resolve with respect to the Closing Balance Sheet
within 30 days from the date of Buyers' challenge shall be resolved by Arthur
Anderson, the independent certified public accountants of Sellers, on the one
hand and KPMG, LLP, the independent certified public accountants of Buyers, on
the other hand. If such accountants are unable to resolve such dispute within 60
days from the date of Buyers' challenge, such dispute shall be resolved by
reference to a mutually acceptable, nationally recognized independent accounting
firm. The decision of such accounting firm shall be final and binding upon all
parties, and the Closing Balance Sheet as modified by any decision of such firm
shall be the "Final Balance Sheet" for purposes of this Agreement. The fees and
expenses of such independent accounting firm shall be divided equally between
Sellers and Buyers unless for good reason shown the independent accounting firm
shall otherwise determine fair and reasonable. Buyers and Sellers shall
cooperate reasonably with each other in order to effectuate the foregoing
including making the books and records of the Business available to one another
for inspection and copying.
(e) True-Up. Within 5 days after the Actual Net Assets is finally
determined pursuant to this paragraph 2.02:
(i) If the Actual Net Assets is less than the Estimated Net
Assets (such difference, the "Deficiency Amount"), Sellers shall pay to
Buyers the Deficiency Amount in immediately available funds.
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(ii) If the Actual Net Assets is greater than Estimated Net
Assets (such difference, the "Surplus Amount"), Buyers shall pay to
Sellers the Surplus Amount in immediately available funds.
SECTION 2.03 Assumption of Liabilities. On the Closing Date, Buyers
shall execute and deliver to Sellers an Assumption Agreement, in the form
included in the Bill of Sale, pursuant to which Buyers shall assume and agree to
pay, perform and discharge when due all liabilities and obligations (the
"Scheduled Liabilities") of HRM (i) that have arisen before, or arise on and
after, the Closing Date under the terms of any contract, agreement, license,
lease, sales order, purchase order or other commitment that is disclosed on
Schedules 3.01(i) (other than any commitment of the kind described in Section
3.01(i)(iii) hereof) or 3.01(q) hereto, other than any of the foregoing that
shall not be assigned as contemplated by Section 1.03 hereof; and (ii) which are
trade accounts payable arising in the ordinary course of business to the extent
reflected on the Closing Balance Sheet. If at any time after the Closing Date
consent to assignment satisfactory to Buyers and their counsel is obtained with
respect to any such commitment that shall not have been assigned as contemplated
by said Section 1.03, Buyers shall thereafter be deemed to have assumed all such
liabilities and obligations of HRM thereunder.
SECTION 2.04 Non-Assumption of Certain Liabilities. Buyers are not
assuming, and shall not be deemed to have assumed, any liabilities or
obligations of Sellers of any kind or nature whatsoever, except as expressly
provided herein and as set forth on Schedule 2.03. Without limiting the
generality of the foregoing, it is hereby agreed that Buyers are not assuming
any liability and shall not have any obligation for or with respect to: (i) any
liabilities or obligations of Sellers that arise under the terms of a contract,
agreement, license, lease, sales order, purchase order, or other commitment
which shall not be assigned as contemplated by Section 1.01(c) of this
Agreement; (ii) any liabilities or obligations of Sellers that would not have
arisen but for the consummation of the transactions contemplated by this
Agreement, unless, such liabilities or obligations are expressly assumed by
Buyers as provided herein and included in Schedule 2.03 or otherwise expressly
provided for herein, including, without limitation, Buyer's obligations under
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this Agreement; (iii) any liabilities or obligations of Sellers under any Plan
(as defined in Section 3.01(l)), including any obligation to adopt or to sponsor
such Plan except as Buyers may, in their sole discretion, elect to adopt or to
sponsor; (iv) any obligation of Sellers arising out of any action, suit or
proceeding based upon (A) an event occurring or a claim arising on or prior to
the Closing Date and attributable to acts performed or omitted by Sellers on or
prior to the Closing Date or (B) a claim arising after the Closing Date based on
an event occurring on or prior to the Closing Date in the case of claims in
respect of products or services sold and delivered or required to be delivered
by Sellers or provided by Sellers or the conduct of the Business on or prior to
the Closing Date and attributable to acts performed or omitted by Sellers on or
prior to the Closing Date; (v) any obligation of Sellers to any Retained
Employee relating to their employment by Seller on or prior to the Closing Date;
(vi) except as otherwise provided in Section 4.06(d), any obligation of Sellers
to any employee of, or consultant to, the Business who does not become a
Retained Employee or to any other employee of, or consultant to, the Business
whose employment or consultancy is terminated by Sellers prior to or effective
at the end of the Transition Period, as hereinafter defined; and (vii) any and
all Taxes incurred by or imposed upon Sellers relating to periods ending on or
prior to the Closing Date, whether such Taxes are assessed before or after the
Closing Date, including without limitation, but subject to the provisions of
Section 4.04(a) hereof, any Taxes incurred by or lawfully imposed upon Sellers,
other than any Taxes to be paid by Buyers in accordance with this Agreement or
the Bill of Sale.
SECTION 2.05 Sellers' Interest and Repurchase Obligations Regarding
Accounts Receivable.
(a) Interest.
(i) As soon as practicable following the 75th day after the
Closing Date, HMS shall send Sellers a notice (an "Accounts Receivable
Notice"), which Accounts Receivable Notice shall include an itemized
list of all accounts receivable included in the Actual Net Assets which
have not been collected by such 75th day. Buyers shall use commercially
reasonable efforts to collect all such accounts receivable. Commencing
the 76th day following the Closing
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Date, Sellers shall pay to HMS simple interest on such uncollected
accounts receivable at a rate per annum equal to the prime rate of
interest as quoted in the Wall Street Journal on such 75th day.
Interest shall be payable monthly in arrears on the first business day
of each month. Sellers' obligation to pay interest under this Section
2.05(b)(i) shall terminate as to each unpaid account receivable on the
earlier of (x) the date such account receivable is collected (but only
as to the amount of such account receivable actually collected) or (y)
the Repurchase Date. Buyers shall provide such information as may be
reasonably requested by Sellers to permit Sellers to verify the status
of any such account receivable and shall promptly refund any interest
overpayment to Sellers.
(ii) Commencing on the Repurchase Date, Sellers shall pay to
HMS simple interest on all accounts receivable included in the
Repurchase Notice at a rate per annum equal to the prime rate of
interest as quoted in the Wall Street Journal on the Repurchase Date,
plus 4%. Buyers shall invoice Sellers for interest from time to time
but in no case more frequently than bi-weekly, and each invoice shall
be due and payable within ten business days of the date of such
invoice. Sellers' obligation to pay interest under this Section
2.05(b)(ii) shall terminate as to each unpaid account receivable on the
earlier of (x) the date such account receivable is collected (but only
as to the amount of such account receivable actually collected) or (y)
the date Sellers repurchase the account receivable.
(iii) Notwithstanding the foregoing, in no event shall Sellers
be required to pay interest to Buyers with respect to the Rush
Receivable.
(b) Repurchase Obligation. Upon written notice (the "Repurchase
Notice") from HMS delivered to Sellers no later than three business days prior
to the 150th day after the Closing Date, Sellers shall be required to repurchase
from Buyers on the 151st day (the "Repurchase Date") after the Closing Date,
with immediately available funds, any uncollected accounts receivable (other
than the Rush Receivable) designated in such notice at the full invoiced or
stated value thereof together with all accrued interest then due. In addition,
Buyers shall reassign the Rush
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Receivable, to the extent uncollected, to Sellers on the Repurchase Date.
SECTION 2.06 Change of Names. At the Closing, Sellers shall deliver to
Buyers such documents as are necessary to cause the name of HRM to be changed to
a name which is not similar to the name of HRM, and shall assign all their
rights to HRM's names to Buyers. Sellers shall furnish to Buyers at the Closing
all documents reasonably necessary to enable Buyers to utilize and/or register
such name following the Closing, including any consents required by the state of
Illinois and all other jurisdictions where HRM is qualified to do business as a
foreign limited liability company. In addition, Sellers will use their
reasonable best efforts to obtain the consent of any other person whose consent
to Buyers' use of such names is required. Sellers agree that they will not,
subsequent to the Closing, cause HRM to amend its organizational documents to
any name which is confusingly similar to Health Receivables Management, LLC.
SECTION 2.07 Additional Deliveries by Sellers at Closing. Sellers shall
provide the following to Buyers at or prior to the Closing Date:
(a) Bill of Sale. Sellers shall have executed and delivered the Bill of
Sale.
(b) Supporting Documents. Buyers and their counsel shall have received
copies of the following supporting documents:
(i) (1) copies of the Certificate of Formation of each Seller
and all amendments thereto, certified as of a recent date by the
Secretary of State of the State of Delaware, and (2) a certificate of
said Secretary dated as of a recent date as to the good standing of
each such Seller and listing all documents of such Seller on file with
said Secretary; and
(ii) a certificate of the Secretary or an Assistant Secretary
of each of the Sellers dated the Closing Date and certifying: (1) that
attached thereto is a true and complete copy of resolutions duly
adopted by the managing member of such Seller authorizing the
execution, delivery and performance of this Agreement and the Ancillary
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Agreements and the transactions contemplated hereby and thereby and
that all such resolutions are still in full force and effect and are
all the resolutions adopted in connection with the transactions
contemplated by this Agreement; and (2) as to the incumbency and
specimen signature of each officer of such Seller executing this
Agreement and any certificate or instrument furnished pursuant hereto,
and a certification by another officer of such Seller as to the
incumbency and signature of the officer signing the certificate
referred to in this paragraph (ii).
(c) Assignment of Not-to-Compete Agreements. Prior to the end of the
Transition Period, Sellers shall assign to Buyers Sellers' interest in any
not-to-compete or confidentiality agreements with Retained Employees.
(d) Offer of Sublease. Sellers shall have caused to be delivered to
Buyers a letter offering to sublease HRM's office space in Chicago to Buyers for
a five year term of approximately six years at a rental of $20 per square foot.
SECTION 2.08 Additional Deliveries by Buyers at Closing. Buyers shall
provide the following to Sellers at or prior to the Closing Date:
(a) Bill of Sale. Buyers shall have executed and delivered the Bill of
Sale.
(b) Supporting Documents. Sellers and their counsel shall have received
copies of the following supporting documents:
(i) A certificate of the Secretary of State of the State of
Delaware, with respect to Sub, and of the Secretary of State of the
State of New York, with respect to HMS, dated as of a recent date, as
to the due incorporation and good standing of Buyers and listing all
documents of Buyers on file with each of said Secretaries; and
(ii) a certificate of an officer of each of the Buyers dated
the Closing Date and certifying: (1) that attached thereto is a true
and complete copy of resolutions duly adopted by the Board of Directors
of such Buyer
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authorizing the execution, delivery and performance of this Agreement
and the Bill of Sale and the transactions contemplated hereby and
thereby and that all such resolutions are still in full force and
effect and are all the resolutions adopted in connection with the
transactions contemplated by this Agreement; and (2) as to the
incumbency and specimen signature of each officer of such Buyer
executing this Agreement and any certificate or instrument furnished
pursuant hereto, and a certification by another officer of such Buyer
as to the incumbency and signature of the officer signing the
certificate referred to in this paragraph (ii).
III. REPRESENTATIONS AND WARRANTIES
SECTION 3.01 Representations and Warranties of Sellers. Sellers
represent and warrant to Buyers as follows:
(a) Organization, Corporate Power, Etc. HRM is a limited liability
company duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization and is duly qualified to do business as a
foreign limited liability company in each jurisdiction in which it is required
to be so qualified with respect to the operations of the Business, except where
the failure to be so qualified could not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the properties,
results of operations, financial condition or prospects of the HRM and/or the
Business (a "Material Adverse Effect"). Sellers have all requisite power and
authority to own, operate and lease the Assets, to carry on the Business as it
is now being conducted, to execute and deliver this Agreement and the Bill of
Sale and to perform their obligations hereunder and thereunder. Schedule
3.01(a) hereto sets forth a complete list of the jurisdictions in which HRM is
qualified to do business with respect to the operations of the Business.
(b) Authorization of Agreements. The execution and delivery by Sellers
of this Agreement and the Bill of Sale, and the consummation by Sellers of the
transactions contemplated hereby and thereby, have been duly authorized by all
requisite action. This Agreement has been duly and validly executed by Sellers
and constitutes the legal, valid and binding obligation
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of Sellers, enforceable in accordance with its terms and the Bill of Sale, and
when duly executed and delivered in accordance with this Agreement, will
constitute legal, valid and binding obligations of Sellers, enforceable in
accordance with their respective terms, except as enforceability may be limited
by applicable equitable principles or by bankruptcy, insolvency, reorganization,
moratorium, or similar laws from time to time in effect affecting the
enforcement of creditors' rights generally. A majority of the issued and
outstanding membership interest of HRM is owned by ARC. Except for the requisite
affirmative vote of ARC under the laws of the State of Delaware, the
authorization of no other person or entity is required to consummate the
transactions contemplated herein by virtue of any such person or entity having
an equitable or beneficial interest in HRM.
(c) Effect of Agreement. Except as set forth on Schedule 3.01(c)
hereto, the execution and delivery by Sellers of this Agreement and the Bill of
Sale and the performance by Sellers of their obligations hereunder and
thereunder, will not violate any provision of law, any order of any court or
other agency of government, Limited Liability Company Agreements of Sellers, or
any judgment, award or decree or any indenture, agreement, permit or other
instrument to which Sellers are parties, or by which Sellers or any of the
Assets are bound or affected, or conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under, any such
indenture, agreement, permit or other instrument, or result in the creation or
imposition of any lien, charge, security interest or encumbrance of any nature
whatsoever upon any of the Assets.
(d) Governmental Licenses and Approvals. HRM has all material
governmental licenses, franchises and permits required under applicable law for
the conduct of the Business as currently conducted and is in full compliance
with, and in good standing under, all such licenses, franchises and permits,
except where such lack of full compliance would not have a Material Adverse
Effect. Schedule 3.01(d) hereto lists all material licenses, franchises and
permits held by Sellers. Except as set forth on Schedule 3.01(d) hereto, no
approval, authorization, consent or order or action of or filing with any court,
administrative agency or other governmental authority (i) is required for the
execution and delivery by Sellers of this Agreement or the Bill
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of Sale or the consummation by Sellers of the transactions contemplated hereby
or thereby or (ii) is necessary in order that the Business may be conducted
immediately following the Closing Date substantially in the same manner as
heretofore conducted, other than those that become applicable solely as a result
of the specific regulatory status of Buyers or their affiliates.
(e) Financial Statements. Attached as Schedule 3.01(e) hereto are the
Financial Statements. The Financial Statements are complete and correct in all
material respects and have been prepared in accordance with generally accepted
accounting principles (including, without limitation, HRM's policies of revenue
recognition), consistently applied and consistent with prior periods, except for
the absence of footnotes and except that the Financial Statements will be
subject to normal year-end adjustments, which adjustments in the aggregate will
not have a Material Adverse Effect. Except as set forth on Schedule 3.01(e)
hereto, the Financial Statements fairly present the operating results of the
Business during the period indicated therein.
(f) Accounts Receivable. All of the accounts receivable set forth in
Schedule 1.01(a)(i) hereto reflect actual transactions, have arisen in the
ordinary course of business and will not be subject to offset or deduction.
(g) Absence of Certain Changes or Events. Since May 31, 1999, except as
otherwise set forth on Schedule 3.01(g) hereto and except for the transactions
contemplated hereby, Sellers have not with respect to the Business:
(i) incurred any material obligation or liability of any kind
or nature whatsoever, except normal trade or business obligations
incurred in the ordinary course of business and consistent with past
practice and except in connection with this Agreement and the
transactions contemplated hereby;
(ii) discharged or satisfied any material lien, security
interest or encumbrance or paid any obligation or liability (fixed or
contingent) of any kind or nature whatsoever, other than in the
ordinary course of business and consistent with past practice;
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(iii) mortgaged, pledged or subjected to any lien, security
interest or other encumbrance any of the Assets (other than mechanic's,
materialman's and similar statutory liens arising as a matter of law
and purchase money security interests arising in the ordinary course of
business between the date of delivery and payment);
(iv) transferred, leased or otherwise disposed of any of the
Assets except in the ordinary course of business and consistent with
past practice or, except in the ordinary course of business and
consistent with past practice, acquired any assets or properties to be
used by or in connection with the activities of the Business;
(v) canceled or compromised any material debt or claim related
to the Business, except in the ordinary course of business and
consistent with past practice;
(vi) waived or released any rights of material value related
to the Business, except in any case in the ordinary course of business
and consistent with past practice;
(vii) transferred or granted any rights under any concessions,
leases, licenses, sublicenses, agreements, patents, inventions,
trademarks, trade names, service marks or copyrights or with respect to
any know-how related to the Business, except in the ordinary course of
business and consistent with past practice;
(viii) made or granted any wage, salary or benefit increase or
paid any bonus applicable to any group or classification of employees
generally, entered into or amended the terms of any employment contract
(other than employment agreements terminable at will by Sellers without
liability) with, or made any loan to, or granted any severance benefits
to or entered into or amended the terms of any material transaction of
any other nature with any person listed on Schedule 4.06(a) hereto,
except in the ordinary course of business and consistent with past
practice;
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(ix) suffered any casualty loss or damage (whether or not such
loss or damage shall have been covered by insurance) that affects in
any material respect their ability to conduct the Business or received
any claim or claims in respect of the Business in excess of insurable
limits, or canceled any insurance coverage, in whole or in part, under
any policy the coverage limits of which exceed $25,000;
(x) suffered any adverse change in any of their operations or
in their financial condition or in their assets, properties or
business, which adverse change is material or could reasonably be
expected to be material to the Business;
(xi) surrendered or had revoked or otherwise terminated any
material license, permit or other approval, authorization or consent
from any court, administrative agency or other governmental authority
relating to the conduct of the Business; or
(xii) entered into any agreement or commitment to take any
action described in this Section 3.01(f).
(h) Title to Properties, Absence of Liens and Encumbrances. Except as
set forth on Schedule 3.01(h) hereto, Sellers have good and marketable title to
all the Assets, free and clear of all liens, charges, pledges, security
interests or other encumbrances of any nature whatsoever. Except as set forth on
Schedule 3.01(h) hereto, all leases of personal property of Sellers to be
assigned to Buyers hereunder are, to the knowledge of Sellers, valid and binding
in accordance with their respective terms and there is not under any of such
leases any existing default, or any condition, event or act attributable to
Sellers or, to the knowledge of Sellers, attributable to the other party to such
leases, which with notice or lapse of time or both would constitute such a
default, nor would consummation of the transactions contemplated hereby result
in a default or any such condition, event or act, which, in any such case, would
have a Material Adverse Effect. As used in this Agreement, "to the knowledge of
Sellers" shall mean the individual or collective knowledge of each of Marie E.
Sinioris, Paul Palz and Tony Davis, the President, Director of Finance and the
Chief Financial
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Officer, respectively, of ARC and John Robertson, Richard Slowiak and Donna
Connelly, the Vice President of Business Development and Strategic Alliances,
Manager of Finance and Director of Finance of HRM, respectively (collectively,
the "Sellers' Officers"). "Knowledge" when used in this context shall mean, as
to the facts or circumstances represented, actual knowledge of any one of the
Sellers' Officers.
(i) List of Properties, Contracts and Other Data. Annexed hereto as
Schedule 3.01(i) hereto is a list setting forth with respect to the operations
of the Business, as of the dates specified on such Schedule, the following:
(i) all leases of real or personal property included in the
Assets involving payments in excess of $5,000 per annum to which
Sellers are a party, either as lessee or lessor, with a brief
description of the parties to each such lease, the property to which
each such lease relates and the termination dates thereof;
(ii) (A) all patents, material unregistered trademarks and
material unregistered trade names, trademark and trade name
registrations, material unregistered service marks and service mark
registrations, material unregistered copyrights and copyright
registrations which are used in connection with the operations of the
Business, all applications pending for patents or for trademark, trade
name, service mark or copyright registrations, owned or held by
Sellers, and reasonably necessary to, or primarily used in connection
with, the Business, and (B) all licenses and sublicenses granted by or
to Sellers and all other agreements to which Sellers are a party which
relate, in whole or in part, to any items of the categories mentioned
in (A) above whether owned by Sellers or any affiliate thereof;
(iii) with respect to the persons listed on Schedule 4.06(a)
hereto, all employment and consulting agreements, executive
compensation plans, collective bargaining agreements, bonus plans,
guaranteed bonus arrangements, deferred compensation agreements,
commission plans, employee pension plans or retirement plans, employee
profit sharing plans, employee stock purchase and stock option plans,
group life insurance, hospitalization
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insurance or other plans or arrangements providing for benefits to such
employees (other than employment agreements terminable at will by
Sellers without liability);
(iv) all contracts pursuant to which Sellers have (A) been
granted rights to market software owned by third parties relating to
the Business or (B) granted marketing rights in the Owned Software to
third parties; and
(v) all contracts and commitments (including proposed (i)
contracts and commitments and (ii) amendments to contracts and
commitments) relating to the Business, whether oral or written, to
which Sellers are or may become parties or to which Sellers or any of
their assets or properties are or may become subject and which are not
specifically referred to in any other schedule hereto and which involve
payments by or to Sellers exceeding $5,000 per annum in amount or
cannot be canceled within 90 days after the Closing Date without breach
or penalty.
True and complete copies of all documents and complete
descriptions of all oral contracts (if any) referred to in Schedule 3.01(i)
hereto have been provided or made available to Buyers and their counsel. Except
as disclosed in said Schedule 3.01(i) hereto, Sellers have not received any
claim that any contract referred to therein is not valid and enforceable in
accordance with its terms (subject, as to enforcement, to the rights of
creditors generally) for the periods stated therein, and there does not exist
under any such contract any existing default or event of default or event which
with notice or lapse of time or both would constitute such a default, in either
case, on the part of Sellers, or to the knowledge of Sellers, on the part of any
other party thereto, except where any such default or event of default or event
would not have a Material Adverse Effect.
(j) Litigation. Except for isolated workers' compensation cases, all of
which are fully insured, there are no actions, suits, issues or proceedings
(collectively, "Legal Actions") involving claims pending or threatened against
Sellers with respect to the Business or against any officer or employee of the
Business (other than any matter that is unrelated to such person's employment or
to actions taken in the course of such
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person's employment, in the Business) or relating to any operations of the
Business, at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, in which a decision adverse to Sellers could reasonably be
expected to have a Material Adverse Effect. Set forth on Schedule 3.01(j) hereto
are all pending or threatened Legal Actions, other than pending and threatened
Legal Actions to collect accounts receivable on behalf of HRM's customers.
(k) Collective Bargaining Agreements; Labor Controversies; etc. Sellers
are not a party to any labor or collective bargaining agreement and there are no
labor or collective bargaining agreements which pertain to any employees engaged
in the operations of the Business. No employees of Sellers are represented by
any labor organization. No labor organization or group of employees of Sellers
has made a pending demand for recognition, and there are no representation
proceedings or petitions seeking a representation proceeding presently pending
or, to the knowledge of Sellers, threatened to be brought or filed with the
National Labor Relations Board or other labor relations tribunal relating to the
Business. There is no organizing activity relating to the Business involving
Sellers pending or, to the knowledge of Sellers, threatened by any labor
organization or group of employees of Sellers. There are no (A) strikes, work
stoppages, slowdowns, lockouts or arbitrations or (B) material grievances or
other material labor disputes pending or, to the knowledge of Sellers,
threatened against or involving Sellers relating to the Business. There are no
unfair labor practice charges, grievances or complaints pending or, to the
knowledge of Sellers, threatened against or involving Sellers or any group of
employees of Sellers relating to the Business. There are no complaints, charges
or claims against Sellers pending or, to the knowledge of Sellers, threatened to
be brought or filed with any governmental body based on, arising out of, in
connection with, or otherwise relating to the employment by Sellers of any
individual, including any claim for workers' compensation relating to the
Business. Hours worked by and payments made to employees of Sellers engaged in
the operations of the Business have not been in violation of the federal Fair
Labor Standards Act or any other law dealing with such matters.
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(l) Employee Benefit Plans.
(i) Schedule 3.01(l) hereto lists each employee benefit plan
within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), maintained by Sellers or to
which Sellers contributes or is required to contribute or in which any
employee of Sellers engaged in the operations of the Business
participates as a result of being employed by Sellers (a "Plan"). To
Sellers' knowledge, Sellers have complied and currently are in
compliance, in all material respects, both as to form and operation,
with the applicable provisions of ERISA and the Internal Revenue Code
of 1986, as amended (the "Code"), respectively, with respect to each
Plan, except as would not result in a Material Adverse Effect.
(ii) Each of the Plans that is intended to qualify under
Section 401(a) of the Code does so qualify and is exempt from taxation
pursuant to Section 501(a) of the Code.
(iii) Sellers have not maintained, contributed to or been
required to contribute to, nor do any of their employees participate
in, a "multiemployer plan" (as defined in Section 3(37) of ERISA). No
amount is due or owing from Sellers on account of a "multiemployer
plan" (as defined in section 3(37) of ERISA) or on account of any
withdrawal therefrom.
(iv) Except as set forth on Schedule 3.01(l), Sellers do not
maintain for the benefit of any of their employees engaged in the
operations of the Business a defined benefit plan, as defined in
section 3(35) of ERISA.
(v) Notwithstanding anything else set forth herein, Sellers
have not incurred any liability with respect to any Plan under ERISA
(including, without limitation, Title I or Title IV of ERISA), the Code
or other applicable law, which has not been satisfied in full, and no
event has occurred, and, to Sellers' knowledge, there exists no
condition or set of circumstances which could result in the imposition
of any material liability under ERISA (including,
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without limitation, Title I or Title IV of ERISA), the Code or other
applicable law with respect to any of the Plans.
(vi) Except as set forth on Schedule 3.01(l), no Plan, other
than a Plan which is an employee pension benefit plan (within the
meaning of Section 3(2)(A) of ERISA), provides benefits, including
without limitation death, health or medical benefits (whether or not
insured), with respect to current or former employees of Sellers
engaged in the operations of the Business beyond their retirement or
other termination of service with Sellers (other than coverage mandated
by applicable law or benefits the full cost of which is borne by the
current or former employee (or his or her beneficiary)).
(vii) Except as set forth on Schedule 3.01(l) hereto, the
consummation of the transactions contemplated by this Agreement will
not (A) entitle any current or former employee or officer of Sellers to
severance pay, unemployment compensation or any other payment, or (B)
accelerate the time of payment or vesting, or increase the amount of
compensation due any such employee or officer.
(viii) Sellers have provided to Buyers true and complete
copies of each of the Plans together with summary plan descriptions and
each determination letter from the Internal Revenue Service with
respect to each Plan that is intended to qualify under Section 401(a)
of the Code.
(m) Patents, Trademarks, Etc. The patents, trademarks, service
marks, trade names and copyrights, and the registrations and
applications therefor and the licenses and sublicenses with respect
thereto (collectively, "Business Intellectual Property Rights") listed
on Schedule 3.01(i)(ii) hereto, together with Sellers' rights in the
Owned Software, constitute all the Intellectual Property Rights of
Sellers reasonably necessary to, or used primarily in connection with,
the conduct of the Business. To the knowledge of Sellers, except as set
forth on Schedule 3.01(i), Sellers own or have valid rights to use all
the Business Intellectual Property Rights without conflicting with the
intellectual property rights of any other person. No person has advised
Sellers of or, to the knowledge of
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Sellers, has threatened to make, any claims that the operation
of the Business as presently conducted is in violation of or infringes
upon the intellectual property rights of any other person.
(n) Software.
(i) The Owned Software listed on Schedule
3.01(n)(i)-l hereto includes all of the operating and applications
computer software programs and databases that have been licensed by
Sellers to any customer of the Business or as to which Sellers have
agreed to provide services to any customer of the Business, in each
case, pursuant to the contracts listed on Schedule 3.01(q) hereto. The
Owned Software and the Licensed Software listed on Schedule
3.01(n)(i)-2 hereto comprise the operating and applications computer
software programs and databases used by Sellers in connection with the
operations of the Business, the licensing, servicing, developing, or
maintaining of the Owned Software or otherwise used by Sellers in the
Business.
(ii) Except as set forth on Schedule 3.01(n)(i)-l
hereto and except for the rights of the customers of the Business under
the contracts listed on Schedule 3.01(q) hereto, Sellers have good and
marketable title to all Owned Software, free and clear of all liens,
charges, pledges, security interests, or other encumbrances of any
nature whatsoever. Sellers hold valid licenses to all Licensed
Software, subject, in any event, to the terms of any agreements
relating to the Licensed Software. To the knowledge of Sellers, none of
the Owned Software, and no use by Sellers of the Licensed Software,
infringes upon or violates any patent, copyright, trade secret or other
proprietary right of any other person and to the knowledge of Sellers,
no claim with respect to any such infringement or violation is
threatened.
(iii) Sellers possess or have access to (i) to the
extent required to conduct the Business, the source and object codes
for all Owned Software and, to the extent permitted under the
respective license agreements, for all the Licensed Software used by
Sellers in the conduct of the
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Business and (ii) all other technical materials, guidelines and
other written materials pertaining to the Owned Software or, to the
knowledge of Sellers, the Licensed Software. Upon consummation of the
transactions contemplated by this Agreement, Sellers will transfer,
assign and deliver to buyers all Sellers' rights, title and interest
in and to (A) the Owned Software, subject to the rights of customers
under the contracts listed on Schedule 3.01(q) hereto, and (B) the
Licensed Software, to the extent permitted by license agreements for
such Licensed Software. To the extent that Buyers shall identify, at
any time or from time to time after the Closing Date, any Licensed
Software for which no such valid license has been assigned, Sellers
shall transfer, assign and deliver same to Buyers to the extent such
transfer, assignment and delivery is permitted by the license
agreement from such Licensed Software.
(iv) To the knowledge of Sellers, any programs,
modifications, enhancements or other inventions, improvements,
discoveries, methods or works of authorship included in the Owned
Software that were created by employees of Sellers were made in the
regular course of such employees' employment with Sellers using
Sellers' facilities and resources and, as such, constitute "works made
for hire".
(o) Use of Real Property. The real property as set forth on
Schedule 3.01(i)(i) hereto are used and operated in material compliance and
conformity with all applicable leases, contracts, licenses and permits. Sellers
have not received notice of any material violation of any applicable zoning or
building regulation, ordinance or other law, order, regulation or requirement
relating to the conduct of the Business or to the Assets and, to the knowledge
of Sellers, there is no such violation. To the knowledge of Sellers, all
buildings used in the operations of the Business substantially conform with all
applicable ordinances, codes, regulations and requirements, and no law presently
in effect or condition precludes or materially restricts continuation of the
present use of such properties.
(p) Condition of Assets. To the knowledge of Sellers, all
tangible personal property, furniture, fixtures and equipment comprising the
Assets substantially conform with all applicable
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ordinances, codes, regulations and requirements, including without
limitation all applicable ordinances, codes, regulations and requirements
relating to occupational safety, and no law presently in effect or condition
precludes or materially restricts continuation of the present use of such
properties. No warranty is made regarding the tangible personal property
comprising the Assets. All such tangible personal property is conveyed hereunder
AS IS, WHERE IS, WITH ALL FAULTS AND DEFECTS.
(q) Customer Contracts.
(i) Schedule 3.01(q) hereto contains a list of (A)
all contracts between Sellers and the customers of the Business
pursuant to which Sellers have agreed to provide goods or services to
such customers, (B) all contracts between Sellers and the customers of
the Business pursuant to which Sellers have licensed any Owned Software
to such customers and (C) all proposed amendments to any such
contracts. All correspondence files with respect to such contracts
shall be made available for review by Buyers upon their reasonable
request.
(ii) Except as set forth on said Schedule 3.01(q)
hereto and except for contracts under which Sellers are not currently
obligated to supply any product or provide any service, no such
contract contains a prohibition on the assignment thereof without the
consent of the other party thereto.
(iii) Schedule 3.01(q) hereto identifies each
agreement of the Business that (A) requires joint services to be
performed by the Business and ARC's other business units or (B) is with
any administrative agency or other governmental authority. In addition,
Schedule 3.01(q) hereto sets forth all outstanding contract proposals
relating to the Business for which a contract has been requested for
goods or services involving fees in excess of $25,000 per annum.
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(r) Taxes.
(i) Except as set forth on Schedule 3.01(r) hereto,
all federal, state, local and foreign income, franchise, sales, use,
property, payroll, employment, transfer and all other tax returns and
information statements ("Tax Returns") required to be filed with
respect to the operations of the Business have been properly prepared
and timely filed for all years and periods for which such Tax Returns
have become due and all such Tax Returns are correct and complete in
all respects. For purposes of this Agreement, "Taxes" shall mean any
and all income, franchise, sales, use, property, payroll, employment,
transfer and any other taxes, charges, fees, levies, imports, duties,
licenses or other assessments, together with interest, penalties and
any other additions to tax or additional amounts imposed by any
governmental or taxing authority, or liability for such amounts as a
result of Seller being a member of an affiliated, consolidated,
combined or unitary group or being a party to any agreement or
arrangement whereby Sellers may be liable for Taxes of any other person
for any period prior to (or up to and including) the close of business
on the day prior to the Closing Date.
(ii) Sellers have paid to the appropriate taxing
authority, all Taxes owed by Sellers with respect to the operations of
the Business, whether or not shown on any Tax Return, to the extent
such Taxes are due.
(iii) Sellers are not parties to any agreement,
contract or arrangement that would result, by reason of the
consummation of any of the transactions contemplated hereby, separately
or in the aggregate, in the payment of any "excess parachute payment"
within the meaning of Section 28OG of the Code.
(iv) None of the Assets is required to be treated as
being owned by any other person pursuant to the "safe harbor" leasing
provisions of Section 168(f)(8) of the Code of 1954, as in effect prior
to the repeal thereof.
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(s) Environmental Matters. No Hazardous Substances (as
hereinafter defined) have been, or have been threatened to be, discharged,
released or emitted by Sellers into the air, water, surface water, ground water,
land surface or subsurface strata or transported to or from any property used by
Sellers in the operations of the Business except in accordance with all
applicable Environmental Laws, and except for incidental release of Hazardous
Substances in amounts or concentrations that could not reasonably be expected to
give rise to any material claims or liabilities against Sellers under any
Environmental Law. Sellers have not received any notification from a
governmental agency that there is any violation of any Environmental Law with
respect to the properties of Sellers used in the operations of the Business or
any notification from a governmental agency pursuant to Section 104, 106 or 107
of the Comprehensive Environmental Response Compensation and Liability Act, as
amended.
For purposes of this Agreement, the following terms shall have
the following meanings:
"Environmental Law" shall mean any federal, state or local
statute, law, ordinance, rule or regulation and any order to which Sellers are
parties or are otherwise bound with respect to the operations of the Business,
relating to pollution or protection of the environment, including natural
resources, or exposure of persons, including employees, to Hazardous Substances;
and
"Hazardous Substances" shall mean any substance, whether
liquid, solid or gas listed, identified or designated as hazardous or toxic
under any Environmental Law, which, applying criteria specified in any
Environmental Law, is hazardous or toxic, or the use or disposal of which is
regulated under any Environmental Law.
(t) Broker's or Finder's Fees. All negotiations relative to
this Agreement and the transactions contemplated hereby have been carried out by
Sellers directly with Buyers, without the intervention of any person on behalf
of Sellers in such a manner to give rise to any claim by any person against
Buyers for a finder's fee, brokerage commission or similar payment.
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(u) The Assets. To the knowledge of Sellers, the Assets
referred to in Section 1.01(a) constitute all of the assets or properties of
Sellers used by Sellers exclusively in the Business.
(v) Incentives to Key Management. ARC has provided substantial
financial incentives to the key management personnel of HRM to continue in the
employ of Buyers for a period of not less than three months (and six months, in
the case of John Robertson) after the Closing Date.
(w) Other Information. None of the information furnished by
Sellers to Buyers in this Agreement, the exhibits hereto, the schedules
identified herein, or in any certificate or other document to be executed or
delivered pursuant hereto by Sellers hereunder is, in any material respect,
false or incomplete or contains any misstatement of material fact.
(x) Scope of Representations and Warranties. THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION 3.01 ARE THE ONLY
REPRESENTATIONS AND WARRANTIES BEING MADE BY SELLERS AND NO OTHER
REPRESENTATIONS AND WARRANTIES SHALL BE DEEMED TO BE IMPLIED AT LAW OR IN
EQUITY.
SECTION 3.02 Representations and Warranties of Buyers. Buyers
represents and warrants to Sellers as follows:
(a) Organization, Corporate Power, Etc. Each of Buyers is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and is duly qualified to do business as
a foreign corporation in each jurisdiction in which it is required to be so
qualified, except where the failure to be so qualified would not have a material
adverse effect on the properties, results of operations or financial condition
of Buyers. Buyers have all requisite corporate power and authority to acquire,
own, lease and operate the Assets and the Business, to execute and deliver this
Agreement and the Bill of Sale and to perform their respective obligations
hereunder and thereunder.
(b) Authorization of Agreements. The execution, delivery and
performance by Buyers of this Agreement and the Bill of Sale and the
consummation by Buyers of the transactions
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contemplated hereby and thereby, have been duly authorized by all requisite
corporate action. This Agreement has been duly and validly executed by Buyers
and constitutes the legal, valid and binding obligation of Buyers, enforceable
in accordance with its terms, and the Bill of Sale, when duly executed and
delivered in accordance with this Agreement, will constitute legal, valid and
binding obligations of Buyers, enforceable in accordance with their respective
terms, except as enforceability may be limited by applicable equitable
principles or by bankruptcy, insolvency, reorganization, moratorium, or similar
laws from time to time in effect affecting the enforcement of creditors' rights
generally. All of the issued and outstanding capital stock of Sub is owned by
HMS. Except for the affirmative vote of HMS as the sole shareholder of Sub, the
authorization of no other person or entity is required to consummate the
transactions contemplated herein by virtue of any such person or entity having
an equitable or beneficial interest in Sub.
(c) Effect of Agreements. The execution and delivery by Buyers
of this Agreement and the Bill of Sale, and the performance by Buyers of their
respective obligations hereunder and thereunder, will not violate any provision
of law, any order of any court or other agency of government, the Certificates
of Incorporation or By-laws of Buyers or any judgment, award or decree or any
indenture, agreement or other instrument to which Buyers are parties or by which
Buyers or their properties or assets are bound or affected, or conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under, any such indenture, agreement or other instrument, or result in
the creation or imposition of any lien, charge or encumbrance of any nature
whatsoever upon any of the properties or assets of Buyers.
(d) Litigation. There is no action, suit, investigation or
proceeding pending or, to the knowledge of Buyers, threatened against or
affecting Buyers before any court or by or before any governmental body or
arbitration board or tribunal that might enjoin or prevent the consummation of
the transactions contemplated by this Agreement. For purposes of this Agreement,
"to the knowledge of Buyers" shall mean the individual or collective knowledge
of each of Paul J. Kerz and Alan L. Bendes (collectively, the "Sellers'
Officers"), the President and Chief Executive Officer and the Chief Financial
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Officer, respectively, of HMS. "Knowledge" when used in this context shall mean,
as to the facts or circumstances represented, actual knowledge of any one of the
Buyers' Officers.
(e) Governmental Approvals. No approval, authorization,
consent or order or action of or filing with any court, administrative agency or
other governmental authority is required for the execution and delivery by
Buyers of this Agreement or the Bill of Sale or the consummation by Buyers of
the transactions contemplated hereby or thereby.
(f) Broker's or Finder's Fees. All negotiations relative to
this Agreement and the transactions contemplated hereby have been carried out by
Buyers directly with Sellers, without the intervention of any person on behalf
of Buyers in such a manner to give rise to any claim by any person against
Sellers for a finder's fee, brokerage commission or similar payment.
(g) Other Information. None of the information furnished by
Buyers to Sellers in this Agreement, the exhibits hereto, the schedules
identified herein, or in any certificate or other document to be executed or
delivered pursuant hereto by Buyers is, in any material respect, false or
incomplete or contains any misstatement of material fact.
(h) Scope of Representations and Warranties. THE
REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS SECTION 3.02 ARE THE ONLY
REPRESENTATIONS AND WARRANTIES BEING MADE BY BUYERS AND NO OTHER REPRESENTATIONS
AND WARRANTIES SHALL BE DEEMED TO BE IMPLIED AT LAW OR IN EQUITY.
IV. COVENANTS
SECTION 4.01 Amounts Due Retained Employees. Within 45 days
following the Closing Date, Sellers shall have paid any amount owed (or that
will be owed as of the Closing Date) by such Sellers to any Retained Employee,
in respect of salary, bonus, sales commission, vacation pay, paid sick days and
other compensation or benefit. To the extent that amounts to be paid to any
Retained Employee in reimbursement of expenses incurred by such Retained
Employee on behalf of Sellers shall be unpaid as of the Closing Date, Sellers
shall pay such amounts in accordance
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with Sellers' customary practice upon receipt of a duly prepared claim
therefor properly submitted by such Retained Employee.
SECTION 4.02 Confidentiality. None of the parties shall issue
any press releases or make any similar public disclosure intended for mass
distribution pertaining to the existence of this Agreement or the transactions
contemplated hereby without the prior written consent of the other parties,
which consent shall not be unreasonably withheld; provided, however, that each
party shall, after review and comment by the other parties, be permitted to make
such disclosures as its counsel deems necessary to comply with, and to prevent
violations of, applicable laws, rules or regulations.
SECTION 4.03 Allocation of Purchase Price. For all federal,
state and local tax purposes, Buyers and Sellers agree to allocate the
consideration described in Section 2.02 hereof (i) as to a portion thereof to
the covenants and agreements of Sellers contained in the Article V hereof and
(ii) as to the balance, in the manner reasonably determined by Buyers, but
subject to the reasonable approval of Sellers, which approval shall not be
unreasonably withheld. Within 180 days following the Closing, Buyers shall
deliver to Sellers a schedule (the "Allocation Schedule") allocating the
Purchase Price (including, for the purpose of this Section 4.03, any other
consideration paid to Sellers, including any liabilities assumed pursuant
hereto) among the Assets and the covenant not to compete granted pursuant to
Article V hereof. The Allocation Schedule shall be reasonable and shall be
prepared in accordance with Section 1060 of the Code and the regulations
thereunder. Buyers and Sellers each agree to file Internal Revenue Service Form
8594, and all federal, state, local and foreign Tax Returns, in accordance with
the Allocation Schedule. Buyers and Sellers each agree to provide the other
parties promptly with any other information required to complete Form 8594 and
with a copy of such form after it is filed.
SECTION 4.04 Certain Tax Matters.
(a) All sales and use taxes, including interest, penalties and
any other additions to such sales and use taxes, imposed by any governmental or
taxing authority upon or incurred by any of the parties hereto in connection
with this Agreement and the transactions contemplated hereby shall be borne by
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Buyers. All transfer taxes, including interest, penalties and any other
additions to such transfer taxes, imposed by any governmental or taxing
authority upon or incurred by any of the parties hereto in connection with this
Agreement and the transactions contemplated hereby shall be borne by Sellers.
Sellers and/or Buyers, to the extent required by law and this Section 4.04(a),
shall prepare and file all necessary Tax Returns and other documents with
respect to all such transfer, sales and use taxes. Sellers and Buyers agree to
cooperate in any endeavor to effect a reduction in any such transfer, sales and
use taxes.
(b) For all federal, state, local and foreign income and
franchise Tax purposes, each of the parties hereto agrees to treat the
acquisition of the Assets by Buyers, pursuant to the terms and conditions of
this Agreement, as a taxable sale of the assets of Sellers to Buyers solely in
exchange for cash (and the liabilities assumed by Buyers from Sellers).
(c) Sellers shall be responsible for and shall pay any and all
Taxes with respect to the operations of the Business relating to all periods
prior to the Closing Date and Buyers shall be responsible for and shall pay any
and all Taxes with respect to the operations of the Business relating to periods
commencing the Closing Date.
SECTION 4.05 Insurance. At Buyers' request, Sellers shall
reasonably cooperate in transferring to Buyers (to the extent transferable)
policies of fire, liability, workers' compensation and other forms of insurance
carried by Sellers in the conduct of the Business.
SECTION 4.06 Retention of Employees; Benefits.
(a) Offers of Employment. During the Transition Period (as
hereinafter defined), Buyers shall offer to continue the employment, at will, or
consultancy of all employees or consultants that, at Buyers' request, Sellers
have listed on Schedule 4.06(a) hereto on terms that are mutually acceptable to
HMS and such employees or consultants. Sellers shall promptly notify Buyers if
any employee of, or consultant to, the Business shall announce his or her
intention not to accept such offer by Buyers. The employees and consultants
listed on Schedule 4.06(a)
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hereto who accept Buyers' offer of employment or consultancy are herein referred
to collectively as the "Retained Employees."
(b) Benefits. Not later than the end of the Transition Period
(as hereinafter defined), Buyers shall ensure that Retained Employees (excluding
consultants unless otherwise indicated on Schedule 4.06(a)) are afforded the
opportunity to participate in benefits and equity acquisition programs that
currently are available to employees of HMS and on similar terms of
participation.
(c) No Offer of Employment. Nothing in this Agreement, express
or implied, shall confer upon any employee of Sellers engaged in the Business,
or any representative of any such employee, any rights or remedies of any nature
whatsoever, including any right to employment or continued employment for any
period or for severance, whether as third-party beneficiary or otherwise, it
being understood and agreed that any such employment shall, to the maximum
extent permitted by applicable law, be employment at will.
(d) Transition Period. The obligation of Sellers to provide
payroll services and employee benefits services to Buyers as set forth in
Section 1.06 hereunder shall begin on the Closing Date and shall terminate for
each Retained Employee on the earlier of the date Buyers inform Sellers that
such Transition Services are no longer required or 45 days following the Closing
Date (the "Transition Period"). Notwithstanding any other provisions of this
Agreement, for the Transition Period, the Retained Employees shall remain
employees of Sellers and shall continue to participate in all Applicable Seller
Plans (as defined below), subject to the terms and conditions of such plans;
provided, however, that a Retained Employee shall not participate in any
Applicable Seller Plan after the Closing Date unless such Retained Employee
participated in such Applicable Seller Plan immediately prior to the Closing
Date. For purposes of this Section 4.06, the term "Applicable Seller Plans"
means all of the Seller Plans as in effect on the Closing Date, other than the
ArcVentures, LLC 401(k) Plan.
(i) Sellers shall invoice Buyers for the Reimbursable
Amount (as defined below) and Buyers shall pay such amount to Sellers
within 30 days after submission of
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such invoice. For purposes of this Agreement, the "Reimbursable
Amount" is an amount equal to the costs, expenses and fees incurred or
accrued by Sellers to, on behalf of or with respect to the Retained
Employees with respect to the Transition Period, including, without
limitation, expense reimbursement, premium payments, employment
contributions or benefits under or with respect to the Applicable
Seller Plans, governmental charges, violations of law or overpayments
(other than violations or overpayments resulting from Sellers'
intentional misconduct), any increase in costs or assessments
(including, without limitation, insurance costs) due to the service
performed by Sellers hereunder or the participation of Retained
Employees in the Applicable Seller Plans for periods after the Closing
Date and any other costs incurred or accrued by Sellers to, on behalf
of or with respect to Retained Employees after the Closing Date.
(ii) Any portion of the Reimbursable Amount that is
not paid within 30 days after submission of an invoice shall be
considered a "Late Payment." Buyers shall pay Sellers simple interest
on the amount of any Late Payment outstanding at a rate per annum equal
to the prime rate of interest as quoted in the Wall Street Journal on
such 30th day.
SECTION 4.07 Further Assurances. From time to time following
the Closing Date, Sellers shall execute and deliver, or cause to be executed and
delivered, to Buyers such bills of sale, deeds, endorsements, assignments and
other good and sufficient instruments of conveyance and transfer, in form
reasonably satisfactory to Buyers and their counsel, as Buyers may reasonably
request or as may be otherwise reasonably necessary to vest in Buyers all the
right, title and interest of Sellers in, to or under, and put Buyers in
possession of, any part of the Assets. Without limiting the generality of the
foregoing, with respect to HRM's Illinois debt collection license (the "Illinois
License"):
(i) To the extent permitted by law, Buyers may
continue to operate under the Illinois License from and after the
Closing Date and until a new license is issued to Buyers (at which time
Buyers shall so notify Sellers in
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writing and shall surrender and terminate use of the Illinois License);
(ii) Buyers shall apply for such new license as soon
as is practicable after the Closing Date, and Sellers shall provide
Buyers with all reasonable assistance in the prosecution of such
application; and
(iii) Sellers shall use commercially reasonable
efforts to maintain the Illinois License in full force and effect until
the issuance of such new license, including but not limited to
maintaining the existing bond and delaying the initiation of processing
the termination of the Illinois License until such time as a new
license is issued to Buyers.
V. NON-COMPETITION AND NON-SOLICITATION
SECTION 5.01 Statement of Intent. HMS has agreed to engage in
the transactions contemplated by this Agreement in anticipation that HMS will
benefit from the organization, proprietary information and product technology,
and good will pertaining to and constituting the Business of HRM. As a
consequence, and to preserve the value of the Business, HMS would have not have
agreed to the transactions contemplated by this Agreement unless, for the period
specified in this Article V, the Sellers agreed, on the terms described herein,
to refrain from (a) performing services to third parties in competition with the
Business, (b) disclosing to third parties confidential information proprietary
to the Business and (c) soliciting the employment of persons employed by the
Sellers to operate the Business. The Sellers hereby acknowledge the foregoing
and the importance placed thereon by HMS in the negotiations which led to this
Agreement. The Sellers further acknowledge that, as the owners and operators of
the Business, they each have had free access to the proprietary information
pertaining to the business and operations of the Business and that any violation
by them of the provisions of this Article V would diminish the value of the
Business and thereby have an adverse effect upon HMS. Notwithstanding the
foregoing, in no event shall Rush be prohibited, directly or indirectly, from
engaging in activities on behalf of itself, its affiliates and their respective
faculty and staff (except to the extent otherwise provided in the Rush
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Agreement (as defined below)), whether by reason of the Rush Guaranty (as
defined below), the dissolution of Sellers (however effected) or otherwise.
SECTION 5.02 Definitions. For purposes of this
Article V, the following definitions will apply:
(a) Business. "Business" shall have the meaning ascribed
to such term in the recitals hereof.
(b) Territory. In recognition of the national scope of the
Business, and in order to effect the statement of intent in Section 5.01, the
geographic area covered by this Article V (the "Territory") shall be defined as
the Continental United States.
(c) Competing Organization. "Competing Organization"
will be defined as a business or organization which competes in the Business.
SECTION 5.03 Non-Competition. Each Seller covenants and agrees
that, for a period of three years following the Closing Date (the "Contract
Period"), it will refrain from:
(a) directly or indirectly engaging in competition with the
Business, or owning any interest in, performing any services of the type
conducted by HRM prior to the Closing or participating in or being connected
with any "Competing Organization";
(b) discussing with any existing or potential client of the
Business the present or future availability of services or products of a
Competing Organization; or
(c) making any statement or doing any act intended to cause
any existing or potential client of the Business to make use of the services or
purchase the products of any Competitive Organization.
Notwithstanding the foregoing, nothing herein shall be deemed to
prohibit Sellers or Rush from engaging in collection activities with regard to
the receivables they repurchase pursuant to Section 2.05.
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SECTION 5.04 Non-Solicitation. Each Seller covenants and
agrees that, during the Contract Period, it will refrain from:
(a) directly or indirectly soliciting for employment or
advising or recommending to any other person that they employ or solicit for
employment, any employee of the Business; or
(b) soliciting any other employee of the Business in
connection with the formation or operations of any Competing Organization for
the possible future employment of such other employee.
SECTION 5.05 Confidential Information.
(a) Each Seller acknowledges that, as a result of its
ownership and operation of the Business, it possesses secret and confidential
information which constitute trade secrets and is proprietary to the Business.
(b) Each Seller agrees that, for a period of five years
following the Closing Date, such Seller will not directly or indirectly furnish,
disclose or divulge any confidential or proprietary information, methods,
processes or trade secrets pertaining to the Business (collectively,
"Confidential Information") to any other party or use Confidential Information
without the prior written consent of HMS, in each case except as required by law
or court order.
(c) Notwithstanding the foregoing or anything else contained
in this Agreement to the contrary, for a period of four years following the
Closing Date, Buyers shall grant Sellers, Rush and their representatives, at
such party's request, reasonable access to and the right to make copies of those
records and documents which are included in Assets hereunder, and which relate
to Sellers' operation of the Business prior to the Closing Date. In addition, in
connection with Arc and/or Rush's use of such records and documents, Buyers
agree to make reasonably available to Sellers and Rush those employees of Buyers
with knowledge of the contents of such records and documents. If during such
time Buyers elect to dispose of such records and documents, Buyers shall first
give Sellers and Rush 60 days' prior written notice, during which period such
Sellers
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and/or Rush shall have the right to obtain such records and documents
from Buyers without further consideration. In the event Buyers receive a
subpoena or other document request, including, without limitation, from the
United States Government or any state government or any agency or department
thereof or any third party requesting the submission of any records or documents
which constitute Assets hereunder, Buyers shall immediately notify Sellers and
Rush of such request and allow Sellers and/or Rush to review, at least ten days
prior to any submission, any documents Buyers intend to submit and, if Sellers
or Rush elects, the opportunity to communicate directly with the requesting
party regarding such documents.
SECTION 5.06 Remedies. The Sellers agree and acknowledge that
the rights and obligations set forth under this Article V are of a unique and
special nature and that HMS is, therefore, without an adequate legal remedy in
the event of any Seller's violation of the covenants set forth therein. The
parties, therefore, agree that the covenants made by each Seller in this Article
V shall be specifically enforceable in equity in addition to all other rights
and remedies, at law or in equity, that may be available to HMS.
VI. CONDITIONS PRECEDENT
SECTION 6.01 Conditions Precedent to the Obligations of
Buyers. The obligations of Buyers under this Agreement are subject, at the
option of Buyers, to the satisfaction at or prior to the Closing Date of each of
the following conditions (provided that consummation of the transactions
contemplated herein shall constitute a waiver of such conditions to closing;
provided further, however, such consummation shall not constitute a waiver of
Buyers' rights with respect to any breach by Sellers prior to such consummation,
subject to the provisions of Article VII hereof):
(a) Accuracy of Representations and Warranties. The
representations and warranties of Sellers contained in Sections 3.01(d)(except
with respect to Section 2080.18 of the State Medicaid Manual, Part 2 (HCFA-Pub.
45-2) and whether HRM satisfies the requirements stated in Subsection E.3
thereof) and 3.01(j) of this Agreement shall be true and correct in all
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material respects on and as of the Closing Date, and Sellers shall have
delivered to Buyers a certificate to that effect.
(b) Confirmation Regarding Customers. Annexed to the Letter of
Intent as Exhibit I thereto was a list of HRM's top ten customers, based upon
average monthly booked revenue during the five month period January through May
1999, in each of its four service offerings (MAS, PRT, Billing and Outsourcing
and HBS). Through its due diligence, Buyers shall have confirmed the average
monthly revenue presented for each of the listed customers and that, except as
set forth on Exhibit I, such customers have neither given notice to HRM of their
intention to terminate HRM's services or materially diminish the scope of the
relationship nor so advised Buyers in the course of Buyers' confirmatory due
diligence, except for those customers projected by HRM to generate no or less
revenue in Fiscal Year 2000. Buyers' obligation to close shall be subject to
Buyers confirming the above with respect to HRM customers representing not less
than 75% of the aggregate current revenue run rate for the "top 10" customers
set forth for each product line in Exhibit I.
(c) Rush Agreement. Rush shall have entered into an agreement
with HMS in the form of Exhibit IV to the Letter of Intent and submitted to
Shared Medical Systems Corporation the data request appended thereto (the "Rush
Agreement").
(d) Rush Guaranty. Rush shall have delivered to Buyers a
guaranty of Sellers' obligations hereunder (the "Rush Guaranty"). A form of such
guaranty is annexed hereto as Exhibit B.
(e) Legal Actions or Proceedings. No legal action or
proceeding shall have been instituted or threatened seeking to restrain,
prohibit, invalidate or otherwise materially adversely affect the consummation
of the transactions contemplated hereby.
SECTION 6.02 Conditions Precedent to the Obligations of
Sellers. The obligations of Sellers under this Agreement are subject, at the
option of Sellers, to the satisfaction at or prior to the Closing Date of the
condition that no legal action or proceeding shall have been instituted or
threatened seeking to restrain, prohibit, invalidate or otherwise materially
adversely affect the consummation of the transactions contemplated hereby.
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VII. SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
SECTION 7.01 Survival of Representations. Subject as set forth
below, (i) all representations and warranties (other than representations and
warranties as to Tax matters) made by any party hereto in this Agreement or
pursuant hereto shall survive for the period commencing on the date hereof and
ending on the eighteen month anniversary of the Closing Date, and (ii) the
representations and warranties as to Tax matters made by any party hereto in
this Agreement or pursuant hereto shall survive for the applicable Tax statute
of limitation period, including any extensions or waivers thereof.
SECTION 7.02 Tax Indemnity.
(a) Sellers hereby agree to jointly and severally indemnify,
defend and hold Buyers harmless from and against:
(i) any and all Taxes incurred by, imposed upon or
attributable to Sellers for all periods prior to (and up to and
including) the close of business on the Closing Date, including
reasonable legal fees and expenses incurred by any party hereto and
relating to such Taxes; and
(ii) subject to the provisions of Section 4.05(a)
hereof, any and all Taxes incurred by, imposed upon or attributable to
Sellers, arising out of the consummation of any of the transactions
contemplated hereby, including reasonable legal fees and expenses
incurred by any party hereto and relating to such Taxes.
(b) Buyers hereby agree to indemnify, defend and hold Sellers
harmless from and against:
(i) any and all Taxes incurred by, imposed upon or
attributable to Buyers for all periods after the close of business on
the Closing Date, including reasonable legal fees and expenses incurred
by any party hereto and relating to such Taxes; and
(ii) subject to the provisions of Section 4.05(a)
hereof, any and all Taxes incurred by, imposed upon or attributable to
Buyers, arising out of the consummation
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of any of the transactions contemplated hereby, including reasonable
legal fees and expenses incurred by any party hereto and relating to
such Taxes.
(c) For purposes of this Section 7.02, any interest, penalty
or additional charge included in Taxes shall be deemed to be a Tax for the
period in which the items on which the interest, penalty or additional charge is
based occurs.
(d) The indemnity provided for in this Section 7.02 shall be
independent of any other indemnity provision hereof and, anything in this
Agreement to the contrary notwithstanding, shall survive until the expiration of
the applicable statutes of limitation, including any extensions or waivers
thereof, for the Taxes referred to herein and any Taxes, legal fees and expenses
subject to indemnification under this Section 7.02 shall not be subject to
indemnification under Section 7.03.
SECTION 7.03 General Indemnity.
(a) Subject to the terms and conditions of this Article VII,
Sellers hereby agree to indemnify, defend and hold Buyers harmless from and
against all demands, claims, actions or causes of action, assessments, losses,
damages, liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and expenses (collectively,
"Damages"), asserted against, resulting to, imposed upon or incurred by Buyers
by reason of or resulting from:
(i) a breach of any representation, warranty or
covenant of Sellers contained in or made pursuant to this Agreement;
(ii) any liabilities or obligations of, or claims
against or imposed on, Sellers (whether absolute, accrued, contingent
or otherwise and whether a contractual, or any other type of liability,
obligation or claim) not assumed by Buyers pursuant to this Agreement
relating to Sellers' conduct of the Business and based upon facts,
circumstances, events or conditions existing or occurring on or prior
to the Closing Date;
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(iii) any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) in respect of (A) any of
the actions, suits or proceedings or threatened actions, suits or
proceedings described on Schedule 3.01(j) hereto, or (B) any action,
suit or proceeding commenced after the Closing Date based upon an
event, circumstance or condition existing or occurring or a claim
arising on or prior to the Closing Date in respect of Sellers' conduct
of the Business; and
(iv) any liability in respect of any failure by
Sellers to conduct the Business on or prior to the Closing Date in
compliance with all material governmental licenses, franchises and
permits and all applicable regulatory rules and regulations in force as
of the Closing Date.
(b) Subject to the terms and conditions of this Article VII,
Buyers hereby agree to jointly and severally indemnify, defend and hold Sellers
harmless from and against all Damages asserted against, resulting to, imposed
upon or incurred by Sellers, by reason of or resulting from:
(i) a breach of any representation, warranty or
covenant of Buyers contained in or made pursuant to this Agreement;
(ii) the failure of Buyers to pay, perform and
discharge when due the liabilities and obligations assumed by Buyers
pursuant to this Agreement;
(iii) any liabilities or obligations (whether
absolute, accrued, contingent or otherwise) in respect of any action,
suit or proceeding based on an event occurring or claim arising after
the Closing Date, including but not limited to any such actions, suits
or proceedings based on or arising out of the activities of the
Retained Employees, in their capacities as such, during the Transition
Period; and
(iv) any liability in respect of any failure by
Buyers to conduct the Business after the Closing Date in compliance
with all material governmental licenses,
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franchises and permits and all
applicable regulatory rules and regulations from time to time in force.
SECTION 7.04 Conditions of Indemnification. The respective
obligations and liabilities of Sellers, on the one hand, and Buyers, on the
other hand (the "indemnifying party"), to the other (each, collectively, the
"party to be indemnified") under Sections 7.02 and 7.03 hereof with respect to
claims resulting from the assertion of liability by third parties shall be
subject to the following terms and conditions:
(a) within 15 days after receipt of notice of commencement of
any action or the assertion in writing of any claim by a third party, the party
to be indemnified shall give the indemnifying party written notice thereof
together with a copy of such claim, process or other legal pleading, and the
indemnifying party shall have the right to undertake the defense thereof by
representatives of its own choosing;
(b) in the event that the indemnifying party, by the 30th day
after receipt of notice of any such claim (or, if earlier, by the tenth day
preceding the day on which an answer or other pleading must be served in order
to prevent judgment by default in favor of the person asserting such claim),
does not elect to assume control of the defense of such claim, the party to be
indemnified will (upon further notice to the indemnifying party) have the right
to undertake the defense, compromise or settlement of such claim on behalf of
and for the account and risk of the indemnifying party, subject to the right of
the indemnifying party to assume control of the defense of such claim at any
time prior to settlement, compromise or final determination thereof, provided
that the indemnifying party shall be given at least 15 days prior written notice
of the effectiveness of any such proposed settlement or compromise; and
(c) anything in this Section 7.04 to the contrary
notwithstanding (i) if there is a reasonable probability that a claim may
materially and adversely affect the indemnifying party other than as a result of
money damages or other money payments, the indemnifying party shall have the
right, at its own cost and expense, to compromise or settle such claim, but (ii)
the indemnifying party shall not, without the prior written consent of the party
to be indemnified, settle or compromise any claim or
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<PAGE> 51
consent to the entry of any judgment which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to the party to be
indemnified a release from all liability in respect of such claim.
SECTION 7.05 Direct Claims. Any claim by the party to be
indemnified for indemnification other than with respect to claims resulting from
the assertion of liability by third parties (a "Direct Claim") will be asserted
by giving the indemnifying party reasonably prompt written notice thereof, and
the indemnifying party will have a period of twenty (20) calendar days within
which to respond in writing to such Direct Claim. If the indemnifying party does
not so respond within such twenty (20) calendar day period, the indemnifying
party will be deemed to have rejected such claim, in which event the party to be
indemnified will be free to pursue another remedy to which it may be entitled.
SECTION 7.06 Certain Information. In connection with any
indemnification provided in this Article VII, the indemnified party shall
cooperate in all reasonable requests of the indemnifying party and each party
shall furnish or cause to be furnished to the other (at reasonable times and at
the expense of the party requesting such information) upon request as promptly
as practicable such information (including access to books and records of the
Business and to employees familiar with the affairs thereof) and assistance
relating to the Business as is reasonably necessary for the defense of any
claim, suit or proceeding.
SECTION 7.07 Limitations on Liability of Sellers.
(a) The indemnities set forth in Section 7.03 and all
representations, warranties and covenants hereunder shall survive for a period
of eighteen months following the Closing Date, unless such indemnities,
representations, warranties and covenants of the Sellers hereunder pertain to
Tax claims, in which event they shall survive until expiration of the applicable
statute of limitation period. Upon the expiration of such respective periods,
the Sellers shall have no liability for Damages under such indemnification
provisions unless and to the extent the Buyers have been given notice of a claim
asserting liability by a third party prior to the expiration of such
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respective periods and thereafter provides notice to the Sellers in the manner
provided in Section 7.04 above prior to the expiration of such periods.
(b) If the Sellers become liable for Damages to Buyers
hereunder, the Sellers shall be entitled to a credit or offset against such
liability of an amount equal to $50,000 (the "Threshold"). At such time as the
aggregate of all Damages exceeds the Threshold, the Buyers shall be entitled to
recover from the Sellers any and all amounts for which a claim for indemnity has
been made, without regard to the Threshold. The Threshold shall not apply to any
Damages relating to (i) HRM's compliance with respect to Section 2080.18 of the
State Medicaid Manual, Part 2 (HCFA-Pub. 45-2) and whether HRM satisfies the
requirements stated in Subsection E-3 thereof, (ii) any matter which, if
properly reflected in the Final Balance Sheet, would have resulted in a
dollar-for dollar reduction in the Purchase Price or (iii) those matters set
forth in Sections 7.03(a)(iii) and (iv) hereof.
(c) If the Sellers become liable for Damages to Buyers
hereunder, in no event shall the liability of the Sellers exceed $2,700,000;
provided, however, that nothing in this section 7.07(c) shall limit, in any
manner, any remedy at law or in equity to which Buyers may be entitled as a
result of intentional fraud by any party to this Agreement.
SECTION 7.08 Anti-Sandbag Provisions. Notwithstanding anything
to the contrary contained herein, except for matters relating to (i) the
Estimated, Closing and Final Balance Sheets and (ii) HRM's conformance with
Section 2080.18 of State Medicaid Manual, Part 2 (HFCA-Pub 45-2) entitled "State
Contracts with Outside Parties to Verify for Providers a Medicaid Recipient's
Eligibility", (x) Buyers shall have no rights, including, without limitation,
any right to terminate this Agreement, with respect to any fact, event,
circumstance or condition of which it has knowledge on the date of its delivery
of an executed copy hereof and (y) Buyers shall have no right to indemnification
or other recovery or recourse with respect to any fact, event, circumstance or
condition of which Sellers shall demonstrate by clear and convincing evidence
that Buyers had knowledge of as of the Closing.
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SECTION 7.09 No Special, Consequential or Punitive Damages.
Notwithstanding anything to the contrary contained in this Agreement, the
indemnification provided by Sellers hereunder shall exclude claims for, and
indemnification for losses based on, consequential, special and punitive damages
and for damages based upon a multiple of financial results.
SECTION 7.10 Limitation of Remedies. The provisions of this
Article 7 shall constitute the sole remedy for either party in respect of any
breach of a representation, warranty or covenant by the other party absent
fraud.
VIII. MISCELLANEOUS
SECTION 8.01 Bulk Transfer Laws. Buyers hereby waive
compliance by Sellers with any applicable bulk transfer laws including, without
limitation, the bulk transfer provisions of the Uniform Commercial Code of any
state, or any similar statute that may be applicable to the sale or transfer of
the Assets hereunder with respect to the transactions contemplated hereby.
SECTION 8.02 Expenses, Etc. Sellers, on the one hand, and
Buyers on the other hand, shall not have any obligation to pay any of the fees
and expenses of the other party incident to the negotiation, preparation and
execution of this Agreement, including the fees and expenses of counsel,
accountants, investment bankers and other experts. Sellers, on the one hand, and
Buyers on the other hand, will indemnify the other and hold the other harmless
from and against any claims for finder's fees or brokerage commissions in
relation to or in connection with such transactions as a result of any agreement
or understanding between such indemnifying party and any third party.
SECTION 8.03 Execution in Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument.
SECTION 8.04 Notices. All notices that are required or may be
given pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if delivered by hand or via a national overnight
courier service or mailed by registered or certified mail postage prepaid, as
follows:
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(a) If to Sellers:
c/o ArcVentures, LLC
820 West Jackson Boulevard
Chicago, Illinois 60607
Attention: Marie E. Sinioris, President
and to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Gary R. Silverman, Esq.
(b) If to Buyers:
c/o Health Management Systems, Inc.
401 Park Avenue South
New York, New York 10016
Attention: Paul J. Kerz, President
and to:
Coleman, Rhine & Goodwin LLP
750 Lexington Avenue
New York, New York 10022
Attention: Bruce S. Coleman, Esq.
(c) If to Rush:
Rush-Presbyterian St. Luke's Medical Center
1725 West Harrison
Suite 364
Chicago, Illinois 60612
Attention: President
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and to:
Rush-Presbyterian St. Luke's Medical Center
Office of Legal Affairs
1700 West Van Buren
Suite 301
Chicago, Illinois 60612
Attention: Vice President and General Counsel
or such other address or addresses as Sellers, on the one hand, or Buyers, on
the other hand, shall have designated by notice to the other in writing. Any
such notice, claim or other communication shall be deemed conclusively to have
been given and received (i) on the first business day following the day timely
received by a national overnight courier, with the cost of delivery prepaid;
(ii) on the fifth business day following the day duly sent by certified or
registered United States mail, postage prepaid and return receipt requested; or
(iii) when otherwise personally delivered to the addressee.
SECTION 8.05 Waivers. Sellers, on the one hand, and Buyers, on
the other hand, may, by written notice to the other, (i) extend the time for the
performance of any of the obligations or other actions of the other under this
Agreement; (ii) waive any inaccuracies in the representations or warranties of
the other contained in this Agreement or in any document delivered pursuant to
this Agreement; (iii) waive compliance with any of the conditions or covenants
of the other contained in this Agreement; or (iv) waive performance of any of
the obligations of the other under this Agreement. Except as provided in the
preceding sentence, no action taken pursuant to this Agreement, including,
without limitation, any investigation by or on behalf of Sellers, on the one
hand, and Buyers, on the other hand, shall be deemed to constitute a waiver by
the party taking such action of compliance with any representations, warranties,
covenants or agreements contained in this Agreement. The waiver by Sellers, on
the one hand, and Buyers, on the other hand, of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach.
SECTION 8.06 Amendments, Supplements, Etc. At any time this
Agreement may be amended or supplemented by such additional agreements, articles
or certificates as may be
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determined by the parties hereto to be necessary, desirable or expedient to
further the purposes of this Agreement, or to clarify the intention of the
parties hereto, or to add to or modify the covenants, terms or conditions hereof
or to effect or facilitate any governmental approval or acceptance of this
Agreement or to effect or facilitate the consummation of any of the transactions
contemplated hereby. Any such instrument must be in writing and signed by the
parties.
SECTION 8.07 Entire Agreement. This Agreement, its Exhibits
and Schedules including, without limitation, the Bill of Sale, the Letter of
Intent and the documents executed on the Closing Date in connection herewith,
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral and written, between the parties hereto with respect to the subject matter
hereof. No representation, warranty, promise, inducement or statement of
intention has been made by any party which is not embodied in this Agreement or
such other documents, and neither Sellers, on the one hand, nor Buyers, on the
other hand, shall be bound by, or be liable for, any alleged representation,
warranty, promise, inducement or statement of intention not embodied herein or
therein.
SECTION 8.08 Applicable Law.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed entirely within the State of New York.
SECTION 8.09 Dispute Resolution; Arbitration. Any dispute
between the parties which is not resolved in the normal course of business or as
otherwise provided hereunder shall be resolved as follows:
(a) Within ten days after sending written notice by either
party, designees (the "Designees") of each of Buyers and Sellers shall meet and
attempt to resolve the dispute.
(b) If the dispute is not resolved with 45 days after the
sending of the initial written notice, then either party may commence
arbitration as specified in Section 8.09(c) below.
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(c) All disputes between the parties arising from or relating
to this Agreement ("Disputes") shall be settled by final and binding arbitration
conducted in New York City in accordance with and subject to this Section
8.09(c). Any such arbitration shall occur in the City and State of New York in
accordance with the rules of the American Arbitration Association then in
effect. Notwithstanding anything to the contrary which may now or hereafter be
contained in the rules of the American Arbitration Association, each party will
appoint one person to hear and determine the dispute within 20 days after
receipt by one party of a written request for arbitration made by the other. The
two persons so chosen shall, within 20 business days of their appointment,
appoint a third impartial arbitrator. Each arbitrator shall be a member of the
Bar of the State of New York. The majority decision of the arbitrators will be
final and conclusive upon both parties hereto. If either party fails to
designate its arbitrator as described above, then the arbitrator designated by
the other party will act as the sole arbitrator and will be deemed to be the
single, mutually approved arbitrator to resolve the controversy. In the event
that the parties are unable to agree upon a rate of compensation for the
arbitrators, they will be compensated for their services at a rate to be
determined by the American Arbitration Association. Each party shall bear its
own costs and expenses of arbitration including, without limitation, filing
fees, attorneys' fees and costs of transcripts, and each party hereby agrees to
pay one half (1/2) of the compensation to be paid to the arbitrators in any such
arbitration. The arbitrators shall not have power or competence to allocate any
such costs, expenses, fees or share of arbitrators' compensation between the
parties, except that the arbitrators shall have the right to award reasonable
attorneys' fees to the prevailing party in accordance with the equities. IN THE
EVENT OF ANY LEGAL ACTION RELATING TO THE ARBITRATION, INCLUDING ANY ACTION TO
STAY THE ARBITRATION, TO VACATE, MODIFY OR CORRECT ANY AWARD OR OTHERWISE, ANY
SUCH ACTION SHALL BE BROUGHT IN A STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION LOCATED IN THE CITY AND STATE OF NEW YORK and the prevailing party
in the action as determined by the court will be entitled to recover from the
other its court costs and reasonable attorneys' fees.
SECTION 8.10 Binding Effect; Benefits. This Agreement shall
inure to the benefit of and be binding upon the parties
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hereto and their respective successors and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
SECTION 8.11 Assignability. Neither this Agreement nor any of
the parties' rights hereunder shall be assignable by any party hereto without
the prior written consent of the other parties hereto.
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IN WITNESS WHEREOF, this Asset Purchase Agreement has been
duly executed and delivered by the parties hereto as of the date first above
written.
ARCVENTURES, LLC
By:
----------------------------
Marie E. Sinioris, President
HEALTH RECEIVABLES MANAGEMENT, LLC
By:
----------------------------
Marie E. Sinioris, President
HEALTH MANAGEMENT SYSTEMS, INC.
By:
---------------------------
Paul J. Kerz, President
QUALITY STANDARDS IN MEDICINE, INC.
By:
---------------------------
Alan L. Bendes, Vice President
54
<PAGE> 1
Exhibit 10
FOURTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY
FOURTH AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of
July 15, 1999 (the "Fourth Amendment") among HEALTH MANAGEMENT SYSTEMS, INC.
(the "Borrower"), ACCELERATED CLAIMS PROCESSING, INC. ("ACP"), QUALITY MEDI-CAL
ADJUDICATION, INCORPORATED ("QMA"), HEALTH CARE MICROSYSTEMS, INC. ("HCM"), CDR
ASSOCIATES INC. ("CDR"), HSA MANAGED CARE SYSTEMS, INC. ("HSA"), QUALITY
STANDARDS IN MEDICINE, INC. ("QSM") and THE CHASE MANHATTAN BANK (the "Bank").
PRELIMINARY STATEMENT. The Borrower, ACP, QMA, HCM, CDR and
the Bank have entered into a Credit Agreement and Guaranty dated as of July 15,
1996, as amended by First Amendment to Credit Agreement and Guaranty dated as of
September 9, 1996, the Second Amendment to Credit Agreement and Guaranty dated
as of April 16, 1997 and the Third Amendment to Credit Agreement and Guaranty
dated as of June 30, 1997 (as so amended and as it may be further amended,
supplemented or modified, the "Credit Agreement"). Any term used herein and not
otherwise defined herein shall have the meaning assigned to such term in the
Credit Agreement.
The Borrower, ACP, QMA, HCM, CDR, HSA, QSM and the Bank have
agreed to amend the Credit Agreement as hereinafter set forth.
SECTION 1. Amendment to Credit Agreement. The Credit Agreement
is, effective as of the date hereof and subject to the satisfaction of the
condition precedent set forth in Section 2 hereof, hereby amended as follows:
(a) The following definition shall be added in its proper
alphabetical order:
""Fourth Amendment" means the Fourth Amendment to Credit
Agreement and Guaranty dated as of July 15, 1999 among the Borrower, each of the
Guarantors and the Bank.";
(b) The definition of "Revolving Credit Facility Termination
Date" is amended in full to read as follows:
""Revolving Credit Facility Termination Date" means September
30, 1999."; and
(c) Section 9.02. Minimum Consolidated Tangible Net Worth, is
hereby amended by replacing "October 1998, January 1999, April 1999" with
"October 1998, January 1999, April 1999, July 1999".
<PAGE> 2
SECTION 2. Conditions of Effectiveness. This Fourth Amendment
shall become effective as of the date on which each of the following conditions
shall have been fulfilled:
(a) the Borrower, ACP, QMA, HCM, CDR, HSA, QSM and the Bank shall each have
executed and delivered this Fourth Amendment; and
(b) the Bank shall have received a certificate signed by a duly authorized
officer of the Borrower dated the date hereof (a) certifying that no Default or
Event of Default has occurred and is continuing; and (b) with computations
demonstrating compliance with the covenants contained in Article IX of the
Credit Agreement.
SECTION 3. Reference to and Effect on the Loan Documents. (a)
Upon the effectiveness of Section 1 hereof, on and after the date hereof each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import, and each reference in the other Loan Documents
to the Credit Agreement, shall mean and be a reference to the Credit Agreement
as amended hereby.
(b) Except as specifically amended above, the Credit Agreement
and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Fourth
Amendment shall not operate as a waiver of any right, power or remedy of the
Bank under any of the Loan Documents, nor constitute a waiver of any provision
of any of the Loan Documents, and, except as specifically provided herein, the
Credit Agreement and each other Loan Document shall remain in full force and
effect and are hereby ratified and confirmed.
SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to
reimburse the Bank on demand for all out-of-pocket costs, expenses and charges
(including, without limitation, all fees and charges of legal counsel for the
Bank) incurred by the Bank in connection with the preparation, reproduction,
execution and delivery of this Fourth Amendment and any other instruments and
documents to be delivered hereunder. In addition, the Borrower shall pay any and
all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery, filing or recording of this Fourth
Amendment and any other instruments and documents to be delivered hereunder, and
agrees to save the Bank harmless from and against any and all liabilities with
respect to or resulting from any delay in paying or omission to pay such taxes
or fees.
SECTION 5. Governing Law. This Fourth Amendment shall be
governed by and construed in accordance with the laws of the State of New York.
SECTION 6. Headings. Section headings in this Fourth Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Fourth Amendment for any other purpose.
SECTION 7. Counterparts. This Fourth Amendment may be executed
in
2
<PAGE> 3
any number of counterparts, all of which taken together shall constitute one and
the same instrument, and any party hereto may execute this Fourth Amendment by
signing any such counterpart.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed as of the day and year first above written.
HEALTH MANAGEMENT SYSTEMS, INC.
By
--------------------------------------
Name:
Title:
ACCELERATED CLAIMS PROCESSING, INC.
By
--------------------------------------
Name:
Title:
QUALITY MEDI-CAL ADJUDICATION, INCORPORATED
By
--------------------------------------
Name:
Title:
HEALTH CARE MICROSYSTEMS, INC.
By
--------------------------------------
Name:
Title:
CDR ASSOCIATES, INC.
By
--------------------------------------
Name:
Title:
4
<PAGE> 5
HSA MANAGED CARE SYSTEMS, INC.
By
--------------------------------------
Name:
Title:
QUALITY STANDARDS IN MEDICINE, INC.
By
--------------------------------------
Name:
Title:
THE CHASE MANHATTAN BANK
By
--------------------------------------
Name:
Title:
5
<PAGE> 6
AMENDED AND RESTATED PROMISSORY NOTE
Reference is made to the $30,000,000 Amended and Restated
Promissory Note dated June 30, 1997 of Health Management
Systems, Inc. and payable to The Chase Manhattan Bank (the
"Note"). To the extent that this Amended and Restated
Promissory Note amends the Note, the Note is amended. To the
extent this Amended and Restated Promissory Note restates the
Note, the Note is restated.
$30,000,000 July 15, 1999
New York, New York
FOR VALUE RECEIVED, the undersigned, Health Management Systems, Inc., a
New York corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
The Chase Manhattan Bank (the "Bank") at its office located at 1411 Broadway,
Fifth Floor, New York, New York 10018, in lawful money of the United States and
in immediately available funds, the principal amount of THIRTY MILLION DOLLARS
($30,000,000) or the aggregate unpaid principal amount of all Loans (as defined
in the Credit Agreement hereinafter defined) made to the Borrower by the Bank
pursuant to the Credit Agreement, whichever is less, on the Revolving Credit
Facility Termination Date (as defined in the Credit Agreement), and to pay
interest from the date of this Note, in like money, at said office at the time
and at a rate per annum as provided in the Credit Agreement.
The Borrower hereby authorizes the Bank to endorse on the Schedule
annexed to this Note the amount of all Loans made to the Borrower and all
payments of principal amounts in respect of such Loans, which endorsements
shall, in the absence of manifest error, be conclusive as to the outstanding
principal amount of all Loans;
<PAGE> 7
provided, however, that the failure to make such notation with respect to any
Loan or payment shall not limit or otherwise affect the obligation of the
Borrower under the Credit Agreement or this Note.
This Note is the Note referred to in the Credit Agreement and Guaranty
dated as of July 15, 1996, among the Borrower, the Bank, Accelerated Claims
Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care
microsystems, Inc. and CDR Associates, Inc., as amended by the First Amendment
to Credit Agreement and Guaranty dated as of September 9, 1996, as further
amended by Second Amendment to Credit Agreement and Guaranty dated as of April
16, 1997, as further amended by Third Amendment to Credit Agreement and Guaranty
dated as of June 30, 1997 and as further amended by Fourth Amendment to Credit
Agreement and Guaranty dated as of July 15, 1999 (as so amended and as it may be
further amended, modified or supplemented, the "Credit Agreement"). The Credit
Agreement, among other things, contains provisions for acceleration of the
maturity of this Note upon the happening of certain stated events and also for
prepayments on account of the principal of this Note prior to the maturity of
this Note upon the terms and conditions specified in the Credit Agreement.
2
<PAGE> 8
This Note shall be governed by the laws of the State of New York, provided that,
as to the maximum rate of interest which may be charged or collected, if the
laws applicable to the Bank permit it to charge or collect a higher rate than
the laws of the State of New York, then such law applicable to the Bank shall
apply to the Bank under this Note.
HEALTH MANAGEMENT SYSTEMS, INC.
By_______________________________
Name: Alan L. Bendes
Title: Senior Vice President and
Chief Financial Officer
3
<PAGE> 9
<TABLE>
Principal
Balance Notation
Amount of Amount of Remaining Made
Date Loan Payment Unpaid By
- ---- ---- ------- ------ --
<S> <C> <C> <C> <C>
</TABLE>
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at July 31, 1999 (unaudited) and the
Interim Condensed Consolidated Statement of Operations for the nine months ended
July 31, 1999 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000861179
<NAME> HEALTH MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-1-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 12,986
<SECURITIES> 16,313
<RECEIVABLES> 59,312
<ALLOWANCES> 1,978
<INVENTORY> 0
<CURRENT-ASSETS> 90,920
<PP&E> 30,228
<DEPRECIATION> 22,761
<TOTAL-ASSETS> 122,503
<CURRENT-LIABILITIES> 31,956
<BONDS> 0
0
0
<COMMON> 184
<OTHER-SE> 89,006
<TOTAL-LIABILITY-AND-EQUITY> 122,503
<SALES> 83,881
<TOTAL-REVENUES> 83,881
<CGS> 75,182
<TOTAL-COSTS> 75,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 599
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 9,022
<INCOME-TAX> 3,545
<INCOME-CONTINUING> 8,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,477
<EPS-BASIC> .32
<EPS-DILUTED> .31
</TABLE>
