<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
HEALTHPLAN SERVICES CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 13-3787901
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3501 FRONTAGE ROAD
TAMPA, FLORIDA 33607
(813) 289-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
JAMES K. MURRAY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEALTHPLAN SERVICES CORPORATION
3501 FRONTAGE ROAD
TAMPA, FLORIDA 33607
(813) 289-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
With copies to:
<TABLE>
<S> <C>
DAVID C. SHOBE, ESQ. DAVID C. GRORUD, ESQ.
FOWLER, WHITE, GILLEN, BOGGS, FREDRIKSON & BYRON, P.A.
VILLAREAL AND BANKER, P.A. 1100 INTERNATIONAL CENTRE
501 EAST KENNEDY BOULEVARD, SUITE 1700 900 SECOND AVENUE SOUTH
TAMPA, FLORIDA 33602 MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (813) 222-1123 TELEPHONE: (612) 347-7032
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and upon
consummation of the Merger, as described in this Registration Statement.
---------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM PROPOSED
AMOUNT OFFERING MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK, PAR VALUE $0.01 PER
SHARE................................ 1,699,998 shares(2) $13.36 $22,719,483.28 $6,884.69
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</TABLE>
(1) Pursuant to Rule 457(f)(1), 457(f)(3) and 457(c) promulgated under the
Securities Act of 1933, as amended, and estimated solely for purposes of
calculating the registration fee, the proposed maximum aggregate offering
price is $22,719,483.28, which equals the average of the high and low prices
of the common stock, $.01 par value ("HRM Common Stock"), of Health Risk
Management, Inc. ("HRM") of $14.50, as reported on the Nasdaq National
Market on November 8, 1996, multiplied by the total number of shares of HRM
Common Stock (including shares issuable pursuant to the exercise of
outstanding options to purchase HRM Common Stock) to be cancelled in the
merger of HRM with and into a subsidiary of HealthPlan Services Corporation
("HPS") (the "Merger"), less the amount of cash per share ($9.68603) to be
paid by HPS in connection with the Merger multiplied by the total number of
shares of HRM Common Stock (including shares issuable pursuant to the
exercise of outstanding options to purchase HRM Common Stock) to be
cancelled in the Merger. The proposed maximum offering price per share is
equal to the proposed maximum aggregate offering price determined in the
manner described in the preceding sentence divided by the number of HPS
common shares, $.01 par value, that could be issued in the Merger based on
the initial share exchange ratio of .360208 (which share exchange ratio may
be adjusted under certain circumstances as provided in the Plan and
Agreement of Merger dated September 12, 1996, as amended by and among HRM,
HPS and HealthPlan Services Alpha Corporation (the "Merger Agreement"),
described in the Registration Statement).
(2) Plus such indeterminable number of additional shares issuable upon
adjustment of the share exchange ratio as provided in the Merger Agreement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
HEALTHPLAN SERVICES CORPORATION
CROSS-REFERENCE SHEET SHOWING THE LOCATION IN THE
PROXY STATEMENT/PROSPECTUS OF INFORMATION REQUIRED
BY PART I OF FORM S-4 PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
LOCATION OR HEADING IN PROXY
ITEM STATEMENT/PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Forepart of Registration Statement and
Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Available Information; Incorporation of
Certain Documents by Reference; Table of
Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information............. Outside Front Cover Page of Prospectus;
Summary; Risk Factors
4. Terms of the Transaction................... Summary; The Merger; Description of HPS
Capital Stock; Comparison of Shareholder
Rights; Certain Federal Income Tax
Consequences
5. Pro Forma Financial Information............ Summary; Unaudited Pro Forma Consolidated
Financial Statements
6. Material Contracts With the Company Being
Acquired................................... Summary; The Merger
7. Additional Information Required For
Reoffering by Persons and Parties Deemed to
be Underwriters............................ *
8. Interests of Named Experts and Counsel..... Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ *
10. Information With Respect to S-3
Registrants................................ Summary; The Companies
11. Incorporation of Certain Information by
Reference.................................. Incorporation of Certain Documents by
Reference
12. Information With Respect to S-2 or S-3
Registrants................................ *
13. Incorporation of Certain Information by
Reference.................................. *
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants.......... *
15. Information With Respect to S-3
Companies.................................. *
16. Information With Respect to S-2 or S-3
Companies.................................. *
17. Information With Respect to Companies Other
Than S-3 or S-2 Companies.................. Summary; The Companies; Selected Historical
Financial Information of HRM; Management's
Discussion and Analysis of Financial
Condition and Results of Operations of HRM;
Principal Shareholders of HRM; Index to
Financial Statements
18. Information if Proxies, Consents or
Authorizations Are to be Solicited......... Incorporation of Certain Documents by
Reference; Notice of Special Meeting;
Summary; The Special Meeting; The Merger;
Other Matters
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or
in an Exchange Offer....................... *
</TABLE>
- ---------------
* Not Applicable
<PAGE> 3
HEALTH RISK MANAGEMENT, INC.
8000 WEST 78TH STREET
MINNEAPOLIS, MINNESOTA 55439
TO THE SHAREHOLDERS OF HEALTH RISK MANAGEMENT, INC.:
You are cordially invited to attend a Special Meeting of Shareholders of
Health Risk Management, Inc. ("HRM") to be held at HRM's corporate offices
located at 7900 West 78th Street, Fourth Floor, Minneapolis, Minnesota, on
, December , 1996, at a.m., Minnesota time.
At the Special Meeting you will be asked to vote on a proposal to approve
and adopt a Plan and Agreement of Merger, dated September 12, 1996, as amended
(the "Merger Agreement"), providing for the merger (the "Merger") of HRM with
and into a wholly owned subsidiary of HealthPlan Services Corporation ("HPS").
Upon consummation of the Merger, HRM will become a wholly owned subsidiary of
HPS, and HRM shareholders will be entitled to receive $9.68603 per share in cash
and 0.360208 of an HPS common share for each share of HRM common stock held by
them. The 0.360208 share exchange ratio is subject to possible increase or
decrease, depending on the market price of HPS shares during the five trading
days preceding the consummation of the Merger, as set forth in the Merger
Agreement.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND THE ANNEXES THERETO,
WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY.
The Board of Directors of HRM has carefully considered the terms and
conditions of the proposed Merger. In addition, in connection with its approval
of the transaction with HPS, the Board of Directors of HRM has received a
written opinion from Robertson, Stephens & Company LLC dated September 11, 1996,
to the effect that, as of such date and subject to certain assumptions, factors
and limitations set forth therein, the consideration to be received by the HRM
shareholders in the Merger was fair, from a financial point of view, to the
shareholders of HRM.
Your Board of Directors has determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, HRM and the HRM shareholders. THE BOARD RECOMMENDS THAT YOU VOTE
"FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE MERGER.
Approval of the Merger Agreement and the Merger requires the affirmative
vote of the holders of a majority of the outstanding shares of HRM common stock
entitled to vote at the meeting. As of November , 1996, the executive officers
and directors of HRM and certain of their affiliates, who may be deemed to be
beneficial owners of approximately 14.4% of the outstanding HRM common stock,
have advised HRM that they intend to vote in favor of the Merger. Any holder of
shares of HRM common stock is entitled to dissent from the Merger and demand the
fair value of the shares of HRM common stock held by such shareholder in cash,
if such dissenting shareholder follows the procedures provided by applicable
law.
In view of the importance of the action to be taken at this important
Special Meeting of HRM shareholders, we urge you to review carefully the
accompanying Notice of Special Meeting of Shareholders and the Proxy
Statement/Prospectus, including the annexes thereto, which also include
information on HPS and HRM. Whether or not you expect to attend the Special
Meeting, please complete, sign and date the enclosed proxy and return it as
promptly as possible.
Sincerely,
Gary T. McIlroy, M.D.
Chairman and Chief Executive Officer
<PAGE> 4
HEALTH RISK MANAGEMENT, INC.
8000 WEST 78TH STREET
MINNEAPOLIS, MINNESOTA 55439
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER , 1996
---------------------
To the Shareholders of
Health Risk Management, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Health
Risk Management, Inc., a Minnesota corporation ("HRM"), will be held on ,
December , 1996 at a.m., Minnesota time, at HRM's corporate offices
located at 7900 West 78th Street, Fourth Floor, Minneapolis, Minnesota, for the
following purposes:
1. To consider and vote on a proposal (the "Merger Proposal") to
approve and adopt the Plan and Agreement of Merger, dated September 12,
1996, as amended (the "Merger Agreement"), by and among HRM, HealthPlan
Services Corporation, a Delaware corporation ("HPS"), and HealthPlan
Services Alpha Corporation, a Delaware corporation and a wholly owned
subsidiary of HPS formed solely for the purpose of effecting the Merger
("Subcorp"), pursuant to which, among other things, (i) HRM will be merged
with and into Subcorp with the result that HRM becomes a wholly owned
subsidiary of HPS, and (ii) each outstanding share (other than shares held
by HRM shareholders who validly exercise dissenters' rights) of HRM common
stock, par value $0.01 per share ("HRM Common Stock"), will be converted
into the right to receive $9.68603 per share in cash and 0.360208 of an HPS
common share, par value $0.01 per share, which share exchange ratio is
subject to possible increase or decrease as set forth in the Merger
Agreement. A copy of the Merger Agreement is attached as Annex A to the
accompanying Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on November ,
1996, as the record date for the determination of the holders of HRM Common
Stock entitled to notice of, and to vote at, the meeting and any adjournments or
postponements thereof. The Merger Proposal requires the affirmative vote of the
holders of a majority of the outstanding shares of HRM Common Stock entitled to
vote at the meeting. Any holder of shares of HRM Common Stock is entitled to
dissent from the Merger and demand the fair value of the shares of HRM Common
Stock held by such shareholder in cash, if such dissenting shareholder follows
the procedures provided by applicable law.
Information regarding the Merger and related matters is contained in the
accompanying Proxy Statement/Prospectus and the annexes thereto, which are
incorporated by reference herein and form a part of this Notice.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IT IS
IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE MEETING.
<PAGE> 5
YOUR BOARD OF DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, HRM AND HRM'S SHAREHOLDERS. THE HRM BOARD OF DIRECTORS RECOMMENDS
THAT YOU VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
MERGER.
By Order of the Board of Directors
Marlene O. Travis
President, Chief Operating Officer and
Secretary
Minneapolis, Minnesota
November , 1996
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE> 6
HEALTH RISK MANAGEMENT, INC.
PROXY STATEMENT
---------------------
HEALTHPLAN SERVICES CORPORATION
PROSPECTUS
---------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock, $0.01 par value per share ("HRM Common Stock"), of Health Risk
Management, Inc., a Minnesota corporation ("HRM"), in connection with the
solicitation of proxies by the Board of Directors of HRM for use at the Special
Meeting of HRM shareholders to be held on , December , 1996, at
HRM's corporate offices located at 7900 West 78th Street, Fourth Floor,
Minneapolis, Minnesota, commencing at a.m., Minnesota time, and at any
adjournment or postponement thereof (the "Special Meeting"). At the Special
Meeting, holders of HRM Common Stock ("HRM Shareholders") as of the close of
business on the Record Date (as hereinafter defined) will be asked to consider
and vote on a proposal to approve and adopt the Plan and Agreement of Merger,
dated September 12, 1996, as amended (the "Merger Agreement"), providing for the
merger (the "Merger") of HRM with and into HealthPlan Services Alpha Corporation
("Subcorp"), a Delaware corporation formed solely for the purpose of effecting
the Merger and a wholly owned subsidiary of HealthPlan Services Corporation, a
Delaware corporation ("HPS"). The Merger will be consummated on the terms and
subject to the conditions set forth in the Merger Agreement, as a result of
which (i) HRM will become a wholly owned subsidiary of HPS and (ii) HRM
Shareholders will be entitled to receive $9.68603 per share in cash and 0.360208
of an HPS common share ("HPS Common Shares"), par value $0.01 per share. The
0.360208 share exchange ratio (the "Exchange Ratio") is subject to possible
increase or decrease, depending on the market price of HPS Common Shares during
the five trading days preceding the consummation of the Merger, as set forth in
the Merger Agreement. See "The Merger Agreement -- Merger Consideration."
This Proxy Statement/Prospectus also constitutes the Prospectus of HPS with
respect to the HPS Common Shares to be issued by HPS in the Merger in exchange
for the outstanding shares of HRM Common Stock. HPS Common Shares are quoted on
the New York Stock Exchange (the "NYSE") under the symbol "HPS." On November ,
1996, the closing price of HPS Common Shares on the NYSE Composite Tape was
$ per share. HRM Common Stock is quoted on the Nasdaq National Market (the
"NASDAQ/NM") under the symbol "HRMI." On November , 1996, the last sale price
of HRM Common Stock on the NASDAQ/NM was $ per share. HRM Shareholders
should obtain current quotes for the HPS Common Shares and HRM Common Stock. The
HPS Common Shares to be issued upon consummation of the Merger have been
approved for listing by the NYSE, subject to notice of issuance.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
All information contained or incorporated by reference in this Proxy
Statement/Prospectus with respect to HPS has been supplied by HPS. All
information contained in this Proxy Statement/Prospectus with respect to HRM has
been supplied by HRM.
This Proxy Statement/Prospectus, the Letter to HRM Shareholders, the Notice
of the Special Meeting and the form of proxy for use at the Special Meeting are
first being mailed to HRM Shareholders on or about November , 1996. Any
shareholder who has given his, her or its proxy may revoke it at any time prior
to its use. See "The Special Meeting -- Voting of Proxies."
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
THE CAPTION "RISK FACTORS" ON PAGES 13 THROUGH 19 OF THIS PROXY
STATEMENT/PROSPECTUS.
---------------------
The date of this Proxy Statement/Prospectus is November , 1996.
<PAGE> 7
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF HPS COMMON SHARES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF HPS OR
HRM SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE HEREIN IS CORRECT AS OF ANY TIME AFTER THE DATE HEREOF.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus includes and incorporates by reference
forward-looking statements based on current plans and expectations of HRM, HPS
and Subcorp, relating to, among other matters, analyses and estimates of amounts
that are not yet determinable. Such forward-looking statements are contained in
the sections entitled "Summary," "The Merger," "The Companies," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of HRM"
and other sections of this Proxy Statement/Prospectus. Such statements involve
risks and uncertainties which may cause actual future activities and results of
operations to be materially different from those suggested in this Proxy
Statement/Prospectus, including, among others, HRM's dependence on its current
management, the risks and uncertainties present in HRM's and HPS's business and
the competitive health care marketplace where clients and vendors commonly
experience mergers or acquisitions, volume fluctuations, participant enrollment
fluctuations, fixed price contracts, contract disputes, contract modifications,
contract renewals and nonrenewals, various business reasons for delaying
contract closings, and the operational challenges of matching case volume with
optimum staffing, having fully trained staff, having computer and telephonic
supported operations, and managing turnover of key employees and outsourced
services to performance standards, as well as other factors described elsewhere
in this Proxy Statement/Prospectus.
AVAILABLE INFORMATION
Each of HPS and HRM is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Securities and Exchange Commission (the "SEC" or the "Commission"). Such
reports, proxy statements, and other information filed by either HPS or HRM with
the Commission can be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048, and Chicago Regional Office, Citicorp Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates, or through the World
Wide Web (http://www.sec.gov). The HPS Common Shares are listed on the NYSE, and
such reports, proxy statements and other information concerning HPS are
available for inspection and copying at the offices of the NYSE, 20 Broad
Street, New York, New York 10005. The HRM Common Stock is quoted on the
NASDAQ/NM, and such reports, proxy statements and other information concerning
HRM are available for inspection and copying at the Public Reference Section of
the NASDAQ/NM at 1737 K Street, N.W., Washington, D.C. 20006.
HPS has filed with the Commission a Registration Statement on Form S-4
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the HPS Common Shares to be issued in the Merger (the "Registration
Statement"). This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement and related annexes and
exhibits for further information with respect to HPS and the securities offered
hereby.
ii
<PAGE> 8
Statements contained herein concerning the provisions of any document are
necessarily summaries of such document and not complete, and in each instance,
reference is made to the copy of such document attached hereto or filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
HRM SHAREHOLDERS WHO HAVE ANY QUESTIONS ABOUT EXECUTING, CHANGING OR
REVOKING A PROXY SHOULD CONTACT: [CONTACT PERSON AT PROXY SOLICITING SERVICE
SERVING AS INFORMATION AGENT]
---------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by HPS with the Commission pursuant to the
Exchange Act are hereby incorporated by reference in this Proxy
Statement/Prospectus:
1. The description of HPS Common Shares contained in HPS's
Registration Statement on Form 8-A dated May 12, 1995, and any amendment or
report filed for the purpose of updating such description;
2. HPS's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, filed with the Commission on March 29, 1996 (the "1995 HPS Form
10-K");
3. The information contained in HPS's Proxy Statement dated April 2,
1996 for its Annual Meeting of Shareholders held on May 2, 1996 that has
been incorporated by reference in the 1995 HPS Form 10-K and was filed with
the Commission on Schedule 14A on April 3, 1996;
4. HPS's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1996 (filed with the Commission on May 15, 1996), June 30, 1996 (filed
with the Commission on August 13, 1996); and
5. HPS's Current Reports on Form 8-K filed with the Commission on July
15, 1996, and July 16, 1996 and HPS's Current Reports on Form 8-K/A filed
with the Commission on September 13, 1996.
All reports and other documents filed with the Commission by HPS pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the Special Meeting shall be deemed to
be incorporated by reference herein and to be a part hereof from the respective
dates of filing of such reports and other documents. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained herein or in any other subsequently filed
document that is also incorporated or deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WITH
RESPECT TO HPS THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF
THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS
ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS OR HEREIN) ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS
IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO HEALTHPLAN SERVICES CORPORATION,
3501 FRONTAGE ROAD, TAMPA, FLORIDA 33607, ATTENTION: JAMES K. MURRAY, III,
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, TELEPHONE NUMBER (813)
289-1000.
IN ORDER TO ENSURE TIMELY DELIVERY, ANY REQUEST FOR DOCUMENTS SHOULD BE
MADE BY DECEMBER , 1996.
iii
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FORWARD-LOOKING STATEMENTS................ ii
AVAILABLE INFORMATION..................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE............................... iii
SUMMARY................................... 1
The Companies........................... 1
The Special Meeting..................... 2
The Merger.............................. 3
Certain Federal Income Tax
Consequences.......................... 6
Comparison of Shareholder Rights........ 7
Summary Historical and Unaudited Pro
Forma Consolidated Financial
Information........................... 8
COMPARATIVE PER SHARE DATA................ 11
MARKET PRICE AND DIVIDEND
DATA.................................... 12
RISK FACTORS.............................. 13
THE SPECIAL MEETING....................... 19
General................................. 19
Matters to Be Considered at the Special
Meeting............................... 19
Record Date; Vote Required; Voting at
the Meeting........................... 19
Voting of Proxies....................... 20
Solicitation of Proxies................. 20
Recommendation of the HRM Board of
Directors............................. 21
Appraisal Rights........................ 21
THE MERGER................................ 21
Background of the Merger................ 21
Reasons of HRM for the Merger;
Recommendation of the HRM Board of
Directors............................. 24
Reasons of HPS for the Merger........... 25
Opinion of Robertson Stephens........... 26
Interests of Certain Persons in the
Merger................................ 29
Accounting Treatment.................... 30
Regulatory Approvals.................... 30
Federal Securities Law Consequences..... 31
Deregistration of HRM Common Stock...... 31
Treatment of Stock Options.............. 32
Support/Voting Agreements............... 32
Rights of Dissenting Shareholders....... 33
Joint Marketing Agreement............... 35
THE MERGER AGREEMENT...................... 35
The Merger.............................. 35
Merger Consideration.................... 35
Exchange Procedures..................... 36
Representations, Warranties and
Covenants............................. 37
Negotiations and Solicitations.......... 40
Conditions.............................. 40
Termination; Effect of Termination...... 42
Amendment and Waiver.................... 43
Expenses................................ 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES... 44
THE COMPANIES............................. 46
Business of HRM......................... 46
Business of HPS......................... 54
<CAPTION>
PAGE
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<S> <C>
SELECTED HISTORICAL FINANCIAL INFORMATION
OF HRM.................................. 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HRM....................... 63
Overview................................ 63
Results of Operations................... 63
Liquidity and Capital Resources......... 66
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS.............................. 68
PRINCIPAL SHAREHOLDERS OF HRM............. 74
Security Ownership of Certain Beneficial
Owners and Management................. 74
COMPARISON OF SHAREHOLDER RIGHTS.......... 76
Cumulative Voting in the Election of
Directors............................. 76
Power to Call Special Meeting........... 76
Dissolution............................. 76
Classified Board of Directors........... 77
Removal of Directors.................... 77
Actions by Written Consent of
Shareholders.......................... 77
Voting Requirements..................... 77
Approval of Mergers and
Consolidations........................ 78
Preemptive Rights....................... 78
Rights of Dissenting Shareholders....... 79
Dividends and Repurchase of Shares...... 79
Limitations of Liability of Directors
and Officers; Indemnification......... 79
Business Combinations and Control Share
Acquisitions.......................... 80
DESCRIPTION OF HPS CAPITAL STOCK.......... 81
General................................. 81
HPS Common Shares....................... 81
Preferred Stock......................... 81
Delaware Anti-Takeover Law.............. 81
LEGAL MATTERS............................. 82
EXPERTS................................... 82
OTHER MATTERS............................. 82
SHAREHOLDER PROPOSALS..................... 83
INDEX TO FINANCIAL STATEMENTS OF HEALTH
RISK MANAGEMENT, INC.................... F-1
ANNEXES:
A -- Plan and Agreement of Merger, dated
September 12, 1996, as amended,
among HealthPlan Services
Corporation, HealthPlan Services
Alpha Corporation, and Health Risk
Management, Inc.
B -- Opinion of Robertson, Stephens &
Company LLC dated September 11,
1996
C -- Minnesota Dissenters' Rights
Provisions
</TABLE>
iv
<PAGE> 10
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/ Prospectus and the Annexes hereto (the "Proxy
Statement/Prospectus"). This summary is not intended to be complete and is
qualified in its entirety by the more detailed information and financial
statements appearing elsewhere or incorporated by reference in this Proxy
Statement/Prospectus. HRM Shareholders are urged to read and consider carefully
all of the information contained or incorporated by reference in this Proxy
Statement/Prospectus.
THE COMPANIES
HRM
HRM was incorporated in 1977. HRM provides comprehensive, integrated total
health plan management and information services from diagnosis through claim
payment supported by HRM's QUALITYFIRST(R) clinical practice guidelines for
self-funded health benefit plans, fully insured health benefit plans, workers'
compensation care and disability care using electronic data interchange ("EDI")
technology. HRM provides these services for self-insured employers, unions,
governmental entities, insurance companies, health maintenance organizations
("HMOs"), preferred provider organizations ("PPOs"), hospitals, and others to
manage the quality, volume, cost, and payment for health care. HRM's managed
health care services include a 24 hours per day, 7 days per week ("24/7") health
information line; care review management services, which apply diagnostic and
utilization review; case management services for a variety of catastrophic or
long-term illnesses and conditions; price control management services such as
preferred provider networks, fee negotiations, and audits of hospital and
physician charges; claims administration management services; and health care
information management and software services. HRM has developed its managed
health care services based upon proprietary clinical practice protocols
(QUALITYFIRST Healthcare Practice Guidelines), HRM-developed medical and cost
databases, and extensive medical expertise. Unless the context otherwise
requires, references to "HRM" include its wholly owned domestic subsidiaries,
HRM Claim Management, Inc., Institute for Healthcare Quality, Inc., Health
Benefit Reinsurance, Inc., and Health Program Managers, Inc., and its wholly
owned Canadian subsidiary, Health Resource Management Ltd. The principal
executive offices of HRM are located at 8000 West 78th Street, Minneapolis,
Minnesota 55439, and its telephone number is (612) 829-3500. See "The
Companies -- Business of HRM."
HPS
HPS, along with its newly acquired operating units, Consolidated Group,
Inc. and Harrington Services Corporation, is a leading provider of managed care
services to small businesses and large, self-insured organizations. Its services
include distribution, enrollment, billing and collection, claims administration,
and information reports and analysis on behalf of health care payors and
providers, covering over three million members in the United States. HPS's
clients include managed care organizations (HMOs and PPOs), integrated health
care delivery systems, insurance companies, and health care purchasing
alliances. The majority of HPS's in-force business utilizes managed care
products, and substantially all of HPS's new business since October 1994
utilizes managed care products. The principal executive offices of HPS are
located at 3501 Frontage Road, Tampa, Florida 33607, and its telephone number is
(813) 289-1000. See "The Companies -- Business of HPS."
1
<PAGE> 11
THE SPECIAL MEETING
DATE, TIME AND PLACE OF SPECIAL MEETING
The Special Meeting will be held at HRM's corporate offices located at 7900
West 78th Street, Fourth Floor, Minneapolis, Minnesota, on December , 1996, at
a.m., Minnesota time, for the following purposes:
1. To consider and vote on a proposal (the "Merger Proposal") to
approve and adopt the Merger Agreement, pursuant to which, among other
things, (i) HRM will be merged with and into Subcorp with the result that
HRM becomes a wholly owned subsidiary of HPS, and (ii) each outstanding
share of HRM Common Stock (other than shares held by HRM Shareholders who
validly exercise dissenters' rights) will be converted into the right to
receive $9.68603 per share in cash and 0.360208 of an HPS Common Share. The
0.360208 share exchange ratio is subject to possible increase or decrease,
depending on the market price of HPS Common Shares during the five trading
days preceding the consummation of the Merger, as set forth in the Merger
Agreement. A copy of the Merger Agreement is attached as Annex A to this
Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
RECORD DATE
Only HRM Shareholders of record at the close of business on November ,
1996 (the "Record Date"), will be entitled to notice of and to vote at the
Special Meeting. On the Record Date, there were shares of HRM Common Stock
outstanding held by approximately holders of record (which number of shares
does not include shares of HRM Common Stock issuable upon the exercise of
outstanding options prior to the Effective Time (defined below)). See "The
Special Meeting -- Record Date; Vote Required; Voting at the Meeting."
REQUIRED VOTE
The Merger Proposal requires the affirmative vote of the holders of a
majority of the shares of HRM Common Stock outstanding and entitled to vote
thereon. As of the Record Date, the directors and executive officers of HRM and
certain of their affiliates owned approximately 14.4% of the outstanding HRM
Common Stock, and each such person has advised HRM that he, she or it intends to
vote in favor of the Merger Proposal. Of this group, certain executive officers
and directors of HRM who as of the Record Date owned in the aggregate
approximately 14.2% of the outstanding HRM Common Stock have each formally
agreed in writing to vote or direct the vote of all HRM Common Stock over which
such person or such person's affiliates have voting power or control in favor of
the Merger Proposal. See "The Special Meeting -- Record Date; Vote Required;
Voting at the Meeting."
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by (i) filing
(including by telegram or telecopy) with the Secretary of HRM, before the taking
of the vote at the Special Meeting, a written notice of revocation bearing a
later date than the date of the proxy or any later-dated proxy relating to the
same shares, or (ii) attending the Special Meeting and voting in person. HRM
Shareholders who require assistance in changing or revoking a proxy should
contact HRM's proxy solicitor, .
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of HRM has determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, HRM Shareholders. Accordingly, the HRM Board of Directors
recommends that HRM Shareholders vote FOR the approval and adoption of the
Merger Agreement.
2
<PAGE> 12
APPRAISAL RIGHTS
Any holder of shares of HRM Common Stock is entitled to dissent from the
Merger and demand the fair value of the shares of HRM Common Stock held by such
shareholder in cash, if such dissenting shareholder follows the procedures
provided by applicable law which are described elsewhere in this Proxy
Statement/Prospectus. See "The Special Meeting -- Appraisal Rights," "The
Merger -- Rights of Dissenting Shareholders" and "Comparison of Shareholder
Rights -- Rights of Dissenting Shareholders."
THE MERGER
GENERAL; EXCHANGE RATIO
Pursuant to the Merger Agreement, each share of HRM Common Stock issued and
outstanding prior to the Effective Time, except for dissenting shares, will be
converted into the right to receive (a) $9.68603 in cash (the "Per Share Cash
Consideration"), plus (b) 0.360208 of an HPS Common Share; provided, however,
that (i) if the weighted (by the daily trading volume) average closing price of
the HPS Common Shares on the NYSE Composite Tape for the five full trading days
ending on the last full trading day immediately prior to the Effective Time (the
"Market Price") is less than $17.93, then the per share stock consideration will
be equal to 0.360208 multiplied by a fraction, the numerator of which is $17.93
and the denominator of which is the Market Price, and (ii) if the Market Price
is greater than $30.00, then the per share stock consideration will be equal to
0.360208 multiplied by a fraction, the numerator of which is $30.00 and the
denominator of which is the Market Price (the "Per Share Stock Consideration").
No fractional HPS Common Shares will be issued, and any holder who would
otherwise have received a fractional HPS Common Share will have a right to
receive cash in an amount equal to such fraction multiplied by the Market Price.
The consummation of the Merger and the conversion of HRM Common Stock into cash
and HPS Common Shares as described above are subject to the satisfaction or
waiver of certain conditions (see "The Merger Agreement -- Conditions") and the
right of one or both of HRM and HPS to terminate the Merger Agreement under
certain circumstances as described under the caption "The Merger
Agreement -- Termination; Effect of Termination." Further information regarding
calculation of the Per Share Stock Consideration can be obtained by contacting
the person specified at the phone number provided in this Proxy
Statement/Prospectus under the caption "Available Information."
EFFECTIVE TIME OF THE MERGER; CLOSING DATE
The Merger will become effective (the "Effective Time") when a certificate
of merger and articles of merger are filed with the Secretary of State of the
States of Delaware and Minnesota, respectively, or at such later time as is
specified in the certificate of merger and articles of merger. Prior to such
filing, a closing (the "Closing") will be held on a date (the "Closing Date")
agreed to by HPS and HRM, which date will be within three business days
following the date upon which all conditions set forth in the Merger Agreement
have been satisfied or waived, as the case may be, but not earlier than January
1, 1997. See "The Merger Agreement -- Conditions."
CONDITIONS TO CONSUMMATION OF THE MERGER
Consummation of the Merger is subject to, among other things, (i) approval
by HRM Shareholders of the Merger Proposal; (ii) there being no order or
injunction of a court of competent jurisdiction which prohibits the consummation
of the Merger; (iii) the expiration or termination of all waiting periods under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), all of which terminated on November 4, 1996; (iv) the Commission shall
have declared the Registration Statement effective, and at the Effective Time,
no stop order or similar restraining order shall have been threatened by the
Commission or entered by the Commission or any state securities administrator
prohibiting the Merger; (v) all consents, authorizations, orders and approvals
of (or filings or registrations with) any governmental commission, board or
other regulatory body shall have been obtained or made, except for filings in
connection with the Merger and any other documents required to be filed after
the Effective Time and except where the
3
<PAGE> 13
failure to have obtained or made any such consent, authorization, order,
approval, filing or registration would not have a material adverse effect; and
(vi) the HPS Common Shares to be issued to the HRM Shareholders in connection
with the Merger shall have been approved for listing on the NYSE, subject only
to official notice of issuance.
In addition, consummation of the Merger by any party to the Merger
Agreement is conditioned upon the representations and warranties of the other
parties being true and correct on and as of the Closing Date (except for those
made as of a specified time), except for such inaccuracies which have not had
and would not reasonably be expected to have a material adverse effect on the
representing or warranting party, and performance in all material respects of
each obligation and agreement and compliance in all material respects with each
covenant to be performed and complied with by the other parties thereto. See
"The Merger -- Interests of Certain Persons in the Merger," "The
Merger -- Regulatory Approvals," "The Merger Agreement -- Representations,
Warranties and Covenants" and "The Merger Agreement -- Conditions."
ACCOUNTING TREATMENT
The Merger will be accounted for under the "purchase" method of accounting,
in accordance with generally accepted accounting principles. See "The
Merger -- Accounting Treatment."
REASONS OF HRM FOR THE MERGER; RECOMMENDATION OF THE HRM BOARD OF DIRECTORS
In reaching its conclusions to approve the Merger Agreement and to
recommend the approval and adoption of the Merger Agreement by the HRM
Shareholders, the HRM Board of Directors considered a wide variety of factors,
including the opportunity to HRM Shareholders to continue equity participation
in a larger, more diversified medical service company on a tax-deferred basis
and also to receive cash in the transaction; the potential for increased sales,
cost savings, improved profit margins, and expanded products through the
combination of the two companies; the fairness opinion of Robertson, Stephens &
Company LLC; the exchange ratio and historical trading prices for HRM Common
Stock and HPS Common Shares; the terms and conditions of the Merger Agreement;
and the likelihood of consummation of the Merger. In addition, the HRM Board of
Directors considered the business, financial condition, results of operations
and prospects of HRM and HPS and determined that the Merger could provide to HRM
competitive strength and business opportunities not otherwise available to HRM
if it remained a separate company. For additional information, see "The
Merger -- Reasons of HRM for the Merger; Recommendation of the HRM Board of
Directors."
THE BOARD OF DIRECTORS OF HRM HAS DETERMINED THAT THE TERMS OF THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST
INTERESTS OF, HRM AND THE HRM SHAREHOLDERS. ACCORDINGLY, THE HRM BOARD OF
DIRECTORS RECOMMENDS THAT HRM SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION
OF THE MERGER AGREEMENT.
REASONS OF HPS FOR THE MERGER
The HPS Board of Directors, in the course of reaching its decision to
approve the Merger Agreement and the transactions contemplated thereby,
considered a number of factors, including among others: (i) the HPS Board's
knowledge of the business, operations, properties, assets, financial condition,
operating results and prospects of HRM, including, in particular, the enhanced
ability of HPS to grow and expand its business through combined operations with
HRM; (ii) the HPS Board's judgment as to the future prospects of HPS in light of
management's assessment of the future of the health care industry, including
consolidation in the health care industry in general and the trend toward
expanded risk management products such as those available through HRM, and its
belief that larger, more diversified companies will be better able to compete
effectively in a rapidly changing and competitive health care industry; (iii)
the attractiveness of HRM as a strategic partner, including HRM's knowledge of
the industry and its quality products, potential benefits of combining the two
companies' customers, services, and products, and the strong management team of
HRM; (iv) current industry, economic, and market conditions and trends,
including the likelihood of continuing consolidation and increasing competition
in the health care services industries (and corresponding decrease in
4
<PAGE> 14
the number of suitable merger partners with the types of quality products
offered by HRM), the growing importance of financial resources, market position,
and economies of scale to a health care institution's ability to compete
successfully in this changing environment, and the increase in costs of
technology; (v) the possibility of achieving significant costs savings,
operating efficiencies, and synergies as a result of the Merger that would not
be available to either company on its own; (vi) the terms of the Merger
Agreement and other agreements connected with the proposed transaction; (vii)
the presentation of Bear Stearns and its oral opinion that the transaction is
fair to HPS shareholders from a financial point of view; (viii) the historical
market price of HPS Common Shares, which had ranged from $17.675 per share to
$29.25 per share during the 12 months ended September 12, 1996, the last trading
date prior to the announcement of the signing of the Merger Agreement; (ix) the
lack of significant regulatory barriers to consummating the Merger; and (x) the
interests of HPS's customers, which the HPS Board believed would be best served
by the Merger with a strategic partner such as HRM. For additional information,
see "The Merger -- Reasons of HPS for the Merger."
OPINION OF ROBERTSON STEPHENS
Robertson, Stephens & Company LLC ("Robertson Stephens") has rendered an
opinion to the HRM Board of Directors dated September 11, 1996 to the effect
that, as of such date and subject to certain assumptions, factors and
limitations set forth therein, the consideration to be received by HRM
Shareholders in the Merger was fair, from a financial point of view, to such
shareholders. The full text of the written opinion of Robertson Stephens,
setting forth the assumptions made, procedures followed, matters considered and
limits on the review undertaken by Robertson Stephens, is attached as Annex B to
this Proxy Statement/Prospectus, and HRM Shareholders are urged to read
carefully the opinion in its entirety. See "The Merger -- Opinion of Robertson
Stephens."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of HRM's Board of Directors with respect
to the Merger Agreement, HRM Shareholders should be aware that certain officers
and directors of HRM (or their affiliates) have interests in the Merger that are
different from and in addition to the interests of HRM Shareholders generally.
These interests include, but are not limited to, the fact that certain executive
officers of HRM will enter into amendments to existing employment agreements
with HRM effective upon the consummation of the Merger, the accelerated vesting
of HRM's outstanding options, including options held by officers and directors,
and HPS's agreement to indemnify HRM's officers and directors following the
Merger. In addition, certain executive officers and directors of HRM entered
into Support/Voting Agreements with HPS. See "The Merger -- Interests of Certain
Persons in the Merger" and "The Merger -- Support/Voting Agreements."
EXCHANGE PROCEDURES
If the Merger Proposal is approved and the Merger is consummated, as soon
as practicable after the Effective Time, a letter of transmittal will be mailed
or delivered to each HRM Shareholder to be used in forwarding certificates
evidencing such holder's shares of HRM Common Stock for surrender and exchange
for cash and certificates evidencing HPS Common Shares to which such holder has
become entitled and, if applicable, cash in lieu of fractional HPS Common
Shares. After receipt of such letter of transmittal, each holder of certificates
formerly representing shares of HRM Common Stock should surrender such
certificates to , the exchange agent for the Merger, pursuant to and in
accordance with the instructions accompanying such letter of transmittal, and
each holder will receive in exchange therefor cash and certificates evidencing
the whole number of HPS Common Shares to which such holder is entitled,
including any cash which may be payable in lieu of fractional HPS Common Shares.
See "The Merger Agreement -- Merger Consideration." Such letter of transmittal
will be accompanied by instructions specifying other details of the exchange.
HRM SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
LETTER OF TRANSMITTAL.
5
<PAGE> 15
TREATMENT OF STOCK OPTIONS
Under the terms of the Merger Agreement, each holder of an option to
purchase shares of HRM Common Stock that is outstanding at the Effective Time of
the Merger (an "HRM Option") will receive a cash payment equal to (i) the total
number of shares of HRM Common Stock subject to the unexercised portion of such
HRM Option, determined by assuming that such HRM Option is immediately vested
and exercisable in full, multiplied by (ii) the excess of (x) the Per Share Cash
Consideration plus the current fair market value of the Per Share Stock
Consideration, over (y) the per share exercise price specified in such HRM
Option. Prior to the Effective Time of the Merger, HRM will take such action as
is legally required to amend the 1990 Stock Option Plan and the 1992 Long-Term
Incentive Plan and the terms of all HRM Options outstanding at the Effective
Time such that (i) all outstanding HRM Options are immediately vested and
exercisable in full at or before the Effective Time, (ii) the holders of all
outstanding HRM Options will receive the cash described herein, (iii) all HRM
Options outstanding at the Effective Time reflect the revised exercise terms
described above, (iv) no further options will be grantable under such plans
after the Effective Time, and (v) all change-of-control provisions contained in
such plans and outstanding HRM Options will not apply to any HRM Options
outstanding as of the Effective Time.
SUPPORT/VOTING AGREEMENTS
Concurrently with the execution of the Merger Agreement, certain executive
officers and directors of HRM who as of the Record Date owned in the aggregate
approximately 14.2% of the outstanding shares of HRM Common Stock (each, a
"Supporting Shareholder" and together, the "Supporting Shareholders"), executed
separate Support/Voting Agreements with HPS pursuant to which each Supporting
Shareholder agreed, among other things, to vote or direct the vote of all shares
of HRM Common Stock beneficially owned by the Supporting Shareholder or his or
her affiliates, directly or indirectly, to approve the Merger and the Merger
Agreement and the transactions contemplated thereby. Each Supporting Shareholder
also thereby agreed, among other things, to not: (i) contract to sell, sell or
otherwise transfer any shares of HRM Common Stock, other than pursuant to the
Merger or except for certain permitted transfers, without HPS's prior written
consent, or (ii) solicit, initiate, encourage or facilitate any inquiries with
respect to any merger, consolidation or other business combination involving
HRM, or acquisition of stock or any material portion of the assets of HRM, or
any combination of the foregoing (a "Competing Transaction"), or engage in
discussions or enter into any agreement or understanding with respect to any
Competing Transaction; provided, however, that nothing in any Support/Voting
Agreement prevents or restricts any Supporting Shareholder from taking any
action or omitting to take any action (i) solely as a member of the Board of
Directors of HRM required so as not to violate such Supporting Shareholder's
fiduciary obligations as a director of HRM or which action is not in violation
of any of the terms of the Merger Agreement or (ii) if such Supporting
Shareholder is an officer of HRM, as directed or authorized by the Board of
Directors of HRM so long as such direction or authorization was not made in
violation of any of the terms of the Merger Agreement. Each Support/Voting
Agreement will terminate at the earlier of (i) the termination of the Merger
Agreement or (ii) the Effective Time. See "The Merger -- Support/Voting
Agreements."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger will be treated as a tax-free reorganization within the meaning
of sections 368(a)(1)(A) and 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended (the "Code"). HRM, HPS, and Subcorp will each be a "party to the
reorganization" within the meaning of section 368(b) of the Code.
No gain or loss will be recognized by the shareholders of HRM upon their
receipt of HPS Common Shares in exchange for their HRM Common Stock. HRM
Shareholders will be required, however, to recognize gain, if any, realized in
the transaction up to the amount of the cash received by each such shareholder.
As to each shareholder, the character of the resulting gain will be either
capital gain or ordinary income, depending on the nature of such shareholder's
investment in the HRM Common Stock.
6
<PAGE> 16
THE FOREGOING SUMMARY IS NOT INTENDED, AND SHOULD NOT BE CONSIDERED, AS TAX
ADVICE. HOLDERS OF HRM COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX CONSEQUENCES TO THEM UNDER APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX LAWS. See "Certain Federal Income Tax Consequences."
COMPARISON OF SHAREHOLDER RIGHTS
As a result of the Merger, shares of HRM Common Stock, which are issued by
a Minnesota corporation, will be converted into the right to receive cash and
HPS Common Shares, which are issued by a Delaware corporation. There are
differences between the rights of HRM Shareholders and the rights of holders of
HPS Common Shares ("HPS Shareholders"). These differences result from (i)
differences between Minnesota and Delaware law, and (ii) differences between the
governing instruments of HRM and HPS. For a discussion of the various
differences between the rights of HRM Shareholders and HPS Shareholders, see
"Comparison of Shareholder Rights."
7
<PAGE> 17
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
HRM SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information of HRM and has been derived from and should be read in conjunction
with HRM's audited consolidated financial statements, unaudited interim
consolidated financial statements, and other financial information, including
the notes thereto, included elsewhere in this Proxy Statement/Prospectus.
Unaudited interim data reflects, in the opinion of HRM's management, all
adjustments considered necessary for a fair presentation of results for such
interim periods. Results of operations for unaudited interim periods are not
necessarily indicative of results which may be expected for any other interim or
annual period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SEPTEMBER
30, FISCAL YEAR ENDED JUNE 30,
----------------- -----------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................... $14,395 $13,371 $54,507 $49,302 $45,824 $40,871 $27,828
Net income (loss)........................... $ 438 $ 529 $ 1,996 $ 844 $ 1,716 $ 2,294 $ (95)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per common and common
equivalent share(1)....................... $ .10 $ .13 $ .47 $ .21 $ .43 $ .57 $ (.02)
======== ======== ======== ======== ======== ======== ========
Weighted average common and common
equivalent shares(1)...................... 4,356 4,140 4,219 3,982 4,015 3,993 3,871
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
------------- -----------------------------------------------
1996 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $43,619 $44,822 $39,962 $37,844 $32,501 $28,313
Total debt..................................... 5,401 6,977 7,101 7,996 5,893 4,437
Shareholders' equity........................... 29,189 28,474 25,101 23,677 21,668 19,060
</TABLE>
- ---------------
(1) Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the period. Common
share equivalents include dilutive stock options and warrants using the
treasury stock method.
8
<PAGE> 18
HPS SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information of HPS and has been derived from and should be read in conjunction
with HPS's audited consolidated financial statements, unaudited interim
consolidated financial statements, and other financial information, including
the notes thereto, incorporated by reference in this Proxy Statement/Prospectus.
See "Incorporation of Certain Documents by Reference." Unaudited interim data
reflects, in the opinion of HPS's management, all adjustments considered
necessary for a fair presentation of results for such interim periods. Results
of operations for unaudited interim periods are not necessarily indicative of
results which may be expected for any other interim or annual period.
<TABLE>
<CAPTION>
HPS PREDECESSOR COMPANY(1)
------------------------------- ------------------------------------------
NINE MONTHS ENDED PRO FORMA THREE NINE
YEAR YEAR MONTHS MONTHS
--------------------- ENDED ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31, SEPT. 30, ------------------------------
1996(2) 1995 1995 1994(3) 1994 1994 1993 1992 1991
--------- --------- -------- --------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $129,876 $ 70,889 $100,250 $107,178 $ 25,233 $81,945 $113,863 $124,165 $123,868
Net income (loss).......... $(12,395) $ 6,551 $ 9,535 $ 6,467 $ 231 $ 1,747 $ 6,960 $ 11,559 $ 11,763
Dividends on redeemable
preferred stock.......... -- 285 285 -- 285
Net income (loss)
attributable to common
stock.................... $(12,395) $ 6,266 $ 9,250 $ 6,467 $ (54)
Pro forma net income (loss)
per share(4)............. $ (0.83) $ 0.49 $ 0.71 $ 0.69 $ 0.03
Pro forma weighted average
shares outstanding(4).... 14,968 13,407 13,414 9,339 9,339
Historical weighted average
net income (loss) per
share.................... $ (0.90) $ 0.59 $ 0.82 n/a n/a
Historical weighted average
shares outstanding....... 13,834 10,635 11,336 n/a n/a
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA DECEMBER 31,
SEPT. 30, SEPT. 30, DEC. 31, DEC. 31, DEC. 31, SEPT. 30, ------------------------------
1996 1995 1995 1994(3) 1994 1994 1993 1992 1991
--------- --------- -------- --------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............... $249,878 $112,455 $112,667 $ 53,189 $ 53,189 $27,884 $ 31,851 $ 19,853 $ 21,872
Total debt................. 67,874 1,283 1,282 1,300 1,300 1,254 1,450 -- --
Redeemable preferred stock
(Series A & B), including
accrued dividends........ -- -- -- -- 19,285 -- -- -- --
Common stockholders' equity
(divisional equity
(deficit))............... 101,548 77,923 80,966 20,292 1,007 2,170 634 (1,897) (4,404)
</TABLE>
- ---------------
(1) Represents the historical results of operations of Plan Services, Inc. -
HealthPlan Services Division (the "Predecessor Company") of The Dun &
Bradstreet Corporation ("D & B") which was purchased by HPS from D & B on
September 30, 1994 (the "Acquisition"). See "The Companies -- Business of
HPS." HPS's historical financial statements reflect certain expenses,
including expenses attributable to employee benefit programs, retirement
and health plans, treasury and insurance, which were incurred by the
Predecessor Company and allocated to HPS on a pro rata basis.
(2) In the third quarter of 1996, HPS took a pre-tax charge of approximately
$18.0 million in restructuring, integration and contract commitment
expenses. Additionally, HPS recorded a pre-tax charge of $19.2 million for
the impairment of goodwill. See "Risk Factors -- Risks Related to
Goodwill."
(3) Gives effect to the Acquisition and the Recapitalization as if such
transactions had occurred on January 1, 1994.
(4) Gives effect to the recapitalization of all 19,000,000 shares of Preferred
Stock (plus the right to receive dividends accrued thereon), which were
exchanged for 1,397,857 HPS Common Shares contemporaneously with
consummation of HPS's initial public offering on May 19, 1995 (the
"Recapitalization"), for all periods presented.
9
<PAGE> 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The summary unaudited pro forma consolidated financial information of HPS
and HRM has been derived from, or prepared on a basis consistent with, the
unaudited pro forma consolidated financial statements included elsewhere in this
Proxy Statement/Prospectus. This data is presented for illustrative purposes
only and is not necessarily indicative of the consolidated results of operations
or financial position that would have occurred if the Merger had occurred at the
beginning of each period presented or on the dates indicated, nor is it
necessarily indicative of future operating results or financial position of HPS.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED OR AS OF YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996(B) 1995
---------------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(A):
Revenues.................................................. $247,556 $298,144
Income (loss) from continuing operations.................. (11,024) 8,974
Income (loss) per share from continuing operations........ (0.67) 0.35
BALANCE SHEET DATA(A):
Total assets.............................................. $348,849
Total debt................................................ 118,935
Stockholders' equity...................................... 135,429
</TABLE>
- ---------------
(a) The unaudited pro forma consolidated statement of operations data is based
on the individual pro forma consolidated statements of income of HPS as
reported in its Amendment No. 1 to Current Reports on Form 8K/A as filed
with the Commission on September 13, 1996, incorporated by reference,
relating to HPS's acquisitions of Harrington Services Corporation
("Harrington"), and of Consolidated Group, Inc., Consolidated Group Claims,
Inc., Consolidated Health Coalition, Inc., and Group Benefit Administrators
Insurance Agency, Inc. (collectively the "Consolidated Group"), net of the
effect of an additional 52,977 shares of stock issued to Harrington
shareholders, and HPS's unaudited consolidated statement of operations for
the three months ended September 30, 1996, included herein, and on the
individual unaudited consolidated statements of net income for HRM,
included herein, and combines the results of operations of HPS and HRM as
if the Merger occurred at the beginning of each period presented. The
unaudited pro forma consolidated balance sheet data is based on the
individual balance sheets of HPS and HRM and has been prepared to reflect
the Merger as of September 30, 1996. The unaudited pro forma consolidated
financial information should be read in conjunction with the historical
financial statements of HPS and HRM.
(b) In the third quarter of 1996, HPS took a pre-tax charge of approximately
$18.0 million in restructuring, integration and contract commitment
expenses. Additionally, HPS recorded a pre-tax charge of $19.2 million for
the impairment of goodwill. See "Risk Factors -- Risks Related to
Goodwill."
10
<PAGE> 20
COMPARATIVE PER SHARE DATA
Set forth below are historical income (loss) from continuing operations per
share, cash dividends per share and book value per share data of HPS and HRM,
unaudited pro forma consolidated per share data and unaudited pro forma
equivalent per share data of HRM. The data set forth below should be read in
conjunction with the HPS audited consolidated financial statements and unaudited
interim consolidated financial statements, including the notes thereto, which
are incorporated by reference in this Proxy Statement/Prospectus, and the HRM
audited consolidated financial statements and unaudited interim consolidated
financial statements, including the notes thereto, which are prepared on the
basis of a June 30 year end and which are included elsewhere in this Proxy
Statement/Prospectus. The data should also be read in conjunction with the
unaudited pro forma consolidated financial statements, including the notes
thereto, included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
HPS HRM
--------------------------------- ---------------------------------
NINE MONTHS YEAR ENDED NINE MONTHS YEAR ENDED
ENDED OR AS OF OR AS OF ENDED OR AS OF OR AS OF
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1995 1996 1995
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Historical:(c)
Income (loss) from continuing operations
per share.............................. $ (0.90) $ 0.82 $0.30 $ 0.49
Cash dividends per share.................. -- -- -- --
Book value per share...................... 6.81 6.04 6.92 6.51
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED OR AS OF OR AS OF
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- ------------
<S> <C> <C>
Pro Forma Consolidated(a)(c):
Income (loss) from continuing operations
per share.............................. $ (0.67) $ 0.54
Cash dividends per share.................. -- --
Book value per share...................... 8.25 8.93
HRM Pro Forma Equivalents(b)(c):
Income (loss) from continuing operations
per share.............................. $ (0.53) $ 0.43
Cash dividends per share.................. -- --
Book value per share...................... 6.52 7.05
</TABLE>
- ---------------
(a) The unaudited pro forma consolidated statement of operations data is based
on the individual pro forma consolidated statements of income of HPS as
reported in its Amendments No. 1 to Current Reports on Form 8K/A as filed
with the Commission on September 13, 1996, incorporated by reference,
relating to HPS's acquisitions of Harrington, and of the Consolidated
Group, net of the effect of an additional 52,977 shares of stock issued to
Harrington shareholders, and HPS's unaudited consolidated statement of
operations for the three months ended September 30, 1996, included herein,
and on the individual unaudited consolidated statements of net income for
HRM, included herein, and combines the results of operations of HPS and HRM
as if the Merger occurred at the beginning of each period presented. The
unaudited pro forma consolidated balance sheet data is based on the
individual balance sheets of HPS and HRM and has been prepared to reflect
the Merger as of September 30, 1996. The unaudited pro forma consolidated
financial information should be read in conjunction with the historical
financial statements of HPS and HRM.
(b) The HRM Pro Forma Equivalents are computed by multiplying the consolidated
pro forma amounts by a factor of .79 to reflect an assumed conversion ratio
of HPS Common Shares for shares of HRM Common Stock. This conversion ratio
was calculated as the sum of: (i) a factor of .43 resulting from dividing
the Per Share Cash Consideration of $9.68603 by the last sales price of HPS
Common Shares on September 12, 1996 ($22.375), the last trading day prior
to the announcement of the Merger Agreement, plus (ii) the Per Share Stock
Consideration of 0.360208.
(c) In the third quarter of 1996, HPS took a pre-tax charge of approximately
$18.0 million in restructuring, integration and contract commitment
expenses. Additionally, HPS recorded a pre-tax charge of $19.2 million for
the impairment of goodwill (see the "Risk Factors" section of this Proxy
Statement/Prospectus).
11
<PAGE> 21
MARKET PRICE AND DIVIDEND DATA
The following table reflects (i) the range of the reported high and low
closing or last sale prices of HRM Common Stock on the NASDAQ/NM for the
calendar quarters indicated, and (ii) the range of the reported high and low
closing or last sale prices of HPS Common Shares on the NYSE Composite Tape for
the calendar quarters indicated.
<TABLE>
<CAPTION>
HRM HPS
------------- -------------
HIGH LOW HIGH LOW
----- --- ----- ---
<S> <C> <C> <C> <C>
CALENDAR 1994
First Quarter................................... 13 3/4 10 * *
Second Quarter.................................. 11 1/4 5 3/4 * *
Third Quarter................................... 7 1/4 5 3/4 * *
Fourth Quarter.................................. 8 1/4 4 1/2 * *
CALENDAR 1995
First Quarter................................... 8 1/8 5 3/16 * *
Second Quarter.................................. 11 1/2 7 3/8 18 14 1/4
Third Quarter................................... 11 1/2 9 1/2 22 15 1/8
Fourth Quarter.................................. 10 7/8 7 3/4 27 17 3/8
CALENDAR 1996
First Quarter................................... 18 1/8 9 1/4 28 1/8 22 7/8
Second Quarter.................................. 18 3/8 10 29 1/4 20 1/2
Third Quarter................................... 16 10 1/8 26 3/4 19 1/4
Fourth Quarter (through , 1996).....
</TABLE>
- ---------------
* The initial public offering of HPS Common Shares was completed on May 19,
1995.
On September 12, 1996, the last full trading day prior to the public
announcement of the Merger Agreement, the closing price of HPS Common Shares was
$22.375 per share and the last sale price of HRM Common Stock was $15.50 per
share, as reported on the NYSE Composite Tape and the NASDAQ/NM, respectively.
The value of HRM Common Stock at September 12, 1996, on an equivalent per share
basis, was $17.75 (assuming an Exchange Ratio of 0.360208). On November ,
1996, the most recent practicable date prior to the mailing of this Proxy
Statement/Prospectus, the last sale prices of HPS Common Shares and HRM Common
Stock were $ per share and $ per share, respectively, as
reported on the NYSE Composite Tape and the NASDAQ/NM, respectively. The value
of HRM Common Stock at November , 1996, on an equivalent per share basis, was
$ (assuming an Exchange Ratio of ). HRM Shareholders are
encouraged to obtain current market quotations for HPS Common Shares and HRM
Common Stock.
HPS has applied for the listing of the HPS Common Shares to be issued in
the Merger on the NYSE.
Neither HRM nor HPS declared any dividends on their common stock in the
calendar years ended December 31, 1994 and 1995 or for the first, second or
third quarters of calendar 1996. Pursuant to the Merger Agreement, HRM has
agreed that, during the period from the date of the Merger Agreement to the
Effective Time, HRM will not make, declare or pay any dividend or distribution
on the HRM Common Stock. In addition, certain covenants contained in their
respective credit facilities restrict HRM and HPS from making, declaring or
paying any such dividend or distribution.
12
<PAGE> 22
RISK FACTORS
Shareholders of HRM should carefully consider the following information in
addition to the other information contained in this Proxy Statement/Prospectus
in evaluating an investment in the HPS Common Shares.
RISKS RELATED TO NEW BUSINESS STRATEGY
From 1990 to 1995, HPS's annual revenues declined from approximately $129
million to approximately $100 million. Effective September 30, 1994, HPS,
formerly known as Plan Services, Inc., a division of The Dun & Bradstreet
Corporation ("D & B"), was acquired from D & B by the Noel Group, Inc. ("Noel"),
James K. Murray, Jr., HPS's current President and Chief Executive Officer, and
certain other investors. A new management team was recruited to implement a new
business strategy aimed at growing revenue through strengthening its
relationships with managed care companies, adding new payors as customers (such
as PPOs, HMOs, and integrated delivery systems), and consolidating the
fragmented third party administrator industry.
HPS believes that the decline in revenue during the 1990-1995 period is
attributable primarily to a slow transition by its major customers from offering
traditional "fee for service" health care plans to managed care products. The
cost of traditional health insurance increased significantly during this period,
and HPS did not expand distribution by developing relationships with HMOs or
PPOs. As a result, many of HPS's small business customers elected to seek
alternative coverage or become self-insured.
In order to combat this trend, HPS's management is committed to expand
distribution and develop client relationships with established HMOs. HPS will
seek to build economies of scale by continuing to pursue vigorously these
relationships, as well as by executing an acquisition strategy aimed at
consolidating the third party administrator industry. In addition, HPS expects
to pursue administrative services contracts with large employers to administer
their self-insured health care plans, and it may also invest in the development
of information based products for its payors and their customers.
Starting in 1994, HPS has also pursued contracts with state sponsored
health care purchasing alliances, initially in Florida, and in 1995-1996, with
additional contracts in North Carolina, Kentucky, and Washington. HPS has
incurred substantial expenses in connection with the start up of these
contracts, and, to date, the alliance business has been unprofitable. During the
quarter ended December 31, 1994, HPS recorded a pre-tax charge of approximately
$3.6 million related to state sponsored and private health care purchasing
alliances. HPS has also announced that an additional charge in the amount of
$2.6 million was taken in the third quarter of 1996. There can be no assurance
that HPS will be able to recoup its investment in developing these relationships
or that these operations will ultimately be profitable.
The implementation of this overall strategy involves substantial risks, and
there can be no assurance that this strategy will be effectively implemented. In
addition, it is likely that HPS will experience a flattening or decrease in net
margins as it pursues this aggressive expansion strategy.
RISKS RELATED TO GROWTH THROUGH ACQUISITIONS
HPS's strategy has included the acquisition of other managed care services
companies, as well as the acquisition of blocks of health care administrative
services business. Growth through acquisition involves substantial risks,
including the risk of improper valuation of the acquired business. In addition,
the value of such an acquired business or block of business could be impaired if
HPS is not successful in integrating the business or block of business into its
existing operations. These risks are increased when HPS elects to make such
acquisitions on a leveraged basis. In 1995, HPS acquired, in two separate
transactions, two blocks of administrative services business for a total
consideration of $20.3 million ($5.0 million of which is being held in escrow).
On July 1, 1996, HPS acquired all of the issued and outstanding shares of
capital stock of Consolidated Group, Inc., Consolidated Group Claims, Inc.,
Consolidated Health Coalition, Inc., and Group Benefit Administrators Insurance
Agency, Inc. (collectively, the "Consolidated Group") for a purchase price of
$61.9 million, subject to a post-closing adjustment based on the balance sheet
of the Consolidated Group as of June 30, 1996. Consolidated Group, like HPS,
provides distribution and administra-
13
<PAGE> 23
tive services to payors interested in accessing the small group market. On July
1, 1996, HPS acquired all of the issued and outstanding shares of capital stock
of Harrington Services Corporation ("Harrington") for a purchase price
consisting of (i) approximately $32.5 million in cash, subject to a post-closing
adjustment based on the balance sheet of Harrington as of June 30, 1996, and
(ii) 1,400,110 HPS common Shares. Harrington's principal business is the
administration of medical benefits for self-funded health care plans of
primarily large employer groups. The combined 1995 revenues of Harrington and
the Consolidated Group exceed HPS's 1995 revenues. The acquisition of HRM will
constitute the third major acquisition in 1996. The issuance of additional HPS
Common Shares and the operation of HRM upon closing of the Merger may have a
dilutive effect on earnings per share if HPS is unable to effect meaningful
synergies within an appropriate period of time.
There can be no assurance that HPS will successfully and profitably
integrate the business of Harrington, the Consolidated Group and HRM into its
existing operations. In addition, certain costs will be incurred to successfully
integrate Harrington and Consolidated Group. On September 13, 1996, HPS
announced that it has recorded approximately $18 million of restructuring and
integration related charges related to this consolidation effort, which charges
include the $2.6 million alliance charge referenced above and approximately $1.3
million taken in relation to other contract commitments. HPS does not anticipate
any additional charges in the future as a result of these acquisitions.
HPS may compete for acquisition and expansion opportunities with companies
which have significantly greater resources than HPS. There can be no assurance
that suitable acquisition candidates will be available, that financing for such
acquisitions will be obtainable on terms acceptable to HPS, that such
acquisitions can be consummated, or that acquired businesses or blocks of
business can be integrated successfully and profitably into HPS's operations.
SIGNIFICANT BORROWINGS
In connection with its growth strategy, HPS has incurred significant
indebtedness with relatively short-term repayment schedules under its primary
credit facility (the "Line of Credit"). On September 13, 1996, HPS announced an
expansion of its credit facility from $85 million to $175 million. First Union
National Bank of North Carolina is the "agency bank," and the participating
banks are Barnett Bank N.A., Fleet Bank N.A., The Fifth Third Bank of Columbus,
NationsBank, N.A., SouthTrust Bank of Alabama and SunTrust Bank, Tampa Bay.
After the completion of the acquisition of HRM, HPS expects that its total
indebtedness under the Line of Credit will be approximately $120 million, of
which approximately 13.3% will be due on November 30, 1998. An additional 13.3%
will be due on April 30, 1999. On both November 30, 1999 and April 30, 2000, an
additional 16.7% will be due. Finally, on both November 30, 2000 and April 30,
2001, an additional 20% will be due. HPS's borrowing under the Line of Credit
will result in interest expense that will range from LIBOR plus 125 to 175 basis
points or New York prime plus 25 to 75 basis points. For 1996 and 1997, interest
expense will approximate $2.5 million and $9.0 million, respectively, based on
currently prevailing interest rates and assuming the outstanding indebtedness is
paid in accordance with the existing payment schedule without any prepayment or
additional borrowings. Such interest payments must be made regardless of HPS's
operating results. The Line of Credit is guaranteed by HPS's subsidiaries and
secured by the stock of such subsidiaries, and upon completion of the Merger
will be guaranteed by and secured by all of the stock of HRM.
On September 13, 1996, HPS entered into an interest rate swap agreement
with NationsBank, N.A. ("NationsBank"). According to the terms of the agreement,
HPS is obligated to pay NationsBank on the 17th of each month, commencing
October 17, 1996 and ending September 17, 2001, monthly interest at a fixed per
annum rate of 6.61% on the principal amount of the swap, which is $25 million.
In exchange, NationsBank will reimburse HPS based on the prevailing one month
LIBOR rate, thereby matching the floating rate index as required on the Line of
Credit.
On October 21, 1996, HPS entered into an interest rate swap agreement with
First Union National Bank of North Carolina ("First Union"). According to the
terms of the agreement, HPS is obligated to pay First Union on the 22nd of each
month, commencing November 22, 1996 and ending October 22, 1999, monthly
interest at a fixed per annum rate of 6.10% on the principal amount of the swap,
which is $15 million. In
14
<PAGE> 24
exchange, First Union will reimburse HPS based on the prevailing one month LIBOR
rate, thereby matching the floating rate index as required on the Line of
Credit.
RISKS RELATED TO GOODWILL
In March 1995, the Financial Accounting Standards Board issued its
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FASB 121"), which became effective for fiscal years beginning after December
15, 1995.
FASB 121 established standards for determining when impairment losses on
long-lived assets, including goodwill, have occurred and how impairment losses
should be measured. HPS is required to review long-lived assets and certain
intangibles, to be held and used, for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. In performing such a review for recoverability, HPS is required to
compare the expected future cash flows to the carrying values of the long-lived
assets and identifiable intangibles. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of such assets and
intangibles, the assets are impaired, and the assets must be written down to
their estimated fair market value.
After performing a review for impairment of goodwill related to each of
HPS's acquired businesses and applying the principles of measurement contained
in FASB 121, HPS recorded a pre-tax charge against earnings of $19.2 million in
the third quarter of 1996, representing approximately 11% of HPS's pre-charge
goodwill. The pre-tax charge is attributable to impairment of goodwill recorded
on the following acquisitions: Diversified Group Brokerage Corporation (acquired
in October 1995), $7.7 million; Third Party Claims Management, Inc. (acquired in
August 1995), $6.2 million; and Consolidated Group (acquired in July 1996), $5.3
million.
Subsequent to the recording of this pre-tax charge, the remaining values of
goodwill were $1.7 million, $1.6 million, and $54.8 million for the acquisitions
of Diversified Group Brokerage, Third Party Claims Management, Inc., and
Consolidated Group, respectively.
The impairment of goodwill was determined based primarily on the expected
future discounted cash flows attributable to the acquired companies. Such cash
flows have declined since the effective dates of the acquisitions due primarily
to higher than expected customer attrition experienced at the acquired
companies. Recognition of this charge had no impact on cash flow.
HPS will continue to evaluate on a regular basis whether events and
circumstances have occurred that indicate the carrying amount of goodwill of
$162.1 million at September 30, 1996, may warrant revision or may not be
recoverable. Although the net unamortized balance of goodwill is not considered
to be impaired, any such future determination requiring the write-off of a
significant portion of unamortized goodwill could adversely affect HPS's
results.
RELIANCE ON SMALL NUMBER OF PAYORS
HPS derives a significant portion of its revenues from a small number of
payors. On a pro forma basis giving effect to the acquisitions of Harrington and
the Consolidated Group prior to the completion of the Merger, New England Mutual
Life Insurance Company ("The New England"), Celtic Life Insurance Company,
Ameritas Life Insurance Corporation and MetraHealth Division of United
Healthcare accounted for, in the aggregate, 54.8%, 53.0% and 59.7% of total
revenues in 1995, 1994 and 1993, respectively. In 1995, on a pro forma basis,
The New England, Celtic Life Insurance Company, Ameritas Life Insurance
Corporation and MetraHealth Division of United Healthcare accounted for 12.5%,
9.3%, 7.0% and 26.0%, respectively, of HPS's total revenues. There can be no
assurance that these or any other payors will continue their contracts with HPS
for any particular period of time. Typically, HPS's insurance, PPO, HMO and
managed care payors sign contracts with HPS that are cancelable without penalty
by either party upon written notice, ranging from 90 days to one year, and are
also cancelable upon a change of ownership of HPS. Over the past several years,
a number of payors have elected to abandon or de-emphasize their involvement in
the small group health insurance market. In the third quarter of 1996,
Metropolitan Life Insurance Company completed its acquisition of The New
England. HPS is unable to predict what effect, if any, such merger will
15
<PAGE> 25
have on HPS's relationship with The New England. The abandonment of the small
group market by The New England, Celtic Life Insurance Company, Ameritas Life
Insurance Corporation or MetraHealth Division of United Healthcare could have a
material adverse effect on HPS. In addition, a decision by any one of these
payors to administer and distribute a significant portion of its products
directly to small businesses could also have a material adverse effect on HPS.
DEPENDENCE ON KEY PERSONNEL
The success of HPS depends to a large degree upon the efforts of its
executive officers, the loss of whose services could have a material adverse
effect on its business and prospects. HPS does not generally enter into
employment agreements with its executive officers, and such executive officers
are generally not bound by any non-competition agreement following termination
of their employment.
UNCERTAINTIES RELATING TO HEALTH CARE REFORM INITIATIVES
Since 1993, many competing proposals have been introduced in Congress and
various state legislatures have called for general health care insurance market
reforms to increase the access and availability of group health insurance and to
require that all businesses offer health insurance coverage to their employees.
For example, the Health Insurance Portability and Accountability Act of 1996 was
signed into law in August 1996. This law, among other things, provides for
insurance portability for individuals who lose or change jobs, limits exclusions
for pre-existing conditions, and establishes a pilot program for medical savings
accounts. It is uncertain what additional health care reform legislation, if
any, will ultimately be implemented or whether other changes in the
administration or interpretation of governmental health care programs will
occur. Although recent proposals on health care reform have focused primarily on
Medicare and Medicaid reform, it is not possible to predict if proposals calling
for broad insurance market reform will be reintroduced in Congress or in any
state legislature in the future, or if and when any such proposal may be
enacted. Additionally, the adoption of a publicly-financed, single payor,
national or state health plan not requiring the marketing, distribution and
administrative services currently delivered by HPS would have a material adverse
effect on HPS's business. It is possible that health care reform at the federal
or state level, whether implemented through legislation or through action by
federal or state administrative agencies, would require HPS to make significant
changes to the way it conducts its business. Although it is not possible at this
time to predict accurately the nature or effects of health care reform or
whether it will be adopted and implemented, if at all, no assurances can be
given that health care reform will not materially and adversely affect HPS's
business.
GOVERNMENT REGULATION
HPS is subject to regulation under the health care and insurance laws and
other statutes and regulations of all 50 states, the District of Columbia and
Puerto Rico. Many states in which HPS provides claims administration services
require HPS or its employees to receive regulatory approval or licensure to
conduct such business. Provider networks are also regulated in many states, and
certain states require the licensure of companies, such as HPS, which provide
utilization review services. HPS's operations are dependent upon its continued
good standing under applicable licensing laws and regulations. Such laws and
regulations are subject to amendment or interpretation by regulatory authorities
in each jurisdiction. Generally, such authorities have relatively broad
discretion when granting, renewing, or revoking licenses or granting approvals.
These laws and regulations are intended to protect insured parties rather than
stockholders, and differ in content, interpretation and enforcement practices
from state to state. Moreover, with respect to many issues affecting HPS, there
is a lack of guiding judicial and administrative precedent. Certain of these
laws could be construed to prohibit or restrict practices which have been
significant factors in HPS's operating procedure for many years. HPS could risk
major erosion and even "rebate" exposure in these states if state regulators
were to deem HPS's practices to be impermissible.
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
governs the relationships between certain health benefit plans and the
fiduciaries of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a fiduciary of a plan to the extent that such person
has discretionary authority in the
16
<PAGE> 26
administration of the plan or with respect to the plan's assets. The employers
who are the customers of HPS are fiduciaries of the plans that they sponsor, but
there can also be other fiduciaries of a plan. ERISA imposes various express
obligations on fiduciaries. These include barring a fiduciary from permitting a
plan to engage in certain prohibited transactions with parties in interest or
from acting under an impermissible conflict of interest with a plan. Generally,
a party in interest with respect to a plan includes a fiduciary of the plan and
persons that provide services to the plan. Violations of ERISA by fiduciaries
can result in the rescission of any affected agreement, the imposition of
substantial civil penalties on fiduciaries and parties in interest and the
imposition of excise taxes under the Internal Revenue Code on parties in
interest.
Currently, HPS's Consolidated Group subsidiary is undergoing a Department
of Labor (the "DOL") audit in which the DOL has raised various questions about
the application of ERISA to the way that subsidiary does business. This audit is
ongoing and there can be no assurance that the DOL will not take positions which
could require changes to the way this subsidiary operates or result in the
assertion or the imposition of administrative fines and penalties.
The application of ERISA to the operations of HPS and its customers is an
evolving area of law and is subject to ongoing regulatory and judicial
interpretations of ERISA. Although HPS strives to minimize the applicability of
ERISA to its business and to ensure that HPS's practices are not inconsistent
with ERISA, there can be no assurance that courts or the DOL will not take
positions contrary to the current or future practices of HPS. Any such contrary
positions could require changes to HPS's business practices (as well as industry
practices generally) or result in liabilities of the type referred to above.
Similarly, there can be no assurance that future statutory changes to ERISA will
not significantly affect HPS and its industry.
COMPETITION
HPS faces competition and potential competition from traditional indemnity
insurance carriers, Blue Cross/Blue Shield organizations, PPOs, HMOs, third
party administrators, utilization review companies and health care informatics
companies. HPS competes principally on the basis of the price and quality of its
services. Many large insurers have actively sought the claims administration
business of self-funded programs and have begun to offer utilization review and
other managed health care services similar to the services offered by HPS. Many
of HPS's competitors and potential competitors are considerably larger and have
significantly greater resources than HPS. There can be no assurance that HPS
will be able to compete effectively against such competitors in the future.
AUTHORIZATION OF PREFERRED STOCK; EFFECT OF DELAWARE GENERAL CORPORATION LAW
HPS's Certificate of Incorporation authorizes the issuance of preferred
stock with such designation, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of HPS Common Shares. The ability of
HPS to issue preferred stock and the application of Section 203 of the Delaware
General Corporation Law could have the effect of discouraging, delaying or
preventing a change in control of HPS. Section 203 of the Delaware General
Corporation Law prohibits a Delaware corporation from engaging in a wide range
of specified transactions with any interested stockholder, defined to include,
among others, any person or entity who in the previous three years obtained 15%
or more of any class or series of stock entitled to vote in the election of
directors, unless, among other exceptions, the transaction is approved by (i)
the Board of Directors prior to the date the interested stockholder obtained
such status or (ii) the holders of two-thirds of the outstanding shares of each
class or series not owned by the interested stockholder.
RISK OF CONTRACTING WITH GOVERNMENT AGENCIES
An increasing number of states, including some of the principal states in
which HPS does business, are providing for the statutory creation of health care
purchasing alliances. As part of its business strategy, HPS is aggressively
seeking to provide administrative and related services to these state-sponsored
health care purchasing alliances. The competitive bidding processes in which HPS
typically is required to participate in
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order to obtain this business may limit the profitability of this business and
lengthen the amount of time required to recover start-up expenses. There can be
no assurance that the health care purchasing alliance contracts obtained by HPS
will ultimately be profitable for HPS. Additionally, changes in governmental
policy could make the alliances substantially less attractive to small
businesses and could materially and adversely affect HPS's health care
purchasing alliance revenues. Also, the health care purchasing alliance
contracts currently held by HPS contain broad cancellation provisions which
enable the health care purchasing alliance to cancel the administration
contracts on relatively short notice without penalty.
CONTROL BY NOEL ET AL.
As of September 30, 1996, Noel beneficially owned approximately 38% of
HPS's Common Shares, and HPS's executive officers and directors beneficially
owned in the aggregate approximately 20% of the HPS Common Shares. This
ownership, in all likelihood, gives Noel, together with the executive officers
and directors of HPS, the ability to control the vote on all matters submitted
to a vote of stockholders including the election of all directors. This may have
the effect of discouraging unsolicited offers to acquire HPS.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of HPS Common Shares in the public market
under Securities Act Rule 144 ("Rule 144") or otherwise, or the perception that
such sales could occur, may adversely affect prevailing market prices of the HPS
Common Shares and could impair the future ability of HPS to raise capital
through an offering of its equity securities. As of September 30, 1996, HPS had
14,908,847 Common Shares outstanding. Of those, approximately 4,030,000 were
freely tradable in the public market and approximately 9,370,000 HPS Common
Shares will be eligible for sale in the public market, pursuant to Rule 144, in
the fourth quarter of 1996. On November 13, HPS filed a Registration Statement
on Form S-3 (the "S-3") to register the offer and sale of 1,561,067 HPS Common
Shares issued in connection with the Harrington and Consolidated Group
acquisitions. When the S-3 is declared effective under the Securities Act, such
shares will be freely tradable in the public market. In addition, certain
stockholders owning approximately 3,774,511 shares, and the holders of the
1,561,067 HPS Common Shares to which the S-3 relates, have the right to have
their HPS Common Shares included in future registered public offerings of Common
Shares.
On May 21, 1996, the Board of Directors of Noel adopted a Plan of Complete
Liquidation and Dissolution of Noel (the "Plan") subject to shareholder approval
at a special meeting of shareholders of Noel to be held as soon as practicable.
If the Plan is approved by the shareholders, Noel will be liquidated (i) by the
sale of such of its assets as are not to be distributed in-kind to its
shareholders, and (ii) after paying or providing for all its claims, obligations
and expenses, by cash and in-kind distributions to its shareholders pro rata
and, if required by the Plan or deemed necessary by Noel's Board of Directors,
by distributions of its assets from time to time to one or more liquidating
trusts established for the benefit of the then shareholders, or by a final
distribution of its then remaining assets to a liquidating trust established for
the benefit of the then shareholders. Noel holds 5,595,846 HPS Common Shares at
September 30, 1996 and has announced that it currently intends to distribute
most of its HPS Common Shares to its shareholders, but Noel may engage in a
private or registered public sale of a sufficient number of shares to raise cash
to pay the taxes payable upon distribution or sale of Noel's assets if such cash
is not available from existing cash resources or defrayed by the proceeds from
the sale of other assets. In addition, Noel may sell a portion of its holdings
of HPS in public or private sales as market conditions permit.
LEGAL PROCEEDINGS
In 1995, a complaint was filed against HPS claiming wrongful termination of
an exclusive marketing agreement and breach of contract. The complaint asserted
damages of $25,000,000. The parties to the dispute have agreed to binding
arbitration. The arbitration proceedings occurred during the week of October 29,
1996, and the arbitration panel's decision is expected by early December 1996.
Although HPS management believes it has meritorious defenses against the
complaint, the ultimate outcome of the matter cannot presently be determined.
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In connection with the acquisition of Harrington, HPS agreed to use its
best efforts to cause a registration statement sufficient to permit the public
offering and sale of the HPS Common Shares issued to the Harrington stockholders
in the acquisition, through the facilities of all appropriate securities
exchanges and the over-the-counter market, provided that in all events, such
registration statement shall have become effective on or before October 31,
1996. On October 30, 1996, HPS received a letter from Harrington's shareholders'
representative notifying HPS that it was in apparent violation of such agreement
and reserving all rights under such agreement. Due to the inability of both
parties to finalize the closing balance sheet for the transaction, and due to
the disclosure requirements for the pending Merger, HPS was not able to have
such registration statement declared effective by October 31, 1996. While HPS's
management believes it has meritorious defenses against any possible claim, as
of the date hereof, it is not possible for HPS to evaluate what, if any, damages
might result from such notice.
HPS is involved in various claims arising in the normal course of business.
In the opinion of HPS's management, although the outcomes of these claims
arising in the normal course of business are uncertain, in the aggregate they
are not likely to have a material adverse effect on HPS's business, financial
condition and results of operations.
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to HRM Shareholders in
connection with the solicitation of proxies by the Board of Directors of HRM for
use at the Special Meeting to be held on , December , 1996, at
HRM's corporate offices located at 7900 West 78th Street, Fourth Floor,
Minneapolis, Minnesota, commencing at a.m., Minnesota time, and at any
adjournment or postponement thereof.
This Proxy Statement/Prospectus, the Letter to HRM Shareholders, the Notice
of the Special Meeting and the form of proxy for use at the Special Meeting are
first being mailed to HRM Shareholders on or about November , 1996.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, HRM Shareholders will consider and vote on:
1. The Merger Proposal, which is a proposal to approve and adopt the
Merger Agreement pursuant to which, among other things, (i) HRM will be
merged with and into Subcorp with the result that HRM becomes a wholly
owned subsidiary of HPS, and (ii) each outstanding share of HRM Common
Stock (other than shares held by HRM Shareholders who validly exercise
dissenters' rights) will be converted into the right to receive $9.68603
per share in cash and a number of HPS Common Shares as determined pursuant
to the share exchange ratio set forth in the Merger Agreement. A copy of
the Merger Agreement is attached as Annex A to this Proxy
Statement/Prospectus.
2. Such other business as may properly come before the Special
Meeting.
RECORD DATE; VOTE REQUIRED; VOTING AT THE MEETING
The Board of Directors of HRM has fixed November , 1996, as the Record
Date for determination of HRM Shareholders entitled to notice of and to vote at
the Special Meeting. Accordingly, only holders of HRM Common Stock of record at
the close of business on November , 1996, will be entitled to notice of and to
vote at the Special Meeting. Each holder of record of HRM Common Stock on the
Record Date is entitled to cast one vote per share, exercisable in person or by
a properly executed proxy, at the Special Meeting. As of the Record Date, there
were shares of HRM Common Stock outstanding and entitled to vote which were
held by approximately holders of record.
Pursuant to HRM's Amended and Restated Articles of Incorporation (the "HRM
Articles") and Composite Bylaws (the "HRM Bylaws") and applicable law, the
affirmative vote of the holders of a majority
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of the shares of HRM Common Stock outstanding and entitled to vote thereon is
required to approve and adopt the Merger Proposal. As of the Record Date, the
directors and executive officers of HRM and certain of their affiliates owned
approximately 14.4% of the outstanding shares of HRM Common Stock and each such
person has advised HRM that such person intends to vote in favor of the Merger
Proposal. Of this group, certain executive officers and directors of HRM, who as
of the Record Date owned in the aggregate approximately 14.2% of the outstanding
shares of HRM Common Stock, have entered into formal agreements pursuant to
which they each agreed to vote or direct the vote of all HRM Common Stock over
which such person or such person's affiliates have voting power or control in
favor of the Merger Proposal.
VOTING OF PROXIES
All HRM Shareholders who are entitled to vote and are represented at the
Special Meeting by properly executed proxies received prior to or at such
meeting and not revoked will be voted at such meeting in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted FOR approval and adoption of the Merger Proposal.
If any other matters are properly presented for consideration at the
Special Meeting, including, among other things, consideration of a motion to
adjourn such meeting to another time or place (including, without limitation,
for the purpose of soliciting additional proxies), the persons named in the
enclosed form of proxy, and acting thereunder, will have discretion to vote on
such matters in accordance with their best judgment (unless authorization to use
such discretion is withheld). HRM is not aware of any matters expected to be
presented at the meeting other than as described in its Notice of Special
Meeting.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
(including by telegram or telecopy) with the Secretary of HRM, before the taking
of the vote at the Special Meeting, a written notice of revocation bearing a
later date than the date of the proxy, (ii) duly executing a later-dated proxy
relating to the same shares and delivering (including by telegram or telecopy)
it to the Secretary of HRM before the taking of the vote at the Special Meeting,
or (iii) attending the Special Meeting and voting in person. In order to vote in
person at the Special Meeting, HRM Shareholders must attend the meeting and cast
their votes in accordance with the voting procedures established for the
meeting. Attendance at the meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy must
be sent so as to be delivered at or before the taking of the vote at the meeting
to Health Risk Management, Inc., 8000 West 78th Street, Minneapolis, Minnesota
55439, Attention: Secretary.
HRM Shareholders who require assistance in changing or revoking a proxy
should contact the person at the phone number provided in this Proxy
Statement/Prospectus under the caption "Available Information."
Pursuant to the HRM Articles and applicable law, broker non-votes and
abstaining votes will not be counted in favor of the Merger Proposal. Since the
Merger Proposal requires the affirmative vote of a majority of the outstanding
HRM Common Stock, abstentions and broker non-votes will have the same effect as
votes against such proposal.
SOLICITATION OF PROXIES
The expenses of the solicitations for the Special Meeting, including the
cost of printing and distributing this Proxy Statement/Prospectus and the form
of proxy, will be borne by HRM, subject to each party's obligation to reimburse
the other for its expenses under certain circumstances. See "The Merger
Agreement -- Termination; Effect of Termination." In addition to solicitation by
mail, proxies may be solicited by directors, officers and employees of HRM in
person or by telephone, telegram or other means of communication. These persons
will receive no additional compensation for solicitation of proxies, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. In addition, , a firm that provides professional
proxy soliciting services, has been engaged to assist in the solicitation of
proxies from brokers, bank nominees, institutional holders, and other HRM
Shareholders. will receive reasonable and customary compensation
for such services and reimbursement of reasonable out-of-pocket expenses.
Arrangements will also be made by HRM with custodians, nominees and fiduciaries
for forwarding
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of proxy solicitation materials to beneficial owners of shares held of record by
such custodians, nominees and fiduciaries, and HRM will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
RECOMMENDATION OF THE HRM BOARD OF DIRECTORS
The Board of Directors of HRM has determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, HRM and the HRM Shareholders. Accordingly, the HRM Board of
Directors recommends that HRM Shareholders vote FOR the approval and adoption of
the Merger Agreement.
APPRAISAL RIGHTS
Any holder of shares of HRM Common Stock is entitled to dissent from the
Merger and demand the fair value of the shares of HRM Common Stock held by such
shareholder in cash, if such dissenting shareholder follows the procedures
provided by applicable law which are described elsewhere in this Proxy
Statement/Prospectus. See "The Merger -- Rights of Dissenting Shareholders" and
"Comparison of Shareholder Rights -- Rights of Dissenting Shareholders."
THE MERGER
BACKGROUND OF THE MERGER
The terms of the Merger Agreement are the result of arm's-length
negotiations between representatives of HPS and HRM. The following is a brief
discussion of the background of these negotiations, the Merger and related
transactions.
The past decade has been a period of rapid change in the health care
industry, characterized by a shift from fee or indemnity-based care to managed
care services. To better balance HPS's business and the collective quality of
its services and products, as well as to enhance profitability and maximize
shareholder value, HPS has been exploring the acquisition and expansion of
products in the health risk or care management business.
Prior to entering into discussions with HPS, in June 1995, in order to
explore alternatives to maximize shareholder value, HRM authorized consultants
to explore, on a confidential basis, the possible interest of certain selected
leading companies in the health care industry to pursue an acquisition of or
combination with HRM. Based on the informal overtures made by those consultants
on HRM's behalf to approximately 10 companies, HRM received no proposals or
requests to explore an acquisition transaction with HRM. HRM did not conduct a
formal public auction process, however, so as not to jeopardize its
relationships with customers and employees, its business or the overall value to
its shareholders, which could be adversely affected by the uncertainty and
disruption caused by a public process.
On February 16, 1996, a representative of Bear, Stearns & Co. Inc. ("Bear
Stearns") notified James K. Murray, Jr., President and Chief Executive Officer
of HPS, that it had identified an interesting company (HRM) that had developed
outstanding products in health risk management and appeared to complement HPS's
business strategy. Bear Stearns offered to introduce the two parties, to perform
financial analysis and to coordinate any further discussions between the
parties.
During March 1996, Mr. Murray, Jr. met with Curtis Lane of Bear Stearns to
discuss the rationale underlying a potential combination of the two companies.
HPS reviewed a preliminary analysis prepared by Bear Stearns and authorized Mr.
Lane to meet and open discussions with appropriate representatives of HRM.
On May 8, 1996, Mr. Lane met with Gary T. McIlroy, M.D., Chairman and Chief
Executive Officer of HRM, and Thomas P. Clark, HRM's Chief Financial Officer, to
propose that HRM management consider meeting with HPS management to discuss a
possible combination of the two companies.
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On May 29, 1996, Mr. Lane hosted a meeting in Chicago among Mr. Murray,
Jr., Gary L. Raeckers, Executive Vice President of HPS, David Nierenberg, an HPS
director, Dr. McIlroy, and Mr. Clark. The parties discussed their respective
businesses and strategies and explored the possibility of combining their
efforts to accomplish mutually beneficial objectives in the health care
industry. A Nondisclosure and Confidentiality Agreement was executed on May 30,
1996, and negotiations officially commenced on or around May 31, 1996.
On June 11, 1996, James K. Murray, III, HPS's Chief Financial Officer, and
Richard M. Bresee, an Executive Vice President of HPS, met with Dr. McIlroy and
Mr. Clark in Cincinnati, Ohio, to further explore the possibility of a business
combination and to evaluate the various products and services offered by HRM.
On June 18, 1996, Mr. Murray, Jr. and William L. Bennett, HPS's Chairman,
met with Dr. McIlroy and Mr. Clark in Chicago to discuss HRM's organizational
structure, potential synergies between the two companies, and the potential
benefits of a business combination to current and prospective customers of HPS
and HRM. Following the meeting, the parties started developing a term sheet and
discussing appropriate valuation models.
On June 20, 1996, during a regularly scheduled meeting of the HRM Board of
Directors, HRM management informed the HRM Board regarding the preliminary
meetings that had been held to date with HPS management and discussed basic
information regarding HPS and possible strategic fits.
On June 25, 1996, Mr. Murray, Jr., Mr. Bennett, and Mr. Murray, III met
with Dr. McIlroy and Mr. Clark in Charlotte, North Carolina, to evaluate
potential revenue and cost savings opportunities that might result from a
business combination. In addition, the parties discussed the transaction
valuation range in detail and mutually agreed to discuss a potential merger
between HPS and HRM with their respective Boards of Directors.
On July 9, 1996, the HRM Board of Directors held a telephonic meeting to
review with management the discussions to date between HRM and HPS and the basic
terms being discussed for a possible acquisition. Following such review, HRM
management continued with negotiations concerning the terms of the proposed
acquisition.
The Strategic Planning Committee of HPS's Board met during the morning of
July 23, 1996 to discuss the proposed acquisition of HRM. Present at the meeting
were Messrs. Murray, Jr., Bennett, Nierenberg, and HPS Directors Trevor G.
Smith, Nancy Kane and James G. Niven. The Committee discussed, among other
things, HRM's historical financial performance, the compatibility of the two
companies and their respective management teams, and the appropriateness of
HPS's further entry into the care management and medical informatics business.
The Board of Directors of HPS convened later that day and discussed the
prospects of a merger. During the Board meeting, representatives of Bear Stearns
discussed their preliminary evaluation and outlined various models under which
HPS could proceed with a transaction involving HRM. Following the presentation
by Bear Stearns and a presentation by HPS's management, the HPS Board agreed to
proceed with good faith negotiations concerning the terms of the Merger
Agreement and related agreements which would memorialize the business
combination between the parties. Counsel for HPS immediately commenced its
preparation of drafts of the Merger Agreement, and the parties undertook
preliminary due diligence.
During late July and August, several HPS operating officers visited HRM's
facility in Minneapolis to perform due diligence and further evaluate the care
management and demand management products developed by HRM, as well as HRM's
clinical decision support software, QUALITYFIRST(R), which enables payors and
providers to more effectively manage their health care risk.
In July 1996, HRM initiated discussions with Robertson, Stephens & Company
LLC ("Robertson Stephens") regarding its engagement of Robertson Stephens to
render an opinion to the Board of Directors of HRM as to the fairness, from a
financial point of view, of the consideration to be received by the HRM
Shareholders pursuant to the Merger. In August 1996, Robertson Stephens began
its due diligence review of
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both HRM and HPS, and HRM and Robertson Stephens executed an engagement letter
dated August 23, 1996.
On August 28, 1996, Messrs. Murray, Jr., Bennett, Murray, III, Robert R.
Parker, HPS's Chief Operating Officer of Large Group Business, and Timothy T.
Clifford, HPS's Chief Operating Officer of Small Group Business, met in Chicago
with Dr. McIlroy, Marlene O. Travis, HRM's President and Chief Operating
Officer, and Mr. Clark. The parties discussed operating plans and the
availability of potential synergies.
On August 29, 1996, the Board of Directors of HPS conducted a telephonic
meeting by which HPS's management updated the Board on its continuing due
diligence. Discussion focused on the managed care, demand management, and
disease management products available through HRM. The Board agreed on the
salient terms that were contained in the draft of the Merger Agreement,
discussed the due diligence performed and to be performed during the ensuing
week, and evaluated the proprietary features of HRM's business. The Board also
discussed the potential synergies available as a result of the Merger.
On August 29, 1996, the HRM Board of Directors met again to discuss the
proposed acquisition of HRM by HPS and the basic terms of such acquisition. The
Board discussed, among other things, provisions of a preliminary draft of the
Merger Agreement and due diligence matters regarding HPS. Following such
discussions, the HRM Board directed management to proceed with efforts to
finalize the Merger Agreement for submission to and consideration by the Board
at a later meeting.
On September 4-5, 1996, representatives of Bear Stearns and Donald W.
Gould, HPS's Vice President of Finance, visited HRM's headquarters in
Minneapolis and, together with representatives of Robertson Stephens, conducted
due diligence discussions at the offices of HRM's counsel. Representatives of
HPS and Arthur Andersen LLP, acting as a consultant to HPS, also visited the
Minneapolis offices of Ernst & Young LLP, HRM's auditors.
On September 6, 1996, representatives of Robertson Stephens visited HPS's
headquarters in Tampa to conduct due diligence discussions. Such representatives
and Mr. Clark met with Messrs. Bennett, Murray, Jr., Murray, III, and other
various operating officers of HPS.
The Board of Directors of HPS again conducted a telephonic meeting on
September 11, 1996. Bear Stearns made a presentation to the HPS Board which
included its oral opinion that the HRM transaction was fair to HPS stockholders
from a financial valuation point of view, based upon the facts and circumstances
as they existed and subject to various assumptions and considerations. Bear
Stearns also described to the HPS Board the basis for its opinion and answered
questions from members of the HPS Board. Following further discussions, the HPS
Board determined that the terms of the Merger Agreement and the transaction
contemplated thereby are fair to and in the best interests of HPS and HPS's
stockholders, and approved the Merger Agreement and the transaction contemplated
thereby. See "-- Reasons of HPS for the Merger."
The Board of Directors of HRM conducted a meeting on September 11, 1996, at
which the proposed Merger Agreement was presented for consideration and approval
by the Board. Robertson Stephens made a presentation to the HRM Board which
included its opinion that, as of September 11, 1996 and subject to certain
assumptions, factors and limitations set forth therein, the consideration to be
received by the HRM Shareholders in the Merger was fair to the HRM Shareholders
from a financial point of view. Robertson Stephens also described to the HRM
Board the basis for its opinion and answered questions from members of the HRM
Board. Following further discussions, the HRM Board determined that the terms of
the Merger Agreement and the transaction contemplated thereby are fair to and in
the best interests of HRM and the HRM Shareholders, and approved the Merger
Agreement and the transactions contemplated thereby. See "Reasons of HRM for the
Merger; Recommendation of the HRM Board of Directors."
At its meeting on September 11, 1996, the HRM Board of Directors also
established a committee of all disinterested directors (the "Special
Disinterested Committee") to separately and independently consider and approve
the Merger Agreement and the Support/Voting Agreements in accordance with the
procedures prescribed by Minnesota corporate law. On September 11, 1996, the
Special Disinterested Committee of the Board of Directors of HRM conducted a
meeting. The Committee reviewed the presentations made at the HRM Board of
Directors meeting and reviewed the Merger Agreement and the transactions and
agreements
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contemplated thereby, including the Support/Voting Agreements. Following
discussion, the Committee approved the Merger Agreement, the transactions
contemplated thereby, and the Support/Voting Agreements.
On September 12, 1996, HRM, HPS and Subcorp executed the definitive Merger
Agreement and other documents, including the Support/Voting Agreements, and on
September 13, 1996, HRM and HPS issued a joint press release announcing the
signing of the Merger Agreement.
On November 12, 1996, HRM, HPS and Subcorp executed the First Amendment to
the Merger Agreement to extend from January 31, 1997, to February 28, 1997, the
date at which the Merger Agreement may be terminated and the Merger may be
abandoned by either HRM or HPS if the Merger shall not have been consummated by
such date.
REASONS OF HRM FOR THE MERGER; RECOMMENDATION OF THE HRM BOARD OF DIRECTORS
The HRM Board of Directors believes that the Merger is in the best interest
of the HRM Shareholders and recommends to the HRM Shareholders that they vote
FOR approval and adoption of the Merger Agreement. The HRM Board of Directors
consulted with HRM's management, its legal counsel, and its financial advisors
and considered a number of factors prior to approving the Merger Agreement and
recommending it to the shareholders. The Board considered a number of
potentially positive factors, including (i) the potential for increased sales
through HPS's larger sales force and geographically more extensive distribution
channels; (ii) the ability to realize cost savings and improved profit margins
due to an increase in the number of covered lives utilizing HRM's products and
services and the synergies of common operating systems being combined; (iii) the
combined data sets of the two companies and the resulting expansion of the
products of HRM's information business; and (iv) enhanced access to capital for
continued development of HRM's information products, QUALITYFIRST(R) software
guidelines, and the development of Care Management services.
The HRM Board of Directors believes that the health care environment is
changing and undergoing considerable consolidation with the emergence of large
managed care organizations. The desire of these consolidated entities to do
business with the few vendors that can deliver high volume, broad-based managed
care services has resulted in an increasingly competitive marketplace. The HRM
Board of Directors believes that a strategic alliance with a larger, more
diversified medical service company will allow HRM's products to be more
effectively developed and marketed and reduces the risk inherent in HRM's
smaller size and difficulty in competing against larger companies with greater
product lines and financial resources.
The HRM Board also considered certain potentially negative factors related
to the Merger, including (i) the risk that the benefits sought in the Merger
would not be fully achieved; (ii) fears that the Merger would not be
consummated; (iii) possible adverse effects of the public announcement of the
Merger on HRM's sales and operating results, together with the significant costs
HRM would incur in the event that, after having been announced, the Merger was
not consummated; (iv) the substantial management time and effort required to
consummate the Merger and integrate the businesses; and (v) the impact on
personnel as a result of the Merger. In the view of the HRM Board of Directors,
the potentially negative factors are not sufficient either individually or
collectively to outweigh the potential benefits of the Merger.
In the course of its deliberations, the HRM Board reviewed with HRM
management a number of additional factors relevant to the Merger, including the
long-term prospects for HRM as an independent company. The HRM Board also
considered, among other matters, information concerning HPS's and HRM's
respective business prospects; financial performance and condition; and
operations, technology and competitive position; the historical financial
performance of HPS and other publicly available information concerning HPS; and
current financial market conditions and historical market prices, volatility and
trading information with respect to HPS and HRM common stock.
In addition, the HRM Board reviewed the consideration to be issued to HRM
Shareholders upon the Merger, the relationship between the market value of HPS
Common Shares to be issued in exchange for
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HRM Common Stock, and the market value of HRM Common Stock and the principal
terms of the Merger Agreement. The following additional factors were considered
to be favorable to the Merger:
1. The terms and conditions of the Merger Agreement, including the
amount and form of consideration, resulting in the HRM Shareholders
receiving both cash and HPS Common Shares, giving them a tax-deferred
opportunity to gain equity participation in a more diversified medical
service company.
2. The fairness opinion of Robertson Stephens, dated September 11,
1996, to the effect that, as of such date and subject to certain
assumptions, factors and limitations set forth therein, the consideration
to be received by the HRM Shareholders in connection with the Merger was
fair to such shareholders from a financial point of view.
3. The conversion ratio, which presented HRM Shareholders with a
possibility of obtaining a premium for the shares of HRM Common Stock
relative to the historical trading value of such common stock.
4. The likelihood of consummation of the Merger, including the terms
and conditions of the Merger Agreement, and the limited conditions to the
consummation of the Merger.
The HRM Board of Directors believes that the Merger allows HRM the
opportunity to join a company with greater financial resources; flexibility;
broader, more diverse markets and product lines; well developed sales and
marketing distribution systems; and competitive strength of business
opportunities not otherwise available to HRM if it were to remain a separate
company.
The foregoing discussion of the information and factors considered and
given weight by the HRM Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the Merger,
the HRM Board did not find it practicable to, and did not, quantify, prioritize
or otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the HRM Board may
have given different weights to different factors.
FOR THE REASONS DISCUSSED ABOVE, THE BOARD OF DIRECTORS OF HRM HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE FAIR TO, AND IN THE BEST INTERESTS OF, HRM AND THE HRM
SHAREHOLDERS. ACCORDINGLY, THE HRM BOARD OF DIRECTORS RECOMMENDS THAT HRM
SHAREHOLDERS VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
REASONS OF HPS FOR THE MERGER
The Board of Directors of HPS believes that the Merger is fair to and in
the best interests of HPS and its shareholders and unanimously approved HPS
entering into the proposed Merger Agreement. In that regard, the Board
determined that the Merger represents a unique strategic fit between two sound
institutions with complementary service and product capabilities and market
coverage. The Board further believes that the combined company would be a
stronger health care services company, with product, service, geographic
diversity, and market leadership positions in important segments of the health
care industry.
In reaching its conclusions, the HPS Board considered a number of factors,
including: (i) the HPS Board's knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of HRM,
including, in particular, the enhanced ability of HPS to grow and expand its
business through combined operations with HRM; (ii) the HPS Board's judgment as
to the future prospects of HPS in light of management's assessment of the future
of the health care industry, including consolidation in the health care industry
in general and the trend toward expanded risk management products such as those
available through HRM, and its belief that larger, more diversified companies
will be better able to compete effectively in a rapidly changing and competitive
health care industry; (iii) Bear Stearns' analysis of the industry and its
evaluation of the strategic partnership; (iv) the attractiveness of HRM as a
strategic partner, including HRM's knowledge of the industry and its quality
products, potential benefits of combining the two companies' customers,
services, and products, and the strong management team of HRM; (v) current
industry, economic, and market conditions and trends, including the likelihood
of continuing consolidation and
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increasing competition in the health care services industries (and corresponding
decease in the number of suitable merger partners with the types of quality
products offered by HRM), the growing importance of financial resources, market
position, and economies of scale to a health care institution's ability to
compete successfully in this changing environment, and the increase in costs of
technology; (vi) the possibility of achieving significant costs savings,
operating efficiencies, and synergies as a result of the Merger that would not
be available to either company on its own; (vii) the terms of the Merger
Agreement and other agreements connected with the proposed transaction; (viii)
the presentation of Bear Stearns and its opinion that the transaction is fair to
HPS shareholders from a financial point of view; (ix) the historical market
price of HPS Common Shares, which had ranged from $17.675 per share to $29.25
per share during the 12 months ended September 12, 1996, the last trading date
prior to the announcement of the signing of the Merger Agreement; (x) the lack
of significant regulatory barriers to consummating the Merger; and (xi) the
interests of HPS's customers, which the HPS Board believed would be best served
by a merger with a strategic partner such as HRM.
The foregoing discussion of the factors considered by the HPS Board is not
intended to be exhaustive. In view of the wide variety of factors considered in
connection with its evaluation of the Merger, the HPS Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations.
OPINION OF ROBERTSON STEPHENS
Robertson Stephens has delivered to the HRM Board of Directors its written
opinion, dated September 11, 1996, that the consideration to be received by the
shareholders of HRM in connection with the Merger was fair to such shareholders
from a financial point of view as of the date thereof. In its opinion, Robertson
Stephens calculated the consideration to be received by the shareholders of HRM
in connection with the Merger on the basis that, in the Merger, each outstanding
share of HRM Common Stock would be converted into the right to receive $9.68603
in cash (the "Cash Consideration") and 0.360208 of an HPS Common Share (the
"Stock Consideration," and together with the Cash Consideration, the
"Consideration"), subject to certain adjustments to the amount of the Stock
Consideration based upon the market price of HPS Common Shares.
A COPY OF THE FULL TEXT OF THE WRITTEN OPINION OF ROBERTSON STEPHENS, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITS ON THE REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS
AS ANNEX B AND IS INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF HRM ARE
URGED TO, AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. ROBERTSON STEPHENS DID
NOT RECOMMEND TO HRM THE SPECIFIC CONSIDERATION TO BE PAID IN THE MERGER OR THAT
ANY SPECIFIC AMOUNT OF CONSIDERATION CONSTITUTED THE APPROPRIATE CONSIDERATION
FOR THE MERGER. ROBERTSON STEPHENS' OPINION IS DIRECTED ONLY TO THE FAIRNESS,
FROM A FINANCIAL POINT OF VIEW AND AS OF SEPTEMBER 11, 1996, OF THE
CONSIDERATION TO BE RECEIVED BY THE SHAREHOLDERS OF HRM IN CONNECTION WITH THE
MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HRM SHAREHOLDER AS TO HOW
SUCH SHAREHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE SUMMARY OF THE OPINION
OF ROBERTSON STEPHENS SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
ROBERTSON STEPHENS DOES NOT EXPRESS ANY OPINION REGARDING THE VALUE OF THE
HPS COMMON SHARES AT THE TIME THEY ARE ISSUED TO THE SHAREHOLDERS OF HRM
PURSUANT TO THE MERGER OR THE PRICE AT WHICH THE HPS COMMON SHARES WILL BE
TRADED AT ANY TIME AFTER THE DATE OF THE OPINION. IN THIS REGARD, ROBERTSON
STEPHENS NOTED IN ITS OPINION THAT NOEL GROUP, INC. CURRENTLY HOLDS
APPROXIMATELY 37% OF THE OUTSTANDING SHARES OF HPS COMMON SHARES AND HAS
ANNOUNCED ITS INTENTION TO ADOPT A PLAN OF LIQUIDATION THAT MAY INVOLVE THE SALE
OR DISTRIBUTION OF SUCH SHARES. ROBERTSON STEPHENS DOES NOT EXPRESS ANY OPINION
AS TO THE NATURE OR TIMING OF THIS PROPOSED LIQUIDATION OR THE POTENTIAL EFFECT
THAT SUCH LIQUIDATION (OR ANY SUBSEQUENT OR RELATED TRANSACTIONS) MIGHT HAVE ON
THE TRADING PRICE OF HPS COMMON SHARES PRIOR TO OR AFTER THE MERGER. MOREOVER,
ROBERTSON STEPHENS DOES NOT EXPRESS ANY OPINION REGARDING THE FAIRNESS OF THE
MERGER TO HPS OR TO ITS SHAREHOLDERS. ROBERTSON STEPHENS EXPRESSES NO OPINION AS
TO THE TAX CONSEQUENCES OF THE MERGER, AND ROBERTSON STEPHENS' OPINION AS TO THE
FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION DOES NOT TAKE INTO
ACCOUNT THE PARTICULAR TAX STATUS OR POSITION OF ANY HOLDER OF HRM COMMON STOCK.
ROBERTSON
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STEPHENS WAS NOT ASKED TO CONSIDER, AND ITS OPINION DOES NOT ADDRESS, THE
RELATIVE MERITS OF THE MERGER AS COMPARED TO ANY ALTERNATIVE BUSINESS STRATEGIES
THAT MAY BE AVAILABLE TO HRM OR THE DECISION BY THE HRM BOARD TO PROCEED WITH
THE MERGER. IN RENDERING ITS OPINION, ROBERTSON STEPHENS WAS NOT ENGAGED AS AN
AGENT OR FIDUCIARY OF HRM SHAREHOLDERS OR ANY OTHER THIRD PARTY, AND NO
LIMITATIONS WERE IMPOSED BY HRM ON THE SCOPE OF ROBERTSON STEPHENS' OPINION OR
THE PROCEDURES TO BE FOLLOWED BY ROBERTSON STEPHENS IN RENDERING ITS OPINION.
In connection with its opinion, Robertson Stephens, among other things, (i)
reviewed financial information regarding HRM and HPS furnished to it by both
companies, including certain internal financial analyses and forecasts prepared
by the managements of HRM and HPS; (ii) reviewed publicly available information
relating to HRM and HPS; (iii) held discussions with the managements of HRM and
HPS concerning the businesses, past and current business operations, financial
condition and future prospects of both companies, independently and combined,
including certain information provided by the management of HPS concerning
potential cost savings and synergies that could result from the Merger; (iv)
reviewed the draft Plan and Agreement of Merger dated as of August 26, 1996 (the
"Draft Agreement"); (v) reviewed the stock price and trading histories of both
companies; (vi) reviewed the contribution by each company to pro forma combined
revenue, gross income, earnings before interest and taxes, and net income; (vii)
reviewed the valuations of publicly-traded companies which Robertson Stephens
deemed comparable to HRM; (viii) compared the financial terms of the Merger with
other transactions which Robertson Stephens deemed relevant; and (ix) made such
other studies and inquiries, and reviewed such other data, as Robertson Stephens
deemed customary and relevant.
In rendering its opinion, upon the assurance of HRM and HPS management that
they were unaware of any information that would make information provided to
Robertson Stephens inaccurate or misleading, Robertson Stephens assumed and
relied upon, without independent verification, the accuracy and completeness of
all publicly available information reviewed by it and all other information
furnished (or made available) to it by or on behalf of HRM and HPS or otherwise
used by Robertson Stephens in connection with its opinion. Furthermore,
Robertson Stephens was not requested to, and did not, make or obtain any
independent appraisal of the properties, assets or liabilities of HRM or HPS.
With respect to the financial and operating forecasts (and the assumptions and
bases therefor) of HRM and HPS which Robertson Stephens reviewed, Robertson
Stephens assumed that such forecasts were reasonably prepared in good faith on
the basis of reasonable assumptions, reflect the best available estimates and
judgments of such respective managements and that such projections and forecasts
will be realized in the amounts and in the time periods currently estimated by
the managements of HRM and HPS. In addition, Robertson Stephens relied upon
estimates and judgments of managements of HRM and HPS as to the future financial
performance of both companies. Further, Robertson Stephens assumed that the
historical financial statements of HRM and HPS that it reviewed had been
prepared and presented in accordance with generally accepted accounting
principles ("GAAP"). In addition, Robertson Stephens assumed that the Merger
will be consummated upon the terms set forth in the Draft Agreement without
material alteration. The opinion of Robertson Stephens is necessarily based only
upon market, economic, and other conditions that existed and could be evaluated
as of the date of the opinion, and on information available to Robertson
Stephens as of the date of the opinion.
The following paragraphs summarize certain of the financial analyses
performed by Robertson Stephens in connection with providing its opinion, dated
September 11, 1996, to the HRM Board, and do not purport to be a complete
description of the analyses performed by Robertson Stephens.
Comparable Companies Analysis. Robertson Stephens reviewed and compared
certain financial information relating to HRM to corresponding publicly
available financial information for certain publicly traded companies in the
health care information services/outsourcing industry that Robertson Stephens
deemed relevant. These companies included Health Management Systems, Inc.,
Medaphis Corporation, MedQuist, Inc., Physician Support Systems, Inc. and
Transcend Services, Inc. (collectively, the "Comparable Companies"). Financial
data reviewed included revenues, earnings before interest and taxes ("EBIT"),
EBIT margin, earnings per share (both historical and projected based on
analysts' estimates) and projected earnings per share growth rate. Robertson
Stephens also assessed multiples of price per share to projected 1996 earnings
per share accorded to the Comparable Companies, and compared such information to
the multiple
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for HRM implied by the Consideration to be received by the shareholders of HRM
in connection with the Merger. The multiples assessed for the Comparable
Companies were based on publicly available information and composite analyst
estimates as reported by First Call, with the exception that the estimates of
projected earnings per share and projected earnings per share growth rate for
Health Management Systems, Inc., were as estimated by Robertson Stephens. Such
multiples for the Comparable Companies and for the Consideration were calculated
using the closing prices of the common stock of the Comparable Companies and of
HPS on September 10, 1996 (the "Reference Prices"). Robertson Stephens' analysis
indicated that for the Comparable Companies, Reference Prices as a multiple of
1996 estimated earnings per share ranged from 21.8 to 58.3, with a mean of 34.4,
compared with a multiple of the Consideration to 1996 estimated earnings per
share of 36.2.
Precedent Acquisition Transactions Analysis. Robertson Stephens also
analyzed publicly available information for selected completed acquisitions and
mergers in the health care information services/ outsourcing industry since 1995
(the "Precedent Acquisition Transactions"), and compared certain multiples
implied by such information to various multiples for HRM implied by the
Consideration to be received by the shareholders of HRM in connection with the
Merger. Such analysis indicated that for the Precedent Acquisition Transactions
(i) aggregate consideration as a multiple of latest twelve months ("LTM")
revenues ranged from 0.6x to 4.2x, with a mean of 1.7x, compared with a multiple
of 1.5x indicated by the Consideration; and (ii) equity consideration as a
multiple of LTM net income ranged from 10.3x to 40.4x, with a mean of 25.9x,
compared with a multiple of 39.3x for the Consideration.
No company or transaction used in the analyses described in the preceding
two paragraphs is identical to HRM, HPS or the Merger. Accordingly, an analysis
of the results of the foregoing is not entirely mathematical; rather, it
involves complex considerations and judgments concerning the differences in the
financial and operating characteristics of the comparable companies or
transactions and other factors that could affect the acquisition or public
trading values of the comparable companies or transactions.
Discounted Cash Flow Analysis. Robertson Stephens performed a discounted
cash flow analysis of HRM under two scenarios, utilizing financial information
and estimates of future financial performance for HRM as provided by HRM
management, such scenarios being referred to as the "Company Case" and the
"Extrapolation Case." In such analysis, Robertson Stephens assumed terminal
value multiples of 7.0x to 9.0x projected EBIT for calendar year 2002 and
discount rates of 14.0% to 16.0%. For the Company Case, such analysis produced
implied current per share values of HRM Common Stock ranging from $19.84 to
$25.99. For the Extrapolation Case, such analysis produced implied current per
share values of HRM Common Stock ranging from $13.62 to $17.82.
Contribution Analysis. Robertson Stephens compared the contribution of HRM
and HPS to pro forma estimated combined revenue, gross profit, EBIT and net
income for calendar years 1996 and 1997. Robertson Stephens noted that HRM
contributes approximately 20.2%-22.4% of revenues, 21.3%-23.8% of gross profit,
10.7%-15.3% of EBIT and 10.5%-17.3% of net income. Robertson Stephens further
noted that based upon the market price for HPS Common Shares as of September 10,
1996, such contribution implied a value per share of HRM Common Stock of
approximately $7.63 to $19.67 based upon 1996 pro forma financial performance,
and approximately $11.46 to $17.08 based upon 1997 pro forma financial
performance.
The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such opinions are not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Robertson Stephens did not attribute any particular weight to any
analysis or factor considered by it, but rather made qualitative judgments as to
the significance and relevance of each analysis and factor. Accordingly,
Robertson Stephens believes that its analyses must be considered as a whole and
that considering any portion of such analyses alone could create a misleading or
incomplete view of the process underlying its opinion. Analyses based upon
forecasts of future results are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or Robertson Stephens, none of
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HRM, HPS or Robertson Stephens, or any other person, assumes responsibility if
future results are materially different from those forecast. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
As described above, Robertson Stephens' opinion to the HRM Board was one of
many factors taken into consideration by the HRM Board in making its
determination to approve the Merger and the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analyses performed
by Robertson Stephens and is qualified in its entirety by reference to the full
text of the written opinion of Robertson Stephens set forth in Annex B hereto.
Robertson Stephens is a nationally recognized investment banking firm. As
part of its investment banking business, Robertson Stephens is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. In the course of its
securities trading, sales and other activities, Robertson Stephens may purchase
or sell the securities of HRM or HPS, including their common stock, for its own
account and the accounts of its customers. Accordingly, Robertson Stephens may,
from time to time, have a long or short position in the securities of HRM or
HPS.
Pursuant to a letter agreement dated August 23, 1996 (the "Engagement
Letter"), HRM engaged Robertson Stephens to render its opinion with respect to
the fairness, from a financial point of view, of the Consideration to be
received by the shareholders of HRM in connection with the Merger. HRM retained
Robertson Stephens on the basis of Robertson Stephens' experience and reputation
in the rendering of fairness opinions in connection with merger and acquisition
transactions, in the health care industry in particular. Pursuant to the terms
of the Engagement Letter, HRM agreed to pay Robertson Stephens a fee of
$225,000, of which a $75,000 retainer was payable upon signing of the engagement
letter, $75,000 was payable upon Robertson Stephens's presentation and delivery
of its fairness opinion to the HRM Board of Directors, and the remainder is
payable upon the mailing of this Proxy Statement/Prospectus to the HRM
Shareholders. HRM has also agreed to reimburse Robertson Stephens for certain of
their reasonable out-of-pocket expenses, including attorneys' fees, not to
exceed $20,000, and to indemnify Robertson Stephens against certain liabilities,
including certain liabilities under federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of HRM with
respect to the Merger and the transactions contemplated thereby, shareholders
should be aware that certain members of the management of HRM and the Board of
Directors of HRM have certain interests in the Merger that are in addition to
the interests of shareholders of HRM generally.
Employment Agreements. In June 1996, HRM entered into employment
agreements with Gary T. McIlroy, M.D., Marlene O. Travis, and Thomas P. Clark
that were negotiated prior to the initiation of discussions with HPS, pursuant
to which they agreed to continue to serve as Chief Executive Officer, President
and Chief Operating Officer, and Chief Financial Officer, respectively, of HRM.
Such agreements provide for base salary, incentive compensation, retirement
benefits and other benefits, as well as certain payments in the event of a
change of control.
In accordance with the Merger Agreement, it is expected that Dr. McIlroy,
Ms. Travis and Mr. Clark will enter into amendments to those Employment
Agreements with HRM, each of which amendment is effective only upon consummation
of the Merger.
The amendment to Dr. McIlroy's agreement revises the change in control and
severance provision described in his Employment Agreement to refer to changes in
control of either HRM or HPS. The amendment contains a waiver of Dr. McIlroy's
right to terminate his employment in connection with the Merger and also
provides that Dr. McIlroy will be granted a seat on the Board of Directors of
HPS.
The amendment to Ms. Travis's agreement revises the change in control and
severance provision described in her Employment Agreement to refer to changes in
control of either HRM or HPS. The
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amendment contains a waiver of Ms. Travis's right to terminate her employment in
connection with the Merger.
The amendment to Mr. Clark's agreement revises the change in control and
severance provision described in his Employment Agreement to refer to changes in
control of either HRM or HPS. It also provides that Mr. Clark may terminate his
Employment Agreement at any time following the Effective Time of the Merger upon
30 days prior written notice to HRM, provided that such notice is given on or
before the date which is six months after the Effective Time of the Merger. Upon
such termination, Mr. Clark will be entitled to the severance benefits described
in his Employment Agreement. Following the Effective Time of the Merger, Mr.
Clark will serve in the office of Executive Vice President -- Finance and
Administration and his duties will include, but not be limited to, the
day-to-day financial management, supervision and control of all businesses and
operations of HRM and its subsidiaries.
Stock Options. Under the terms of the Merger Agreement, at or before the
Effective Time of the Merger, each outstanding option to purchase shares of HRM
Common Stock not otherwise vested will be accelerated and fully vested as of
immediately prior to the Effective Time. Directors and executive officers of HRM
hold options to acquire an aggregate 340,188 shares of HRM Common Stock, the
vesting of 86,139 of which will accelerate as a result of the Merger. Options
subject to such accelerated vesting are held by the following individual
directors and executive officers: Gary T. McIlroy, M.D. (21,902), Marlene O.
Travis (15,649), Thomas P. Clark (12,879), Adele M. Kimpell (2,500), Vance
Kenneth Travis (3,800), Ronald R. Hahn (3,800), Robert L. Montgomery (18,009),
Gary L. Damkoehler (3,800), and Raymond G. Schultze, M.D. (3,800). See
"-- Treatment of Stock Options."
Indemnification. Under the Merger Agreement, HPS has agreed to indemnify
the present and former officers and directors of HRM following the Merger with
respect to acts or omissions occurring prior to the Effective Time, to the
extent that they were indemnified under Minnesota law and HRM's Articles of
Incorporation and Bylaws immediately prior to the Effective Time. See "The
Merger Agreement -- Representations, Warranties and Covenants."
For additional information on certain interests, see "-- Support/Voting
Agreements."
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting,
in accordance with generally accepted accounting principles. Under the purchase
method, the purchase price of HRM, including direct costs of the Merger, will be
allocated to the assets acquired and liabilities assumed based upon their
estimated relative fair values, with the excess purchase consideration allocated
to goodwill. The results of HPS's operations will include the results of
operations of HRM commencing at the Effective Time.
The Unaudited Pro Forma Consolidated Financial Statements appearing
elsewhere in this Proxy Statement/Prospectus are based upon certain assumptions
and allocate the purchase price to assets and liabilities based upon preliminary
estimates of their respective fair values. The unaudited pro forma adjustments
and combined amounts are included for informational purposes only. If the Merger
is consummated, then HPS's financial statements will reflect effects of
acquisition adjustments only from the Effective Time. The actual allocation of
the purchase price may differ significantly from the allocation reflected in the
Unaudited Pro Forma Consolidated Financial Statements.
REGULATORY APPROVALS
Under the HSR Act and the rules that have been promulgated thereunder by
the Federal Trade Commission (the "FTC"), the Merger may not be consummated
unless certain filings have been submitted to the Antitrust Division of the
United States Department of Justice (the "Antitrust Division") and the FTC and
certain waiting period requirements have been satisfied. On October 21, 1996,
HPS and HRM submitted the required filings to the FTC and the Antitrust
Division. On November 4, 1996, early termination of the applicable waiting
period was granted by the FTC and the Antitrust Division.
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The Antitrust Division and the FTC frequently scrutinize the legality under
the antitrust laws of transactions such as the Merger. At any time before or
after the consummation of the Merger, the Antitrust Division or the FTC could
take such action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the consummation of the Merger
or seeking the divestiture of substantial assets of HRM or HPS. HRM and HPS
believe that the consummation of the Merger will not violate the antitrust laws.
There can be no assurance, however, that a challenge to the Merger on antitrust
grounds will not be made, or, if such a challenge is made, what the result will
be.
Other than as described in this Proxy Statement/Prospectus, consummation of
the Merger does not require the prior approval of, or filing with, any federal
or state agency.
FEDERAL SECURITIES LAW CONSEQUENCES
All HPS Common Shares issued in connection with the Merger will be freely
transferable, except that any HPS Common Shares received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
HPS or HRM prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act with
respect to affiliates of HPS or HRM, or Rule 144 under the Securities Act with
respect to persons who are or become affiliates of HPS, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of HPS or HRM generally include individuals or entities that control, are
controlled by or are under common control with, such person and generally
include the executive officers and directors of such person as well as principal
shareholders of such person.
Affiliates may not sell their HPS Common Shares acquired in connection with
the Merger, except pursuant to an effective registration under the Securities
Act covering such shares or in compliance with Rule 145 under the Securities Act
(or Rule 144 under the Securities Act in the case of persons who become
affiliates of HPS), or another applicable exemption from the registration
requirements of the Securities Act. In general, Rule 145 provides that for two
years following the Effective Time an affiliate (together with certain related
persons) would be entitled to sell HPS Common Shares acquired in connection with
the Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 under the Securities Act may not
exceed the greater of 1% of the outstanding HPS Common Shares or the average
weekly trading volume of such shares during the four calendar weeks preceding
such sale. Rule 145 will remain available to affiliates if HPS remains current
with its informational filings with the Commission under the Exchange Act. Two
years after the Effective Time, an affiliate will be able to sell such HPS
Common Shares without being subject to such manner of sale or volume limitations
provided that HPS is current with its Exchange Act informational filings and
such affiliate is not then an affiliate of HPS. Three years after the Effective
Time, an affiliate will be able to sell such HPS Common Shares without any
restrictions so long as such affiliate had not been an affiliate of HPS for at
least three months prior to the date of such sale.
It is a condition to the Merger that HRM obtain written undertakings
("Affiliate Letters") at least 35 days prior to the Special Meeting from each
person who may be at the Effective Time or was on the date of the Merger
Agreement an "affiliate" of HRM for purposes of Rule 145 under the Securities
Act to the effect that, among other things, such person will not sell, transfer
or otherwise dispose of any HPS Common Shares owned by such affiliate as a
result of the Merger or otherwise except in accordance with registration, or an
exemption from registration, under the Securities Act. See "The Merger
Agreement -- Conditions."
DEREGISTRATION OF HRM COMMON STOCK
If the Merger is consummated, the HRM Common Stock will cease to be quoted
on the Nasdaq National Market and HPS will apply to the Commission for the
deregistration of HRM Common Stock under the Exchange Act.
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TREATMENT OF STOCK OPTIONS
Under the terms of the Merger Agreement, each holder of an option to
purchase shares of HRM Common Stock that is outstanding at the Effective Time of
the Merger (an "HRM Option") will receive a cash payment equal to (i) the total
number of shares of HRM Common Stock subject to the unexercised portion of such
HRM Option, determined by assuming that such HRM Option is immediately vested
and exercisable in full, multiplied by (ii) the excess of (x) the Per Share Cash
Consideration plus the current fair market value of the Per Share Stock
Consideration, over (y) the per share exercise price specified in such HRM
Option. Prior to the Effective Time of the Merger, HRM will take such action as
is legally required to amend the 1990 Stock Option Plan and the 1992 Long-Term
Incentive Plan and the terms of all HRM Options outstanding at the Effective
Time such that (i) all outstanding HRM Options are immediately vested and
exercisable in full at or before the Effective Time, (ii) the holders of all
outstanding HRM Options will receive the cash described above, (iii) all HRM
Options outstanding at the Effective Time reflect the revised exercise terms
described above, (iv) no further options will be grantable under such plans
after the Effective Time, and (v) all change-of-control provisions contained in
such plans and outstanding HRM Options will not apply to any HRM Options
outstanding as of the Effective Time.
SUPPORT/VOTING AGREEMENTS
Concurrently with the execution of the Merger Agreement, HPS and each
Supporting Shareholder executed separate Support/Voting Agreements. The
Supporting Shareholders and the number of shares of HRM Common Stock owned by
them or over which they have voting control as of the Record Date are as
follows: (i) Gary T. McIlroy, M.D., 267,774; (ii) Marlene O. Travis, 272,688;
and (iii) Thomas P. Clark, 60,000.
Pursuant to the Support/Voting Agreements, each Supporting Shareholder
agreed that, among other things, such Supporting Shareholder (i) will not, will
not permit any company, trust or other entity controlled by such Supporting
Shareholder to, and will not permit any of his or her affiliates to, contract to
sell, sell or otherwise transfer or dispose of any of the shares of the capital
stock of HRM of which such Supporting Shareholder or his or her affiliates is
the record or beneficial owner ("Supporting Shareholder Shares") or any interest
therein or securities convertible thereinto or any voting rights with respect
thereto, other than (x) pursuant to the Merger, (y) with HPS's prior written
consent or (z) transfers by gift to family members, charitable organizations, or
certain trusts, (ii) will not, will not permit any such company, trust or other
entity to, and will not permit any of his or her affiliates to, directly or
indirectly (including through its officers, directors, employees, or other
representatives), solicit, initiate, encourage or facilitate, or furnish or
disclose non-public information in furtherance of, any inquiries or the making
of any proposal with respect to any recapitalization, merger, consolidation or
other business combination involving HRM, or acquisition of any capital stock or
any material portion of the assets (except for acquisitions of assets in the
ordinary course of business consistent with past practice) of HRM, or any
combination of the foregoing (a "Competing Transaction"), or negotiate, explore
or otherwise engage in discussions with any person (other than HPS, Subcorp or
their respective directors, officers, employees, agents and representatives)
with respect to any Competing Transaction or enter into any agreement,
arrangement or understanding with respect to any Competing Transaction or agree
to or otherwise assist in the effectuation of any Competing Transaction;
provided, however, that nothing in any Support/Voting Agreement prevents any
Supporting Shareholder from taking any action or omitting to take any action (x)
solely as a member of the Board of Directors of HRM required so as not to
violate such Supporting Shareholder's fiduciary obligations as a director or
which action is not in violation of any of the terms of the Merger Agreement, or
(y) if such Supporting Shareholder is an officer of HRM, as directed or
authorized by the Board of Directors of HRM so long as such direction or
authorization was not made in violation of any of the terms of the Merger
Agreement, and (iii) will vote all of such Supporting Shareholder Shares
beneficially owned by such Supporting Shareholder or his or her affiliates, or
over which such Supporting Shareholder or any of his or her affiliates has
voting power or control, directly or indirectly (including any HRM Common Stock
acquired after the date of the Support/Voting Agreement), at the record date for
any meeting of shareholders of HRM called to consider and vote to approve the
Merger and the Merger Agreement and/or the transactions contemplated thereby in
favor
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thereof, and neither the Supporting Shareholder nor any of his or her affiliates
will vote such Supporting Shareholder Shares in favor of any Competing
Transaction. Each Support/Voting Agreement will terminate upon the earlier of
(i) termination of the Merger Agreement or (ii) the Effective Time.
The foregoing is a summary of the material provisions of the Support/Voting
Agreements, a form of which is filed as an exhibit to the Registration
Statement. See "Available Information." This summary is qualified in its
entirety by reference to the form of Support/Voting Agreement which is
incorporated herein by this reference.
RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of HRM are entitled to exercise dissenters' rights pursuant to
the provisions of sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act ("MBCA"). In accordance with these sections, HRM Shareholders
have the right to dissent to the Merger and to be paid the "fair value" of their
HRM shares. In this context, the term "fair value" means the value of the HRM
Common Stock immediately before the Effective Time of the Merger. Under section
302A.473, where a merger is to be submitted for approval at a meeting of
shareholders, the corporation must notify each of its shareholders of the right
to dissent, include in such notice a copy of sections 302A.471 and 302A.473 and
provide a brief description of the procedures to be followed under these
sections. This Proxy Statement/Prospectus shall constitute such notice to the
shareholders of HRM and the following discussion describes the procedures to be
followed by a dissenting shareholder. The applicable statutory provisions are
attached hereto as Annex C.
The following discussion is not a complete statement of the law pertaining
to a dissenting shareholder's rights under Minnesota law and is qualified in its
entirety by the full text of sections 302A.471 and 302A.473 attached hereto. Any
HRM Shareholder who wishes to exercise the right to dissent and demand the fair
value of his or her shares, or who wishes to preserve the right to do so, should
review the following discussion and Annex C carefully, because failure to timely
and properly comply with the procedures will result in the loss of a
shareholder's right to dissent under Minnesota law.
A shareholder of HRM wishing to exercise the right to demand the fair value
of his or her shares must:
- Before the vote of shareholders is taken at the Special Meeting of HRM
Shareholders, file a written notice of intent to demand the fair value of
his or her shares and, in addition, he or she must not vote in favor of
the Merger Agreement. Because a proxy that does not contain voting
instructions will, unless revoked, be voted FOR approval of the Merger
Agreement, a shareholder of HRM who votes by proxy and who wishes to
exercise dissenters' rights must (i) vote AGAINST the approval of the
Merger Agreement or (ii) ABSTAIN from voting on the approval of the Merger
Agreement. A vote against the Merger Agreement in person or by proxy will
not in and of itself constitute a written notice of intent to demand the
fair value of a shareholder's HRM shares satisfying the requirements of
the MBCA.
- A demand for fair value must be executed by or for the shareholder of
record, fully and correctly, as such shareholder's name appears on his or
her HRM stock certificate or certificates. If the HRM stock is owned of
record in a fiduciary capacity such as by a trustee, guardian or
custodian, such demand must be executed by the fiduciary. If the stock is
owned of record by more than one person, as in a joint tenancy or tenancy
in common, such demand must be executed by all joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the
demand for a shareholder of record; however, the agent must identify the
record owner and expressly disclose the fact that, in exercising the
demand, he or she is acting as agent for the record owner.
A record owner who holds shares of HRM Common Stock as a nominee for
others, such as a broker, may demand the fair value of the shares held for all,
or fewer than all, of the beneficial owners of such shares. In such a case, the
written demand should set forth the number of shares to which it relates. When
no number of shares is expressly mentioned, the demand will be presumed to cover
all shares standing in the name of the record owner. Beneficial owners of HRM
shares who are not record owners and who intend to exercise
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dissenters' rights should instruct the record owner to comply with the statutory
requirements with respect to the exercise of dissenters' rights before the date
of the Special Meeting.
- HRM Shareholders who elect to exercise dissenters' rights and demand fair
value should mail or deliver their written demand to: Thomas P. Clark,
Chief Financial Officer, Health Risk Management, Inc., 8000 West 78th
Street, Minneapolis, MN 55426. The written demand should specify the
shareholder's name and mailing address, the number of shares owned, and
that the shareholder is thereby demanding the fair value of his or her
shares.
- After the Effective Time, Subcorp, as the surviving corporation, will
cause to be mailed to each shareholder of HRM who has properly asserted
dissenters' rights a notice that contains (i) the address to which a
demand for payment and HRM stock certificates must be sent in order to
receive payment and the date by which they must be received; (ii) a form
to be used to certify the date on which the shareholder, or the beneficial
owner on whose behalf the shareholder dissents, acquired his or her HRM
shares or an interest in them and to demand payment; and (iii) another
copy of sections 302A.471 and 302A.473 together with a brief description
of these sections. To receive the fair value of his or her HRM shares, a
dissenting shareholder must demand payment and deposit his or her
certificates within 30 days after the notice is given.
- After the Effective Time or after the surviving corporation receives a
valid demand for payment, whichever is later, the surviving corporation
must remit to each dissenting shareholder who has complied with the
dissenters' rights provisions the amount the surviving corporation
estimates to be the fair value of the shares, plus interest, along with
(i) HRM's closing balance sheet and statement of income for a fiscal year
ending not more than 16 months before the effective date of the Merger,
together with the latest available interim financial statements; (ii) an
estimate by the surviving corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and (iii)
another copy of sections 302A.471 and 302A.473 and a brief description of
the procedure to be followed in demanding supplemental payment. If the
surviving corporation fails to remit payment within 60 days of the deposit
of certificates, the surviving corporation must return all deposited
certificates. However, the surviving corporation may again give notice and
require deposit at a later time.
- If a dissenting HRM Shareholder believes that the amount remitted by the
surviving corporation is less than the fair value of his or her shares
plus interest, such dissenting shareholder may give written notice to the
surviving corporation of his or her own estimate of the fair value for the
shares plus interest and demand a supplemental payment for the difference.
Any written demand for supplemental payment must be made within 30 days
after the surviving corporation mailed its original remittance. Otherwise,
a dissenter is entitled only to the amount remitted by the surviving
corporation.
- Within 60 days after receiving a demand for supplemental payment,
Subcorp, as the surviving corporation, must either pay the amount of the
supplemental payment demanded (or agreed to between the dissenting
shareholder and the surviving corporation) or file a petition in the state
courts of Minnesota requesting that the court determine the fair value of
the shares plus interest. Any petition so filed must name as parties all
dissenting shareholders who have demanded supplemental payments and who
have been unable to reach an agreement with the surviving corporation
concerning the fair value of their shares. The court may appoint
appraisers, with such power and authority as the court deems proper, to
receive evidence on and recommend the amount of fair value of the shares.
The jurisdiction of the court is plenary and exclusive, and the fair value
as determined by the court is binding on all shareholders, wherever
located. A dissenting shareholder, if successful, is entitled to a
judgment for the amount by which the fair value of his or her shares as
determined by the court exceeds the amount originally remitted by the
surviving corporation.
Generally, the costs and expenses associated with a court proceeding to
determine the fair value of the HRM shares will be borne by Subcorp, as the
surviving corporation, unless the court finds that a dissenting shareholder has
demanded supplemental payment in a manner that is arbitrary, vexatious, or not
in good faith. Similar costs and expenses may also be assessed in instances
where HRM or Subcorp, as the surviving
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corporation, has failed to comply with the procedures in section 302A.473 of the
MBCA pertaining to dissenters' rights discussed above. The court may, in its
discretion, award attorneys' fees to an attorney representing dissenting
shareholders out of any amount awarded to such dissenters.
Failure to follow the steps required by section 302A.473 for asserting
dissenters' rights may result in the loss of a shareholder's rights to demand
the fair value of his or her HRM shares. Shareholders considering seeking
appraisal should realize that the fair value of their shares, as determined
under section 302A.473 of the MBCA in the manner outlined above, could be more
than, the same as, or less than the amount of value of the cash and HPS Common
Shares they would be entitled to receive as a result of the Merger if they did
not seek appraisal of their shares.
Pursuant to the Merger Agreement, if the holders of more than five percent
of the outstanding shares of HRM Common Stock properly exercise dissenters'
rights (as described in this section and in Annex C hereto), HPS may terminate
the Merger Agreement prior to closing.
JOINT MARKETING AGREEMENT
On September 25, 1996, HPS and HRM entered into a nonexclusive Joint
Marketing Agreement pursuant to which HRM and HPS may each market the products
and services of the other, provided that neither party will be permitted to
negotiate the final terms, complete a sale of the other party's products and
services, or otherwise bind the other party in any way without the other party's
written consent. Under the agreement, each party is obligated to pay to the
other party a fee equal to five percent of total service fees it receives, or up
to a 15-percent commission for stop loss insurance placement, if the other party
refers the customer to it. The initial term of the agreement is for a period of
12 months and the agreement is terminable by either party upon 60 days' written
notice.
THE MERGER AGREEMENT
The following is a summary of material provisions of the Merger Agreement,
a copy of which is attached as Annex A to this Proxy Statement/Prospectus. This
summary is qualified in its entirety by reference to the Merger Agreement, which
is incorporated herein by this reference.
THE MERGER
The Merger Agreement provides that HRM will be merged with and into Subcorp
with the result that Subcorp as the surviving corporation becomes a wholly owned
subsidiary of HPS, subject to the requisite approvals of HRM Shareholders and
the satisfaction or waiver of the other conditions to the Merger. Upon the
effectiveness of the Merger, Subcorp will change its name to "Health Risk
Management, Inc." The Merger will become effective at the Effective Time upon
the filing of a duly executed certificate of merger with the Delaware Secretary
of State and articles of merger with the Minnesota Secretary of State. Prior to
this filing, a Closing will be held on the Closing Date, which date will be
within three business days following the date upon which all conditions set
forth in the Merger Agreement have been satisfied or waived, as the case may be,
but in no event earlier than January 1, 1997. It is currently anticipated that
the Effective Time will occur shortly after the date of the Special Meeting,
assuming the Merger Agreement and the Merger are approved at such meeting and
all other conditions to the Merger have been satisfied or waived.
MERGER CONSIDERATION
Cash and Exchange Ratio. Upon consummation of the Merger pursuant to the
Merger Agreement, each share of HRM Common Stock issued and outstanding
immediately prior to the Effective Time, other than shares held in the treasury
of HRM, if any, which will be cancelled, and other than shares held by HRM
Shareholders who validly exercise dissenters' rights, will be converted into and
represent the right to receive $9.68603 in cash plus the Per Share Stock
Consideration. The Per Share Stock Consideration is equal to 0.360208 of an HPS
Common Share unless the Market Price of an HPS Common Share is either less than
$17.93 or greater than $30.00. If the Market Price is less than $17.93, then the
Per Share Stock Consideration
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will be equal to 0.360208 multiplied by a fraction, the numerator of which is
$17.93 and the denominator of which is the Market Price. If the Market Price is
greater than $30.00, then the Per Share Stock Consideration will be equal to
0.360208 multiplied by a fraction, the numerator of which is $30.00 and the
denominator of which is the Market Price. The "Market Price" of an HPS Common
Share, for these purposes, is the weighted (by daily trading volume) average
closing price of the HPS Common Shares on the NYSE Composite Tape for the five
full trading days ending on the last full trading day immediately prior to the
Effective Time. As a result, the cash and stock to be received in the Merger in
exchange for one share of HRM Common Stock will have an approximate aggregate
value, as of the time of calculation of the Market Price, that is not less than
$16.14 and not greater than $20.49 per share.
Based on the number of shares of HRM Common Stock outstanding on the Record
Date (assuming Per Share Stock Consideration of 0.360208 of an HPS Common Share
for each share of HRM Common Stock and without giving effect to the exercise of
outstanding HRM Options), an estimated HPS Common Shares will be issued
in exchange for HRM Common Stock upon consummation of the Merger. Such shares
would represent approximately % of the approximately HPS Common
Shares that would be outstanding after consummation of the Merger.
HRM Shareholders will receive in the Merger a number of HPS Common Shares
determined by reference to the Per Share Stock Consideration. As described
above, the Per Share Stock Consideration of 0.360208 is subject to adjustment if
the Market Price of the HPS Common Shares is less than $17.93 per share or
greater than $30.00 per share, which will result in a minimum value and a
maximum value that can be received for each share of HRM Common Stock in the
Merger. In addition, because of fluctuations in the value of HPS Common Shares,
the market value of the HPS Common Shares that HRM Shareholders receive in the
Merger may increase or decrease following the Merger. See "Summary -- Market
Price and Dividend Data" for information regarding the historical market prices
of HPS Common Shares.
Fractional Shares. No certificates for fractional HPS Common Shares will
be issued in the Merger, and to the extent that an outstanding share of HRM
Common Stock would otherwise have become a fractional HPS Common Share, the
holder thereof, upon presentation of such fractional interest represented by an
appropriate certificate of HRM Common Stock to the exchange agent designated by
HPS as described under "Exchange Procedures" below, will be entitled to receive
a cash payment therefor in an amount equal to the value (determined with
reference to the Market Price) of such fractional interest.
EXCHANGE PROCEDURES
HOLDERS OF SHARES OF HRM COMMON STOCK SHOULD NOT SEND IN THEIR HRM STOCK
CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, a letter of transmittal
will be mailed to each holder of record of a certificate or certificates (the
"Certificates") which immediately prior to the Effective Time represented
outstanding shares of HRM Common Stock whose shares were converted into the
right to receive cash and HPS Common Shares. This letter of transmittal must be
used in forwarding Certificates for surrender in exchange for the cash
consideration and the certificates evidencing HPS Common Shares to which a
holder of shares of HRM Common Stock prior to the Effective Time has become
entitled and, if applicable, cash in lieu of any fractional HPS Common Share.
Such letter of transmittal will be accompanied by instructions specifying other
details of the exchange. After receipt of such letter of transmittal, each
holder of Certificates should surrender such Certificates to , the
exchange agent for the Merger, pursuant to and in accordance with the
instructions accompanying such letter of transmittal, and each such holder will
receive in exchange therefor a certificate evidencing the whole number of HPS
Common Shares to which such holder is entitled and a check representing the
amount of cash constituting the cash consideration, the cash payable in lieu of
any fractional HPS Common Share, if any, and unpaid dividends and distributions,
if any, which such holder has the right to receive pursuant to the Merger
Agreement, after giving effect to any required withholding tax. No interest will
be paid or accrued on the cash portion of the Merger consideration, the cash in
lieu of fractional shares, if any, and unpaid dividends and distributions, if
any, payable to holders of Certificates. Certificates surrendered for exchange
by any person constituting an "affiliate" of HRM for
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purposes of Rule 145(c) under the Securities Act will not be exchanged until HPS
has received an executed Affiliate Letter from such person as prescribed under
the Merger Agreement.
After the Effective Time, each Certificate, until so surrendered and
exchanged, will be deemed for all purposes to represent only the right to
receive, upon surrender, HPS Common Shares plus the cash consideration, cash in
lieu of fractional shares, if any, and unpaid dividends and distributions, if
any, as provided above. The holder of such unexchanged Certificate will not be
entitled to receive any dividends or other distributions declared or made by HPS
having a record date on or after the Effective Time until the Certificate is
surrendered. Subject to applicable laws, upon surrender of such unexchanged
Certificate, such dividends and distributions, if any, will be paid less the
amount of any withholding taxes which may be required thereon.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Merger Agreement contains various representations, warranties and
covenants of HPS, HRM and Subcorp. The representations and warranties made by
the parties in the Merger Agreement will not survive the Effective Time,
although it is a condition of HPS's obligations under the Merger Agreement that
HRM's representations and warranties be true and correct; provided, however,
that the failure of any such representations and warranties to be true and
correct in all material respects will not permit HPS to terminate the Merger
Agreement or not consummate the Merger unless such failure constitutes a
"Company Material Adverse Effect." A "Company Material Adverse Effect" is
defined in the Merger Agreement as a material adverse effect on the business,
prospects, results of operation or condition (financial or otherwise) of HRM and
its subsidiaries, taken as a whole, or on the ability of HRM to consummate the
transactions contemplated thereby, provided that the following will not be
considered a material adverse effect: (i) changes relating to the economy in
general or to HRM's industry in general, and (ii) changes relating to
cancellations, terminations or nonrenewals by HRM's customers, employees,
representatives or others having similar relationships with HRM, that occur from
and after the date of announcement of the transactions contemplated by the
Merger Agreement, unless such cancellations, terminations or nonrenewals are
attributable to factors other than the transactions contemplated thereby such as
but not limited to loss of a material customer through the normal bid process.
Additionally, it is a condition of HRM's obligations under the Merger Agreement
that HPS's representations and warranties be true and correct; provided,
however, that the failure of any such representations and warranties to be true
and correct in all material respects will not permit HRM to terminate the Merger
Agreement or not consummate the Merger unless such failure constitutes a
"Purchaser Material Adverse Effect." A "Purchaser Material Adverse Effect" is
defined in the Merger Agreement as a material adverse effect on the business,
prospects, results of operation or condition (financial or otherwise) of HPS and
its subsidiaries, taken as a whole, provided that changes relating to the
economy in general or to HPS's industry in general will not be considered a
material adverse effect.
Pursuant to the Merger Agreement, each of HPS and HRM covenanted that it
will: (i) use reasonable efforts and cooperate to obtain the waiver, consent and
approval of all persons whose waiver, consent or approval is required in order
to consummate the transactions contemplated by the Merger Agreement or is
required by any material agreement, lease, instrument, arrangement, judgment,
decree, order or license to which HRM or HPS is a party or subject to on the
Closing Date and (a) which would prohibit, or require the waiver, consent or
approval of any person to such transactions or (b) under which, without such
waiver, consent or approval, such transactions would constitute an occurrence of
default under the provisions thereof, result in the acceleration of any
obligation thereunder or give rise to a right of any party thereto to terminate
its obligations thereunder; (ii) deliver to the other (a) all SEC documents of
such party as soon as such documents are filed with the SEC, (b) all regularly
prepared monthly, and other, unaudited financial statements of such party
prepared after the date of the Merger Agreement, in format historically utilized
internally, as soon as available but not later than the 20th of each month
following each statement's date, (c) all press releases of such party released
after the date of the Merger Agreement and prior to the Effective Time prior to
the time such releases are released to the public, and (d) such other
information concerning such party as the other shall reasonably request; and
(iii) file any Notification and Report Forms and related materials required to
be filed with the FTC and the Antitrust Division under the HSR Act with respect
to the
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Merger (which filings required to date have been made) and promptly make any
further filings pursuant thereto that may be necessary, proper or advisable.
HPS covenanted in the Merger Agreement: (i) to promptly prepare and file
with the SEC as soon as practicable this Proxy Statement/Prospectus under the
Securities Act, with respect to the HPS Common Shares issuable in the Merger, to
use all reasonable efforts, with the cooperation of HRM to have the Registration
Statement containing this Proxy Statement/Prospectus declared effective by the
SEC as promptly as practicable and to maintain the effectiveness of the
Registration Statement through the Effective Time, and to also take such other
reasonable actions (other than qualifying to do business in any jurisdiction in
which it is not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of the HPS Common Shares in the
Merger; (ii) that, except with the prior written consent of HRM, between the
date of the Merger Agreement and the Effective Time, (a) HPS will not adopt or
propose any change in its Certificate of Incorporation or Bylaws, (b) HPS will
not and will not allow any of its subsidiaries to lease, license or dispose of
any assets or property that are material to HPS and its subsidiaries taken as a
whole, (c) HPS will not declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise with respect to any
of its capital stock, (d) HPS will not and will not allow any of its
subsidiaries to merge or consolidate with any other person if, as a result
thereof, the shareholders of HPS immediately prior thereto cease to own directly
or indirectly at least a majority of the outstanding stock of HPS, (e) HPS will
ensure that the persons currently serving as the Chairman and the President of
HPS will continue to retain such positions and will ensure that persons
currently serving as directors of HPS will continue to comprise a majority of
the Board of Directors of HPS, (f) HPS will not issue any securities if such
issuance requires the vote of its shareholders, and (g) HPS will not agree or
commit to violate any of the foregoing covenants; (iii) to, at or prior to
Closing, purchase tail coverage under HRM's existing directors and officers
liability insurance policy affording coverage for a period of 12 months to HRM's
directors and officers for periods prior to the Closing, and to, from and after
Closing, indemnify (and, to the extent permitted by Minnesota Statutes, advance
expenses to) the officers and directors of HRM who served in such capacity prior
to the Effective Time for any and all claims related to matters occurring prior
to the Effective Time to the same extent that such persons are entitled to
indemnity under Minnesota law and HRM's Articles of Incorporation and Bylaws in
effect immediately prior to the Effective Time; (iv) to promptly prepare and
submit to the NYSE a listing application covering the HPS Common Shares to be
issued in connection with the Merger and to use reasonable efforts to obtain,
prior to the Effective Time, approval for the listing of such HPS Common Shares,
subject to official notice of issuance; and (v) after the Closing and until such
date as HRM's employees commence participation in HPS's employee benefit plans,
to cause the surviving corporation to take whatever action is necessary or
appropriate to cause the surviving corporation to maintain the participation,
sponsorship and/or maintenance of HRM's employee benefit plans except for the
Health Risk Management, Inc. Deferred Compensation Plan for Directors.
HRM covenanted in the Merger Agreement, among other things, as follows: (i)
HRM shall, as promptly as practical, but in no event later than five days after
the Commission clears this Proxy Statement/Prospectus, call a shareholders
meeting to vote upon the Merger, which shareholders meeting will be held as soon
as permitted by HRM's Bylaws and applicable law after the mailing of such notice
and HRM will use reasonable efforts to obtain the affirmative vote of all HRM
Shareholders for approval of the Merger; (ii) between the date of the Merger
Agreement and the Closing Date, HRM will allow HPS, its counsel and other
representatives full access to all the books, records, files, documents, assets,
properties, contracts, customers and agreements of HRM which may be reasonably
requested, and will furnish HPS, its officers and representatives during such
period with all information concerning the affairs of HRM which may be
reasonably requested; (iii) HRM will provide HPS with any information which HPS
reasonably requests concerning the employees of HRM, and will cooperate with,
and assist, HPS with respect to the commencement of participation of any HRM
employee in the surviving corporation's benefit plans or arrangements; and (iv)
HRM will promptly furnish HPS with all information concerning it as may be
required for inclusion in this Proxy Statement/Prospectus, and if at any time
prior to the Effective Time, any information pertaining to HRM contained in or
omitted from this Proxy Statement/Prospectus makes such statements contained
herein false or misleading, HRM will promptly so inform HPS and provide HPS with
the information necessary to make statements contained therein not false and
misleading.
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HRM also covenanted in the Merger Agreement, during the period from the
date of the Merger Agreement to the Effective Time, and except as otherwise
expressly contemplated by the Merger Agreement and the transactions contemplated
thereby or as set forth therein (including the disclosure schedule thereto), or
with the prior written consent of HPS, that HRM will conduct its business only
in the ordinary course, and that it will: (i) use reasonable efforts to preserve
the organization of HRM intact and to preserve the goodwill of clients,
customers and others having business relations with HRM; (ii) maintain the
properties of HRM in the same working order and condition as such properties
were in as of the date of the Merger Agreement, reasonable wear and tear
excepted; (iii) keep in force at no less than their present limits all existing
bonds, letters of credit and policies of insurance insuring HRM, its performance
and its respective properties; (iv) not enter into any contract, commitment,
arrangement or transaction of the type concerning (a) additional equity
investments in the businesses of others, (b) any note receivable, (c) any
material contract or agreement with a creditor not made in the ordinary course
of business, (d) any employment contract or arrangement regarding an employee or
independent contractor which is not terminable by HRM within 30 days without
payment of any amount for any reason whatsoever, or without any continuing
payment of any type or nature, including, without limitation, any bonuses and
vested commissions, (e) any contract, agreement, understanding or arrangement
materially restricting HRM from carrying on its business anywhere in the world,
(f) any material instrument or arrangement evidencing or related to indebtedness
for money borrowed or to be borrowed, whether directly or indirectly, by way of
purchase money obligation, guaranty, subordination, conditional sale,
lease-purchase or otherwise, (g) any contract with any labor organization, (h)
any material bond, suretyship arrangement, guarantee, letter of credit or other
performance guarantee document pursuant to which any obligation of HRM is
guaranteed or secured or pursuant to which HRM has guaranteed or secured the
performance or obligation of another person, (i) any employee benefit plans of
HRM, (j) any insurance policies maintained by HRM, or suffer, permit or incur
any transactions or events resulting in material changes to HRM (except for the
payment of any health, disability and life insurance premiums which may become
due and except for contributions or distributions required to be made (and not
discretionary) pursuant to the terms of any benefit plans), (k) any contract or
commitment which requires services over the term remaining after June 30, 1996
in excess of $500,000 to be provided or performed by HRM or which authorizes
others to perform services in excess of $500,000 over the term remaining after
June 30, 1996 for a third party for, through or on behalf of HRM, other than
those services performed for customers and clients of HRM on September 12, 1996,
or any contract or commitment involving an obligation by HRM in excess of
$500,000 over the term remaining after June 30, 1996 which cannot, or in
reasonable probability will not, be performed or terminated by September 12,
1997, if such contract will require HRM to hire new employees, expand existing
facilities, or acquire or lease new facilities, or (l) licenses granted by or to
HRM with respect to any material trademarks, trade names, service marks, service
names, brand names, copyrights and patents, registrations thereof and
applications therefor, applicable to or used in the business of HRM, or any
material software, if such contract is other than in the ordinary course of
HRM's software licensing business, in each case to the extent such events or
transactions are within the control of HRM; (v) not enter into any contracts,
commitments, arrangements or transactions for the lease or purchase of real or
personal property which individually exceed $500,000 or in the aggregate exceed
$2,000,000; (vi) not make or permit any change in HRM's Articles of
Incorporation or Bylaws, or in its authorized, issued or outstanding securities
(except upon exercise of currently outstanding options or warrants); (vii) not
issue any security (except upon exercise of currently outstanding options or
warrants) or grant any stock option or right to purchase any security of HRM,
issue any security convertible into such securities, purchase, redeem, retire or
otherwise acquire any of such securities, or agree to do any of the foregoing or
declare, set aside or pay any dividend or other distribution in respect of such
securities; (viii) not make any contribution to or distribution on behalf of or
to any employee of HRM (except for the payment of any health, disability and
life insurance premiums which may become due and except for contributions or
distributions required to be made (and not discretionary) pursuant to the terms
of any benefit plans); (ix) not make any capital expenditure (excluding
capitalized computer software costs of a normal and recurring nature in
accordance with past practice) which when aggregated with all other capital
expenditures for the period exceeds the sum of $500,000; (x) promptly advise HPS
in writing of any matters arising or discovered which, if existing or known on
September 12, 1996, would be required to be set forth or described in the Merger
Agreement or the disclosure letter thereto; (xi) not make any distributions or
commitments to charitable organizations; (xii) except after prior notification
to, and with the prior written
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consent of, HPS, not make any material change in its banking or safe deposit
arrangements or grant any powers of attorney; and (xiii) except with the prior
consent in writing of HPS or as otherwise required by generally accepted
accounting principles, not make any changes in its accounting methods or
practices and give HPS written notice of all changes in accounting estimates
promptly upon determination thereof.
NEGOTIATIONS AND SOLICITATIONS
Pursuant to the Merger Agreement, HRM agreed that: (i) neither it nor any
of its subsidiaries shall, nor will it or any of its subsidiaries authorize
their respective officers, directors, employees, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by it or any of its subsidiaries) to initiate or solicit, directly or
indirectly, the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its shareholders) with respect to a
merger, acquisition, consolidation or similar transaction involving, or purchase
of (a) all or any significant portion of the assets of HRM and its subsidiaries
taken as a whole, or of any subsidiary of HRM, (b) 25% or more of the
outstanding shares of HRM Common Stock or (c) 25% of the outstanding shares of
the capital stock of any subsidiary of HRM (any such proposal or offer being
hereinafter referred to as an "Alternative Proposal") or engage in any
negotiations with, or provide any confidential information or data to, or have
any discussions with, any person relating to an Alternative Proposal (excluding
the Merger); and (ii) it will notify HPS immediately if it provides any such
information or conducts any such negotiations or discussions or receives any
bona fide proposal or offer; provided, however, that the Merger Agreement does
not prohibit the Board of Directors of HRM from (a) furnishing information to or
entering into discussions or negotiations with, any person or entity, if, and
only to the extent that (A) the Board of Directors of HRM, based upon the advice
of outside counsel, determines in good faith that such action is required for
the Board of Directors to comply with its fiduciary duties to shareholders
imposed by law, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity relating to an
Alternative Proposal, HRM provides written notice to HPS to the effect that it
is furnishing information to, or entering into discussions or negotiations with,
such person or entity relating to an Alternative Proposal, and (C) HRM keeps HPS
reasonably informed of the status and all material information with respect to
any such discussions or negotiations; (b) to the extent applicable, complying
with Rule 14e-2 promulgated under the Securities Exchange Act with regard to an
Alternative Proposal; and (c) making any statement required by applicable law or
the requirements of the NASDAQ/NM.
CONDITIONS
The obligations of HPS and HRM to consummate the Merger are subject to
fulfillment of the following conditions, among others: (i) the Merger Agreement
and the transactions contemplated thereby shall have been approved in the manner
required by applicable law or by the applicable regulations of any stock
exchange or other regulatory body, as the case may be, by the HRM Shareholders;
(ii) the waiting period applicable to the consummation of the Merger under the
HSR Act shall have expired or been terminated; (iii) neither HRM nor HPS shall
be subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by the Merger
Agreement; (iv) the Registration Statement containing this Proxy
Statement/Prospectus shall have become effective and shall be effective at the
Effective Time, and no stop order suspending effectiveness of the Registration
Statement shall have been issued, no action, suit, proceeding or investigation
by the Commission to suspend the effectiveness thereof shall have been initiated
and be continuing, or, to the knowledge of HPS or HRM, threatened, and all
necessary approvals under state securities laws relating to the issuance or
trading of HPS Common Shares to be issued to HRM Shareholders in connection with
the Merger shall have been received; (v) all consents, authorizations, orders
and approvals of (or filings or registrations with) any governmental commission,
board or other regulatory body required in connection with the execution,
delivery and performance of the Merger Agreement shall have been obtained or
made, except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time and except where the failure to
have obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect; and (vi) the HPS
Common Shares to be issued to HRM Shareholders in connection with the Merger
shall have been approved for listing on the NYSE, subject only to official
notice of issuance.
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<PAGE> 50
The obligations of HRM to consummate the Merger and the transactions
contemplated by the Merger Agreement are further subject to the receipt of
certain closing certificates and a legal opinion and fulfillment of the
following conditions: (i) the representations and warranties made by HPS and
Subcorp to HRM in the Merger Agreement or any document or instrument delivered
to HRM thereunder shall be true and correct in all material respects on the
Closing Date, except for changes contemplated by the Merger Agreement; provided,
however, that the failure of any such representation and warranties to be true
and correct in all material respects will not permit HRM to terminate the Merger
Agreement or not consummate the Merger unless such failure constitutes a
material adverse effect; (ii) HPS and Subcorp shall have duly performed in all
material respects all of the covenants, acts and undertakings to be performed by
them on or prior to the Closing Date; (iii) HRM shall have received the opinion
of Fredrikson & Byron, P.A., dated as of the Closing, to the effect that the
Merger should be treated as a tax free reorganization pursuant to the provisions
of Section 368(a)(1)(A) and (a)(2)(D) of the Code, and the HRM Shareholders
should recognize no gain on the exchange of their shares, except to the extent
that they receive consideration other than the Per Share Stock Consideration;
(iv) HPS shall not have suffered a material adverse event which continues as of
the Effective Time or any series of events which when taken in the aggregate
have a material adverse effect which continues as of the Effective Time and
which is not disclosed in an SEC document of HPS filed prior to the date of the
Merger Agreement; and (v) HPS and/or Subcorp shall have taken such action as is
necessary to elect Robert L. Montgomery, Raymond G. Schultze, M.D., and Gary L.
Damkoehler as directors of the surviving corporation following the Merger and
Gary T. McIlroy, M.D., as a director of HPS following the Closing.
The obligations of HPS to consummate the Merger and the transactions
contemplated by the Merger Agreement are further subject to the receipt of
certain closing certificates and a legal opinion and fulfillment of the
following conditions: (i) the representations and warranties made by HRM in the
Merger Agreement or any document or instrument delivered to HPS thereunder shall
be true and correct in all material respects on the Closing Date, except for
changes contemplated by the Merger Agreement; provided, however, that the
failure of any such representations and warranties to be true and correct in all
material respects will not permit HPS to terminate the Merger Agreement or not
consummate the Merger unless such failure constitutes a material adverse effect;
(ii) HRM shall have duly performed in all material respects all of the
covenants, acts and undertakings to be performed by it on or prior to the
Closing Date; (iii) HPS shall have received a true and correct copy of each
consent, approval and waiver required on the part of HRM for the execution of
the Merger Agreement by HRM and the consummation by HRM of the transactions
contemplated thereby; provided, however, that the failure to deliver any such
consents, approvals and waivers will not permit HPS to terminate the Merger
Agreement or not consummate the Merger unless such failure constitutes a
material adverse effect; (iv) HRM and/or its subsidiaries shall not have
suffered a material adverse event which continues as of the Effective Time or
any series of events which when taken in the aggregate have a material adverse
effect which continues as of the Effective Time and which is not disclosed in an
SEC document of HRM filed prior to the date of the Merger Agreement or in the
disclosure letter thereto; (v) such shareholders of HRM as are required by
applicable law to have approved the Merger shall have in fact approved the
Merger and shareholders holding not more than 5% of the outstanding stock of HRM
shall not have notified HRM that such shareholders intend to elect nor shall
have taken any other action to perfect any dissenter's or similar statutory
rights affording any such shareholder such rights as a result of the Merger;
(vi) after the Effective Time, no person shall, by action of HRM taken prior to
the Effective Time, have any right to acquire any equity securities of HRM or
any subsidiary under any stock option plan (or any option granted thereunder) or
other plan, program or arrangement in existence prior to or triggered by the
Effective Time; (vii) each person who may be at the Effective Time or was on the
date of the Merger Agreement an "affiliate" of HRM for purposes of Rule 145
under the Securities Act shall have executed and delivered to HPS at least 35
days prior to the date of the meeting of HRM Shareholders to approve the Merger
a written affiliate undertakings agreement; and (viii) the Support/Voting
Agreements shall have remained in full force and effect through the Effective
Time.
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TERMINATION; EFFECT OF TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval of the Merger
Agreement by the shareholders of HRM, (i) by the mutual consent of HPS and HRM;
or (ii) by action of the Board of Directors of either HPS or HRM if (a) the
Merger shall not have been consummated by February 28, 1997, provided, that the
terminating party shall not have breached in any material respect its
obligations under the Merger Agreement in any manner that shall have proximately
contributed to the failure to consummate the Merger by February 28, 1997, or (b)
the approval of the HRM Shareholders shall not have been obtained at a meeting
duly convened therefor or at any adjournment thereof, or (c) a United States
federal or state court of competent jurisdiction or United States federal or
state governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
the Merger Agreement and such order, decree, ruling, or other action shall have
become final and non-appealable; provided that the terminating party shall have
used all reasonable efforts to remove such injunction, order or decree.
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the adoption and approval
by the shareholders of HRM, by action of the Board of Directors of HRM, if (i)
in the exercise of its good faith judgment as to fiduciary duties to its
shareholders imposed by law, as advised by outside counsel, the Board of
Directors of HRM determines that such termination is required by reason of an
Alternative Proposal being made; provided that HRM must notify HPS promptly of
its intention to terminate the Merger Agreement or enter into a definitive
agreement with respect to any Alternative Proposal; or (ii) there has been a
breach by HPS of any representation or warranty contained in the Merger
Agreement which would have or would be reasonably likely to have a material
adverse effect on HPS; or (iii) there has been a material breach of any of the
covenants or agreements set forth in the Merger Agreement on the part of HPS,
which breach is not curable or, if curable, is not cured within 30 days after
written notice of such breach is given by HRM to HPS.
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval by the
shareholders of HRM, by action of the Board of Directors of HPS, if (i) the
Board of Directors of HRM shall have withdrawn or modified in a manner
materially adverse to HPS its approval or recommendation of the Merger Agreement
or the Merger or shall have recommended an Alternative Proposal to the HRM
Shareholders, or (ii) there has been a breach by HRM of any representation or
warranty contained in the Merger Agreement which would have or would be
reasonably likely to have a material adverse effect on HRM, or (iii) there has
been a material breach of any of the covenants or agreements set forth in the
Merger Agreement on the part of HRM, which breach is not curable or, if curable,
is not cured within 30 days after written notice of such breach is given by HPS
to HRM.
The Merger Agreement provides that in the event that any person shall have
made an Alternative Proposal for HRM and thereafter (i) the Merger Agreement is
terminated by HRM on the basis of its fiduciary duties, or by HPS because the
HRM Board of Directors withdraws or materially modifies its approval or
recommendation of the Merger to the HRM Shareholders or (ii) the Merger
Agreement is terminated by HRM for any other reason (other than (A) the issuance
of an injunction preventing the Merger, (B) the occurrence of a material adverse
event to HPS, (C) the failure of a condition to closing to be met by February
28, 1997, which failure is not caused by HRM or its counsel, or (D) the failure
of the HRM Shareholders to approve the Merger if, at the time of the HRM
Shareholder meeting, there is not then pending and publicly announced an
Alternative Proposal and HRM has fulfilled all of its covenants with respect to
the calling of such meeting, has not withdrawn its endorsement and
recommendation of the transactions contemplated hereby and has actively
solicited approval of the Merger at and prior to such meeting) and, in the case
of the clause (ii) only, a definitive agreement with respect to such Alternative
Proposal is executed within one year after such termination, then HRM must pay
HPS the sum of $1,000,000 by wire transfer either within 10 days after
termination if under clause (i) above or, otherwise, within two business days
after such amount becomes due if under clause (ii) above, plus an additional
payment of the sum of $3,000,000 upon the tenth day following consummation of a
transaction with the person making the Alternative Proposal or an affiliate
thereof that gave rise to the initial $1,000,000 termination payment.
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AMENDMENT AND WAIVER
The Merger Agreement may be amended in writing by the parties thereto by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval and adoption of the Merger Agreement by HRM
Shareholders, but after any such approval, no amendment will be made which by
law requires further approval or authorization by the HRM Shareholders without
such further approval or authorization.
At any time prior to the Effective Time, HPS (with respect to HRM) and HRM
(with respect to HPS and Subcorp) by action taken or authorized by their
respective Boards of Directors may, to the extent legally allowed, (i) extend
the time for performance of any of the obligations or other acts of such party,
(ii) waive any inaccuracies in the representations and warranties contained in
the Merger Agreement or any document delivered pursuant thereto, and (iii) waive
compliance with any of the agreements or conditions contained therein, provided
such waiver or extension is set forth in a written instrument signed on behalf
of such party.
EXPENSES
Except as otherwise provided in the Merger Agreement, HPS and HRM will pay
their own costs and expenses associated with the transactions contemplated by
the Merger Agreement. If the Merger does not occur, HPS will pay the costs and
expenses incurred by HRM if HRM terminates the transaction (when no Alternative
Proposal is pending) because the Merger does not occur by February 28, 1997, or
HPS materially breaches its representations and covenants, or the transaction is
enjoined.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of certain federal income tax consequences of the
Merger does not take into account the facts and circumstances of any particular
shareholder of HRM and does not address all aspects of federal income taxation
that may be important to particular shareholders in light of their personal
investment circumstances or to shareholders subject to special treatment under
the federal income tax laws (including life insurance companies, foreign
persons, tax-exempt entities, and holders who acquired their HRM Common Stock
pursuant to the exercise of employee stock options or otherwise as
compensation). This summary also assumes that the HRM Common Stock will be held
as a capital asset by each HRM Shareholder at the Effective Time. Neither HPS
nor HRM has sought a ruling from the Internal Revenue Service with respect to
the income tax consequences of the Merger and related transactions, and there
can be no assurance that the Internal Revenue Service will not take a different
view of the transaction.
Fredrikson & Byron, P.A., counsel to HRM, has advised HRM concerning the
federal income tax consequences of the proposed Merger. In the opinion of
Fredrikson & Byron, P.A., the following accurately summarizes the material
federal income tax consequences of the proposed Merger:
(a) The Merger will be treated as a reorganization within the meaning
of sections 368(a)(1)(A) and 368(a)(2)(D) of the Code.
(b) HPS, HRM, and Subcorp will each be "a party to a reorganization"
within the meaning of section 368(b) of the Code.
(c) Each HRM Shareholder will be required to recognize, upon receipt
of HPS Common Shares and cash in exchange for such shareholder's HRM Common
Stock, any capital gain (but not loss) that such shareholder realizes in
the transaction, but only up to the amount of the cash received by such
shareholder. The gain realized by each shareholder is equal to the excess
of the fair market value of the HPS Common Shares and the cash received by
such shareholder over the shareholder's basis in his or her HRM Common
Stock.
As to each shareholder, the recognized gain will be treated either as
capital gain or, if the exchange has the effect of the distribution of a
dividend to such shareholder, then as a dividend to the extent of the
shareholder's share of HRM's accumulated earnings and profits, with the
remainder of the gain, if any, treated as capital gain. If the gain is
treated as capital gain, it will constitute long-term capital gain if the
shareholder held the HRM Common Stock for more than one year at the
Effective Time. The determination as to whether the exchange has the effect
of the distribution of a dividend is made on a shareholder-by-shareholder
basis.
In determining whether any gain recognized in the transaction should
be treated as capital gain or as a dividend, the United States Supreme
Court has taken the position that each shareholder should be treated as
having received solely HPS Common Shares for the shareholder's HRM Common
Stock, a portion of which HPS stock is then treated as redeemed by HPS for
an amount equal in value to the cash that such shareholder will actually
receive. That redemption will be treated as a sale or exchange of stock
(and not as a dividend), and will qualify for capital gain treatment, if it
is "substantially disproportionate" with respect to a shareholder or if it
is "not essentially equivalent to a dividend." A distribution will be
"substantially disproportionate" with respect to a particular shareholder
if that shareholder's proportionate interest in HPS after his or her shares
are treated as redeemed is less than 80 percent of that shareholder's
proportionate interest in HPS immediately prior to such redemption and,
after such redemption, the shareholder owns less than 50 percent of the
total combined voting power of all stock entitled to vote. The Internal
Revenue Service has also indicated that, in the case of a minority
shareholder in a publicly held corporation whose relative stock interest is
minimal and who exercises no control over the corporation's affairs, even a
minimal reduction in the percentage of stock owned by such shareholder will
avoid dividend treatment. For purposes of determining such percentages,
stock owned by certain persons related to the holder or which the holder
can acquire pursuant to the exercise of options
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would be treated as owned by the holder. HRM Shareholders should consult
their own personal tax advisors as to the application of these rules to
their own situation.
(d) The aggregate tax basis of the HPS Common Shares to be received by
an HRM Shareholder will be the same as the aggregate basis of the HRM
Common Stock surrendered in exchange therefor, decreased by the amount of
cash received, and increased by the amount of gain recognized on the
exchange.
(e) The holding period of the HPS Common Shares to be received by an
HRM Shareholder will include the holding period of the HRM Common Stock
surrendered in exchange therefor.
(f) An HRM Shareholder who receives solely cash for his or her HRM
Common Stock pursuant to the exercise of dissenters' rights will be
obligated to report either (i) capital gain or loss equal to the difference
between the cash received and the shareholder's basis in his or her HRM
Common Stock, or (ii) dividend income, depending on whether the redemption
qualifies for sale or exchange treatment under the tests described above.
Most such shareholders should receive capital gain or loss treatment if the
deemed redemption of their HRM Common Stock constitutes a complete
termination of their interest in HRM (and HPS, after the Merger).
(g) An HRM Shareholder who receives cash in lieu of a fractional HPS
Common Share will generally be obligated to report capital gain or loss
equal to the difference between the cash received and the shareholder's
basis in his or her HRM Common Stock for which the fractional share would
otherwise be received.
In describing its conclusions as to the tax consequences of the
transaction, Fredrikson & Byron, P.A. is relying on, among other things,
representation letters provided by HPS and HRM to such counsel containing
customary statements relating to planned dispositions of HPS Common Shares by
HRM Shareholders, plans to undertake transactions outside the ordinary course of
business, and certain other technical requirements under the Code. Such counsel
is also basing its conclusions on the assumption that the value of the HPS
Common Shares being issued to the HRM Shareholders pursuant to the Merger will
be at least equal to 40 percent of the aggregate value of the cash being paid
and HPS Common Shares being issued to the HRM Shareholders.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND
IS NOT INTENDED AS AND SHOULD NOT BE CONSIDERED TAX ADVICE. THE DISCUSSION IS
BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING AND PROPOSED
TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT
DECISIONS, ALL OF WHICH ARE SUBJECT TO CHANGE. ANY SUCH CHANGE, WHICH MAY OR MAY
NOT BE RETROACTIVE, COULD ALTER THE TAX CONSEQUENCES TO HRM OR ITS SHAREHOLDERS
DESCRIBED ABOVE. THE FOREGOING DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES,
IF ANY, OF THE MERGER UNDER APPLICABLE STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
HRM SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER
APPLICABLE TAX LAWS AND THE POSSIBLE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
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THE COMPANIES
BUSINESS OF HRM
GENERAL
HRM provides comprehensive, integrated total health plan management and
information services from diagnosis through claim payment supported by HRM's
QUALITYFIRST(R) clinical practice guidelines for self-funded health benefit
plans, fully insured health benefit plans, workers' compensation care and
disability care using electronic data interchange (EDI) technology. HRM provides
these services for self-insured employers, unions, governmental entities,
insurance companies, HMOs, PPOs, hospitals, and others to manage the quality,
volume, cost, and payment for health care. HRM's managed health care services
include a 24 hours per day, 7 days per week (24/7) health information line; care
review management services, which apply diagnostic and utilization review; case
management services for a variety of catastrophic or long-term illnesses and
conditions; price control management services such as preferred provider
networks, fee negotiations, and audits of hospital and physician charges; claims
administration management services; and health care information management and
software services. HRM has developed its managed health care services based upon
proprietary clinical practice protocols (QUALITYFIRST Healthcare Practice
Guidelines), HRM-developed medical and cost databases, and extensive medical
expertise.
PRODUCTS AND SERVICES
The principal services currently offered by HRM are 24/7 CareCALL(SM)
(health information hotline), care review management (both inpatient and
outpatient), case management, price control management, claims administration
management, and information services. HRM has historically provided its range of
managed health care services for management of medical health plans.
HRM's fees for these services are generally based on the number of lives
covered by the particular benefit plan or on a fee-per-transaction basis. HRM
typically contracts with a client to provide 24/7 CareCALL, precertification and
concurrent review services, and some or all of HRM's other care review
management, case management, price control management, or claim administration
management services under contracts of one- to three-year terms. HRM also offers
QUALITYFIRST Healthcare Practice Guidelines software, certain health care
information management computer systems, and consulting services on an hourly,
project or software license and subscription fee basis.
Care Review Management
HRM's Care Review Management Services, accredited by the Utilization Review
Accreditation Committee (URAC) in Washington, D.C., promote quality care through
the software technology and medical expertise required for prospective,
concurrent, and retrospective care management of significant health care events:
medical/surgical procedures, long-term care management, prenatal care management
and selected outpatient medical/surgical care. All care management for total
health plan management activity takes place within medical specialty teams using
QUALITYFIRST guidelines for self-funded benefit plans, fully insured benefit
plans, HMOs, providers and workers' compensation and disability insurance
programs.
HRM's medically driven approach is grounded in its use of clinical
specialty teams rather than generalist care managers. HRM care managers are
organized by clinical specialty review teams to provide the same level of
specialization in managing care as is practiced by the medical professions. Each
case is evaluated at the initial stage and immediately directed to the
appropriate specialty review team to begin the review process. HRM's clinical
specialty review teams enable HRM to review the spectrum of medical, surgical
and specialty care.
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HRM's review teams are constructed in the following specialty areas:
- Cardiology
- Gastroenterology
- Otolaryngology (ENT)
- Neonatology
- Neurology
- Urology/Nephrology
- Surgical
- Obstetrics/Gynecology
- Orthopedics
- Case Management
- Internal Medicine
The specialty team evaluates the patient's symptoms, diagnosis, and
proposed treatment plan and setting in consultation with the patient's
physician, before evaluating secondary factors such as length of stay and price,
thus reducing the cost and risk associated with inappropriate care.
HRM's Care Review Management applies diagnostic and utilization review for
all inpatient and outpatient care eligible under the health plan of HRM's
clients.
Diagnostic review determines whether the proposed diagnostic and
therapeutic selections by the hospital or physician for a patient's particular
illness or condition are medically appropriate. Utilization review, which
follows the diagnostic review, compares prescribed health care services to
accepted medical resource utilization standards. Utilization review evaluates
the appropriateness of the proposed location of services (e.g., hospital
intensive care unit, hospital general ward, hospital outpatient, or physician's
office), the proposed length of stay, and any proposed ancillary services.
These evaluations are performed using QUALITYFIRST guidelines, which are
proprietary clinical practice protocols developed by HRM using international
medical databases, selected experts in the field, and a variety of medical
professional organizations.
Under HRM's Care Management Services, a plan participant or the
participant's physician must call a toll-free telephone number a number of days
prior to commencement of elective medical or surgical treatment, or prior to an
emergency admission. This toll-free call can be placed by the plan participant
or the participant's physician 24 hours per day, seven days per week, 365 days
per year. From these calls, HRM gathers information on the participant's medical
condition and the attending physician's proposed treatment plan, and then
compares the diagnosis and proposed treatment against HRM's QUALITYFIRST
guidelines to determine the reasonableness of the diagnosis and appropriateness
of treatment. In the event of any discrepancies between the proposed diagnosis
and treatment and HRM's QUALITYFIRST guidelines, or at the request of the
attending physician (and in all cases involving certain complicated illnesses),
these determinations are reviewed by an HRM physician who is available 24 hours
per day, seven days per week, 365 days per year, and, in certain instances, by
an independent physician (second opinion). A second opinion provides the patient
with additional information to enable him or her to make an informed decision
concerning the advisability of proceeding with a certain treatment. The
determination of whether the diagnosis, plan of treatment, and setting for care
are medically necessary and appropriate is entered into HRM's computer system to
determine health plan reimbursement and to communicate the determination to the
client's health plan administrator and the patient. Under no circumstances does
HRM prohibit the provision of any medical services. If HRM does not authorize
the payment of the physician's or hospital's fee, the health plan administrator
may nonetheless choose to pay such fee. Even if the health plan administrator
chooses not to pay such fee, the patient remains free to engage any physician,
hospital, or outpatient facility to perform any treatment based upon any
diagnosis, at the patient's expense.
The following Care Management Services are offered by HRM generally on a
fixed monthly fee per covered life based on expected transaction volume, or on a
per transaction or case basis:
24/7 CareCALL. HRM's 24-hour health information line provides
personal health management by educating and empowering consumers to make
better decisions about their health care and the resources they use. At the
same time, it reduces claim expenditures through reductions in unnecessary
emergency room and office visits by promoting continuing education
regarding self-care where appropriate.
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The health information line is staffed by registered nurses who use
on-line pediatric and adult triage guidelines to assess symptoms and triage
callers to the appropriate level of care.
In addition, this service provides medical information and unlimited,
confidential access to more than 500 audio health library topics covering
prevention, self-care, behavioral health issues and advice on parenting. It
also enables members to precertify inpatient and outpatient care and locate
appropriate network providers any time of the day or night. HRM's health
line is objective, friendly, easy to use and accessible when community
health care resources are unavailable.
Medical/Surgical Review. HRM's Care Management precertification and
concurrent review service for medical and surgical procedures is designed
to reduce employer and employee medical and surgical costs by identifying
and approving for reimbursement the most appropriate and cost-effective
plan of treatment and setting for care.
Behavioral Health Review. HRM also offers precertification and
concurrent review of mental health and chemical dependency treatment. HRM's
mental health and chemical dependency review service evaluates the medical
necessity and appropriateness of the type, frequency and location of
planned inpatient and outpatient mental health and chemical dependency
treatment for the purpose of determining what the plan should consider
eligible for coverage. HRM also identifies alternative treatments. HRM uses
a multidisciplinary approach to mental health and substance abuse care
management. HRM's strategy draws on the professional expertise of
behavioral health teams that specialize in chemical dependency; child,
adolescent, and adult mental health; and behavioral medicine. Cases are
matched with behavioral health teams trained to manage specific types of
care.
Case Management
Case management services provide special coordination of the full range of
managed care services in complex, unpredictable medical and social cases. These
include catastrophic and long-term care, behavioral health illnesses being
managed under both health plans and employee assistance programs ("EAPs"),
illnesses covered simultaneously under health plans and workers' compensation
plans, prenatal care management, and specialized care under chiropractic plans.
Due to the complex and long-term nature of these cases, a single case manager
may coordinate all managed care services for a patient for periods ranging from
one month to several years. Services are billed most frequently on a per hour
basis or a per transaction or case basis.
The following case management services are offered by HRM:
Coordinated Care Management ("CCM"). HRM manages cases that require
costly medical treatment such as AIDS, cancer, mental health, chemical
dependency and major trauma. HRM identifies these cases by reviewing the
health claims history and the information obtained during the
precertification and concurrent review process. In these cases, HRM helps
identify cost-effective health care alternatives, including transferring
the patient from a hospital to an alternative care facility such as a
skilled nursing facility or the patient's home. HRM also coordinates all of
the services or care that will be required as a result of such a transfer
and may arrange for special pricing of required services. In cases where
the alternative treatment may not be covered under the employer's health
plan, the employer is advised that it may save money by electing to pay for
these more cost-effective services outside of the plan. HRM's chiropractic
review program involves precertification review of chiropractic services
involving the spine for authorized length of treatment and proposed
charges.
Employee Assistance Programs. HRM and Ceridian Corporation
("Ceridian") have jointly developed an employee assistance program ("EAP")
that combines Ceridian's employee assistance services with HRM's mental
health and chemical dependency review. EAP services performed by Ceridian
include: telephone and in-person assessment of mental health, chemical
dependency, legal, financial, employment, and other problems; crisis
intervention; specialist consultation; and referral to screened services.
EAP services performed by HRM include: diagnostic and utilization review,
large case management, fee negotiation, auditing of charges, and claims
administration. EAP is independently
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marketed by both HRM and Ceridian. HRM and Ceridian each provides, on a
subcontractor basis, its respective services to the other's customers at
specified rates.
QualityBIRTH(SM) Prenatal Care Management. HRM's prenatal care
management program, QualityBIRTH, is a service for expectant mothers for
early identification and management of pregnancies at risk for premature
delivery. HRM OB/GYN specialists consult with the mother-to-be and her
physician to screen for risk factors that suggest premature birth, thereby
avoiding the need for crisis management. The primary responsibilities of
HRM's staff are patient education and advocacy, and support throughout the
pregnancy.
DisabilityCARE(SM). HRM's disability management program,
DisabilityCARE, promotes quality medical care and early return-to-work for
short- and long-term disability and workers' compensation cases.
DisabilityCARE is initiated with identification of injury through 24-hour,
seven-days-per-week access to experienced staff, and continues through
successful return-to-work. DisabilityCARE care managers use QUALITYFIRST
medical and post-acute, return-to-work disability guidelines to confirm the
diagnosis, establish a treatment plan, and help get injured workers back to
the job as soon as medically appropriate. These guidelines cover more than
80 percent of the disability/workers' compensation-related diagnoses.
Additionally, HRM is committed to reducing its customer's lost
productivity, indemnity benefit payments and medical expenses surrounding
disabilities.
Price Control Management
HRM's principal price management activities are fee negotiation, preferred
provider contract pricing, and bill review. HRM's price control management is
designed to help locate and negotiate for clients and covered plan participants
the most reasonable fees possible for health care services. These services are
provided for a fee based on the number of lives covered based on expected
transactions, on a per transaction or case basis, or on a percentage of savings
basis.
Services provided under price control management are as follows:
Preferred Provider Organizations ("PPOs"). HRM's CarePASS(R) service
assists employers with the evaluation and selection of health care
providers, similar to traditional PPOs. PPOs are groups of hospitals,
physicians and other health care providers that offer services at
negotiated rates to employer groups or insurers. Most PPOs negotiate a
specified percentage discount in prices, which does not prevent price
increases during the term of the PPO contract. HRM, however, uses its
medical expertise and claims database to evaluate bid prices submitted by
participating providers for each specific treatment during the contract
term.
HRM establishes CarePASS in selected markets based on the number and
size of current and prospective clients in those markets, and on the
anticipated level of acceptance by employees in those markets. In some
cases, employers pay HRM to develop a network in a specific market.
HRM can also provide its clients with access to PPOs organized by
others that meet HRM's criteria for provider selection. HRM's criteria in
selecting PPOs established by third parties are the same as those used by
HRM in developing CarePASS. HRM evaluates the quality, cost, and financial
stability of the providers and the third-party organization and reviews the
contracts between the third-party organization and providers. HRM receives
monthly reports from the third-party organization, integrates them with
HRM's own management reports, and provides the clients with a unified
report.
Prospective Case-by-Case Fee Negotiation. In situations where its
clients are not participants in a PPO, HRM will negotiate the cost of
covered services, on a case-by-case basis, on behalf of clients and covered
participants prior to the services being performed. At the time medical
treatments are being reviewed under HRM's care review services, a separate
staff of price negotiators and bill reviewers simultaneously negotiates the
amount of the covered fees with the provider.
Audit of Hospital and Physician Bills. HRM also retrospectively
reviews the charges billed by hospitals and physicians with respect to
covered participants. Under HRM procedures, hospital bills in
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excess of specified amounts and the associated physician bills are reviewed
to determine whether services were actually delivered to the patient and
whether the charges for the delivered services were reasonable in view of
prevailing fees for such services in that geographic area.
Claims Administration Management
HRM's claims administration management handles processing and payment of
health care bills under the terms of a client's health plan, providing for
adequate funding (fully insured premium or self-funded), easy access, efficient
processes, accurate payment and timely reporting through plan design,
underwriting services and claim administration services. HRM's claims
administration management maintains enrollment and eligibility data for covered
participants and dependents and eligible providers located in all states.
Reimbursement rules are based on levels of co-insurance, co-dependency,
segregation, provider contracts, care management, and negotiated fee
arrangements specified in the health plan and allowable under ERISA regulations.
HRM also administers continuation of benefit programs for terminated employees
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and
flexible benefit programs under Code section 125. HRM also coordinates benefit
payments with other group health plans.
Effective claim administration is a critical part of the health management
system. Claims administrative management services highlight the value of HRM's
totally integrated process by working to ensure that care and price management
goals are attained within the proper bounds of each client's health plan. Claim
personnel verify that decisions made during a patient's care are accurately
reflected in the billing process. Consolidated administrative reporting provides
clients with information to monitor and manage their health benefit programs
effectively. HRM's management report format combines Care Management results and
claim payment decisions in an easy-to-read document. HRM's claim subsidiary was
the first claim administrator in the United States to be awarded I.S.O. 9002
certification.
Electronic data interchange ("EDI") links providers, through a third-party
clearinghouse, to payors, and processes claims electronically. The electronic
submission, processing, and payment of claims cut administrative costs and allow
benefits analysts to apply their skills to problem cases. EDI technology is a
key to streamlining administrative operations. HRM has developed software that
allows its claim payment system to connect with third-party EDI networks.
HRM offers a full range of administrative services to help clients manage
and supplement their health plans. HRM's underwriting division can produce
valuation reports to support the financial integrity of clients' self-funded
plans. HRM can also help produce a cost analysis of additional benefits and
define the funding levels needed to support those benefits. HRM's systems and
strategies support the use of flexible benefit plans, and can assist clients in
determining flex-plan objectives and deciding whether a full-blown cafeteria
plan, a section 125 plan with 401(k), or a simple flexible spending account can
best suit the client's needs. HRM's underwriting group provides a variety of
reinsurance and stop-loss insurance strategies and products to meet clients'
needs, including group life and long-term disability products. COBRA
administration services are also available to help clients handle COBRA
compliance.
Generally, HRM's bills for claim administration service are based on a
monthly fee per covered life, based upon the expected number of transactions, or
on a per transaction basis.
During fiscal year 1996, HRM formed a wholly owned subsidiary, Health
Benefit Reinsurance, Inc. ("HBRe"), to act, independent of HRM and its
subsidiaries, as a managing general underwriter for products including specific
and aggregate stop loss insurance, life and disability insurance, fully insured
underwriting and other underwriting services needed for customers that contract
with HRM and subsidiaries, or others that purchase services directly from HBRe.
The services offered by HBRe include underwriting, premium billing, collection
and distribution, policy or certificate issuance, customer service and claim
administration.
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Information Services
HRM's information services are complementary to its health plan management
services. These are offered by HRM on an hourly, project or software license fee
basis.
QUALITYFIRST Healthcare Practice Guidelines Software and Related Systems
Software. QUALITYFIRST guidelines and system software provide decision support
for evaluating diagnosis, treatment selection and resource use for each episode
of care. In addition, the guidelines provide consistent criteria and practice
standards against which care quality and related costs can be measured. These
diagnosis-driven guidelines, which promote consistency in decision making, are
used to influence quality of care; promote clinically appropriate decisions
prospectively, concurrently, and retrospectively; promote optimal outcomes; and
allow the practitioner flexibility in care decisions on the basis of individual
patient factors. The guidelines software operates under standard, easy-to-use
software and provides primary baseline data needed for Continuous Quality
Improvement ("CQI") such as usage characteristics and patterns of care for a
given organization or practitioner. QUALITYFIRST software and systems are made
available to clients on a software license basis. In late fiscal 1992, HRM
entered into its first software license agreement. Its licensees include
hospitals, insurance companies, HMOs, and PPOs. Fees are based on a license fee
at inception with a monthly subscription fee during the term of the license
agreement based on covered lives or number of workstations utilizing the
guidelines.
Health Care Information Management. HRM manages health care data for large
organizations and governments, including acquisition, verification and analysis
of health care data, comparison of data sets to normative data standards
developed by HRM, and interpretation of practice and utilization standards. HRM
seeks to obtain the right to use internally in HRM's managed health care
services data collected and developed in such projects. Clients are generally
charged a set fee for information management projects, payable in installments
over the anticipated length of the project, or incorporated into the basic fees
charged for care management, price control management, or claim administration
management services.
HRM's information management services also provide various reports to
employers to define current services, identify inappropriate practice patterns
and utilization problems, and compare costs to normative data sets prepared by
HRM. Recommendations for benefit plan changes and managed care services are
provided. Clients are generally charged a fee based on hourly rates and required
resources for these services, or these products are incorporated into the basic
fee charged for managed care, price control, or claim administration management
services.
Health Benefit Plan Design and Consulting Services. HRM works with
clients, independent brokers, and consultants in designing specific health care
management programs and health plans to meet the needs of individual clients.
These services include assistance in the design of plan documents describing
benefit coverage. Health benefit plans designed by HRM utilize employee
co-payments, deductibles, and flexible benefits to improve the effectiveness of
employer health care management programs. HRM also designs continuation of
benefits programs for terminated employees under COBRA, and flexible benefit
programs under Code section 125. HRM also produces pamphlets, brochures, videos,
educational talks, and other materials to explain the client's benefit plans to
its employees. HRM's client service representatives and sales personnel work
together to implement each health care benefit program. Clients are generally
charged a fixed hourly rate for HRM's benefit plan design and consulting
services.
PRODUCT DEVELOPMENT
HRM continually expands its medical and cost databases and medical
expertise for self-funded benefit plans, fully insured benefit plans, HMOs,
providers, and workers' compensation and disability insurance programs; refines
its QUALITYFIRST health care practice guidelines to address an ever enlarging
number of conditions, and will continue expanding its software package
containing HRM's proprietary QUALITYFIRST health care practice guidelines for
license to third parties. HRM also expects to continue to develop programs for
management of health care services and costs associated with particular
illnesses or conditions. HRM anticipates that, as computer hardware, computer
software and telecommunications equipment become more technologically
sophisticated, HRM will create new or enhanced software products utilizing HRM's
medical
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expertise, database systems and technology. HRM will also respond to changes
required by health care reform in the nation.
PATENTS AND PROPRIETARY RIGHTS
HRM has filed a patent application covering its "Health Care Management
System" which is an automated, real-time, interactive health care management
data processing system for use by hospitals, physicians, insurance companies,
HMOs, and others in the health care field to serve as a diagnostic, evaluation,
and utilization tool for health care providers to individuals. The system is
implemented on computer hardware and software and is used by HRM in providing
health care management services.
HRM claims copyrights to software developed by HRM. In addition, HRM has
obtained perpetual licenses to use certain software developed by other companies
which HRM uses in providing services software to its clients. HRM has various
safeguards in place, including authorization codes and encryption, to limit
access to HRM's databases and operating systems. HRM markets its services and
products under a number of trade names and trademarks. The following are
principal trademarks or registered trademarks of HRM or its subsidiaries:
HRM(R), AutoPILOT(TM), CareCALL(SM), CarePASS(R), CarePLUS(SM),
DisabilityCARE(SM), HRMMEDIA(SM), QUALITYBIRTH(SM), ReviewPLUS(R),
QUALITYFIRST(R), Together We Can Make a Healthy Difference(R), Institute for
Healthcare Quality(R), and IHQ(R). HRM relies to varying degrees upon its common
law rights of trademark ownership, copyrights and registration of its
trademarks.
SEASONALITY
HRM's revenues have historically been higher in the second half of each
fiscal year than in the first half. Because a large number of health plans
operate on a calendar year basis, a significant portion of HRM's new clients
become clients as of January 1, which is the beginning of HRM's third quarter.
HRM recognizes revenues as it performs services under a contract, and HRM
typically performs a greater portion of annual services during the first few
months of a new contract. Because of the type of contracts HRM has entered into,
there appears to be little or no seasonality to its current business, as
indicated as follows. In fiscal 1996, 1995, and 1994 revenues totaled 50%, 48%,
and 47% in the first half of the fiscal year and 50%, 52%, and 53% in the second
half of the fiscal year, respectively.
MAJOR CUSTOMERS
HRM services a small number of large clients that have accounted for a
significant portion of HRM's revenues in prior years. Columbia/HCA Healthcare
Corporation accounted for approximately 17% of revenues in fiscal 1996 and
approximately 16% of revenues in fiscal 1995. Ohio Permanente Medical Group
("OPMG") accounted for approximately 11% of revenues in fiscal 1996, and has
transitioned the majority of the services provided by HRM back to OPMG effective
at the beginning of fiscal 1997, but continues as a QUALITYFIRST(R) customer. No
single customer or single customer's clients accounted for more than 10% of
revenues in fiscal 1994.
BACKLOG
HRM's revenues are principally derived through the provisions of services
as and when needed by the contracting client and no backlog amounts are
maintained. HRM's revenues from care management, price control management, and
claim administration management services are generally derived pursuant to
contracts, generally for a term of one to three years, obligating clients to pay
a fixed monthly charge for each covered employee based on anticipated case or
claim volume experience basis, or on a case or percentage of savings basis.
Revenues from information management, software and consulting services are
generally derived from contracts to perform specific projects for a specific
fee, or on an ongoing license fee. Revenues from case management and consulting
services are generally derived on a case-by-case or hourly basis.
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COMPETITION
The health care management industry historically has been highly fragmented
and competitive. HRM competes directly with approximately 100 independent
utilization review firms as well as approximately 120 insurance carriers,
approximately 200 third-party administrators that have established their own
utilization review procedures, and a limited number of software vendors. In
addition, HRM's care management services compete indirectly with HMOs and
several hundred PPOs. Some of HRM's competitors are substantially larger and
possess greater financial resources than HRM. HRM believes, however, that the
trend toward consolidation of services will continue as employers recognize the
convenience of dealing with a single health care management organization. HRM's
principal competitive strengths are its medical expertise, medical and cost
databases, QUALITYFIRST health care practice guidelines, and proprietary
software systems. HRM is able to provide clients with a full range of integrated
health care management services, focusing both on reducing the price of health
care and on improving its quality.
RESEARCH AND DEVELOPMENT
HRM continually enhances its databases and proprietary software systems.
Costs capitalized by HRM for these enhancements, excluding acquired software,
were $5,779,000 in fiscal 1996, $5,337,000 in fiscal 1995, and $4,896,000 in
fiscal 1994.
EMPLOYEES
As of September 30, 1996, HRM employed approximately 800 persons, including
approximately 150 physicians, nurses and other health care professionals. HRM
uses approximately 125 independent consulting physicians. None of HRM's
employees is covered by a collective bargaining agreement.
FOREIGN OPERATIONS AND EXPORT SALES
In Canada, health care prices and payments are set and administered by the
provincial governments. HRM markets all of its managed health care services and
software, other than price control services, to employers, insurance companies,
hospitals and governmental agencies in Canada through HRM's wholly owned
Canadian subsidiary. Revenues derived from Canada totaled U.S. $233,000 in
fiscal 1996, U.S. $174,000 in fiscal 1995, and U.S. $130,000 in fiscal 1994.
HRM's assets attributable to Canada consist of leased offices in Alberta.
PROPERTIES
HRM's principal corporate offices consist currently of approximately
125,000 square feet in two adjacent buildings in Minneapolis, Minnesota, 31,000
square feet in Kalamazoo, Michigan, and 4,000 square feet in Sacramento,
California. The leases on these offices expire in or prior to 1998. HRM also
leases space for six sales offices located in the United States and Canada
generally for one-year terms or less. All of HRM's facilities are used
exclusively by HRM for office space or computer operations and are anticipated
to be adequate, but will be expanded as business needs require.
LEGAL PROCEEDINGS
HRM is not a party to any material pending legal proceedings. Care
Management Services provided by HRM are advisory in nature, and determinations
as to payment or nonpayment of benefits are made by the plan sponsor or its
administrator, which can be HRM as a health plan third-party administrator. All
determinations as to the medical care rendered to the patient are made by the
patient or the attending physician. Nevertheless, patients or others might
assert claims against HRM for damages due to adverse medical consequences. New
or existing legal theories by which patients or attending physicians may seek to
assert liability against HRM or other companies in the health care industry are
evolving and are expected to continue to evolve. Although HRM believes that its
procedures for making care management and claims benefit recommendations and
decisions result in reasonable and accurate recommendations, there can be no
assurance that HRM's procedures for limiting liability are effective or that HRM
will not be subject to liability
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from litigation that might adversely affect HRM's business. HRM maintains
professional liability insurance and such other coverages as HRM believes are
reasonable in light of HRM's experience to date and the limited availability of
insurance in the health care industry.
CERTAIN FINANCIAL PROJECTIONS
HRM does not, as a matter of course, make public forecasts as to future
sales or earnings. Certain projections were, however, made available to HPS on a
confidential basis during the course of the discussions regarding the Merger.
See "The Merger -- Background of the Merger." The information summarized below
was included in the information provided by HRM to HPS.
The financial projections below were not prepared with a view to public
disclosure or to compliance with published guidelines of the Commission or the
American Institute of Certified Public Accountants. The projections were based
upon the assumptions indicated below and were also based on other estimates and
assumptions that are inherently uncertain. Technological, economic, regulatory
and competitive uncertainties and contingencies, many of which are beyond HRM's
control, may render any or all of these assumptions inaccurate. In addition, the
projected results do not take into account costs and expenses to HRM resulting
from the negotiation and consummation of the Merger. Accordingly, there can be
no assurance that the projected results will be realized or that actual results
will not be significantly higher or lower than projected. The inclusion of the
projections herein should not be regarded as an indication that HRM, HPS or any
other person who received any such information considers it an accurate
prediction of future events. None of HRM, HPS or any other person intends
publicly to update or otherwise publicly revise the projections set forth below.
THE PROJECTIONS HAVE NOT BEEN EXAMINED OR COMPILED BY THE INDEPENDENT
PUBLIC ACCOUNTANTS OF EITHER HRM OR HPS, NOR HAVE SUCH ACCOUNTANTS APPLIED ANY
PROCEDURES THERETO. ACCORDINGLY, SUCH ACCOUNTANTS DO NOT EXPRESS AN OPINION OR
ANY OTHER FORM OF ASSURANCE ON THEM.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
-----------------------------------
(IN THOUSANDS)
<S> <C>
Revenues................................................. $65,500
Net income............................................... 3,650
</TABLE>
The principal assumptions employed in the creation of the above projections
include the following: (a) revenue growth of 20% based, in part, upon prospects
prior to the start of the fiscal year, the potential to sell up or expand sales
to existing clients, renewals of approximately 95% of all existing clients, rate
increases on average of 5% for CPI in general plus increases for excess
utilization, growth of HRM's newest services (24/7 CareCall and DisabilityCare),
continued growth of QUALITYFIRST Healthcare Practice Guidelines software and
systems, and growth of HRM's newest markets -- HMOs and providers; (b) margin
improvement resulting from the newest services reaching a critical volume,
additional sales from the higher margin QUALITYFIRST software and systems, and
other operational efficiencies; (c) selling and marketing expenses as a constant
percentage of revenue for the year compared to the prior year; (d) depreciation
and amortization expense as a constant percentage of revenue for the year
compared to the prior year; (e) general and administrative expense as a lower
percentage of revenue for the year compared to the prior year; (f) an effective
income tax rate of 39%; and (g) capital expenditures at approximately 105% of
the prior year at $8.5 million.
BUSINESS OF HPS
HPS was incorporated in August 1994 as a Delaware corporation. Unless the
context otherwise requires, as used in this Proxy Statement/Prospectus "HPS"
refers to HealthPlan Services Corporation and its direct and indirect wholly
owned subsidiaries for periods subsequent to September 30, 1994, and to its
predecessor for prior periods. HPS's principal executive offices are located at
3501 Frontage Road, Tampa, Florida 33607. HPS's telephone number is (813)
289-1000.
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HPS's principal operating subsidiary, HealthPlan Services, Inc., was
founded in 1970 by James K. Murray, Jr., HPS's current President and Chief
Executive Officer, Charles H. Guy, Jr., and Trevor G. Smith (the "Founders"),
each of whom currently serves as a director of HPS. D&B purchased the business
in 1978 and operated it as a division. Mr. Murray continued to play an active
role in the business until 1987, when he left to assume roles of increasing
responsibility within D&B, which included serving as president of two of its
largest operating divisions. On September 30, 1994, the Founders, Noel Group,
Inc., a publicly traded company based in New York, and three funds in which
Trinity Ventures, Ltd., a privately held venture capital company, is the general
partner (the "Initial Investors"), purchased the business (the "Acquisition"),
which was then called Plan Services, Inc., from D&B Plan Services Corporation, a
Delaware corporation.
HPS, along with its newly acquired operating units, Consolidated Group,
Inc. ("Consolidated Group") and Harrington Services Corporation ("Harrington"),
is a leading provider of managed care services to over 120,000 small businesses
and large, self-insured organizations. Its services include distribution,
enrollment, billing and collection, claims administration, and information
reports and analysis on behalf of health care payors and providers, covering
over three million members in the United States. HPS's clients include managed
care organizations (HMOs and PPOs), integrated health care delivery systems,
insurance companies, and health care purchasing alliances. The majority of HPS's
in-force business utilizes managed care products, and substantially all of HPS's
new business since October 1994 utilizes managed care products.
On July 1, 1996, HPS completed the acquisition of Consolidated Group, Inc.,
a health benefit administrator specializing in the small group market. On July
1, 1996, HPS completed the acquisition of Harrington Services Corporation, a
large-group benefits administrator. Revenues in 1995 for HPS, Consolidated
Group, and Harrington were approximately $100 million, $74 million, and $72
million, respectively. The two acquired companies are operated as separate
subsidiaries of HPS and maintain separate entities and management personnel.
HPS has over 25 years of experience in providing insurance companies, PPOs,
HMOs and other managed care companies with services which enable them to access
the small employer (less than fifty employees) market in an efficient, cost
effective manner. These services include sales support to insurance agents and,
on behalf of payors, underwriting, enrollment, and other administrative
services. As a result, HPS offers an economic "outsourcing" alternative to the
payor, which otherwise would be required to develop sufficient internal
resources and services to reach the small business market effectively.
Consolidated Group, founded in 1971, provides substantially the same set of
services as HPS, and has focused on developing access to the small business
market for several major HMOs, including United Healthcare, Kaiser, and U.S.
Healthcare. Harrington Services Corporation was founded in 1953, and is a
leading administrator of self-funded health care plans for large corporations,
government sector employers, Taft-Hartley plans, and associations. In addition
to providing claims administration services, Harrington also offers its clients
utilization management services and information systems services, and workers'
compensation and unemployment cost control programs.
On a pro forma basis, during 1995, HPS and Consolidated Group collected
over $300 million in health care premiums, and together, maintain relationships
with over 100,000 insurance agents. This agent relationship provides HPS and
Consolidated Group with a significant distribution conduit to the small business
market in the United States. HPS and its principal operating units function
solely as service providers generating fee based income; none of HPS's units
assume any underwriting risk.
STRATEGY
HPS's strategy is to grow revenue and increase earnings through new product
development, broader distribution of existing managed care products, and the
addition of new payors, such as PPOs, HMOs and other managed care providers. HPS
will seek to build economies of scale by continuing to pursue vigorously a
consolidation strategy involving the acquisition and integration of small, less
efficient administrators, and by adding administrative services contracts with
larger groups and contracts from state-sponsored and private health care
purchasing alliances. HPS also intends to further support the development of
information-based products for its payors and other customers.
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RECENT ACQUISITIONS
On July 1, 1996, HPS acquired all the issued and outstanding stock of
Consolidated Group for approximately $62.0 million in cash, and Harrington for
$32.5 million cash and 1,400,110 HPS Common Shares. Consolidated Group,
headquartered in Framingham, Massachusetts, specializes in providing medical
benefits administration for health care plans for over 23,000 small businesses
covering approximately 215,000 members. In 1995 it had revenues of $74 million.
Consolidated Group employs approximately 600 people. Harrington, headquartered
in Columbus, Ohio, provides administrative services to over 700 large
self-funded plans covering approximately 1,600,000 members. Its revenues in 1995
were $72 million. Harrington employs approximately 1,500 employees, under
principal offices in Columbus, Ohio, Chicago, Illinois, and El Monte,
California.
During 1995, HPS also acquired two small administrators, Third Party Claims
Management, Inc. ("TPCM"), which serves over 300 mid-to-large sized
organizations covering a total of 140,000 members, and Diversified Group
Brokerage Corporation ("DGB"), which serves approximately 200 medium sized
businesses with 45,000 members. Both TPCM and DGB have experienced declining
revenue due to customer attrition, and HPS elected to consolidate the operations
of TPCM and DGB during 1996, resulting in the closing of the Memphis, Tennessee
office of TPCM.
On January 8, 1996, HPS entered into an agreement with Medirisk, Inc.
("Medirisk"), a provider of health care information, to purchase $2.0 million of
Medirisk preferred stock representing a 9% ownership interest recorded under the
cost method of accounting and, in addition, to lend up to $10.0 million over
four years in the form of debt for which HPS would receive detachable warrants
to purchase Medirisk common stock at $0.01 per share. The funds will be used by
Medirisk to finance its expansion through the development of additional products
and the acquisition of additional health care information businesses. Medirisk,
which was founded in 1983 and is headquartered in Atlanta, Georgia, is a
provider of proprietary health care information products and services that track
the price and utilization of medical procedures. As of September 30, 1996, HPS
had purchased $2 million of preferred stock of Medirisk and loaned Medirisk $6.9
million to finance the acquisition of two health care data companies. On
September 19, 1996, Medirisk filed a Registration Statement on Form S-1 (the
"Medirisk S-1") to register the initial public offering of its shares to the
public. In the Medirisk S-1, Medirisk has proposed to offer 3,000,000 shares of
its common stock at a price range of $11.00 to $13.00 per share. Upon completion
of the offering, HPS would beneficially own 618,895 common shares, or 11.0% of
Medirisk. There can be no assurance, however, that the Medirisk initial public
offering will ultimately be consummated.
HPS PRODUCTS & SERVICES
HPS provides distribution, enrollment, premium billing and collection,
claims administration, and information and analyses outsourcing services to
insurance companies, managed care organizations, integrated delivery systems,
self-funded benefit plans, and health care purchasing alliances.
Distribution and Enrollment
HPS provides distribution services to providers of health insurance and
other payors desiring to sell health care coverage to the small business market.
HPS's services include telemarketing, quote preparation, voice telequoting, and
customer service. In providing these services, HPS works with a broad range of
insurance agents, including independent brokers as well as captive insurance
agents who work exclusively for one underwriter. Based on market research,
actuarial analysis of claims adjudicated and interaction with payor
organizations, HPS helps design managed care products, often with specialized
features (such as dental coverage, disability, eligibility requirements and
deductibles), which address the specialized needs of the small business
employer. HPS also designs and implements communications programs on behalf of
its payors, which are aimed at educating the insurance agent about the relative
merits of a particular product offering. In addition, HPS's marketing
responsibilities include the development of consumer awareness programs,
including advertising and media planning, on behalf of state-sponsored health
care purchasing alliances. HPS
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<PAGE> 66
also offers its customers enrollment services, including underwriting in
accordance with the standards set by the risk bearer, issuance of evidence of
coverage, and case renewal.
Billing and Collection of Premiums
HPS sends monthly bills on behalf of payors to insured parties, receives
premium payments from the insureds, and makes commission payments to agents. As
part of the billing process, HPS implements premium changes due to rate changes,
employee hiring or termination, and other group changes.
Claims Administration
HPS's claims administration services include eligibility verification,
copayment calculation, repricing, claims adjudication, and preparation of
explanation of benefit forms. HPS also pays claims on behalf of payors by
issuing checks to health care providers on payor accounts. HPS's claims
administration services also include utilization review services through its
Cost Watch/Medical Case Management and through Harrington's ProHealth, Inc.
unit. These units are staffed by qualified nurses and other qualified medical
personnel to provide precertification approval (a review mechanism for screening
costs in advance of medical care); medical case management (to contain the costs
of prolonged and catastrophic cases); and special claims review services.
Information and Analysis
HPS has broad reporting and analytic capabilities relating to all aspects
of its services. HPS's information products include reports regarding agent
production, enrollment, and frequency and type of claims. HPS intends to
continue to enhance its information-based products. In particular, HPS plans to
pursue opportunities with its strategic partner, Medirisk, to develop
information-based products from HPS's database of administered claims.
HPS CUSTOMERS
HPS provides services on behalf of a wide range of health care payors,
including insurance companies, managed care organizations, integrated delivery
systems, self-funded benefit plans, and health care purchasing alliances. Since
September 1994, HPS has expanded its customer base from traditional indemnity
carriers to include PPOs, HMOs, and other managed care entities, while at the
same time working with its traditional indemnity carriers to develop competitive
managed care products.
Insurance Companies, Managed Care Organizations, and Integrated Delivery
Systems
In July 1995, HPS began providing marketing and administrative services in
Florida for PCA Family Health Plan, Inc., which is affiliated with Physicians
Corporation of America ("PCA"), the seventh largest HMO in the United States. In
the third quarter of 1995, HPS and PCA Health Plans of Alabama, Inc., which is
also a PCA affiliate, agreed to expand the scope of HPS's services in Alabama,
which expansion commenced in the first quarter of 1996. In October 1995, HPS and
Employers Life Insurance Company of Wausau ("ELOW"), a wholly owned subsidiary
of Nationwide Life Insurance Company, agreed to form a relationship to offer a
broad range of health care products to small businesses in several states. HPS
began marketing activities for ELOW products in the third quarter of 1996. In
December 1995, HPS signed a letter of intent with the Florida Independent
Physicians Association ("FIPA") to provide administrative services for FIPA,
with a projected start-up date in mid-1996. A definitive agreement was signed in
May 1996. FIPA is a network of independent physicians associations representing
nearly 6,000 physicians in the State of Florida. In July 1996, HPS entered into
an agreement with Provident American Corporation to market and administer its
managed indemnity product to individuals in several states. In August 1996, HPS
and Foundation Health, a large national HMO, entered into an agreement whereby
HPS will be Foundation's exclusive marketer and administrator in the State of
Florida for its individual and small group HMO products for groups with 25 or
fewer employees. To date, HPS has not generated any significant revenue from any
of these relationships, and it is unclear when, if ever, significant revenue
will materialize. In addition, the pricing on several of these
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<PAGE> 67
products is still being negotiated, so it is uncertain what effect, if any,
enhanced revenue from these relationships will have on HPS's future
profitability.
Typically, HPS's insurance and managed care payors sign contracts with HPS
that are cancelable by either party without penalty upon advance written notice
of between 90 days and one year, and are also cancelable upon a significant
change of ownership of HPS. In 1995, New England Mutual Life Insurance Company,
Celtic Life Insurance Company, and Ameritas Life Insurance Corporation accounted
for 31.0%, 23.0%, and 10.7%, respectively, of total HPS revenue. The July 1996
run rate for these customers was approximately 11.6%, 9.1%, and 6.7%,
respectively. This decline is due primarily to HPS's expansion through
acquisition, which has diluted its concentration of revenues from these sources.
Historically, the majority of Consolidated Group's business was written
with Travelers Insurance Company, which recently combined with the health
insurance business of Metropolitan Life Insurance Company to form MetraHealth.
Subsequently, MetraHealth was acquired by United HealthCare, one of the nation's
leading HMO companies. This business represents approximately 85% to 90% of
Consolidated Group's revenue, or approximately 22% of total consolidated HPS
revenue as of July 1996. In the third quarter of 1996, Metropolitan Life
Insurance Company (less the recently divested health insurance business)
completed its acquisition of New England Mutual Life Insurance Company.
HPS is unable to predict what effect, if any, the merger of The New England
and Metropolitan will have on HPS's relationship with The New England. In
addition, HPS cannot measure either the commitment United HealthCare will have
to the small group market or the success it will experience in converting the
MetraHealth block of business to United HealthCare's new products. The
abandonment of the small group market by either New England Mutual Life
Insurance Company, Celtic Life Insurance Company, or Ameritas Life Insurance
Corporation, and the degree to which HPS is successful with respect to the
MetraHealth conversion, could have a material adverse effect on HPS. A decision
by any one of these payors to administer and distribute a significant portion of
its products directly to small businesses could also have a material adverse
effect on HPS.
Administrative Services Only ("ASO")
HPS has been in the ASO business since 1987, when HPS assumed
administrative responsibility for the employee health insurance plan of The Dun
& Bradstreet Corporation, its former parent. HPS is also the administrator of
health care programs for the State of Oklahoma Education Employees Group
Insurance Board, which cover approximately 89,000 public employees in Oklahoma.
The contract with Oklahoma renews annually on June 30 and will be subject to
state bidding procedures in 1998. HPS administers this program from its facility
in Oklahoma City, Oklahoma. As a result of the TPCM, DGB, and Harrington
acquisitions, HPS added multiple operating facilities throughout the United
States. Through new business sales, case acquisition, and these acquisitions,
this business unit provides administrative services to nearly 900,000 employees,
representing approximately 2.2 million members.
The current market for HPS's ASO business encompasses all private entities,
public entities, Taft-Hartley Plans, and associations with over 100 employees.
During 1995, HPS redesigned its existing administrative process to serve the
large case (greater than 1,000 employees) market more efficiently. Additionally,
HPS implemented a strategy that increased its market share in the United States
via acquisition. HPS also designed advanced electronic data systems as an
interface with providers in order to automate the adjudication of claims
information and provide for more timely reimbursement to providers.
In September 1995, HPS was selected by Darden Restaurants, Inc. to
administer its self-funded health care benefits plan, covering approximately
19,000 employees, beginning January 1, 1996. Darden Restaurants, Inc., a leader
in the casual dining industry with over $3 billion in sales, owns the Red
Lobster and Olive Garden restaurant chains.
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Health Care Purchasing Alliances
During the 1990s, many small businesses were unable to obtain health care
coverage at affordable prices. In response, some states have formed
state-sponsored health care purchasing alliances. Several privately funded
groups also have formed health care purchasing alliances, in some cases with
state support. HPS has been selected to be the administrator for four
state-sponsored health care purchasing alliances (in Florida, Kentucky, North
Carolina and Washington), and three private alliances.
HPS is the administrator for each of the 11 regional Florida Community
Health Purchasing Alliances ("CHPAs"), health care purchasing alliances
established by the State of Florida. In February 1995, HPS was selected as the
statewide administrator for North Carolina's State Health Plan Purchasing
Alliance program, which was launched in the fourth quarter of 1995. Insurance
carriers in North Carolina have not yet shown significant support for this
alliance. In April 1995, HPS was selected as the statewide administrator for
Kentucky's health care purchasing alliance program, which commenced in July
1995. In the third quarter of 1995, HPS opened an office in Lexington, Kentucky
to administer the Kentucky program. In December 1995, HPS was selected to
develop and implement statewide marketing and selected administrative services
for the "Basic Health Plan," the State of Washington's health care purchasing
alliance program, beginning in the second quarter of 1996. The Kentucky plan is
fully operational and profitable, with over 170,000 enrollees. The Washington
contract is still in the developmental stage, and its ultimate success and
acceptance by the residents of the State of Washington cannot be predicted at
this time.
HPS has incurred substantial expenses in connection with the start-up of
its Florida, Kentucky, North Carolina and Washington alliance administration
contracts and will incur similar start-up expenses in connection with other
state health care purchasing alliance business obtained by HPS in the future. In
the fourth quarter of 1994, and in the third quarter of 1996, HPS took
significant write-downs to reflect the estimated loss HPS would incur over the
life of the Florida CHPA contract. HPS does not anticipate recovering all of its
start-up expenses incurred in connection with the alliance administration
contracts during their initial terms, and there can be no assurance that the
health care purchasing alliance contracts will be profitable for HPS. In
addition, each of the health care purchasing alliance contracts currently held
by HPS contains a broad cancellation provision that enables the alliance to
cancel the contract on relatively short notice without penalty. HPS has
developed marketing expertise and proprietary software to handle the enrollment,
billing, disbursement, and reporting services required under the Alliance
contracts, including client-server technology which HPS believes may provide it
with a competitive advantage in pursuing alliance contracts.
In October 1995, Healthcare Sarasota, Inc., a coalition of employers in
Sarasota, Florida, selected HPS to administer health care benefit plans for some
of its member employers beginning in the first quarter of 1996. In November
1995, HPS began administering health care benefits for the South Broward
Hospital District self-funded benefits plans.
During the first half of 1996, the alliance sector, in aggregate, was still
not profitable; management continues to review operating procedures to improve
profitability, and has entered into discussions with several Florida CHPA Boards
in order to renegotiate the existing contracts which are scheduled to expire in
1997. In the third quarter of 1996, HPS announced that it had taken a charge of
$2.6 million related to the alliance sector.
INFORMATION TECHNOLOGY
HPS's central data processing facilities are located in Tampa, Florida,
Framingham, Massachusetts, Columbus, Ohio, and El Monte, California. HPS is
operating in a three-tiered architectural environment. A large IBM mainframe and
DEC platform supports the large volume of data and transactions processed by HPS
on an annual basis. Since 1990, HPS has invested in client-server technology to
support the front-end sales and marketing function. HPS utilizes personal
computer workstations in a local area and wide area network to deliver
information and images to the desktop. HPS also utilizes a variety of other
technologies to meet specific business needs, including interactive voice
response for sales and services, point of service devices for claims processing,
and optical character recognition for entry of data from forms.
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HPS has completed four acquisitions during 1995 and 1996 and intends to
create a common technology platform for all of its business operations. In
addition, HPS expects to eliminate redundant facilities and personnel as part of
its ongoing integration of acquired businesses.
COMPETITION
HPS faces competition and potential competition from traditional indemnity
insurance carriers, Blue Cross/Blue Shield organizations, PPOs, HMOs, third
party administrators, utilization review companies, and health care informatics
companies. HPS competes principally on the basis of the price and quality of
services. Many large insurers have actively sought the claims administration
business of self-funded programs and have begun to offer utilization review and
other managed health care services similar to the services offered by HPS. Many
of HPS's competitors and potential competitors are considerably larger and have
significantly greater resources than HPS.
GOVERNMENT REGULATION
HPS is subject to regulation under the health care and insurance laws and
other statutes and regulations of all 50 states, the District of Columbia, and
Puerto Rico. Many states in which HPS provides claims administration services
require HPS or its employees to receive regulatory approval or licensure to
conduct such business. Provider networks are also regulated in many states, and
certain states require the licensure of companies, such as HPS, which provide
utilization review services. HPS's operations are dependent upon its continued
good standing under applicable licensing laws and regulations. Such laws and
regulations are subject to amendment or interpretation by regulatory authorities
in each jurisdiction. Generally, such authorities have relatively broad
discretion when granting, renewing, or revoking licenses or granting approvals.
These laws and regulations are intended to protect insured parties rather than
shareholders, and differ in content, interpretation, and enforcement practices
from state to state. Moreover, with respect to many issues affecting HPS, there
is a lack of guiding judicial or administrative precedent. Certain of these laws
could be construed to prohibit or restrict practices which have been significant
factors in HPS's operating procedure for many years if state regulators were to
deem HPS's practices to be impermissible.
ERISA governs the relationships between certain health benefit plans and
the fiduciaries of those plans. In general, ERISA is designed to protect the
ultimate beneficiaries of the plans from wrongdoing by the fiduciaries. ERISA
provides that a person is a fiduciary of a plan to the extent that such person
has discretionary authority in the administration of the plan or with respect to
the plan's assets. The employers who are the customers of HPS are fiduciaries of
the plan they sponsor, but there can also be other fiduciaries of a plan. ERISA
imposes various express obligations on fiduciaries. These include barring a
fiduciary from permitting a plan to engage in certain prohibited transactions
with parties in interest or from acting under an impermissible conflict of
interest with a plan. Generally, a party in interest with respect to a plan
includes a fiduciary of the plan and persons that provide services to the plan.
Violations of ERISA by fiduciaries can result in the rescission of any affected
agreement, the imposition of substantial civil penalties on fiduciaries and
parties in interest, and the imposition of excise taxes under the Code on
parties in interest.
Currently, HPS's Consolidated Group subsidiary is undergoing a Department
of Labor (the "DOL") audit in which the DOL has raised various questions about
the application of ERISA to the way that subsidiary does business. This audit is
ongoing and there can be no assurance that the DOL will not take positions which
could require changes to the way this subsidiary operates or result in the
assertion or the imposition of administrative fines and penalties.
The application of ERISA to the operations of HPS and its customers is an
evolving area of law and is subject to ongoing regulatory and judicial
interpretations of ERISA. Although HPS strives to minimize the applicability of
ERISA to its business and to ensure that HPS's practices are not inconsistent
with ERISA, there can be no assurance that courts or the DOL will not in the
future take positions contrary to the current or future practices of HPS. Any
such contrary positions could require changes to HPS's business practices (as
well as industry practices generally) or result in liabilities of the type
referred to above. Similarly, there can be no assurance that future statutory
changes to ERISA will not significantly affect HPS and its industry.
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LEGAL PROCEEDINGS
In 1995, a complaint was filed against HPS claiming wrongful termination of
an exclusive marketing agreement and breach of contract. The complaint asserted
damages of $25,000,000. The parties to the dispute have agreed to binding
arbitration. The arbitration proceedings occurred during the week of October 29,
1996, and the arbitration panel's decision is expected by early December 1996.
Although HPS management believes it has meritorious defenses against the
complaint, the ultimate outcome of the matter cannot presently be determined.
In connection with the acquisition of Harrington, HPS agreed to use its
best efforts to cause a registration statement sufficient to permit the public
offering and sale of the HPS Common Shares issued to the Harrington stockholders
in the acquisition, through the facilities of all appropriate securities
exchanges and the over-the-counter market, provided that in all events, such
registration statement shall become effective on or before October 31, 1996. On
October 30, 1996, HPS received a letter from Harrington's shareholders'
representative notifying HPS that it was in apparent violation of such agreement
and reserving all rights under such agreement. Due to the inability of both
parties to finalize the closing balance sheet for the transaction, and due to
the disclosure requirements for the pending Merger, HPS was not able to have
such registration statement declared effective by October 31, 1996. While HPS
believes it has meritorious defenses against any possible claim, as of the date
hereof, it is not possible for HPS to evaluate what, if any, damages might
result from such notice.
HPS is involved in various claims arising in the normal course of business.
In the opinion of HPS's management, although the outcomes of these claims are
uncertain, in the aggregate they are not likely to have a material adverse
effect on HPS's business, financial condition and results of operations.
EMPLOYEES
With the acquisitions of the Consolidated Group and Harrington, HPS
employed approximately 3,000 full-time equivalent employees as of September 30,
1996. HPS's labor force is not unionized with the exception of Harrington's
subsidiary, American Benefit Plan Administrators, Inc., which administers Taft-
Hartley plans. HPS believes its relationship with its employees is good.
TRADEMARKS
HPS utilizes various service marks, trademarks, and trade names in
connection with its products and services, most of which are the property of
HPS's payors. Although HPS considers its service marks, trademarks, and trade
names important in the operation of its business, the business of HPS is not
dependent on any individual service mark, trademark or trade name.
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SELECTED HISTORICAL FINANCIAL INFORMATION OF HRM
The following selected consolidated financial data for the five years ended
June 30, 1996 are derived from the audited consolidated financial statements of
HRM. The financial data for the three month periods ended September 30, 1995 and
1996 are derived from unaudited consolidated financial statements of HRM. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which HRM considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the three months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 1997. This data should be read in conjunction with, Management's
Discussion and Analysis of Financial Condition and Results of Operations of HRM
and the Consolidated Financial Statements of HRM contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, FISCAL YEAR ENDED JUNE 30,
----------------- -----------------------------------------------
1996 1995 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $14,395 $13,371 $54,507 $49,302 $45,824 $40,871 $27,828
Operating expenses:
Cost of services........................ 8,648 7,880 31,762 30,290 26,784 24,135 17,117
Depreciation and amortization,
principally cost of services.......... 1,726 1,579 6,947 6,127 5,227 4,331 2,929
Selling and marketing................... 1,908 1,558 6,767 6,064 6,485 5,605 4,144
Administration.......................... 1,291 1,358 5,232 4,811 4,792 4,177 3,109
Reorganization charge and other
expense............................... 0 0 0 0 0 0 692
------- ------- ------- ------- ------- ------- -------
Total operating expenses......... 13,573 12,375 50,708 47,292 43,288 38,248 27,991
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... 822 996 3,799 2,010 2,536 2,623 (163)
Other income (expense):
Interest income......................... 44 44 158 128 65 64 439
Interest expense........................ (146) (186) (708) (759) (436) (373) (354)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......... 720 854 3,249 1,379 2,165 2,314 (78)
Provision for income taxes:
Current................................. 4 3 22 12 24 20 17
Deferred................................ 278 322 1,231 523 425 0 0
------- ------- ------- ------- ------- ------- -------
Total income taxes............... 282 325 1,253 535 449 20 17
------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 438 $ 529 $ 1,996 $ 844 $ 1,716 $ 2,294 $ (95)
======= ======= ======= ======= ======= ======= =======
Net income (loss) per common and common
equivalent share(1)..................... $ .10 $ .13 $ .47 $ .21 $ .43 $ .57 $ (.02)
======= ======= ======= ======= ======= ======= =======
Weighted average common and common
equivalent shares(1).................... 4,356 4,140 4,219 3,982 4,015 3,993 3,871
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
SEPTEMBER 30, -----------------------------------------------
1996 1996 1995 1994 1993 1992
------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 5,472 $ 5,246 $ 3,763 $ 5,491 $ 3,089 $ 2,415
Total assets................................... 43,619 44,822 39,962 37,844 32,501 28,313
Current portion of notes payable and
capitalized equipment leases................. 2,039 2,427 1,946 1,950 3,499 1,708
Long-term portion of notes payable and
capitalized equipment leases................. 3,362 4,550 5,155 6,046 2,394 2,729
Shareholders' equity........................... 29,189 28,474 25,101 23,677 21,668 19,060
</TABLE>
- ---------------
(1) Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the period. Common
share equivalents include dilutive stock options and warrants using the
treasury stock method.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF HRM
OVERVIEW
A majority of HRM's revenues consist of fees for services provided under
contracts obligating clients to pay a fixed monthly charge for each covered
employee based on anticipated case volume experience, a percentage of savings, a
transaction or case fee, or on an hourly basis. In addition, each new client is
typically charged a one-time set-up fee to cover the related set-up costs
incurred by HRM. Such revenue is recognized as services are rendered under each
contract.
HRM's expenses are comprised of its cost of services (consisting primarily
of compensation of personnel, including nurses and physicians, telephone
expenses, rent, costs related to HRM's computer operations, costs related to
customer service, and costs related to development of new services), selling and
marketing expenses (including sales commissions, advertising, and account
management personnel), administration expenses (including bad debts and
compensation of personnel in the corporate, finance, human resources, and
general administration departments) and depreciation and amortization (primarily
capitalized leased equipment and software costs).
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data as a percentage of total revenues for the three months ended as of
September 30, 1996 and 1995, and the three fiscal years ended June 30, 1996,
1995, and 1994.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER
30, YEAR ENDED JUNE 30,
------------ ---------------------
1996 1995 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues..................................................... 100 % 100 % 100 % 100 % 100 %
Operating expenses:
Cost of services........................................... 60 59 58 62 58
Depreciation and amortization, principally cost of
services................................................ 12 12 13 12 12
Selling and marketing...................................... 13 12 12 12 14
Administration............................................. 9 10 10 10 10
---- ---- ---- ---- ----
Total operating expenses........................... 94 93 93 96 94
---- ---- ---- ---- ----
Operating income............................................. 6 7 7 4 6
Other income (expense):
Interest income............................................ * * * * *
Interest expense........................................... (1 ) (1 ) (1 ) (1 ) (1 )
---- ---- ---- ---- ----
Income before taxes.......................................... 5 6 6 3 5
Income taxes................................................. (2 ) (2 ) (2 ) (1 ) (1 )
---- ---- ---- ---- ----
Net income................................................... 3 % 4 % 4 % 2 % 4 %
==== ==== ==== ==== ====
</TABLE>
- ---------------
* Less than 1% on a rounded basis.
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Following is the approximate breakout of revenue by class of similar
service categories:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1995 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Care review and case
management............ $ 5,761,000 $ 5,870,000 $21,935,000 $21,640,000 $22,560,000
Price control
management............ 1,116,000 976,000 3,913,000 4,300,000 5,738,000
Claim administration
management............ 5,730,000 5,511,000 23,291,000 19,942,000 15,755,000
Information
management............ 1,788,000 1,014,000 5,368,000 3,420,000 1,771,000
----------- ----------- ----------- ----------- -----------
$14,395,000 $13,371,000 $54,507,000 $49,302,000 $45,824,000
=========== =========== =========== =========== ===========
</TABLE>
There are variations between the percentage increases of revenue categories
because clients purchasing services may choose all or a portion of these
services and this varies from client to client and period to period.
RESULTS OF OPERATIONS -- THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues: Revenues for the three months ended September 30, 1996 increased
$1,024,000 (8%) over the corresponding period of the prior year (from
$13,371,000 to $14,395,000). This increase is primarily attributable to net
increases in the number of clients and covered participants enrolled in HRM's
health care management services, sales of additional services to existing
clients, and increased sales of the QUALITYFIRST health care practice
guidelines.
Revenues for care review and case management services decreased 2%, or
$109,000, from the first quarter of fiscal 1996 to fiscal 1997 (from $5,870,000
to $5,761,000). The decrease in fiscal 1997 was mainly the result of lower
revenues in the HMO unit.
Revenues for price control services increased 14%, or $140,000, from the
first quarter of fiscal 1996 to fiscal 1997 (from $976,000 to $1,116,000). The
increase in fiscal 1997 was mainly the result of an increase in the CarePASS
customer base.
Claim administration services revenues increased 4%, or $219,000, from the
first quarter of fiscal 1996 to fiscal 1997 (from $5,511,000 to $5,730,000)
because of positive customer response to HRM's comprehensive service offering.
Information management revenues increased 76%, or $774,000, from the first
quarter of fiscal 1996 to fiscal 1997 (from $1,014,000 to $1,788,000). In fiscal
1994, fiscal 1995, fiscal 1996, the first quarter of fiscal 1996, and the first
quarter of fiscal 1997, revenues of $1,363,000, $2,628,000, $4,910,000,
$938,000, and $1,756,000, respectively, were related to QUALITYFIRST(R) software
and system licensing.
Cost of Services: Cost of services increased 10% from the first quarter of
fiscal 1996 to fiscal 1997 (from $7,880,000 to $8,648,000). As a percentage of
revenues, cost of services increased from 59% in fiscal 1996 to 60% in fiscal
1997 because HRM carried excess staff for a portion of the quarter because of a
large HMO's start-up services in August 1996.
Depreciation and Amortization: Depreciation and amortization expenses
increased 9% from the first quarter of fiscal 1996 to fiscal 1997 (from
$1,579,000 to $1,726,000), but remained unchanged as a percentage of revenues at
12%. The increase was primarily the result of depreciation on additional
computer, telephone and office equipment, and amortization of additional
software and contract costs. Approximately 92% of depreciation and amortization
expense is related to cost of services.
Selling and Marketing: Selling and marketing expenses increased 22% from
the first quarter of fiscal 1996 to fiscal 1997 (from $1,558,000 to $1,908,000).
The increase in fiscal 1997 was due primarily to increased marketing, sales and
account management personnel, sales commissions and travel expenses. Selling
64
<PAGE> 74
and marketing expenses as a percentage of revenues increased to 13% in the first
quarter of fiscal 1997 from 12% in the first quarter of fiscal 1996.
Administration: Administration expenses decreased 5% from the first
quarter of fiscal 1996 to fiscal 1997 (from $1,358,000 to $1,291,000), and
decreased as a percentage of revenues from 10% to 9%. The decrease in
administration expenses in the first quarter of fiscal 1997 was due to lower
expense for staff, and other expenses, including salaries, bad debts, training
programs and insurance.
Interest: Interest income was $44,000 for the first quarter of fiscal 1997
and fiscal 1996, respectively. The income resulted from available funds invested
in short-term investments. Interest expense decreased 22% from the first quarter
of fiscal 1996 to fiscal 1997 (from $186,000 to $146,000, respectively) and
decreased as a percentage of revenues from 1.3% to 1.0%.
Income Taxes: Income taxes decreased in the first quarter of fiscal 1997
from fiscal 1996 by $43,000. It is expected that the fiscal year 1997 effective
tax rate will approximate the 39% rate of fiscal 1996.
RESULTS OF OPERATIONS -- YEAR ENDED JUNE 30, 1996, 1995 AND 1994
Revenues: Total revenues increased $5,205,000 (11%) from fiscal 1995 to
fiscal 1996 (from $49,302,000 to $54,507,000), and increased $3,478,000 (8%)
from fiscal 1994 to fiscal 1995 (from $45,824,000 to $49,302,000). These
increases are primarily attributable to increases in the number of clients and
covered participants enrolled in HRM's health plan management services, sales of
additional products to existing clients and increased sales of the
QUALITYFIRST(R) health care practice guidelines.
Revenues for care review and case management services increased 1%, or
$295,000, from fiscal 1995 to fiscal 1996 (increasing from $21,640,000 to
$21,935,000), and decreased 4%, or $920,000, from fiscal 1994 to fiscal 1995
(decreasing from $22,560,000 to $21,640,000). The decrease in fiscal 1995 was
mainly the result of the loss of two major customers in the first half of the
year. In fiscal 1996, growth of revenue came from disability management
services, with an overall decrease in care review revenue in general. There was
a decrease in revenue in the fourth quarter, from approximately $1.5 million of
growth for the first three quarters of fiscal 1996, down to $.3 million growth
for the year principally because a significant client transitioned services to
itself during the fourth quarter. The client will continue to use HRM's
QUALITYFIRST(R) software.
Revenues for price control services decreased 9%, or $387,000, from fiscal
1995 to fiscal 1996 (from $4,300,000 to $3,913,000), and decreased 25% or
$1,438,000 from fiscal 1994 to fiscal 1995 (from $5,738,000 to $4,300,000). The
decrease in fiscal 1995 was mainly the result of the loss of two major customers
in the first half of the year. Revenues from price control services increased
approximately $101,000 for each quarter of fiscal 1996 over the fourth quarter
of fiscal 1995 because of new clients adding price control services.
Claim administration services revenue increased 17%, or $3,349,000, from
fiscal 1995 to fiscal 1996 (from $19,942,000 to $23,291,000), and increased 27%,
or $4,187,000, from fiscal 1994 to fiscal 1995 (from $15,755,000 to $19,942,000)
because of increased reception of HRM's comprehensive service offering.
Information management revenues increased 57%, or $1,948,000, from fiscal
1995 to fiscal 1996 (from $3,420,000 to $5,368,000), and increased 93%, or
$1,649,000, from fiscal 1994 to fiscal 1995 (from $1,771,000 to $3,420,000). In
fiscal 1994, fiscal 1995 and fiscal 1996, revenue of $1,363,000, $2,628,000, and
$4,910,000, respectively, was related to QUALITYFIRST(R) software and system
licensing revenues. The balance of revenue in the three years was from
communication and consulting services.
Cost of Services: Cost of services increased 5% from fiscal 1995 to fiscal
1996 (from $30,290,000 to $31,762,000), and increased 13% from fiscal 1994 to
fiscal 1995 (from $26,784,000 to $30,290,000). As a percentage of revenues, cost
of services decreased from 62% in fiscal 1995 to 58% in fiscal 1996. The
decrease in fiscal 1996 of cost of services as a percentage of revenues was
primarily the result of HRM's ability to reduce cost levels by improved
efficiencies in delivery of services or adjusted revenue structures with
customers.
Depreciation and Amortization: Depreciation and amortization increased 13%
from fiscal 1995 to fiscal 1996 (from $6,127,000 to $6,947,000), and increased
from 12% to 13% as a percentage of revenues.
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<PAGE> 75
Depreciation and amortization increased 17% from fiscal 1994 to fiscal 1995
(from $5,227,000 to $6,127,000) but remained unchanged as a percentage of
revenues at 12%. The increases in each period were primarily the result of
depreciation from additional computer, telephone and office equipment, and
amortization of additional software and contract costs. Approximately 92% of
depreciation and amortization expense is related to cost of services for fiscal
1996 and prior years.
Selling and Marketing: Selling and marketing expenses increased 12% from
fiscal 1995 to fiscal 1996 (from $6,064,000 to $6,767,000), and decreased 6%
from fiscal 1994 to fiscal 1995 (from $6,485,000 to $6,064,000). Selling and
marketing expenses as a percentage of revenue remained unchanged at 12% for
fiscal 1996 and fiscal 1995, and decreased to 12% in fiscal 1995 from 14% in
fiscal 1994. The increase or decrease in fiscal 1996 and fiscal 1995 was
primarily due to changes in marketing, sales and account management personnel,
sales commissions and travel expenses.
Administration: Administration expenses increased 9% from fiscal 1995 to
fiscal 1996 (from $4,811,000 to $5,232,000), and remained basically unchanged
from fiscal 1994 to fiscal 1995 (from $4,792,000 to $4,811,000), but remained
unchanged as a percentage of revenues at 10% in all three fiscal years. The
increase in administration expenses in fiscal 1995 and 1996 was due to the
expense of additional staff, and other expenses, including salaries, bad debts,
training programs and insurance. Bad debt expense was $312,000, $333,000 and
$242,000 in fiscal 1994, fiscal 1995 and fiscal 1996, respectively.
Interest: Interest expense decreased 7% from fiscal 1995 to fiscal 1996
(from $759,000 to $708,000), and decreased as a percentage of revenue from 1.5%
to 1.3%. Interest expense increased 74% from fiscal 1994 to fiscal 1995 (from
$436,000 to $759,000), and increased as a percentage of revenue from 1.0% to
1.5%. Interest expense was impacted in fiscal 1996 by lower interest rates and
lower average principal balances outstanding.
Interest income was $158,000, $128,000, and $65,000 for fiscal years 1996,
1995 and 1994, respectively, and increased in fiscal 1996 and fiscal 1995
because of additional available funds invested in short-term investments.
Income Taxes: Income taxes increased in fiscal 1996 from fiscal 1995 by
$718,000, or 134% (from $535,000 to $1,253,000), and increased in fiscal 1995
from fiscal 1994 by $86,000 or 19% (from $449,000 to $535,000). In fiscal year
1994, HRM recognized its remaining net operating loss carryforwards for
financial reporting purposes and provided income taxes at an effective tax rate
of 21%. Net income had been reported as fully taxed in fiscal year 1996 and 1995
at the effective tax rate of 39%. See Note 6 in the Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
HRM's cash flow from operations was $35,000 and $1,751,000 for the first
three months of fiscal 1996 and 1997, respectively. Cash flow from operating
activities was greater than net income because non-cash charges such as
depreciation and amortization exceeded the net changes in operating assets and
liabilities for the first three months of fiscal 1997. In the first three months
of fiscal 1996, cash flow for operating activities was less than net income
because changes in operating assets and liabilities exceeded the cash flow
created by net income, depreciation, amortization and deferred income taxes.
Cash has been used to invest in software and program enhancements ($1,175,000
and $1,488,000 in the first three months of fiscal 1996 and fiscal 1997,
respectively). In addition, HRM acquired property and equipment, including
acquired assets, of $726,000 and $754,000 for the first three months of fiscal
1996 and 1997, respectively. HRM expects to continue its expansion and will
acquire property and equipment, enhance software and products, and develop
products.
HRM has a net operating loss carryforward for income tax purposes in excess
of $13,000,000 as of June 30, 1996, which can be used to reduce the cash flow
necessary to pay taxes.
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<PAGE> 76
HRM's cash position at September 30, 1996 was $2,518,000 as compared to
$3,347,000 at June 30, 1996. HRM also used approximately $460,000 and $615,000
for the first three months of fiscal 1996 and 1997, respectively, to repay
principal on notes payable and capital leases, net of proceeds. HRM received
$277,000 during the first quarter of fiscal 1997 from stock option exercises for
common stock by current employees. HRM's current ratio was approximately 1.6 at
September 30, 1996 and June 30, 1996. HRM's working capital was $5,472,000 and
$5,246,000 at September 30, 1996, and June 30, 1996, respectively.
HRM believes that its cash and cash flow from operations, together with
credit facilities which HRM has obtained, will be sufficient to finance HRM's
anticipated, normal expansion in fiscal 1997. HRM has a term loan (principal
balance of $1,441,000 as of September 30, 1996) with its bank due June 30, 1999
and a revolving credit facility expiring January 31, 1997 under which HRM may
borrow up to $2,500,000. HRM borrowed $1,500,000 (principal balance of
$1,275,000 as of September 30, 1996) under the $2,500,000 revolving credit
facility during fiscal 1996. The revolving credit and term loan are secured by
liens on the assets of HRM.
YEAR ENDED JUNE 30, 1996 AND 1995
HRM's cash flow from operations was $7,435,000 and $7,314,000 for fiscal
1996 and 1995, respectively. Cash flow from operations has exceeded net income
primarily due to non-cash charges such as depreciation and amortization,
deferred income taxes, options for shares of common stock exchanged for value
which is treated as compensation expense, and changes in operating assets and
liabilities.
Cash has been used to invest in software and program enhancements
($5,799,000 and $5,337,000 in fiscal 1996 and fiscal 1995, respectively). HRM
also acquired property and equipment of $2,256,000 and $1,891,000 for fiscal
1996 and 1995, respectively. HRM expects to continue to acquire property and
equipment and enhance software and products.
HRM also used approximately $2,056,000 and $2,166,000 in fiscal 1996 and
fiscal 1995, respectively, to repay principal on notes payable and capital
leases (net of proceeds from notes payable). HRM borrowed $1,500,000 in fiscal
1996. HRM received cash proceeds of $1,155,000 and $554,000 in fiscal 1996 and
fiscal 1995, respectively, from stock option exercises for common stock by
current or former employees and directors.
HRM's current ratio was 1.6 at June 30, 1996 and 1.4 at June 30, 1995.
HRM's working capital was $5,246,000 and $3,763,000 at June 30, 1996 and 1995,
respectively.
HRM had a net operating loss carryforward of approximately $13,400,000 for
income tax purposes at June 30, 1996, which can be used to reduce taxable income
and reduce the current cash flow necessary to pay taxes.
HRM believes that its cash and cash flow from operations, together with
credit facilities that HRM has obtained, will be sufficient to finance HRM's
anticipated, normal expansion in fiscal 1997. HRM has a term loan (principal
balance of $1,572,000 as of June 30, 1996) with its principal lender due June
30, 1999 and a revolving credit facility expiring January 31, 1997, under which
HRM may borrow a total of $2,500,000. HRM borrowed $1,500,000 (principal balance
of $1,350,000 as of June 30, 1996) under its $2,500,000 revolving credit
facility during fiscal 1996. The revolving credit and term loan are secured by
liens on the assets of HRM.
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<PAGE> 77
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements are
based upon the consolidated financial statements of HPS and HRM combined and
adjusted to give effect to the Merger. Upon consummation of the Merger, each
outstanding share of HRM Common Stock will be converted into the right to
receive $9.68603 per share in cash and 0.360208 of an HPS Common Share. The
0.360208 share exchange ratio is subject to possible increase or decrease,
depending on the market price of HPS Common Shares during the five trading days
preceding the consummation of the Merger, as set forth in the Merger Agreement.
The following unaudited pro forma consolidated statement of operations is
based on the individual pro forma consolidated statements of income of HPS as
reported in its Amendment No. 1 to Current Reports on Form 8K/A as filed with
the Commission on September 13, 1996, incorporated by reference, relating to
HPS's acquisitions of Harrington and of the Consolidated Group, net of the
effect of an additional 52,977 shares of stock issued to Harrington
shareholders, and HPS's unaudited consolidated statement of operations for the
three months ended September 30, 1996, included herein, and on the individual
unaudited consolidated statements of net income for HRM, included herein, and
combines the results of operations of HPS and HRM as if the Merger occurred at
the beginning of each period presented. The following unaudited pro forma
consolidated balance sheet is based on the individual balance sheets of HPS and
HRM and has been prepared to reflect the Merger as of September 30, 1996.
These unaudited pro forma consolidated financial statements should be read
in conjunction with HPS's audited consolidated financial statements, including
the notes thereto, which are incorporated by reference in this Proxy
Statement/Prospectus, and in conjunction with HRM's audited consolidated
financial statements, including the notes thereto, which are prepared on the
basis of a June 30 year-end and are included elsewhere in this Proxy
Statement/Prospectus. See "Incorporation of Certain Documents by Reference."
The unaudited pro forma consolidated financial statements are not
necessarily indicative of the results of operations or financial position of the
combined company that would have occurred had the Merger occurred at the
beginning of each period presented or on the date indicated, nor are they
necessarily indicative of future operating results or financial position.
The unaudited pro forma adjustments are based upon information set forth in
this Proxy Statement/ Prospectus, and certain assumptions included in the notes
to the unaudited pro forma consolidated financial statements. As of the date of
this Proxy Statement/Prospectus, HPS believes that the unaudited pro forma
consolidated financial statements reflect the impact on the operations and
liquidity of HPS of all material events or changes expected to result from the
Merger.
The Merger will be accounted for by the purchase method of accounting.
Accordingly, HPS's cost to acquire HRM (the "Purchase Consideration"),
calculated to be $79.5 million assuming a cash payment of $45.7 million and the
issuance of 1.5 million HPS Common Shares at an estimated $22.50 per share, will
be allocated to the assets acquired and liabilities assumed according to their
respective fair values, with the excess Purchase Consideration being allocated
to goodwill. The Purchase Consideration is subject to change depending on the
market price of HPS Common Shares during the five trading days preceding the
consummation of the Merger, as set forth in the Merger Agreement. Such a change
would result in a corresponding change to goodwill and related amortization
expense. The final allocation of the Purchase Consideration is dependent upon
certain valuations and other studies that have not progressed to a stage where
there is sufficient information to make such an allocation in the accompanying
unaudited pro forma consolidated financial statements. Accordingly, the purchase
allocation adjustments made in connection with the development of the unaudited
pro forma consolidated financial statements are preliminary and have been made
solely for the purpose of developing such unaudited pro forma consolidated
financial statements.
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<PAGE> 78
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HEALTHPLAN SERVICES HEALTH RISK
CORPORATION MANAGEMENT, INC. PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS CONSOLIDATED
------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
$ 45,660 (A)
Cash and cash equivalents............... $ 10,473 $ 2,518 (45,660)(B) $ 12,991
Restricted cash......................... 9,986 -- -- 9,986
Accounts receivable..................... 18,274 9,553 -- 27,827
Prepaid commissions..................... 272 89 -- 361
Prepaid expenses and other current
assets................................ 4,676 1,575 -- 6,251
Deferred taxes.......................... 175 235 -- 410
-------- ------- -------- --------
Total current assets............. 43,856 13,970 -- 57,826
Property and equipment, net............. 16,087 8,693 -- 24,780
Computer software costs, net............ 4,900 17,689 -- 22,589
Note receivable......................... 6,900 -- -- 6,900
79,541 (B)
Investment in unconsolidated
subsidiary............................ 2,758 -- (79,541)(D) 2,758
Other assets............................ -- 1,522 -- 1,522
Intangible assets, net.................. 2,085 992 -- 3,077
Deferred taxes.......................... 11,212 -- -- 11,212
5,000 (C)
Goodwill, net........................... 162,080 753 50,352 (D) 218,185
-------- ------- -------- --------
Total assets..................... $ 249,878 $ 43,619 $ 55,352 $348,849
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 5,984 $ 1,356 $ -- $ 7,340
Premiums payable to carriers............ 29,260 -- -- 29,260
Commissions payable..................... 4,721 -- -- 4,721
Deferred revenue........................ 2,012 3,107 -- 5,119
Accrued liabilities..................... 34,698 1,996 5,000 (C) 41,694
Income taxes payable.................... 2,443 -- -- 2,443
Current portion of long-term debt....... 2,496 2,039 -- 4,535
-------- ------- -------- --------
Total current liabilities........ 81,614 8,498 5,000 95,112
Notes payable............................. 65,378 3,362 45,660 (A) 114,400
Deferred taxes............................ -- 2,570 -- 2,570
Other long-term liabilities............... 1,338 -- -- 1,338
-------- ------- -------- --------
Total liabilities................ 148,330 14,430 50,660 213,420
-------- ------- -------- --------
Common stockholders' equity:
15 (B)
Common stock............................ 149 42 (42)(D) 164
33,866 (B)
Additional paid-in capital.............. 104,598 27,896 (27,896)(D) 138,464
Retained earnings (deficit)............. (3,199) 1,251 (1,251)(D) (3,199)
-------- ------- -------- --------
Total stockholders' equity....... 101,548 29,189 4,692 135,429
-------- ------- -------- --------
Total liabilities and
stockholders' equity........... $ 249,878 $ 43,619 $ 55,352 $348,849
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma consolidated balance sheet.
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<PAGE> 79
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(A) To record a draw on HPS's line of credit to fund the HRM acquisition.
(B) To record the cash paid for the stock of HRM of $45.7 million and HPS
Common Shares issued to HRM's Shareholders valued at approximately $33.9
million.
(C) To record estimated costs, including finders fee, legal and accounting
services, and other expenses related to the acquisition, relating to HPS's
acquisition of HRM.
(D) To eliminate HPS's investment in HRM.
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<PAGE> 80
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HEALTH RISK
HEALTHPLAN SERVICES HEALTHPLAN SERVICES MANAGEMENT, INC.
CORPORATION CORPORATION ACTUAL
PRO FORMA ACTUAL NINE MONTHS
SIX MONTHS ENDED THREE MONTHS ENDED ENDED SEPTEMBER PRO FORMA PRO FORMA
JUNE 30, 1996 SEPTEMBER 30, 1996 30, 1996 ADJUSTMENTS CONSOLIDATED
------------------- ------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues........ $ 137,579 $ 66,555 $ 41,842 $ -- $245,976
Interest income........... 991 451 138 -- 1,580
-------- ------- -------- -------- -------
Total revenues... 138,570 67,006 41,980 -- 247,556
-------- ------- -------- -------- -------
Expenses:
Agents commissions...... 31,593 15,025 -- 178 (C) 46,796
Cost of services........ -- -- 24,679 (24,679)(C) --
Personnel expenses...... 56,023 27,177 -- 23,531 (C) 106,731
General and
administrative........ 28,997 13,379 -- 10,239 (C) 52,615
Selling and marketing... -- -- 5,541 (5,541)(C) --
Administration.......... -- -- 3,728 (3,728)(C) --
Pre-operating and
contract start-up
costs................. 586 109 -- -- 695
Contract commitment
expense............... -- 3,935 -- -- 3,935
Restructure and
integration charge.... -- 14,065 -- -- 14,065
Loss on impairment of
goodwill.............. -- 19,232 -- -- 19,232
Depreciation and
amortization.......... 7,058 3,546 5,409 1,452 (A) 17,465
-------- ------- -------- -------- -------
Total expenses... 124,257 96,468 39,357 1,452 261,534
-------- ------- -------- -------- -------
Income (loss) before
interest expense and
income taxes
(benefits).............. 14,313 (29,462) 2,623 (1,452) (13,978)
Interest expense.......... 2,230 1,277 505 2,346 (B) 6,358
-------- ------- -------- -------- -------
Income (loss) before
income taxes
(benefits).............. 12,083 (30,739) 2,118 (3,798) (20,336)
Provision for income taxes
(benefits).............. 4,894 (11,570) 825 (3,461)(D) (9,312)
-------- ------- -------- -------- -------
Net income
(loss)......... $ 7,189 $ (19,169)(E) $ 1,293 $ (337) $(11,024)(E)
======== ======= ======== ======== ========
Net income (loss) per
share................... $ 0.48 $ (1.28)(E) $ (0.67)(E)
======== =======
Weighted average shares... 14,961 14,966 16,468
======== =======
</TABLE>
See notes to unaudited pro forma consolidated statement of operations.
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<PAGE> 81
HEALTHPLAN SERVICES CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HEALTH RISK
MANAGEMENT, INC.
ACTUAL
TWELVE MONTHS
HEALTHPLAN SERVICES ENDED
CORPORATION DECEMBER 31, PRO FORMA PRO FORMA
PRO FORMA 1995 ADJUSTMENTS CONSOLIDATED
------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Operating revenues........................ $ 243,970 $ 52,848 $ -- $296,818
Interest income........................... 1,197 129 -- 1,326
-------- ------- -------- --------
Total revenues................... 245,167 52,977 -- 298,144
-------- ------- -------- --------
Expenses:
Agents commissions...................... 62,780 -- 222(C) 63,002
Cost of services........................ -- 31,110 (31,110)(C) --
Personnel expenses...................... 88,022 -- 29,545(C) 117,567
General and administrative.............. 57,198 -- 12,784(C) 69,982
Selling and marketing................... -- 6,188 (6,188)(C) --
Administration.......................... -- 5,253 (5,253)(C) --
Pre-operating and contract start-up
costs................................. 1,664 -- -- 1,664
Depreciation and amortization........... 12,619 6,501 2,092(A) 21,212
-------- ------- -------- --------
Total expenses................... 222,283 49,052 2,092 273,427
-------- ------- -------- --------
Income before interest expense and income
taxes................................... 22,884 3,925 (2,092) 24,717
Interest expense.......................... 4,313 722 3,128(B) 8,163
-------- ------- -------- --------
Income before income taxes................ 18,571 3,203 (5,220) 16,554
Provision for income taxes................ 7,521 1,195 (1,136)(D) 7,580
-------- ------- -------- --------
Income from continuing
operations..................... 11,050 2,008 (4,084) 8,974
Loss on discontinued business segment net
of tax benefit.......................... 3,170 -- -- 3,170
-------- ------- -------- --------
Net income....................... $ 7,880 $ 2,008 $ (4,084) $ 5,804
======== ======= ======== ========
Net income per share...................... $ 0.53 $ 0.35
======== ========
Weighted average shares................... 14,956 16,468
======== ========
</TABLE>
See notes to unaudited pro forma consolidated statement of operations.
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<PAGE> 82
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(A) To eliminate historical amortization and to record pro forma amortization
of estimated goodwill of $55.4 million over a 25-year period.
(B) To record estimated interest expense related to net borrowing on the
purchase of HRM at HPS's borrowing rate under its Line of Credit ranging
from LIBOR plus 125 to 175 basis points or New York prime plus 25 to 75
basis points.
(C) To reclassify HRM accounts to conform with those of HPS.
(D) To provide for combined income taxes at an estimated rate of 45.79%.
(E) In the third quarter of 1996, HPS took a pre-tax charge of approximately
$18.0 million in restructuring, integration and contract commitment
expenses. Additionally, HPS recorded a pre-tax charge of $19.2 million for
the impairment of goodwill. See "Risk Factors -- Risks Related to
Goodwill."
73
<PAGE> 83
PRINCIPAL SHAREHOLDERS OF HRM
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 1, 1996, the number of
shares of HRM Common Stock beneficially owned by each person known to HRM to
beneficially own more than five percent of the outstanding HRM Common Stock, by
each of HRM's directors, by each of HRM's current executive officers named in
HRM's Compensation Table for its fiscal year ended June 30, 1996, and by all of
HRM's directors and current executive officers as a group.
<TABLE>
<CAPTION>
NAME OF DIRECTOR, EXECUTIVE NUMBER OF SHARES PERCENT
OFFICER OR IDENTITY OF GROUP BENEFICIALLY OWNED(1) OF CLASS
- --------------------------------------------------------------- --------------------- --------
<S> <C> <C>
Gary T. McIlroy, M.D........................................... 365,872(2) 8.47%
8000 West 78th Street
Minneapolis, MN 55439
Marlene O. Travis.............................................. 347,039(3) 8.08%
8000 West 78th Street
Minneapolis, MN 55439
Thomas P. Clark................................................ 87,121(4) 2.05%
Adele M. Kimpell............................................... 7,000(5) *
Raymond G. Schultze, M.D....................................... 0(6) *
Gary L. Damkoehler............................................. 0(7) *
Vance Kenneth Travis........................................... 10,100(8) *
Ronald R. Hahn................................................. 7,600(9) *
Robert L. Montgomery........................................... 9,779(10) *
All Executive Officers and Directors as a Group (13 persons)... 863,461(11) 19.29%
</TABLE>
- ---------------
* Less than one percent.
(1) Except as otherwise noted, each person or group named in the table has sole
voting and investment power with respect to all shares of HRM Common Stock
listed opposite the name of such person or group. Shares not outstanding
but deemed beneficially owned by virtue of the right of a person to acquire
them as of November 1, 1996, or within 60 days of such date, are treated as
outstanding only when determining the amount and percent owned by such
person or group named in the table.
(2) The number of shares set forth in the above table (i) includes 267,774
shares held by the Gary T. McIlroy Revocable Trust, for which Dr. McIlroy
is grantor and trustee, (ii) includes 98,098 shares that Dr. McIlroy has
the right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Dr. McIlroy's and Ms. Travis' adult child, (iv)
excludes the shares beneficially owned by Ms. Travis, and (v) excludes
21,902 shares that Dr. McIlroy has the right to acquire upon the exercise
of options that are not yet vested but which will be vested immediately
prior to the Merger by reason of the Merger. Dr. McIlroy disclaims
beneficial ownership of such excluded shares.
(3) The number of shares set forth in the above table (i) includes 272,688
shares held by the Marlene O. Travis Revocable Trust, for which Ms. Travis
is grantor and trustee, (ii) includes 74,351 shares that Ms. Travis has the
right to acquire upon exercise of options, (iii) excludes 75 shares
beneficially owned by Ms. Travis' and Dr. McIlroy's adult child, (iv)
excludes the shares beneficially owned by Dr. McIlroy, and (v) excludes
15,649 shares that Ms. Travis has the right to acquire upon the exercise of
options that are not vested but which will be vested immediately prior to
the Merger by reason of the Merger. Ms. Travis disclaims beneficial
ownership of such excluded shares.
(4) Includes 60,000 shares held by Mr. Clark and 27,121 shares that Mr. Clark
has the right to acquire upon exercise of options. Excludes 12,879 shares
that Mr. Clark has the right to acquire upon the exercise of options that
are not yet vested but which will be vested immediately prior to the Merger
by reason of the Merger.
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(5) Includes 7,000 shares that Ms. Kimpell has the right to acquire upon
exercise of options. Excludes 2,500 shares that Ms. Kimpell has the right
to acquire upon the exercise of options that are not yet vested but which
will be vested immediately prior to the Merger by reason of the Merger.
(6) Excludes 3,800 shares that Dr. Schultze has the right to acquire upon the
exercise of options that are not yet vested but which will be vested
immediately prior to the Merger by reason of the Merger.
(7) Excludes 3,800 shares that Mr. Damkoehler has the right to acquire upon the
exercise of options that are not yet vested but which will be vested
immediately prior to the Merger by reason of the Merger.
(8) Includes 2,500 shares held by Mr. Travis and 7,600 shares that Mr. Travis
has the right to acquire upon exercise of options. Excludes 3,800 shares
that Mr. Travis has the right to acquire upon the exercise of options that
are not yet vested but which will be vested immediately prior to the Merger
by reason of the Merger.
(9) Includes 7,600 shares that Mr. Hahn has the right to acquire upon exercise
of options. Excludes 3,800 shares that Mr. Hahn has the right to acquire
upon the exercise of options that are not yet vested but which will be
vested immediately prior to the Merger by reason of the Merger.
(10) Includes 9,779 shares that Mr. Montgomery has the right to acquire upon
exercise of options. Excludes 18,009 shares that Mr. Montgomery has the
right to acquire upon the exercise of options that are not yet vested but
which will be vested immediately prior to the Merger by reason of the
Merger.
(11) Includes 609,412 shares held by the current executive officers and
directors, and 254,049 shares that current executive officers and directors
as a group have the right to acquire as of November 1, 1996, or within 60
days of such date, upon exercise of options. Excludes 86,139 shares that
current executive officers and directors as a group have the right to
acquire upon the exercise of options that are not yet vested but which will
be vested immediately prior to the Merger by reason of the Merger.
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COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of certain of the material differences between
the rights of holders of HRM Common Stock and the rights of holders of HPS
Common Shares. Because HRM is organized under the laws of the State of Minnesota
and HPS is organized under the laws of the State of Delaware, such differences
arise from differences between various provisions of the charter documents of
HRM and HPS as well as from the differences between the Minnesota Business
Corporation Act (the "MBCA") and the Delaware General Corporation Law (the
"DGCL").
CUMULATIVE VOTING IN THE ELECTION OF DIRECTORS
In an election of directors under cumulative voting, each share of stock
normally having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may then cast all such votes for a single
candidate or may allocate them among as many candidates as the shareholder may
choose. Without cumulative voting, the holders of a majority of the shares
present at a meeting held to elect directors would have the power to elect all
the directors to be elected at that meeting, and no person could be elected
without the support of holders of a majority of the shares voting at such
meeting.
Under the MBCA, cumulative voting in the election of directors is mandatory
unless the corporation's articles of incorporation provide that there shall be
no cumulative voting. The HRM Amended and Restated Articles of Incorporation
(the "HRM Articles") provide that there is no cumulative voting. Under the DGCL,
cumulative voting is permitted only if it is specifically provided for in the
corporation's certificate of incorporation. Under the HPS Certificate of
Incorporation, as amended (the "HPS Certificate"), cumulative voting is not
permitted.
POWER TO CALL SPECIAL MEETING
Under the MBCA, a special meeting of shareholders may be called by certain
officers, two or more directors, a person authorized to do so in the articles or
bylaws, or shareholders holding at least 10% of the voting power of all shares
entitled to vote, except that a special meeting for the purpose of considering
an action to effect, directly or indirectly, a business combination, including
any action to change or otherwise affect the composition of the board of
directors for that purpose, must be called by shareholders holding at least 25%
of the voting power of all shares entitled to vote.
Under the DGCL, a special meeting of shareholders may be called by the
board of directors or any other person authorized to do so in the corporation's
certificate of incorporation or bylaws. Under the HPS Certificate and HPS's
Bylaws, a special meeting of shareholders may be called by the Chairman of the
Board, the Chief Executive Officer, the Board of Directors, or shareholders
holding a majority of the shares entitled to vote at that meeting.
DISSOLUTION
Subject to certain exceptions, under the MBCA, the approval of shareholders
holding not less than a majority of the voting power of the corporation is
required for the disposition of all or substantially all of the corporation's
assets, other than the regular course of business, and for voluntary
dissolution. The HRM Articles impose certain supermajority voting requirements
on the disposition of all or any substantial part of its assets. See
"-- Approval of Mergers and Consolidations."
Under the DGCL, a dissolution must be approved by shareholders holding 100%
of the total voting power or the dissolution must be initiated by the board of
directors and approved by the holders of a majority of the outstanding voting
shares of the corporation, unless a greater vote is provided for in the
certificate of incorporation. The HPS Certificate does not require a greater
vote.
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CLASSIFIED BOARD OF DIRECTORS
A classified board is one in which a certain number, but not all, of the
directors are elected on a rotating basis each year. This method of electing
directors makes a change in the composition of the board of directors, and a
potential change in control of a corporation, a lengthier and more difficult
process.
The MBCA permits, but does not require, a classified board of directors.
The HRM Articles provide for a Board of Directors consisting of three classes,
under which the members of such classes are elected for staggered three-year
terms. Any amendment or repeal of the HRM Articles regarding classification of
the Board requires the affirmative vote of the holders of 75% of all outstanding
shares of voting stock, unless such proposed amendment or repeal was approved by
two-thirds of the entire HRM Board of Directors, which requires the affirmative
vote of a majority of such outstanding shares. The DGCL permits, but does not
require, a classified board of directors with staggered terms under which the
directors are elected for terms of two or three years. HPS's charter documents
do not currently provide for a classified board.
REMOVAL OF DIRECTORS
Under the MBCA, unless otherwise provided in the articles of incorporation
or bylaws, any director or the entire board of directors of a Minnesota
corporation may be removed, with or without cause, by the holders of the
proportion or number of the voting power of the shares of the classes or series
the director represents sufficient to elect them. The HRM Articles provide that
an HRM director may be removed either (i) for cause, by the affirmative vote of
the holders of 75% of all outstanding shares entitled to vote generally in the
election of directors, or (ii) with or without cause, by the affirmative vote of
a majority of the entire Board of Directors and a majority of the then
continuing directors.
Under the DGCL, any director or the entire board of directors of a Delaware
corporation without a classified board of directors may be removed with or
without cause by the holders of a majority of the shares then entitled to vote
at an election of directors. Under HPS's Bylaws, any or all of the directors may
be removed, with or without cause, at any time by the vote of the shareholders
at a special meeting of shareholders called for that purpose and any director
may be removed for cause by the action of the Board of Directors at a special
meeting of the Board of Directors called for that purpose.
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
Under the MBCA, unless otherwise provided in the articles of incorporation,
any action that may be taken at any annual or special meeting of shareholders
may be taken without a meeting by written consent of all of the shareholders
entitled to vote on the action.
Under the DGCL, shareholders may execute an action by written consent in
lieu of a meeting of shareholders. The DGCL permits a corporation to eliminate
such actions by written consent in its certificate of incorporation. The HPS
Certificate does not eliminate such actions.
VOTING REQUIREMENTS
Under the MBCA, an amendment to the articles of incorporation generally
requires the affirmative vote of the holders of majority of the shares present
and entitled to vote unless a larger affirmative vote is required by the
corporation's articles. Except as specifically described otherwise herein, the
HRM Articles do not contain any provisions that require a larger affirmative
vote in order to amend the HRM Articles. Except as specifically required
otherwise, under the HRM Articles, HRM's Bylaws or the MBCA, all matters
submitted to the HRM Shareholders are decided by a majority vote of the shares
entitled to vote and represented at a meeting at which there is a quorum.
Under the DGCL, an amendment to the certificate of incorporation requires
the affirmative vote of the holders of a majority of the shares entitled to vote
thereon, unless the corporation's certificate of incorporation requires a
greater or lesser number for approval. The HPS Certificate does not require a
greater or lesser number for such approval. Furthermore, under the DGCL, the
holders of the outstanding shares of a class are entitled to vote as a class
upon any proposed amendment to the certificate of incorporation, whether or not
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they are entitled to vote thereon by the provisions of the corporation's
certificate of incorporation, if the amendment would increase or decrease the
aggregate number of authorized shares of such class, increase or decrease the
par value of the shares of such class, or alter or change the powers,
preferences or special rights of the shares of such class so as to adversely
affect them.
APPROVAL OF MERGERS AND CONSOLIDATIONS
Under both the MBCA and the DGCL, a plan or agreement of merger, exchange
or consolidation must be approved by the directors of each corporation and
adopted by the affirmative vote of the holders of a majority of the outstanding
shares entitled to vote thereon, or by a greater vote as provided in a
corporation's charter. Neither the MBCA nor the DGCL requires the separate vote
of any class of shares, unless any provision of the plan of merger would, if
contained in a proposed amendment to the articles, entitle the class or series
to vote as a class or series. Additionally, both the MBCA and the DGCL provide
generally that, unless its charter provides otherwise, no vote of the
shareholders of the surviving corporation is required to approve the merger if
(i) the agreement of merger does not amend in any respect the corporation's
charter, (ii) each share outstanding immediately prior to the effective date is
to be an identical outstanding share of the surviving corporation after the
effective date, and (iii) the number and voting power of shares of the surviving
corporation's common stock to be issued in the merger plus the number and voting
power of shares of common stock into which any other securities to be issued in
the merger are initially convertible does not exceed 20% of its common stock
outstanding immediately prior to the effective date of the merger.
The HRM Articles impose certain supermajority voting requirements, which do
not apply to the Merger. Any merger or consolidation with or into any other
corporation, any disposition of all or any substantial part of HRM's assets to
any other person or entity, any issuance or transfer of a substantial amount of
any securities of HRM to any other person or entity (except pursuant to certain
stock dividends, stock splits or similar transactions), and any reclassification
of securities or recapitalization of HRM that increases the proportionate share
of any outstanding securities of HRM held by any other person or entity,
requires the affirmative vote of the holders of at least (i) 75% of the voting
stock of HRM and (ii) a majority of the outstanding HRM Common Stock not
beneficially owned by such person or entity, if such other person or entity is
the beneficial owner of 5% or more of the voting stock. This supermajority
voting requirement does not apply to any transaction (i) with another
corporation if a majority of the outstanding shares of all classes of stock of
such other corporation is owned by HRM or (ii) with another person or entity if
the HRM Board of Directors approves a memorandum of understanding with such
other person or entity with respect to such transaction prior to the time such
person or entity became the beneficial owner of 5% or more of the outstanding
shares of voting stock of HRM. Any amendment or repeal of the HRM Articles
regarding these supermajority provisions requires the affirmative vote of the
holders of 75% of all outstanding shares of voting stock and by a majority of
the outstanding shares of voting stock that are not held by such person or
entity if it then holds 5% or more of the outstanding shares of voting stock of
HRM. The HPS Certificate contains no supermajority voting provisions.
The MBCA provides that a corporation may acquire all of the outstanding
shares of one or more classes or series of another corporation pursuant to a
plan of exchange. Unlike a merger, in which there is a single surviving
corporation, an exchange results in an acquired company becoming the wholly
owned subsidiary of the acquiring corporation. The DGCL contains no provisions
for statutory exchanges. The DGCL, however, does contain provisions relating to
statutory consolidations in which all of constituent corporations disappear and
a new entity is created to continue the business. The MBCA does not provide for
consolidations.
PREEMPTIVE RIGHTS
Under the HRM Articles, holders of HRM Common Stock are expressly denied
preemptive rights. The DGCL provides that a corporation's shareholders have
preemptive rights only if such rights are expressly granted in the corporation's
certificate of incorporation. The HPS Certificate does not grant preemptive
rights.
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RIGHTS OF DISSENTING SHAREHOLDERS
The MBCA and the DGCL both contain provisions which entitle certain
dissenting shareholders to receive the appraised value of their ownership in
connection with certain transactions. While the appraisal rights provided by the
DGCL and the MBCA are similar, the specific provisions of the statutes differ,
as discussed below.
Under the MBCA, dissenting shareholders are entitled to appraisal rights in
connection with the lease, sale, exchange, transfer or certain other
dispositions of all or substantially all of the assets of a corporation and in
connection with certain amendments to its articles of incorporation that
adversely affect a shareholder's rights. In addition, shareholders of a
Minnesota corporation are entitled, except in limited situations, to appraisal
rights in connection with any merger or exchange that requires a shareholder
vote.
Under the DGCL, appraisal rights are available only in connection with
statutory mergers or consolidations. Generally, shareholders of a Delaware
corporation who dissent from a merger or consolidation of the corporation for
which a shareholders' vote is required are entitled to appraisal rights,
requiring the surviving corporation to purchase the dissenting shares at fair
value. There are, however, no statutory rights of appraisal with respect to
shareholders of a Delaware corporation whose shares of stock are either (i)
listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
shareholders where such shareholders receive only shares of stock of the
corporation surviving or resulting from the merger or consolidation (or cash in
lieu of fractional interests therein).
DIVIDENDS AND REPURCHASE OF SHARES
Under the MBCA, a corporation may pay dividends and purchase its own
shares, provided the board of directors reasonably determines that such payments
would not render the corporation unable to pay its debts in the ordinary course
of business and would not result in the corporation's total assets being less
than the sum of (i) its total liabilities, plus (ii) the amount that would be
needed, if the corporation were to be dissolved, to satisfy the rights of
preferred shareholders. The MBCA also restricts a Minnesota corporation's
ability to repurchase shares from certain shareholders. Specifically, a publicly
held Minnesota corporation may not purchase or agree to purchase any voting
shares from a person who owns more than 5% of the corporation's voting stock for
more than the fair market value of such shares if the shares have been owned for
less than two years, unless the purchase is approved by shareholders who hold a
majority of the voting power of all shares entitled to vote. The corporation may
also make such a purchase if it makes an offer to purchase shares from all of
its shareholders for at least equal value per share. These provisions may limit
HRM's ability to purchase shares in opposition to a takeover attempt.
Subject to any restrictions contained in a corporation's certificate of
incorporation, the DGCL generally provides that a corporation may declare and
pay dividends out of surplus (defined as net assets minus stated capital) or,
when no surplus exists, out of net profits for the fiscal year in which the
dividends is declared and/or for the preceding fiscal year. Dividends may not be
paid out of net profits if the capital of the corporation is less than the
amount of capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets.
LIMITATIONS OF LIABILITY OF DIRECTORS AND OFFICERS; INDEMNIFICATION
Under the MBCA, a corporation may include in its articles of incorporation
a provision which would, subject to the limitations described below, eliminate
or limit directors' liability to the corporation or its shareholders for
monetary damages for breach of fiduciary duty. Under the MBCA, a director's
liability cannot be eliminated or limited for (i) any breach of the director's
duty of loyalty to the corporation or its shareholders; (ii) acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law; (iii) the making of an unlawful distribution under the MBCA; (iv)
certain violations of Minnesota securities laws; (v) any transaction from which
the director derived an improper personal benefit; or (vi) any act or omission
occurring before the date the provision in the corporation's articles
eliminating or limiting liability became effective. HRM's Articles include such
a provision.
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Minnesota law further provides specific statutory authority for directors
in discharging their duties to consider factors in addition to the interests of
the corporation's shareholders, such as the interests of the corporation's
employees, suppliers, creditors and customers; the economy of the state and
nation; community and societal considerations; and the long-term and short-term
interests of the corporation and its shareholders.
Under the MBCA, Minnesota corporations are required to indemnify persons in
their official capacity (directors, officers, employees and agents) within
prescribed limits as long as they satisfy the five criteria of eligibility set
forth in the MBCA. HRM's Bylaws provide that HRM is to indemnify such persons to
the fullest extent permitted by the MBCA.
The MBCA provides that the corporation must make advance payment of
expenses upon the request of a person who is eligible for indemnification, if
that person supplies the corporation with an affidavit stating that the person
honestly believes that he or she has met the criteria for mandatory
indemnification and promises to repay the corporation if it is ultimately found
that the criteria were not met.
Under the DGCL, a corporation may include in its certificate of
incorporation a provision which would, subject to the limitations described
below, eliminate or limit directors' liability for monetary damages for breaches
of their fiduciary duty of care. Under the DGCL, a director's liability cannot
be eliminated or limited (i) for breaches of duty of loyalty, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for the payment of unlawful dividends or expenditure of
funds for unlawful stock purchases or redemptions, or (iv) for transactions from
which such director derived an improper personal benefit. The HPS Certificate
includes such a provision.
BUSINESS COMBINATIONS AND CONTROL SHARE ACQUISITIONS
HRM is governed by Sections 302A.671 and 302A.673 of the MBCA. In general,
Section 302A.671 provides that the shares of a corporation acquired in a
"control share acquisition" have no voting rights unless voting rights are
approved in a prescribed manner. A "control share acquisition" is an
acquisition, directly or indirectly, of beneficial ownership of shares that
would, when added to all other shares beneficially owned by the acquiring
person, entitle the acquiring person to have voting power of 20% or more in the
election of directors. In general, Section 302A.673 prohibits a public Minnesota
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested shareholder. An "interested shareholder" is a person who is the
beneficial owner, directly or indirectly, of 10% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and at any
time within four years prior to the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the corporation's voting stock. Such
provisions of Minnesota law could have the effect of delaying, deferring or
preventing a change in control of HRM.
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation and an "interested shareholder." For purposes of this provision, an
"interested shareholder" is a shareholder that is directly or indirectly a
beneficial owner of 15% or more of the voting power of the outstanding voting
stock of a Delaware corporation (or its affiliate or associate). This provision
prohibits certain business combinations between an interested shareholder and a
corporation for a period of three years after the date the interested
shareholder acquired its stock, unless (i) the business combination is approved
by the corporation's board of directors prior to the stock acquisition date;
(ii) the interested shareholder acquired at least 85% of the voting stock of the
corporation in the transaction in which he or she became an interested
shareholder; or (iii) the business combination is approved by a majority of the
board of directors and the affirmative vote of two-thirds of disinterested
shareholders.
Delaware law contains no provisions similar to the control share
acquisition provision in the MBCA.
The foregoing summary does not purport to be a complete statement of the
rights of holders of HPS Common Shares and HRM Common Stock under, and is
qualified in its entirety by reference to, the DGCL and the MBCA, the HPS
Certificate and HPS Bylaws, and the HRM Articles and HRM Bylaws. See
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"Description of HPS Capital Stock" for a summary of certain other rights
relating to the HPS Common Shares.
DESCRIPTION OF HPS CAPITAL STOCK
GENERAL
HPS's Certificate of Incorporation authorizes the issuance of 100,000,000
shares of HPS Common Shares, par value $.01 per share, and 20,000,000 shares of
Preferred Stock, par value $.01 per share, of which 1,000,000 shares are
available for issuance. The Board of Directors has established two series of
Preferred Stock, consisting of 100,000 shares of Series A Preferred Stock and
18,900,000 shares of Series B Preferred Stock. As of November , 1996 (i)
approximately shares of HPS Common Shares were issued and outstanding,
and were reserved for issuance pursuant to options outstanding under
stock option plans (with approximately additional HPS Common Shares
available for issuance under such plans), and (ii) no shares of Preferred Stock
were issued and outstanding, or reserved for issuance.
HPS COMMON SHARES
No holder of HPS Common Shares has any preemptive right to subscribe for
any of HPS's securities. All outstanding shares are, and shares to be
outstanding on completion of the offering will be, fully paid and nonassessable.
Holders of HPS Common Shares are not entitled to cumulative voting and are
entitled to one vote per share with respect to all matters that are required by
law to be submitted to shareholders, including the election of directors.
Subject to the prior rights of the holders of any Preferred Stock that may
be outstanding, holders of HPS Common Shares are entitled to share pro rata in
such dividends as may be declared by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation of HPS, all assets
available for distribution (after satisfaction of the prior rights of the
holders of any outstanding shares of Preferred Stock) are distributable among
the holders of the HPS Common Shares according to their respective holdings.
First Union National Bank of North Carolina is the transfer agent and the
registrar for the HPS Common Shares.
The authorized but unissued shares of HPS Common Shares and Preferred Stock
could be used to dilute the stock ownership of persons seeking to obtain control
of HPS, and thereby defeat a possible takeover attempt which, if shareholders
were offered a premium over the market value of their shares, might be viewed as
being beneficial to HPS's shareholders. In addition, the Preferred Stock could
be issued with voting and/or conversion rights and preferences which would
adversely affect the voting power and other rights of holders of HPS Common
Shares.
PREFERRED STOCK
HPS's Certificate of Incorporation provides that the Board of Directors,
without shareholder approval, has the authority to issue preferred stock from
time to time in series and to fix the designation, powers (including voting
powers, if any), preferences and relative, participating, optional, conversion
and other special rights, and the qualifications, limitations, and restrictions
of each series.
DELAWARE ANTI-TAKEOVER LAW
HPS is a Delaware corporation and is subject to Section 203 of the Delaware
General Corporation Law. Section 203 prohibits certain business combinations
between a Delaware corporation, whose stock generally is publicly traded or held
of record by more than 2,000 shareholders, and an interested shareholder for a
three-year period following the date that such shareholder became an interested
shareholder. See "Comparison of Shareholder Rights -- Business Combinations and
Control Share Acquisitions."
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Although HPS continually evaluates possible candidates for acquisition and
intends to seek additional acquisition opportunities in the health care field,
as of the date of this Proxy Statement/Prospectus no material acquisition has
been agreed upon or become the subject of a letter of intent or agreement in
principle.
LEGAL MATTERS
The validity of the HPS Common Shares to be issued in the Merger will be
passed upon for HPS by Fowler, White, Gillen, Boggs, Villareal and Banker, P.A.,
special counsel to HPS.
Fredrikson & Byron, P.A., has advised HRM that the information set forth
herein under the captions "Summary -- Certain Federal Income Tax Consequences"
and "Certain Federal Income Tax Consequences," subject to the limitations stated
therein, contains a summary of the material federal income tax considerations
relevant to the HRM Shareholders receiving HPS Common Shares pursuant to the
Merger Agreement.
EXPERTS
The consolidated financial statements of HPS as of December 31, 1995 and
1994 and for the year ended December 31, 1995, and for the period from inception
(October 1, 1994 through December 31, 1994), incorporated in this Proxy
Statement/Prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 1995, have been so incorporated in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting. The financial statements of HPS as
of September 30, 1994, and for the nine-month period ended September 30, 1994
and the year ended December 31, 1993 incorporated by reference to HPS's Annual
Report on Form 10-K for the year ended December 31, 1995, have been so
incorporated in reliance on the report of Coopers & Lybrand L.L.P., independent
certified public accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of HRM as of June 30, 1996 and 1995,
and for each of the three years in the period ended June 30, 1996, included in
this Proxy Statement/Prospectus have been so included in reliance on the report
of Ernst & Young LLP, independent certified public accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Consolidated Group, Inc. and Affiliates, as of
December 31, 1995 and 1994, and for each of the three years ended December 31,
1995, and the financial statements of Consolidated Health Coalition, Inc., as of
December 31, 1995 and 1994 (year of inception) and for each of the two years
ended December 31, 1995, incorporated in this Proxy Statement/Prospectus by
reference have been so incorporated in reliance on the report of Bonanno, Savino
& Davies, P.C., independent certified public accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Harrington Services Corporation as of December
31, 1995 and 1994, and for each of the three years ended December 31, 1995,
incorporated in this Proxy Statement/Prospectus by reference have been so
incorporated in reliance on the report of Richard A. Eisner & Co., LLP,
independent certified public accountants, given on the authority of said firm as
experts in auditing and accounting.
OTHER MATTERS
The Board of Directors of HRM knows of no other matters to be presented at
the Special Meeting other than as described in the Notice of Special Meeting
accompanying this Proxy Statement/Prospectus. If any other matter does properly
come before the Special Meeting, the appointees named in the Proxies will vote
the Proxies in accordance with their best judgment.
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SHAREHOLDER PROPOSALS
Any HRM Shareholder who intends to present a proposal at HRM's 1997 Annual
Meeting of Shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting is advised that the proposal must be received by the
Secretary of HRM at its principal executive offices not later than November 30,
1996. HRM will not be required to include in its proxy statement a form of proxy
or shareholder proposal which is received after that date or which otherwise
fails to meet the requirements for shareholder proposals established by
regulations of the Commission. If the Merger is consummated prior to these
dates, there will be no 1997 Annual Meeting of HRM Shareholders.
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INDEX TO FINANCIAL STATEMENTS OF HEALTH RISK MANAGEMENT, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 (UNAUDITED)
Consolidated Balance Sheets as of September 30, 1996 and June 30, 1996............. F-2
Consolidated Statements of Net Income for the three months ended September 30, 1996
and 1995........................................................................ F-3
Consolidated Statements of Cash Flows for the three months ended September 30, 1996
and 1995........................................................................ F-4
Notes to Consolidated Financial Statements......................................... F-5
FINANCIAL STATEMENTS AS OF JUNE 30, 1996
Report of Independent Auditors..................................................... F-7
Consolidated Balance Sheets as of June 30, 1996 and 1995........................... F-8
Consolidated Statements of Net Income for the years ended June 30, 1996, 1995 and
1994............................................................................ F-9
Consolidated Statements of Changes in Shareholders' Equity for the years ended June
30, 1996, 1995 and 1994......................................................... F-10
Consolidated Statements of Cash Flows for the years ended June 30, 1996, 1995 and
1994............................................................................ F-11
Notes to Consolidated Financial Statements......................................... F-12
</TABLE>
F-1
<PAGE> 94
PART I. FINANCIAL INFORMATION
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 2,518 $ 3,347
Accounts receivable -- net of allowance for doubtful accounts of $210
and $200 at September 30, 1996 and June 30, 1996, respectively.... 4,105 5,134
Unbilled receivables................................................. 5,448 4,642
Deferred income taxes................................................ 235 235
Other................................................................ 1,664 1,394
------------- --------
Total current assets......................................... 13,970 14,752
Computer software costs, net of amortization of $10,747 and $9,816 at
September 30, 1996, and June 30, 1996, respectively.................. 17,689 17,132
Property and equipment less accumulated depreciation of $9,126 and
$9,272 at September 30, 1996, and June 30, 1996, respectively........ 8,693 9,788
Contract rights, net of amortization of $786 and $748 at September 30,
1996 and June 30, 1996, respectively................................. 992 1,030
Other assets........................................................... 2,275 2,120
------------- --------
$43,619 $ 44,822
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,356 $ 1,863
Accrued expenses..................................................... 1,996 2,638
Unearned revenues.................................................... 3,107 2,578
Current maturities of notes payable.................................. 1,069 1,076
Current portion of capitalized equipment leases...................... 970 1,351
------------- --------
Total current liabilities.................................... 8,498 9,506
Deferred income taxes.................................................. 2,570 2,292
Long-term portion of notes payable..................................... 1,892 2,152
Long-term portion of capitalized equipment leases...................... 1,470 2,398
Commitments
Shareholders' equity:
Undesignated shares, $.01 par value, 9,750,000 authorized, none
issued
Common shares, $.01 par value, 20,000,000 shares authorized,
4,218,476 and 4,180,476 shares issued and outstanding at September
30, 1996 and June 30, 1996, respectively.......................... 42 42
Additional paid-in capital........................................... 27,896 27,619
Retained earnings.................................................... 1,251 813
------------- --------
Total shareholders' equity................................... 29,189 28,474
------------- --------
$43,619 $ 44,822
========== =======
</TABLE>
F-2
<PAGE> 95
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Revenues................................................................ $ 14,395 $ 13,371
--------- ---------
Operating expenses:
Cost of services...................................................... 8,648 7,880
Depreciation and amortization, principally cost of services........... 1,726 1,579
Selling and marketing................................................. 1,908 1,558
Administration........................................................ 1,291 1,358
--------- ---------
Total operating expenses...................................... 13,573 12,375
--------- ---------
Operating income........................................................ 822 996
Other income (expense):
Interest income....................................................... 44 44
Interest expense...................................................... (146) (186)
--------- ---------
Total other income (expense).................................. (102) (142)
--------- ---------
Income before income taxes.............................................. 720 854
Provision for income taxes:
Current............................................................... 4 3
Deferred.............................................................. 278 322
--------- ---------
Total income taxes............................................ 282 325
--------- ---------
Net income.............................................................. $ 438 $ 529
========= =========
Net income per common and common equivalent share....................... $ .10 $ .13
========= =========
Weighted average common and common equivalent shares.................... 4,356,000 4,140,000
========= =========
</TABLE>
F-3
<PAGE> 96
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 438 $ 529
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation.......................................................... 636 634
Amortization.......................................................... 1,090 945
Provision for deferred income tax..................................... 278 322
Changes in operating assets and liabilities:
Accounts receivable................................................. 1,063 (1,596)
Unbilled receivables................................................ (806) 392
Other assets........................................................ (339) (497)
Accounts payable.................................................... (498) (449)
Accrued expenses.................................................... (640) (736)
Unearned revenues................................................... 529 491
------- -------
Net cash provided by operating activities.................................. 1,751 35
Cash flows from investing activities:
Acquisition of assets, net of cash acquired.............................. (139) --
Property and equipment................................................... (615) (726)
Capitalized software..................................................... (1,488) (1,175)
------- -------
Net cash used in investing activities...................................... (2,242) (1,901)
Cash flows from financing activities:
Principal payments on notes payable...................................... (342) (186)
Principal payments on capital leases..................................... (273) (274)
Issuance of common shares................................................ 277 --
------- -------
Net cash used in financing activities...................................... (338) (460)
------- -------
Decrease in cash........................................................... (829) (2,326)
Cash and cash equivalents at beginning of period........................... 3,347 3,348
------- -------
Cash and cash equivalents at end of period................................. $ 2,518 $ 1,022
======= =======
Supplemental disclosures:
Interest paid............................................................ $ 146 $ 186
Income taxes paid........................................................ 7 7
Equipment acquired under capital lease................................... 0 230
</TABLE>
F-4
<PAGE> 97
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited consolidated financial statements herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. The accompanying interim financial statements have been prepared
under the presumption that users of the interim financial information have
either read or have access to the audited financial statements for the latest
fiscal year ended June 30, 1996. Accordingly, footnote disclosures which would
substantially duplicate the disclosures contained in the June 30, 1996 audited
financial statements have been omitted from these interim financial statements.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. These
interim financial statements should be read in conjunction with the annual
financial statements and the notes thereto.
Certain items in the September 30, 1995 financial statements have been
reclassified to conform to the September 30, 1996 presentation.
2. Computer software and database development costs
Computer software and database development costs consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1996 1996
------------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Computer Software (AutoPILOT(TM))
Cost......................................................... $10,924 $ 10,347
Less accumulated amortization................................ 4,698 4,307
------- -------
Net book value....................................... 6,226 6,040
Claim Administration Software
Cost......................................................... 6,936 6,705
Less accumulated amortization................................ 2,353 2,178
------- -------
Net book value....................................... 4,583 4,527
Guidelines, Protocols and Medical Analysis Software
Cost......................................................... 10,576 9,896
Less accumulated amortization................................ 3,696 3,331
------- -------
Net book value....................................... 6,880 6,565
------- -------
Computer Software and Database Development Costs............... $17,689 $ 17,132
======= =======
</TABLE>
Amortization of these costs was as follows for the three month period ended
September 30, 1996 and the year ended June 30, 1996:
<TABLE>
<CAPTION>
YEAR
ENDED
THREE MONTHS ENDED JUNE 30,
SEPTEMBER 30, 1996 1996
------------------ --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Computer Software (AutoPILOT)............................... $391 $1,485
Claim Administration Software............................... 175 645
Guidelines, Protocols and Medical Analysis Software......... 365 1,279
------- -------
Amortization Expense........................................ $931 $3,409
======= =======
</TABLE>
F-5
<PAGE> 98
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MERGER ANNOUNCEMENT
On September 12, 1996, HRM signed a merger agreement with HealthPlan
Services Corporation (HPS) whereby HPS would acquire HRM for consideration
consisting of cash and shares of HPS stock. Under terms of the merger agreement,
each share of HRM stock will be exchanged for $9.68603 in cash plus 0.360208 of
a share of HPS stock. The 0.360208 share exchange ratio is subject to possible
increase or decrease depending on the market price of HPS stock during the five
trading days preceding consummation of the merger. The merger is subject to
regulatory approval, as well as HRM shareholder approval, and is expected to
close in early 1997.
F-6
<PAGE> 99
[LETTERHEAD]
Report of Independent Auditors
Board of Directors and Shareholders
of Health Risk Management, Inc.
We have audited the accompanying consolidated balance sheets of Health Risk
Management, Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of net income, changes in shareholders' equity and cash flows for
each of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Health Risk Management, Inc. at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
August 16, 1996
F-7
<PAGE> 100
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1995
------- -------
(IN THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 3,347 $ 3,348
Accounts receivable-net of allowance for doubtful accounts of $200 ($300
in 1995).............................................................. 5,134 2,760
Unbilled receivables..................................................... 4,642 4,945
Deferred income taxes.................................................... 235 220
Other.................................................................... 1,394 1,028
------- -------
Total current assets............................................. 14,752 12,301
Computer software costs, net of amortization of $9,816 ($7,502 in 1995).... 17,132 14,762
Property and equipment less accumulated depreciation of $9,272 ($6,680 in
1995).................................................................... 9,788 9,760
Contract rights, net of amortization of $748 ($604 in 1995)................ 1,030 1,093
Other assets............................................................... 2,120 2,046
------- -------
$44,822 $39,962
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 1,863 $ 1,697
Accrued expenses......................................................... 2,638 2,599
Unearned revenues........................................................ 2,578 2,296
Current maturities of notes payable...................................... 1,076 753
Current portion of capitalized equipment leases.......................... 1,351 1,193
------- -------
Total current liabilities........................................ 9,506 8,538
Deferred income taxes...................................................... 2,292 1,168
Long-term portion of notes payable......................................... 2,152 1,879
Long-term portion of capitalized equipment leases.......................... 2,398 3,276
Commitments:
Shareholders' equity:
Undesignated shares, $.01 par value, 9,750,000 authorized, none issued
Common shares, $.01 par value; 20,000,000 shares authorized, 4,180,476
issued and outstanding (4,029,699 in 1995)........................... 42 40
Additional paid-in capital............................................ 27,619 26,244
Retained earnings (deficit)........................................... 813 (1,183)
------- -------
Total shareholders' equity....................................... 28,474 25,101
------- -------
$44,822 $39,962
======= =======
</TABLE>
See accompanying notes.
F-8
<PAGE> 101
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues................................................... $ 54,507 $ 49,302 $ 45,824
Operating expenses:
Cost of services......................................... 31,762 30,290 26,784
Depreciation and amortization, principally cost of
services.............................................. 6,947 6,127 5,227
Selling and marketing.................................... 6,767 6,064 6,485
Administration........................................... 5,232 4,811 4,792
---------- ---------- ----------
Total operating expenses......................... 50,708 47,292 43,288
---------- ---------- ----------
Operating income........................................... 3,799 2,010 2,536
Other income (expense):
Interest income.......................................... 158 128 65
Interest expense......................................... (708) (759) (436)
---------- ---------- ----------
Total other expense.............................. (550) (631) (371)
---------- ---------- ----------
Income before income taxes................................. 3,249 1,379 2,165
Income taxes............................................. 1,253 535 449
---------- ---------- ----------
Net income................................................. $ 1,996 $ 844 $ 1,716
========== ========== ==========
Net income per common and common equivalent share.......... $ .47 $ .21 $ .43
========== ========== ==========
Weighted average common and common equivalent shares....... 4,219,186 3,982,093 4,015,317
========== ========== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE> 102
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON SHARES
OUTSTANDING
------------------ ADDITIONAL RETAINED
NUMBER PAID-IN UNEARNED EARNINGS
OF SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) TOTAL
--------- ------ ---------- ------------ -------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1993............ 3,914,724 $ 39 $ 25,381 $ (9) $ (3,743) $21,668
Options to purchase common shares
issued for service............. 47 47
Options exercised................. 31,808 274 274
Cancellation of stock grant....... (3,333) (37) (37)
Amortization of unearned
compensation................... 9 9
Net income........................ 1,716 1,716
--------- --- ------- --- ------- -------
Balance at June 30, 1994............ 3,943,199 39 25,665 -- (2,027) 23,677
Options to purchase common shares
issued for service............. 18 18
Options exercised................. 85,500 1 554 555
Common shares issued for
services....................... 1,000 7 7
Net income........................ 844 844
--------- --- ------- --- ------- -------
Balance at June 30, 1995............ 4,029,699 40 26,244 -- (1,183) 25,101
Options to purchase common shares
issued for service............. 19 19
Options exercised, including tax
benefit of $120................ 143,277 2 1,275 1,277
Common shares issued for contract
rights......................... 7,500 81 81
Net income........................ 1,996 1,996
--------- --- ------- --- ------- -------
Balance at June 30, 1996............ 4,180,476 $ 42 $ 27,619 $ -- $ 813 $28,474
========= === ======= === ======= =======
</TABLE>
See accompanying notes.
F-10
<PAGE> 103
HEALTH RISK MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,996 $ 844 $ 1,716
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................. 2,832 2,406 1,958
Amortization................................................. 4,115 3,721 3,269
Provision for deferred income taxes.......................... 1,231 523 425
Amortization of unearned compensation and other.............. -- 7 (28)
Issuance of options.......................................... 19 18 47
Changes in operating assets and liabilities:
Accounts receivable........................................ (2,374) 153 (214)
Unbilled receivables....................................... 303 (1,371) (859)
Other assets............................................... (1,002) 51 (909)
Accounts payable........................................... (6) 318 453
Accrued expenses........................................... 39 416 347
Unearned revenues.......................................... 282 228 (110)
------- ------- -------
Net cash provided by operating activities......................... 7,435 7,314 6,095
Cash flows from investing activities:
Property and equipment.......................................... (2,256) (1,891) (457)
Capitalized software............................................ (5,779) (5,337) (4,896)
------- ------- -------
Net cash used in investing activities............................. (8,035) (7,228) (5,353)
Cash flows from financing activities:
Proceeds from notes payable..................................... 1,500 -- 3,986
Principal payments on notes payable............................. (904) (935) (4,172)
Principal payments on capital leases............................ (1,152) (1,231) (938)
Issuance of common shares....................................... 1,155 555 274
------- ------- -------
Net cash provided by (used in) financing activities............... 599 (1,611) (850)
------- ------- -------
Decrease in cash.................................................. (1) (1,525) (108)
Cash and cash equivalents at beginning of year.................... 3,348 4,873 4,981
------- ------- -------
Cash and cash equivalents at end of year.......................... $ 3,347 $ 3,348 $ 4,873
======= ======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE> 104
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
have been eliminated.
b. NATURE OF OPERATIONS
The Company is engaged in a single business consisting of managed health
care services providing comprehensive, integrated health plan management and
related information services. The Company's principal health plan management
services include care review, case management, price control, and claims
administration. The Company's information services revenues are derived
principally from software license and subscription fees related to its
QUALITYFIRST(@) clinical practice guidelines (the Guidelines). A significant
percentage of the Company's revenues are derived from the care review management
and claims administration management services. Integrated health plan management
and information services are marketed to self-insured employers, unions,
government entities, insurance companies, HMOs, PPOs and hospitals. Contractual
relationships maintained by the Company with its clients subjects the Company to
revenue fluctuations resulting from changes in client employment levels or
covered lives, restructuring of benefit plan offerings, and price adjustments
based upon contract experience. In addition, the Company services a small number
of large clients. In 1996, sales to two clients were seventeen percent (17%) and
eleven percent (11%) of revenues, and in 1995 sales to one customer were sixteen
percent (16%) of revenues. The markets serviced by the Company are principally
domestic.
c. USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
d. REVENUE RECOGNITION
The Company's revenues for health plan management services are derived from
services provided under contracts obligating clients to generally pay a
capitated monthly charge for each covered employee or covered member based on
anticipated case volume experience, a percentage of savings, a transaction or
case fee, or an hourly fee. In addition, each new client is typically charged a
one-time set-up fee to cover the related set-up costs incurred by the Company.
Revenue for health plan management services is recognized as services are
rendered under each contract. Revenue from license fees is recognized upon
delivery of the Guidelines while subscription fees are recognized as revenue in
the month the Guidelines are utilized by the clients.
e. UNBILLED RECEIVABLES
Unbilled receivables represent costs and related profit incurred for
contract services which have not been billed by the Company and for services
billed in the month subsequent to performance for case, hourly, and percentage
of savings fees.
f. UNEARNED REVENUES
Unearned revenues represent amounts billed to clients for contract services
yet to be performed.
F-12
<PAGE> 105
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
g. COMPUTER SOFTWARE COSTS
The Company capitalizes computer software costs in accordance with
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed. The capitalized
costs are amortized based on the greater of the amount computed using (a) the
ratio of current gross revenues for the product to the total of current and
anticipated future gross revenues or (b) a straight-line basis over their
estimated useful lives, ranging from three to ten years.
h. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using straight-line methods for
financial reporting purposes and accelerated methods for tax purposes. Estimated
useful lives range from three to ten years. Equipment under capital leases is
amortized over the term of the respective lease or over the service lives of the
assets for those leases which substantially transfer ownership.
i. CONTRACT RIGHTS
The fair value of purchased customer lists and relationships is amortized
over their respective estimated useful lives of three to twelve years.
Amortization expense was $144,000, $161,000 and $178,000 for the years ended
June 30, 1996, 1995 and 1994, respectively.
j. INCOME TAXES
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. The statement
requires that all deferred tax balances be determined by using the tax rate
expected to be in effect when the taxes will actually be paid. A deferred income
tax provision or credit is provided based on changes in deferred tax asset or
liability balances.
k. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per share is computed using the weighted average number of Common
Shares and Common Share equivalents outstanding during the period. Common Share
equivalents include dilutive stock options using the treasury stock method.
l. CASH AND CASH EQUIVALENTS
Short-term investments purchased within three months of their maturities
are considered cash equivalents. The Company invests in U.S. government
securities and high rated money market funds. The carrying amount reported in
the consolidated balance sheets for cash and cash equivalents approximates its
fair value.
m. RECLASSIFICATION
Certain items in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentations.
n. NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards No. 121 (FAS 121), Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events of changes in circumstances
F-13
<PAGE> 106
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indicate that the carrying amount of an asset may not be recoverable. The
Company will apply this statement in the first quarter of fiscal 1997. The
Company, however, does not believe the adoption of FAS 121 will have an adverse
effect on its consolidated financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 (FAS 123) "Accounting for Stock-Based Compensation." FAS 123
allows companies to choose whether to account for stock-based compensation under
the current method as prescribed in Accounting Principles Board Opinion Number
25 (APB 25) or use the fair value method described in FAS 123. The Company plans
to continue to follow the accounting measurement provisions of APB 25 and
believes the impact of implementing the disclosure provisions of FAS 123 will
not be material to its consolidated financial statements.
2. COMPUTER SOFTWARE COSTS
Computer software costs consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer Software (AutoPILOT(TM))
Cost........................................................... $10,347 $ 8,813
Less accumulated amortization.................................. 4,307 3,586
------- -------
Net book value................................................. 6,040 5,227
Claim Administration Software
Cost........................................................... 6,705 5,770
Less accumulated amortization.................................. 2,178 1,533
------- -------
Net book value................................................. 4,527 4,237
Guidelines, Protocols and Medical Analysis Software
Cost........................................................... 9,896 7,681
Less accumulated amortization.................................. 3,331 2,383
------- -------
Net book value................................................. 6,565 5,298
------- -------
Computer Software and Database Development Costs................. $17,132 $14,762
======= =======
</TABLE>
Amortization of these costs was as follows for the years ended June 30:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer Software (AutoPILOT(TM))........................ $1,485 $1,255 $1,016
Claim Administration Software............................ 645 552 434
Guidelines, Protocols and Medical Analysis Software...... 1,279 982 735
------ ------ ------
Amortization Expense..................................... $3,409 $2,789 $2,185
====== ====== ======
</TABLE>
F-14
<PAGE> 107
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
OWNED
Office equipment, furniture and fixtures........................... $ 5,037 $ 4,606
Leasehold improvements............................................. 1,387 1,265
Data processing equipment and software............................. 5,951 4,186
------- -------
12,375 10,057
Less accumulated depreciation...................................... 6,431 4,978
------- -------
Net property and equipment owned................................... 5,944 5,079
------- -------
CAPITALIZED LEASES
Office equipment and furniture..................................... 1,372 1,385
Data processing equipment and software............................. 5,313 4,998
------- -------
6,685 6,383
Less accumulated depreciation...................................... 2,841 1,702
------- -------
Net capitalized leases............................................. 3,844 4,681
------- -------
Property and equipment............................................. $ 9,788 $ 9,760
======= =======
</TABLE>
4. NOTES PAYABLE
Notes payable consist of the following at June 30:
<TABLE>
<CAPTION>
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Term loan payable to bank in monthly installments of $43,667 plus
interest at the bank's reference rate plus 0.375% (8.625% at June
30, 1996), with the last payment due June 30, 1999. Secured by
accounts receivable, equipment, fixtures and general
intangibles. ...................................................... $1,572 $2,096
Note payable to bank under revolving credit agreement in monthly
installments of $25,000 plus interest at the bank's reference rate
plus 0.375% (8.625% at June 30, 1996), with the last payment due
December 31, 2001. Secured by accounts receivable, equipment,
fixtures and general intangibles. ................................. 1,350 --
Note payable to bank in monthly installments of $22,325 including
interest at the bank's base rate (8.25% at June 30, 1996) until
September 30, 1997 when the remaining principal balance is due.
Secured by accounts receivable and equipment. ..................... 306 536
------ ------
3,228 2,632
Less Current Maturities.............................................. 1,076 753
------ ------
Long-Term Portion.................................................... $2,152 $1,879
====== ======
</TABLE>
The Company has entered into a revolving credit agreement with a bank
whereby it may borrow up to $2,500,000 under a revolving loan. The loan is
secured by accounts receivable, equipment, fixtures and general intangibles. The
revolving credit agreement terminates on January 31, 1997. The Company borrowed
$1,500,000 (principal balance of $1,350,000 as of June 30, 1996) under the
$2,500,000 revolving credit facility during fiscal 1996.
F-15
<PAGE> 108
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of the Company's borrowings under its term loan and
notes payable approximate their fair value.
Under terms of the revolving credit and term loan agreements, the Company
is prohibited from paying dividends on its stock without the bank's consent.
Scheduled payments under terms of the notes payable will be $1,076,000 in
1997, $878,000 in 1998, $824,000 in 1999, $300,000 in 2000, and $150,000 in
2001.
Total interest paid on notes payable was $281,000, $298,000, and $459,000
for the years ended June 30, 1996, 1995 and 1994, respectively.
5. OPTIONS
The Company's 1992 Long-Term Incentive Plan and the 1990 Stock Option Plan
("the Plans") permit the granting of 800,000 options to officers, directors and
employees. These can be either incentive stock options or non-qualified options.
Options are generally granted at not less than market value at the date of grant
and generally for a five-year period. The Options have been granted at prices
ranging from $4.875 to $15.25. A total of 105,735 and 94,518 common shares are
available for future issuance under the Plans at June 30, 1996 and 1995,
respectively.
At June 30, 1996, the Company had granted 36,000 unregistered options to
purchase common shares not granted under the Plans. The exercise prices of these
options to purchase common shares are $6.50 and $11.00 for 1,000 and 35,000
options, respectively.
Transactions related to all options during the last three years are
summarized as follows:
<TABLE>
<CAPTION>
TOTAL EXERCISABLE PRICE PER SHARE
-------- ----------- ---------------
<S> <C> <C> <C>
Balance at June 30, 1993......................... 611,607 289,543 $ .20/15.25
Granted........................................ 156,508 -- 4.875/12.00
Became exercisable............................. -- 261,376 5.50/15.25
Exercised...................................... (31,808) (31,808) 5.50/11.00
Expired........................................ (46,955) (33,205) .20/13.50
-------- -------- ------------
Balance at June 30, 1994......................... 689,352 485,906 .20/15.25
Granted........................................ 178,657 -- 5.50/7.875
Became exercisable............................. -- 125,320 4.875/11.75
Exercised...................................... (85,500) (85,500) 5.50/ 6.50
Expired........................................ (93,482) (90,482) .20/15.25
-------- -------- ------------
Balance at June 30, 1995......................... 689,027 435,244 .20/15.25
Granted........................................ 139,283 -- 7.25/12.00
Became exercisable............................. 224,117 4.875/11.75
Exercised...................................... (143,277) (143,277) 4.875/11.00
Expired........................................ (151,219) (151,219) .20/15.25
-------- -------- ------------
Balance at June 30, 1996......................... 533,814 364,865 $ 4.875/15.25
======== ======== ============
</TABLE>
The number of options scheduled to expire by fiscal year is 43,750 in 1997,
91,505 in 1998, 105,369 in 1999, 163,407 in 2000, and 129,783 in 2001.
F-16
<PAGE> 109
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The components of the provision for income taxes for the three years ended
June 30 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................................. $ 8,000 $ 0 $ 0
State............................................... 14,000 12,000 24,000
Deferred.............................................. 1,231,000 523,000 425,000
---------- -------- --------
$1,253,000 $535,000 $449,000
========== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
deferred income tax liabilities and assets as of June 30 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Prepaid expenses............................................ $ 114,000 $ 75,000
Deferred contract costs..................................... 212,000 219,000
Computer software costs..................................... 6,251,000 4,724,000
Tax over book depreciation.................................. 917,000 809,000
Capital leases treated as operating leases for tax
purposes................................................. -- 7,000
---------- ----------
Total deferred tax liabilities...................... 7,494,000 5,834,000
Deferred tax assets:
Allowance for doubtful accounts............................. 75,000 104,000
Accrued expenses............................................ 290,000 213,000
Stock options deduction..................................... 424,000 110,000
Net operating loss carryforwards............................ 5,072,000 4,569,000
---------- ----------
Total deferred tax assets........................... 5,861,000 4,996,000
Less valuation allowance.................................... (424,000) (110,000)
---------- ----------
Total net deferred tax assets....................... 5,437,000 4,886,000
---------- ----------
Net deferred tax liabilities.................................. $2,057,000 $ 948,000
========== ==========
</TABLE>
The Company has recorded a deferred tax asset and corresponding valuation
allowance related to the stock option deduction. When such deferred tax asset is
realized for tax purposes, the valuation allowance will be removed and paid-in
capital will be credited.
A reconciliation of the statutory federal income tax rate to the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
Statutory rate.................................................... 34.0% 34.0% 34.0%
State income taxes................................................ 2.7 2.8 .7
Canadian subsidiary loss.......................................... -- -- 3.8
Net operating loss carryforwards.................................. -- -- (17.7)
Non-deductible meals and entertainment expenses................... .7 1.1 .4
Other............................................................. 1.2 .9 (.5)
---- ---- -----
38.6% 38.8% 20.7%
==== ==== =====
</TABLE>
At June 30, 1996, the Company had net operating loss carryforwards of
$13,400,000 for income tax purposes only that expire in years 1999 through 2011.
F-17
<PAGE> 110
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Total income tax paid for the years ended June 30, 1996, 1995 and 1994 was
$20,600, $4,600 and $14,000, respectively.
7. COMMITMENTS
The Company leases its office facilities and various equipment under
operating and capital leases. Rental expense was approximately $2,881,000,
$2,754,000, and $2,183,000, for the years ended June 30, 1996, 1995 and 1994,
respectively. The following is a schedule by years of future minimum rental
payments required under operating leases as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30:
--------------------------------------------------------------------
<S> <C>
1997........................................................... $2,618
1998........................................................... 2,434
1999........................................................... 494
------
Total minimum rental payments............................. $5,546
======
</TABLE>
In addition to the above amounts, additional rental payments are due under
the office facility leases based on the lessor's operating costs.
The following is a schedule of future minimum lease payments under capital
leases as of June 30, 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30:
--------------------------------------------------------------------
<S> <C>
1997........................................................... $1,647
1998........................................................... 1,439
1999........................................................... 938
2000........................................................... 247
------
Total minimum lease payments.............................. 4,271
Less amount representing interest................................... 522
------
Net minimum lease payments.......................................... 3,749
Less current maturities............................................. 1,351
------
Long-term portion................................................... $2,398
======
</TABLE>
The Company entered into capital lease agreements aggregating $432,000,
$1,271,000, and $3,389,000 for the years ended June 30, 1996, 1995 and 1994,
respectively, in connection with the purchase of office equipment, furniture and
fixtures, and data processing equipment.
8. SAVINGS PLAN
The Company has a tax deferred savings plan in accordance with the
provisions of section 401(k) of the Internal Revenue Code covering
substantially all employees. Under the plan, the Company will match a
minimum of 10% of eligible employees' contributions up to 6% of the
employee's salary for the plan year ending June 30, 1996 compared to 5% of
the employee's salary for plan years ending June 30, 1995 and 1994.
Employee contributions to the plan are remitted to a trustee on a biweekly
basis. Company contribution expenses were $240,000, $200,000, and $160,000
for the years ended June 30, 1996, 1995, and 1994, respectively.
F-18
<PAGE> 111
HEALTH RISK MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents certain unaudited quarterly results for fiscal
1996 and 1995.
<TABLE>
<CAPTION>
FISCAL 1996
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $13,371 $13,689 $14,045 $13,402 $54,507
======= ======= ======= ======= =======
Gross profit(1).................................. $ 5,491 $ 5,838 $ 6,034 $ 5,382 $22,745
======= ======= ======= ======= =======
Net income....................................... $ 529 $ 612 $ 784 $ 71 $ 1,996
======= ======= ======= ======= =======
Net income per share............................. $ .13 $ .15 $ .18 $ .02 $ .47
======= ======= ======= ======= =======
Weighted average number of shares................ 4,140 4,107 4,277 4,353 4,219
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
-----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues......................................... $11,633 $11,881 $12,628 $13,160 $49,302
======= ======= ======= ======= =======
Gross profit(1).................................. $ 4,073 $ 4,530 $ 5,131 $ 5,278 $19,012
======= ======= ======= ======= =======
Net income (loss)................................ $ (125) $ 102 $ 412 $ 455 $ 844
======= ======= ======= ======= =======
Net income (loss) per share...................... $ (.03) $ .03 $ .10 $ .11 $ .21
======= ======= ======= ======= =======
Weighted average number of shares................ 3,952 3,952 3,963 4,061 3,982
======= ======= ======= ======= =======
</TABLE>
- ---------------
(1) Represents revenues less cost of services.
F-19
<PAGE> 112
ANNEX A
PLAN AND AGREEMENT OF MERGER
AMONG
HEALTHPLAN SERVICES CORPORATION,
HEALTHPLAN SERVICES ALPHA CORPORATION
A WHOLLY OWNED DIRECT SUBSIDIARY OF HEALTHPLAN SERVICES CORPORATION
AND
HEALTH RISK MANAGEMENT, INC.
September 12, 1996
<PAGE> 113
PLAN AND AGREEMENT OF MERGER
THIS PLAN AND AGREEMENT OF MERGER (the "Agreement"), made this 12th day of
September, 1996, is entered into by and among HealthPlan Services Corporation, a
Delaware corporation (hereinafter referred to as the "Purchaser"), HealthPlan
Services Alpha Corporation, a Delaware corporation (the "Merger Subsidiary"),
and Health Risk Management, Inc., a Minnesota corporation (the "Company").
W I T N E S S E T H :
WHEREAS, the respective Boards of Directors of the Purchaser and the
Company have approved the merger (the "Merger") of the Company with and into the
Merger Subsidiary in accordance with the Delaware General Corporation Law and
the Minnesota Business Corporation Act (the "Acts"), with the effect that the
Company will become a wholly-owned subsidiary of the Purchaser;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the Code
as hereinafter defined; and
WHEREAS, concurrently with the execution of this Agreement, in order to
induce the Purchaser to enter into this Agreement, the Purchaser is entering
into a Support/Voting Agreement (the "Support/Voting Agreement") with Gary T.
McIlroy, M.D., Marlene Travis and Thomas P. Clark providing for certain voting
and other restrictions with respect to the shares of the Company Common Stock as
defined herein which are owned by such shareholders.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
representations, warranties and covenants hereinafter set forth, the parties
hereto agree as follows:
I.
DEFINITIONS
The capitalized terms used herein will have the meanings ascribed to them
in Exhibit 1.1 hereto. Unless the context otherwise requires, such capitalized
terms will include the singular and plural and the term "including" shall mean
"including but not limited to." Wherever in this Agreement reference is made to
the knowledge of the Company it means the individual actual knowledge of Gary T.
McIlroy, M.D., Marlene Travis, Thomas P. Clark and Michael T. McKim.
II.
COVENANTS AND UNDERTAKINGS
2.1 The Merger. At the Effective Time and in accordance with the
provisions of this Agreement and the Acts, the Company will be merged with and
into the Merger Subsidiary in the Merger, the separate corporate existence of
the Company shall thereupon cease, and the Merger Subsidiary shall be the
surviving corporation (the "Surviving Corporation") which, effective with the
Effective Time, shall change its name to Health Risk Management, Inc.
2.2 Effective Time of Merger. The Merger shall become effective at the
time on the Closing Date (the "Effective Time") of filing of a Certificate of
Merger with the Department of State of the State of Delaware and Articles of
Merger with the Secretary of State of the State of Minnesota in accordance with
the provisions of the Acts.
2.3 Effects of Merger. Subject to the Acts, at the Effective Time, the
Merger shall have the following effects:
2.3.1 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of
capital stock of the Purchaser or the Company:
2.3.1.1 each share of Merger Subsidiary Common Stock that is issued
and outstanding immediately prior to the Effective Time shall remain
outstanding;
A-1
<PAGE> 114
2.3.1.2 each share of Company Common Stock that is issued and
outstanding immediately prior to the Effective Time, except for
Dissenting Shares, shall be converted into the right to receive:
(i) the Per Share Stock Consideration, PLUS
(ii) the Per Share Cash Consideration,
provided that (x) no fractional shares of Purchaser Common Stock shall
be issued and any holder who would otherwise have received a fractional
share of Purchaser Common Stock shall have a right to receive cash in an
amount equal to such fraction multiplied by the Market Price.
2.3.1.3 each outstanding certificate representing shares of Company
Common Stock, except for Dissenting Shares, shall be deemed, for all
purposes, to evidence only the right to receive upon surrender of such
certificate the consideration into which such shares of Company Common
Stock are convertible; and
2.3.1.4 each share of Company Common Stock that is owned by the
Company immediately prior to the Effective Time as treasury stock will
be canceled and retired and will cease to exist, without any conversion
thereof.
2.3.1.6 Notwithstanding anything in this Section 2.3 to the
contrary, shares of Company Common Stock which are issued and
outstanding immediately prior to the Effective Time and which are held
by shareholders who have not voted such shares in favor of the Merger
and who shall have properly exercised their rights of appraisal for such
shares in the manner provided by the Minnesota Business Corporation Act
(the "Dissenting Shares") shall evidence only the right to receive the
amount, if any, determined to be payable thereon pursuant to the
applicable appraisal rights statute and shall not be converted or
exchangeable for the right to receive the Merger consideration set forth
herein, unless and until such holder shall have failed to perfect or
shall have effectively withdrawn or lost such holder's right to
appraisal and payment, as the case may be. If such shareholder shall
have failed to so perfect or shall have effectively withdrawn or lost
such right, such shareholder's shares shall thereupon be deemed to have
been converted into and to have become exchangeable for, at the
Effective Time, the right to receive the Merger consideration set forth
herein without any interest thereupon. The Company shall give the
Purchaser prompt notice of any Dissenting Shares (and shall also give
the Purchaser prompt notice of any withdrawals of such demands for
appraisal rights) and the Purchaser shall have the right to direct all
negotiations and proceedings with respect to any such demands. The
Company shall not, except with the prior written consent of the
Purchaser, voluntarily make any payment with respect to, or settle or
offer to settle, any such demand for appraisal rights.
2.4 Exchange of Certificates.
2.4.1 Exchange Agent. Promptly following the Effective Time, the
Purchaser shall deposit with the Exchange Agent for the benefit of Company
Shareholders, for exchange in accordance with this Section 2.4,
certificates representing Purchaser Common Stock issuable pursuant to
Section 2.3 in exchange for outstanding shares of Company Common Stock
which are not Dissenting Shares and shall from time to time deposit cash in
an amount reasonably expected to be paid pursuant to Section 2.3 (such
Purchaser Common Stock and cash, together with any dividends or
distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund").
2.4.2 Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to
the Effective Time represented outstanding shares of Company Common Stock
whose shares were converted into the right to receive Purchaser Common
Stock pursuant to Section 2.3 (i) a letter of transmittal (which shall
specify that delivery shall be effected, and that risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
the Purchaser may reasonably specify) and (ii) instructions for effecting
the surrender of the Certificates in exchange for certificates representing
shares of Purchaser
A-2
<PAGE> 115
Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent, together with a duly executed letter of transmittal, the
holder of such Certificate shall be entitled to receive in exchange
therefor (x) a certificate representing that number of shares of Purchaser
Common Stock which such holder has the right to receive pursuant to Section
2.3 and (y) a check representing the amount of the Per Share Cash
Consideration and cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, which such holder has the right to
receive pursuant to the provisions of this Article II, after giving effect
to any required withholding tax, and the shares represented by the
Certificate so surrendered shall be canceled forthwith. No interest will be
paid or accrued on the Per Share Cash Consideration or on the cash in lieu
of fractional shares, if any, and unpaid dividends and distributions, if
any, payable to holders of shares of Company Common Stock. In the event of
a transfer of ownership of shares of Company Common Stock which is not
registered on the transfer records of Company, a certificate representing
the proper number of shares of Purchaser Common Stock, together with a
check for the Per Share Cash Consideration and the cash to be paid in lieu
of fractional shares, if any, and unpaid dividends and distributions, if
any, may be issued to such transferee if the Certificate representing such
shares of Company Common Stock held by such transferee is presented to the
Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and to evidence that any applicable stock transfer
taxes have been paid. Until surrendered as contemplated by this Section
2.4, each Certificate shall be deemed at any time after the Effective Time
to represent only the right to receive upon surrender a certificate
representing shares of Purchaser Common Stock and Per Share Cash
Consideration and cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, as provided in this Article II.
2.4.3 Distributions with Respect to Unexchanged
Shares. Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared or made after the Effective Time
with respect to shares of Purchaser Common Stock having a record date after
the Effective Time shall be paid to the holder of any unsurrendered
Certificate, and no Per Share Cash Consideration or cash payment in lieu of
fractional shares shall be paid to any such holder, until the holder shall
surrender such Certificate as provided in this Section 2.4. Subject to the
effect of the Acts, following surrender of any such Certificate, there
shall be paid to the holder of the certificates representing whole shares
of Purchaser Common Stock issued in exchange therefor, without interest,
(i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore
payable with respect to such whole shares of Purchaser Common Stock and not
paid, less the amount of any withholding taxes which are required thereon,
and (ii) at the appropriate payment date subsequent to surrender, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Purchaser Common
Stock, less the amount of any withholding taxes which are required thereon.
2.4.4 No Further Ownership Rights in Company Common Stock. All shares
of Purchaser Common Stock issued upon surrender of Certificates in
accordance with the terms hereof (including any cash paid pursuant to this
Article II) shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock represented
thereby, and from and after the Effective Time there shall be no further
registration of transfers on the stock transfer books of Company of shares
of Company Common Stock. If, after the Effective Time, Certificates are
presented to the Merger Subsidiary for any reason, they shall be canceled
and exchanged as provided in this Section 2.4. Certificates surrendered for
exchange by any person constituting an "affiliate" of the Company for
purposes of Rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), shall not be exchanged until the Purchaser has received
written undertakings from such person in the form attached hereto as
Exhibit 2.28.
2.4.5 Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to Company Shareholders for six months after
the Effective Time shall be delivered to the Purchaser, upon demand
thereby, and holders of shares of Company Common Stock who have not
theretofore complied with this Section 2.4 shall thereafter look only to
the Purchaser for payment of any
A-3
<PAGE> 116
claim to shares of Purchaser Common Stock, Per Share Cash Consideration,
cash in lieu of fractional shares thereof, or dividends or distributions,
if any, in respect thereof.
2.4.6 No Liability. None of the Purchaser, the Merger Subsidiary or
the Exchange Agent shall be liable to any person in respect of any shares
of Company Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If
any Certificates shall not have been surrendered prior to seven years after
the Effective Time of the Merger (or immediately prior to such earlier date
on which any cash, any cash in lieu of fractional shares or any dividends
or distributions with respect to whole shares of Company Common Stock in
respect of such Certificate would otherwise escheat to or become the
property of any governmental authority), any such cash, dividends or
distributions in respect of such Certificate shall, to the extent permitted
by the Acts, become the property of the Purchaser, free and clear of all
claims or interest of any person previously entitled thereto.
2.4.7 Investment of Exchange Fund. The Exchange Agent shall invest
any cash included in the Exchange Fund, as directed by the Purchaser, on a
daily basis. Any interest and other income resulting from such investments
shall be paid to the Purchaser upon termination of the Exchange Fund
pursuant to Section 2.4.5.
2.5 Treatment of Stock Options. Each holder of an option to purchase
shares of Company Common Stock that is outstanding at the Effective Time (a
"Company Option") shall receive a cash payment equal to (i) the total number of
shares of Company Common Stock subject to the unexercised portion of such
Company Option, determined by assuming that such Company Option is immediately
vested and exercisable in full, multiplied by (ii) the excess of (x) the Per
Share Cash Consideration plus the current fair market value of the Per Share
Stock Consideration, over (y) the per share exercise price specified in such
Company Option. For purposes of this Section 2.5, the "current fair market
value" of the Per Share Stock Consideration shall be determined using the Market
Price of Purchaser Common Stock on the New York Stock Exchange. Prior to the
Effective Time, the Company shall take such action as is legally required to
amend the 1990 Stock Option Plan and the 1992 Long-Term Incentive Plan and the
terms of all Company Options outstanding at the Effective Time such that (i) all
outstanding Company Options are immediately vested and exercisable in full at or
before the Effective Time, (ii) the holders of all outstanding Company Options
will receive the cash described in this Section 2.5, (iii) all Company Options
outstanding at the Effective Time reflect the revised exercise terms described
above, (iv) no further options shall be grantable under such plans after the
Effective Time, and (v) all change-of-control provisions contained in such plans
and outstanding Company Options shall not apply to any Company Options
outstanding as of the Effective Time. The actions to be taken by the Company
with respect to the Company Options pending the Closing, as described in this
Section 2.5, shall specifically be deemed to be contemplated and permitted by
this Agreement, notwithstanding any other provisions of this Agreement to the
contrary.
2.6 Certificate of Incorporation. At the Effective Time, the Certificate
of Incorporation of the Merger Subsidiary in effect immediately prior to the
Effective Time and in the form of Exhibit 2.6 hereto shall remain in effect as
the Certificate of Incorporation of the Surviving Corporation, until thereafter
amended as provided by law.
2.7 Bylaws. The Bylaws of the Merger Subsidiary as in effect immediately
prior to the Effective Time and in the form of Exhibit 2.7 hereto shall be the
Bylaws of the Surviving Corporation, until thereafter amended as provided by
law.
2.8 Directors. The directors of the Merger Subsidiary immediately prior to
the Effective Time shall be the directors of the Surviving Corporation and shall
hold office from the Effective Time until their respective successors are duly
elected or appointed and qualified in the manner provided in the Certificate of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
2.9 Officers. The officers of the Merger Subsidiary immediately prior to
the Effective Time shall be the officers of the Surviving Corporation and shall
hold office from the Effective Time until their respective
A-4
<PAGE> 117
successors are duly elected or appointed and qualified in the manner provided in
the Certificate of Incorporation and Bylaws of the Surviving Corporation, or as
otherwise provided by law.
2.10 HSR Act Filings. As promptly as practicable after the execution of
this Agreement, and in any event not later than the fourteenth (14) business day
following the date of this Agreement, the Purchaser and the Company shall, in
cooperation with each other, make the required filings in connection with the
transactions contemplated by this Agreement under the HSR Act with the Federal
Trade Commission and the Antitrust Division of the United States Department of
Justice, and, as promptly as practicable from time to time thereafter, each
party shall make all such further filings and submissions, and take such further
action, as may be required in connection therewith. The Purchaser and the
Company shall each request early termination of the waiting period with respect
to such filings. Each party shall furnish the other all information in its
possession necessary for compliance by the other with the provisions of this
Section 2.10. The Purchaser and the Company shall each notify the other
immediately upon receiving any request for additional information with respect
to such filings from either the Antitrust Division of the Department of Justice
or the Federal Trade Commission and the party receiving the request shall use
its best efforts to comply with such request as soon as possible. Neither party
shall withdraw any such filing or submission without the written consent of the
other party.
2.11 Compliance with Securities Laws.
2.11.1 In connection with the transactions contemplated by this
Agreement, the parties hereto agree to cooperate with one another in
complying with the provisions of the Securities Act and the General Rules
and Regulations thereunder, and all other applicable federal and state
securities laws, and each of them agrees to furnish the other, or its
counsel, with such information and to take such actions, as may be
reasonably requested in respect of such compliance.
2.11.2 Before the Closing, the Company shall obtain the consent of
Ernst & Young LLP, in form acceptable to the Purchaser's external auditors,
to the incorporation of the financial statements prepared by Ernst & Young
LLP in the Purchaser's public filings as may be required after Closing.
2.12 Conduct of the Business of the Company Prior to Closing.
2.12.1 Except (i) with the prior consent in writing of the Purchaser,
(ii) as may be required to effect the transactions contemplated by this
Agreement, (iii) as provided otherwise in this Agreement or (iv) as set
forth on Schedule 2.12.1 of the Disclosure Letter, the Company covenants
that, between the date of this Agreement and the Effective Time, the
Company will conduct its business only in the ordinary course, and that it
will: (a) use reasonable efforts to preserve the organization of the
Company intact and to preserve the goodwill of clients, customers and
others having business relations with the Company; (b) maintain the
properties of the Company in the same working order and condition as such
properties are in as of the date of this Agreement, reasonable wear and
tear excepted; (c) keep in force at no less than their present limits all
existing bonds, letters of credit and policies of insurance insuring the
Company, its performance and its respective properties; (d) not enter into
any contract, commitment, arrangement or transaction of the type (i)
required to be listed on Schedules 3.4, 3.14.3, 3.14.6, 3.14.7, 3.14.8,
3.14.9, 3.14.10, 3.14.11, 3.18 or 3.21 of the Disclosure Letter or suffer,
permit or incur any of the transactions or events described in Section 3.11
hereof (except for the payment of any health, disability and life insurance
premiums which may become due and except for contributions or distributions
required to be made (and not discretionary) pursuant to the terms of any
Benefit Plans) (ii) required to be listed on Schedule 3.14.1 or 3.14.2 if
such contract will require the Company to hire new employees, expand
existing facilities, or acquire or lease new facilities, or (iii) required
to be listed on Schedule 3.15.1 or 3.15.2 if such contract is other than in
the ordinary course of the Company's software licensing business in each
case to the extent such events or transactions are within the control of
the Company; (e) not enter into any contracts, commitments, arrangements or
transactions of the type required to be listed on Schedule 3.7 of the
Disclosure Letter which individually exceed $500,000 or in the aggregate
exceeds $2,000,000.00; (f) not make or permit any change in the Company's
Articles of Incorporation or Bylaws, or in its authorized, issued or
outstanding securities (except upon exercise of currently outstanding
options or warrants); (g) not issue any security (except upon exercise of
currently
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outstanding options or warrants) or grant any stock option or right to
purchase any security of the Company, issue any security convertible into
such securities, purchase, redeem, retire or otherwise acquire any of such
securities, or agree to do any of the foregoing or declare, set aside or
pay any dividend or other distribution in respect of such securities; (h)
not make any contribution to or distribution on behalf of or to any
employee of the Company (except for the payment of any health, disability
and life insurance premiums which may become due and except for
contributions or distributions required to be made (and not discretionary)
pursuant to the terms of any Benefit Plans); (i) not make any capital
expenditure (excluding capitalized computer software costs of a normal and
recurring nature in accordance with past practice) which when aggregated
with all other capital expenditures for the period exceeds the sum of
$500,000.00; (j) promptly advise the Purchaser in writing of any matters
arising or discovered after the date of this Agreement which, if existing
or known at the date hereof, would be required to be set forth or described
in this Agreement or the Disclosure Letter; and (k) not make any
distributions or commitments to charitable organizations.
2.12.2 Except after prior notification to, and with the prior written
consent of, the Purchaser, the Company will not make, between the date of
this Agreement and the Closing Date, any material change in its banking or
safe deposit arrangements or grant any powers of attorney. A list of all
bank accounts, safe deposit boxes (and the contents thereof) and powers of
attorney of the Company and of all persons authorized to act with respect
thereto is set forth in Schedule 2.12.2 of the Disclosure Letter.
2.12.3 Except with the prior consent in writing of the Purchaser or as
otherwise required by GAAP, the Company will not make, between the date of
this Agreement and the Closing Date, any changes in its accounting methods
or practices and will give the Purchaser written notice of all changes in
accounting estimates promptly upon determination thereof.
2.13 Intercompany Accounts and Services. Prior to or at the Closing, the
Company will take all actions necessary to settle as of the Closing all cash
overdrafts, loans, advances, intercompany payables or receivables, indebtedness
and other accounts between the Company, on the one hand, and any employee or any
Affiliate of any employee.
2.14 Examination of Property and Records. Between the date of this
Agreement and the Closing Date, the Company will allow the Purchaser, its
counsel and other representatives full access to all the books, records, files,
documents, assets, properties, contracts, customers and agreements of the
Company which may be reasonably requested, and shall furnish the Purchaser, its
officers and representatives during such period with all information concerning
the affairs of the Company which may be reasonably requested. The Purchaser will
conduct any investigation in a manner which will not unreasonably interfere with
the business of the Company.
2.15 Consents and Approvals. The Company and the Purchaser mutually agree
to use reasonable efforts and to cooperate to obtain the waiver, consent and
approval of all persons whose waiver, consent or approval (i) is required in
order to consummate the transactions contemplated by this Agreement or (ii) is
required by any material agreement, lease, instrument, arrangement, judgment,
decree, order or license to which the Company or the Purchaser or any
Shareholder or any Affiliate of any Shareholder is a party or subject to on the
Closing Date and (a) which would prohibit, or require the waiver, consent or
approval of any person to such transactions or (b) under which, without such
waiver, consent or approval, such transactions would constitute an occurrence of
default under the provisions thereof, result in the acceleration of any
obligation thereunder or give rise to a right of any party thereto to terminate
its obligations thereunder. All required written notices, waivers, consents and
approvals from persons other than governmental authorities are listed on
Schedule 3.10 of the Disclosure Letter.
2.16 Employment Agreements. The Company covenants to use reasonable
efforts to cause those employees identified in writing by the Purchaser prior to
the date of this Agreement to enter into, at the Closing, Employment Agreements
or amendments to their existing employment agreements substantially in the form
and substance provided to the Company by the Purchaser prior to the date hereof.
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2.17 Supplying of SEC Documents, Financial Statements, and Other
Information. (a) Between the date of this Agreement and the Effective Time, the
Company covenants to deliver to the Purchaser (i) all Company SEC Documents as
soon as such documents are filed with the SEC; (ii) all regularly prepared
monthly, and other, unaudited financial statements of the Company prepared after
the date of this Agreement, in format historically utilized internally, as soon
as available but not later than the 20th of each month following each
statement's date; (iii) all press releases of the Company released after the
date of this Agreement and prior to the Effective Time prior to the time such
releases are released to the public; and (iv) such other information concerning
the Company as the Purchaser shall reasonably request.
(b) Between the date of this Agreement and the Effective Time, the
Purchaser covenants to deliver to the Company (i) all Purchaser SEC Documents as
soon as such documents are filed with the SEC; (ii) all regularly prepared
monthly, and other, unaudited financial statements of the Purchaser prepared
after the date of this Agreement, in format historically utilized internally, as
soon as available but not later than the 20th of each month following each
statement's date; (iii) all press releases of the Purchaser released after the
date of this Agreement and prior to the Effective Time prior to the time such
releases are released to the public; and (iv) such other information concerning
the Purchaser as the Company shall reasonably request.
2.18 Access to Business Records. Prior to Closing, the Company shall cause
any officer or director of the Company who possesses material documents required
or incident to the performance of the Company's businesses which are not in the
Company's possession to transfer such documents to the Company. Such officer or
director may make copies or extracts from such books and records prior to
transfer at their sole expense if they have a legitimate business need for such
copies.
2.19 Employee Matters.
2.19.1 After the Closing and until such date as the Company's
employees commence participation in the Purchaser's employee benefit plans,
as described in the next sentence (the "Plan Transfer Date" which shall
vary from plan to plan), the Purchaser shall cause the Surviving
Corporation to take whatever action is necessary or appropriate to cause
the Surviving Corporation to maintain the participation, sponsorship and/or
maintenance of the Company's employee benefit plans except those identified
on Exhibit 2.19.1. All employees of the Surviving Corporation shall be
eligible to become participants in the employee benefit plans and programs
maintained by the Purchaser for similarly situated employees of the
Purchaser. Such employee benefit plans that are health benefit plans shall
(i) recognize expenses and claims that were incurred by such employees in
the Plan Year in which the Plan Transfer Date occurs and recognized for
similar purposes under the Company's plans as of the Plan Transfer Date and
(ii) provide coverage (without any required waiting period) for
pre-existing health conditions to the extent covered under the applicable
plans or benefit programs of the Company as of the Plan Transfer Date. In
addition, such employee benefit plans and programs shall credit such
employees with years of service with the Company and any businesses
acquired by the Company for all plan purposes, provided that no such
crediting shall be required to the extent that it would result in a
duplication of benefits or require contributions for years prior to the
Effective Time.
2.19.2 The Company shall provide the Purchaser with any information
which the Purchaser shall reasonably request concerning the employees of
the Company (the "Employees"), and shall cooperate with, and assist, the
Purchaser with respect to the commencement of participation of any Employee
in the Surviving Corporation's benefit plans or arrangements.
2.20 Affiliated Contracts. At or prior to Closing, the Company shall cause
the Company's officers and directors and their Affiliates to transfer to the
Company without payment of consideration any contracts the revenues from which
are included in the revenues of the Company but which are in the name of the
officers and directors or their Affiliates and any assets which have been paid
for by the Company, other than life insurance policies (except where such
payment has been includible in the income of the particular officer or director
or Affiliate), but which are owned by the officers and directors or their
Affiliates, as opposed to the Company. All such assets and contracts are listed
on Schedule 2.20 of the Disclosure Letter.
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2.21 Shareholders' Tax Free Reorganization Treatment. The Company
understands that the Purchaser is making no representation as to the tax-free
status of the Merger or the gain or loss, if any, which the Shareholders will
experience upon consummation of the Merger. The Company represents and warrants
that it has consulted with its own tax advisers concerning the tax consequences
(except that the Company's counsel may be relying on reasonably requested
customary certificates provided by the Purchaser in connection with its tax
opinion) of the proposed transactions and is not relying on any representation
of the Purchaser as to such consequences. Further, the Company represents that
its tax advisers have indicated that they will be able to render the opinion
required by Sections 5.2.10 and 5.3.4 subject to receipt of reasonably requested
representation letters. Notwithstanding the foregoing, the Purchaser covenants
and agrees that it will treat the Merger, for federal income tax purposes, as a
tax-free reorganization under Section 368(a)(1)(A) and (a)(2)(D) of the Code.
Following the Merger, neither the Purchaser, the Surviving Corporation nor any
Affiliate of the Purchaser or the Surviving Corporation shall take, or cause to
be taken, any action which, after consultation with counsel, it reasonably
believes would jeopardize the status of the merger as a tax-free reorganization
within the meaning of Section 368(a) of the Code.
2.22 Shareholder Vote. As promptly as practical after the execution of
this Agreement but in no event later than five days after the SEC clears the
Company's proxy statement related thereto, the Company shall call a shareholders
meeting to vote upon the Merger, which shareholders meeting shall be held as
soon as permitted by the Company's Bylaws and applicable law after mailing of
such notice. The Board of Directors of the Company shall recommend to the
Shareholders the approval of the Merger and the Company shall use reasonable
efforts to obtain the affirmative vote of all Shareholders for approval of the
Merger.
2.23 Conduct of the Business of the Purchaser Prior to the Closing. Except
with the prior written consent of the Company, the Purchaser covenants that,
between the date of this Agreement and the Effective Time, (a) the Purchaser
will not adopt or propose any change in its Certificate of Incorporation or
Bylaws; (b) the Purchaser will not and will not allow any of its subsidiaries to
lease, license or dispose of any assets or property, which assets or property
are material to the Purchaser and its subsidiaries taken as a whole; (c) the
Purchaser will not declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise with respect to any
of its capital stock; (d) the Purchaser will not and will not allow any of its
subsidiaries to merge or consolidate with any other Person if, as a result
thereof, the stockholders of the Purchaser immediately prior thereto cease to
own directly or indirectly at least a majority of the outstanding stock of the
Purchaser; (e) the Purchaser will ensure that the persons currently serving as
the Chairman and the President of the Purchaser will continue to retain such
positions and will ensure that persons currently serving as directors of the
Purchaser will continue to comprise a majority of the Board of Directors of the
Purchaser; (f) the Purchaser will not issue any securities if such issuance
requires the vote of its stockholders; and (g) the Purchaser will not agree or
commit to do any of the foregoing.
2.24 Continuation of Indemnification; Director Compensation. On or prior
to Closing, the Purchaser will purchase tail coverage under the Company's
existing directors and officers liability insurance policy affording coverage
for a period of twelve (12) months to the Company's directors and officers for
periods prior to the Closing. From and after Closing the Purchaser and the
Surviving Corporation will indemnify (and, to the extent permitted by Minnesota
Statutes, advance expenses to) the officers and directors of the Company who
served in such capacity prior to the Effective Time for any and all claims
related to matters occurring prior to the Effective Time to the same extent that
such persons are entitled to indemnity under Minnesota Law and the Company's
Articles of Incorporation and Bylaws in effect immediately prior to the
Effective Time. From and after the Effective Time for so long as he or she is a
director, each director of the Surviving Corporation shall receive for his or
her services as a director the compensation described in writing as furnished by
Purchaser to the Company prior to the date of this Agreement.
2.25 Takeover Statutes. If any "fair price,", "moratorium," "control share
acquisition," or other form of antitakeover statute or regulation shall become
applicable to the transactions contemplated hereby or the transactions
contemplated by the Support/Voting Agreement, the Company and the members of the
Board of Directors of the Company and the Purchaser (if applicable), shall grant
such approvals and take such actions as are reasonably necessary so that the
transactions contemplated hereby and the transactions contemplated by the
Support/Voting Agreement may be consummated as promptly as practicable on the
terms contemplated
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hereby and thereby and otherwise act to eliminate or minimize the effects of
such statute or regulation on the transactions contemplated hereby and thereby.
The Company represents that the Support/Voting Agreements being entered into
concurrently herewith has been approved by the affirmative vote of a majority of
a committee of the Company's disinterested directors formed in accordance with
The Minnesota Business Combination Act and will not prohibit the Company from
engaging in the Merger under the Minnesota Business Combination Act at Closing
or require any Shareholder approval in order to preserve the voting rights of
the shares of the Company represented thereby under the Minnesota Control Share
Acquisitions Act, provided that for purposes of such Acts, Purchaser and any
groups of which Purchaser may be deemed to be a member do not beneficially own
any securities of the Company other than those that may be deemed to be
beneficially owned by them by reason of the Support/Voting Agreements.
2.26 Preparation of Registration Statement and Proxy. The Purchaser and
the Company shall cooperate and promptly prepare and the Purchaser shall file
with the SEC as soon as practicable a Registration Statement on Form S-4 (the
"Registration Statement") under the Securities Act, with respect to the
Purchaser Common Stock issuable in the Merger, a portion of which Registration
Statement shall also serve as the proxy statement with respect to the meeting of
the shareholders of the Company to consider the Merger (the "Proxy
Statement/Prospectus"). In connection therewith, the Company shall promptly
furnish the Purchaser with all information concerning it as may be required for
inclusion in the Registration Statement. If at any time prior to the Effective
Time, any information pertaining to the Company contained in or omitted from the
Registration Statement makes such statements contained in the Registration
Statement false or misleading, the Company shall promptly so inform the
Purchaser and provide the Purchaser with the information necessary to make
statements contained therein not false and misleading. The respective parties
will cause the Proxy Statement/Prospectus and the Registration Statement to
comply as to form in all material respects with the applicable provisions of the
Securities Act, the Securities Exchange Act and the rules and regulations
thereunder. The Purchaser shall use all reasonable efforts, and the Company will
cooperate with the Purchaser, to have the Registration Statement declared
effective by the SEC as promptly as practicable and to maintain the
effectiveness of the Registration Statement through the Effective Time. The
Purchaser also shall take such other reasonable actions (other than qualifying
to do business in any jurisdiction in which it is not so qualified) required to
be taken under any applicable state securities laws in connection with the
issuance of the Purchaser Common Stock in the Merger.
2.27 Alternative Proposals. Prior to the Effective Time, the Company
agrees (a) that neither it nor any of its Subsidiaries shall, nor shall it or
any of its Subsidiaries authorize their respective officers, directors,
employees, agents and representatives (including, without limitation, any
investment banker, attorney or accountant retained by it or any of its
Subsidiaries) to initiate or solicit, directly or indirectly, the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its shareholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or purchase of (i) all or any
significant portion of the assets of the Company and its Subsidiaries taken as a
whole, or of any Subsidiary of the Company, (ii) 25% or more of the outstanding
shares of Company Common Stock or (iii) 25% of the outstanding shares of the
capital stock of any Subsidiary of the Company (any such proposal or offer being
hereinafter referred to as an "Alternative Proposal") or engage in any
negotiations with, or provide any confidential information or data to, or have
any discussions with, any person relating to an Alternative Proposal (excluding
the Merger contemplated by this Agreement); and (b) that it will notify the
Purchaser immediately if it provides any such information or conducts any such
negotiations or discussions or receives any bona fide proposal or offer;
provided, however, that nothing contained in this Section 2.27 shall prohibit
the Board of Directors of the Company from (i) furnishing information to or
entering into discussions or negotiations with, any person or entity, if, and
only to the extent that (A) the Board of Directors of the Company, based upon
the advice of outside counsel, determines in good faith that such action is
required for the Board of Directors to comply with its fiduciary duties to
shareholders imposed by law, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity relating
to an Alternative Proposal, the Company provides written notice to the Purchaser
to the effect that it is furnishing information to, or entering into discussions
or negotiations with, such person or entity relating to an Alternative Proposal,
and (C) the Company keeps the Purchaser reasonably informed of the status and
all material information with respect to any such discussions or negotiations;
(ii) to the extent applicable,
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complying with Rule 14e-2 promulgated under the Securities Exchange Act with
regard to an Alternative Proposal; and (iii) making any statement required by
applicable law or the requirements of Nasdaq. Nothing in this Section 2.27 shall
(x) permit the Company to terminate this Agreement (except as specifically
provided in Article VIII hereof), (y) permit the Company to enter into any
agreement with respect to an Alternative Proposal for as long as this Agreement
remains in effect (it being agreed that for as long as this Agreement remains in
effect, the Company shall not enter into any agreement with any person that
provides for, or in any way facilitates, an Alternative Proposal (other than a
confidentiality agreement in customary form)), or (z) affect any other
obligation of the Company under this Agreement.
2.28 Affiliate Undertakings Letters. At least 35 days prior to the date of
the meeting of the Company Shareholders to approve the Merger, the Company shall
use reasonable efforts to provide to the Purchaser affiliate undertakings
letters in substantially the form of Exhibit 2.28 ("Affiliate Undertakings
Letters") from each such person who may be at the Effective Time, or was on the
date of this Agreement, an "affiliate" of the Company for purposes of Rule 145
under the Securities Act. On or prior to such date, the Company, with the advice
of outside counsel, shall provide the Purchaser with a letter (reasonably
satisfactory to counsel to the Purchaser) specifying all of the persons or
entities who may be deemed to be "affiliates" of the Company under the preceding
sentence.
2.29 Listing Application. The Purchaser shall promptly prepare and submit
to the New York Stock Exchange a listing application covering the Purchaser
Common Stock to be issued in connection with the Merger and shall use reasonable
efforts to obtain, prior to the Effective Time, approval for the listing of such
Purchaser Common Stock, subject to official notice of issuance.
2.30 Funding/Development. After the Effective Time, it is the intention of
the Purchaser to continue development and funding of the Company's risk
management and health care informatics business pursuant to business plans to be
jointly developed by the management of the Company and the management of the
Purchaser.
III.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Purchaser as follows:
3.1 Organization, Standing and Foreign Qualification.
3.1.1 The Company and each of its Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation as set forth in Schedule 3.1.1 of
the Disclosure Letter and has full corporate power and authority to carry
on its business as it is now being conducted and to own and lease the
properties and assets which it now owns or leases.
3.1.2 The Company and each of its Subsidiaries is now, and will be at
Closing, duly qualified and/or licensed to transact business and in good
standing as a foreign corporation in the jurisdictions listed in Schedule
3.1.2 of the Disclosure Letter, and the character of the property owned or
leased by the Company and each of its Subsidiaries and the nature of the
business conducted by them do not require such qualification and/or
licensing in any other jurisdiction, except where the failure to be so
qualified or licensed would not have a Company Material Adverse Effect.
3.1.3 Except as disclosed in the Company SEC Documents or in Schedule
3.1.1 of the Disclosure Letter, the Company has no Subsidiaries.
3.2 Authority and Status. The Company has the corporate capacity and
authority to execute and deliver this Agreement, to perform hereunder and,
subject to the terms and conditions hereof, to consummate the transactions
contemplated hereby. The execution, delivery and performance by the Company of
this Agreement and each and every agreement, document and instrument provided
for herein have been duly authorized and approved by the Board of Directors of
the Company. Subject to Shareholder approval as contemplated by Section 2.22,
this Agreement and each and every agreement, document and instrument to be
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executed, delivered and performed by the Company in connection herewith
constitute or will, when executed and delivered, constitute the valid and
legally binding obligations of the Company enforceable against the Company 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. Attached as Schedule 3.2 of the
Disclosure Letter are true, correct and complete copies of the Certificate or
Articles of Incorporation and Bylaws of each Subsidiary of the Company. The
Articles of Incorporation and Bylaws of the Company filed as exhibits to the
Company's SEC Documents are the true, correct and complete copies of such
documents and have not been amended or rescinded except as indicated in such
filings.
3.3 Capitalization. The authorized capital stock of the Company consists
of 20,000,000 shares of common stock, par value $.01 per share, of which
4,180,476 are issued and outstanding as of the date of this Agreement, 250,000
shares of 9 1/2% Convertible Preferred Stock, none of which are issued and
outstanding and 9,750,000 shares of undesignated stock, par value $.01 per
share, none of which are issued and outstanding. All outstanding securities of
each Subsidiary of the Company, the entire authorized capital stock, the amount
of shares issued and outstanding and the amount of shares held in treasury for
each such Subsidiary are as set forth on Schedule 3.3 of the Disclosure Letter.
All of the outstanding shares of the Company and each Subsidiary are duly
authorized, validly issued, fully paid, nonassessable and free of any preemptive
rights. Except as set forth on Schedule 3.3 of the Disclosure Letter, all of the
outstanding shares of each Subsidiary are owned by the Company, in each case
free and clear of all liens, claims, charges and encumbrances of any nature
whatsoever except those disclosed in Schedule 3.7 of the Disclosure Letter and
except Permitted Liens, and, subject to Shareholder approval as contemplated by
Section 2.22, the authorization or consent of no other person or entity is
required in order to consummate the transactions contemplated herein by virtue
of any such person or entity having an equitable or beneficial interest in the
Company or the capital stock of the Company. Except for options covering 539,014
shares of Company Common Stock as set forth in Schedule 3.3 of the Disclosure
Letter, there are no outstanding options, warrants, calls, commitments or plans
by the Company or any Subsidiary to issue any additional shares of its capital
stock, to pay any dividends on such shares or to purchase, redeem, or retire any
outstanding shares of its capital stock, nor are there outstanding any
securities or obligations which are convertible into or exchangeable for any
shares of capital stock of the Company or any such Subsidiary.
3.4 Absence of Equity Investments. Except as described in Schedule 3.4 of
the Disclosure Letter or in the Company SEC Documents, the Company does not,
either directly or indirectly, own of record or beneficially any shares or other
equity interests in any corporation, partnership, limited partnership, joint
venture, trust or other business entity. Except as disclosed in the Company SEC
Documents or in Schedule 3.4 of the Disclosure Letter, to the knowledge of the
Company, no officer or director of the Company or any Subsidiary or other
Affiliate of such person, directly or indirectly, owns of record or beneficially
any shares or other equity interests in any corporation (except as a stockholder
holding less than one percent (1%) interest in a corporation whose shares are
traded on a national or regional securities exchange or in the over-the-
counter-market), partnership, limited partnership, joint venture, trust or other
business entity, all or any portion of the business of which is competitive with
that of the Company.
3.5 Company SEC Documents. The Company has filed with the SEC all forms,
reports, schedules, statements and other documents required to be filed by it
since July 1, 1993 under the Securities Exchange Act or the Securities Act (such
documents, as supplemented and amended since the time of filing, collectively,
the "Company SEC Documents"). The Company SEC Documents, including, without
limitation, any financial statements or schedules included therein, at the time
filed (and, in the case of registration statements and proxy statements, on the
dates of effectiveness and the dates of mailing, respectively) (a) did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (b) complied in all material respects with the applicable
requirements of the Securities Exchange Act and the Securities Act, as the case
may be. The financial statements of the Company included in the Company SEC
Documents at the time filed (and, in the case of registration statements and
proxy statements, on the date of effectiveness and the date of mailing,
respectively) complied as to form in all
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material respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with GAAP applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC), and fairly present (subject
in the case of unaudited statements to normal, recurring audit adjustments) the
consolidated financial position of the Company as at the dates thereof and the
consolidated results of its operations and cash flows for the periods then
ended.
3.6 Taxes. Except as disclosed on Schedule 3.6 of the Disclosure Letter,
the Company has duly filed all federal and material state, local and foreign
income, franchise, excise, real and personal property and other Tax returns and
reports (including, but not limited to, those filed on a consolidated, combined
or unitary basis) required to have been filed by the Company prior to the date
hereof. Except as disclosed in Schedule 3.6 of the Disclosure Letter, all of the
foregoing returns and reports are true and correct in all material respects, and
the Company has paid or, prior to the Effective Time, will pay all material
Taxes, interest and penalties required to be paid in respect of the periods
covered by such returns or reports to any federal, state, foreign, local or
other taxing authority. Except as disclosed in Schedule 3.6 of the Disclosure
Letter, the Company has paid or made adequate provision in the financial
statements of the Company included in the Company SEC Documents for all material
Taxes payable in respect of all periods ending on or prior to the date of the
financial statements contained therein. Except as disclosed in Schedule 3.6 of
the Disclosure Letter, neither the Company nor any of its Subsidiaries have any
material liability for any Taxes in excess of the amounts so paid or reserves so
established and neither the Company nor any of its subsidiaries is delinquent in
the payment of any material Tax, assessment or governmental charge and none of
them has requested any extension of time within which to file any returns in
respect of any fiscal year which have not since been filed. Except as disclosed
in Schedule 3.6 of the Disclosure Letter, to the knowledge of the Company, no
deficiencies for any Tax, assessment or governmental charge have been proposed
in writing, asserted or assessed (tentatively or definitely), in each case, by
any taxing authority, against the Company or any of its Subsidiaries for which
there are not adequate reserves. Except as disclosed in Schedule 3.6 of the
Disclosure Letter, to the knowledge of the Company, neither the Company nor any
of its Subsidiaries is currently the subject of any Tax audit. To the knowledge
of the Company, as of the date of this Agreement, there are no pending requests
for waivers of the time to assess any such Tax, other than those made in the
ordinary course and for which payment has been made or there are adequate
reserves. The Company has not filed an election under Section 341(f) of the Code
to be treated as a consenting corporation.
3.7 Ownership of Assets and Leases.
3.7.1 Real Estate and Personal Property. Schedule 3.7 of the
Disclosure Letter is a complete and correct list and brief description as
of the date of this Agreement of all real property and items of personal
property which are owned and have a book value in excess of $100,000 net of
the reserve for depreciation, and all real property and all material items
of personal property which are leased or licensed by the Company under
leases relating to assets which are material to the operation of the
Company or which provide for payments throughout the lease term of more
than $100,000. The Company has good and marketable title to all of its
property and assets, other than leased or licensed property, including
those listed and described in Schedule 3.7 of the Disclosure Letter as
owned property and assets, in each case free and clear of any liens,
security interests, claims, charges, options, rights of tenants or other
encumbrances, except as disclosed or reserved against in Schedule 3.7 of
the Disclosure Letter (to the extent and in the amounts so disclosed or
reserved against) and except for Permitted Liens. Each of the leases,
licenses and agreements described in Schedule 3.7 of the Disclosure Letter
is in full force and effect and constitutes a legal, valid and binding
obligation of the Company and the other respective parties thereto and is
enforceable in accordance with its 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, and there is not
under any of such leases, licenses or agreements existing any material
default of the Company or (to the knowledge of the Company) any other
parties thereto (or, to the knowledge of the Company, event or condition
which, with notice or lapse of time, or both, would constitute a default).
Neither the Company nor any officer or director has received any payment
from a lessor or licensor in connection with or as
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inducement for entering into a lease or license under which the Company is
a lessee or a licensee. All buildings, machinery and equipment owned or
leased by the Company are in all material respects in good operating
condition and reasonable state of repair, subject only to ordinary wear and
tear. The Company has not received any notice of a violation of any
applicable zoning regulation, ordinance or other law, regulation or
requirement relating to its operations and properties, whether owned or
leased, and there is no such violation or grounds therefor which could
reasonably be expected to have a Company Material Adverse Effect. Except
pursuant to this Agreement (or pursuant to customer contracts insofar as
such contracts grant customers the rights to their records on termination),
the Company is not a party to any contract or obligation whereby there has
been granted to anyone an absolute or contingent right to purchase, obtain
or acquire any rights in any material assets, properties or operations
which are owned by the Company or which are used in connection with the
business of the Company.
3.8 Accounts Receivable. All of the accounts receivable of the Company as
of the date hereof are and as of the Closing Date will have arisen in the
ordinary course of business and represent valid accounts which are not subject
to offset or dispute except as otherwise disclosed to the Purchaser in the
Disclosure Letter. The accounts receivables reserves reflected on the balance
sheet as of June 30, 1996 included in the Company SEC Documents are as of such
date established in accordance with GAAP consistently applied and any reserves
established after such date and prior to the Effective Time will likewise be
established in accordance with GAAP consistently applied. To the knowledge of
the Company, the accounts receivable of the Company are collectible in full net
of any reserves thereon.
3.9 Registration Statement. None of the information provided by the Company
for inclusion in the Registration Statement at the time it becomes effective or,
in the case of the Proxy Statement, at the date of mailing, will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The portions of
the Registration Statement and Proxy Statement that relate to the Company and
its Subsidiaries will each comply as to form in all material respects with the
provisions of the Securities Act and the Securities Exchange Act.
3.10 Required Filings and Absence of Conflicts. Except as listed in
Schedule 3.10 of the Disclosure Letter, the execution and delivery of this
Agreement by the Company does not, and the consummation of the transactions
contemplated hereby will not, violate any provision of the Certificate of
Incorporation, as amended, Articles of Incorporation, as amended, or Bylaws, as
amended, of the Company or any Subsidiary or violate or constitute an occurrence
of default under any provision of, or conflict with, or result in acceleration
of any obligation under, or give rise to a right by any party to terminate its
obligations under, any material mortgage, deed of trust, conveyance to secure
debt, note, loan, lien, lease, agreement, instrument, or any order, judgment,
decree or other material arrangement to which the Company or any Subsidiary is a
party or is bound or by which the Company's assets are affected. Except for (i)
Shareholder approval as noted in Section 2.22 hereof, (ii) the pre-merger
notification requirements under the HSR Act, (iii) filing and recordation of
appropriate merger and similar documents under Delaware and Minnesota law, (iv)
applicable requirements, if any, under the Securities Exchange Act, the
Securities Act and applicable blue sky laws and (iv) applicable requirements, if
any, under the Code and state, local and foreign tax laws and except as listed
or described on Schedule 3.10 of the Disclosure Letter, no material consent,
approval, order or authorization of, or material registration, declaration or
filing with, any governmental entity is required to be obtained or made by or
with respect to the Company, any Shareholder or any assets, properties or
operations of the Company or any Shareholder, in connection with the execution
and delivery by the Company of this Agreement or the consummation of the
transactions contemplated hereby.
3.11 Absence of Changes. Since June 30, 1996, the Company has not, nor has
anyone on its behalf, except as disclosed on Schedule 3.11 of the Disclosure
Letter or in the Company SEC Documents or as permitted by Section 2.12 hereof:
3.11.1 Transferred, assigned, conveyed or liquidated into current
assets any of its material assets or business or entered into any material
transaction or incurred any material liability or obligation, other than in
the ordinary course of its business;
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3.11.2 Suffered any Company Material Adverse Effect or become aware of
any event or state of facts which would result in a Company Material
Adverse Effect;
3.11.3 Suffered any destruction, damage or loss to a material asset or
a group of assets that in the aggregate cause a Company Material Adverse
Effect, whether or not covered by insurance;
3.11.4 Suffered, permitted or incurred the imposition of any material
lien, charge, encumbrance (which as used herein includes, without
limitation, any mortgage, deed of trust, conveyance to secure debt or
security interest) or claim upon any of its assets, except for Permitted
Liens;
3.11.5 Committed, suffered, permitted or incurred any material default
in any liability or obligation;
3.11.6 Made or agreed to any materially adverse change in the terms of
any material contract or instrument to which it is a party;
3.11.7 Waived, canceled, sold or otherwise disposed of, for materially
less than the face amount thereof, any material claim or right which it has
against others or deviated from its normal collection activities consistent
with historic practice in any materially adverse respect;
3.11.8 Declared, promised or made any distribution or other payment to
its shareholders (other than reasonable compensation for services actually
rendered in accordance with past practice) or issued any additional shares
(except upon the exercise of outstanding options which are disclosed in the
Disclosure Letter) or rights, options or calls with respect to the
Company's shares (except options disclosed in Schedule 3.3 of the
Disclosure Letter, or redeemed, purchased or otherwise acquired the
Company's shares, or made any change in the Company's capital structure;
3.11.9 Paid, agreed to pay or incurred any obligation for any payment
for, any contribution or other amount to, or with respect to, any employee
benefit plan (except for the payment of health, disability and life
insurance premiums which had become due and except for contributions or
distributions required to be made (and not discretionary) pursuant to any
Benefit Plans), or paid or agreed to pay any bonus to, or granted or agreed
to grant any increase in the compensation of, the Company's directors,
officers, agents or employees, or made any increase in the pension,
retirement or other benefits of its directors, officers, agents or other
employees (except for regularly scheduled periodic increases in employees'
compensation at times and in amounts consistent with historic practice);
3.11.10 Committed, suffered, permitted or incurred any transaction or
event which would materially increase its Tax liability for any prior
taxable year;
3.11.11 Incurred any other material liability or obligation or entered
into any significant transaction other than in the ordinary course of
business;
3.11.12 To the knowledge of the Company, received any notices that any
material customer has taken or contemplates any steps which could
reasonably be expected to materially disrupt the business relationship of
the Company with said person or could result in the material diminution in
the value of the Company as a going concern;
3.11.13 Paid, agreed to pay or incurred any material obligation for
any payment of any indebtedness except current liabilities incurred in the
ordinary course of business and except for payments as they become due
pursuant to governing agreements which were included or described in the
Company SEC Documents as such agreements existed on June 30, 1996; or
3.11.14 Delayed or postponed the payment of any material liabilities,
whether current or long term, or failed to pay in the ordinary course of
business any material liability on a timely basis consistent with prior
practice.
3.12 Litigation. Except as otherwise set forth in Schedule 3.12 of the
Disclosure Letter (with such Schedule 3.12 separately identifying litigation
arising in the ordinary course in the Company's third party administrator
business involving denied coverage or claims administration and claims relating
to the Company's care management business), there is no suit, action,
proceeding, claim or investigation pending
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with respect to which the Company has been served or as to which the Company has
knowledge or, to the knowledge of the Company, threatened against or affecting
the Company and, to the knowledge of the Company, there exists no basis or
grounds for any such suit, action, proceeding, claim or investigation. None of
the items described in Schedule 3.12 of the Disclosure Letter, individually or
in the aggregate, if pursued and/or resulting in a judgment, would have a
Company Material Adverse Effect.
3.13 Licenses and Permits; Compliance With Law. The Company holds all
material licenses, certificates, permits, franchises and rights from all
appropriate federal, state or other public authorities necessary for the conduct
of its business and the use of its assets. All such licenses, certificates,
permits, franchises and rights are listed in Schedule 3.13 of the Disclosure
Letter. Except as noted in Schedule 3.13 of the Disclosure Letter, the Company
is presently conducting its business so as to comply in all material respects
with all applicable statutes, ordinances, rules, regulations and orders of any
governmental authority. All necessary records demonstrating such compliance will
become the property of the Surviving Corporation subsequent to the Closing.
Further, except as set forth on Schedule 3.12 or 3.13 of the Disclosure Letter,
the Company is not presently charged with, or, to the knowledge of the Company,
under governmental investigation with respect to, any actual or alleged
violation of any statute, ordinance, rule or regulation, nor presently the
subject of any pending or, to the knowledge of the Company, threatened material
adverse proceeding by any regulatory authority having jurisdiction over its
business, properties or operations. Except as set forth on Schedule 3.12 or 3.10
of the Disclosure Letter, neither the execution and delivery of this Agreement
nor the consummation of the transactions contemplated hereby will result in the
termination of any material license, certificate, permit, franchise or right
held by the Company.
3.14 Contracts, Etc. Schedule 3.14 of the Disclosure Letter sets forth a
true and complete list of all contracts, agreements and other instruments to
which the Company is a party which are not listed on Schedules 3.7, 3.15.2(ii),
3.18 or 3.21 of the Disclosure Letter and which involve the payment by or to the
Company of more than $500,000.00 over the term of the agreement remaining after
June 30, 1996, and contemporaneously with the delivery of the Disclosure
Letters, the Company has delivered a true and complete copy of each contract,
agreement or instrument listed in Schedules 3.7, 3.14, 3.15.2(ii), 3.18 or 3.21
of the Disclosure Letter which is not filed as an Exhibit to the Company's SEC
Documents and is written and a summary of the terms of each such contract or
agreement which is oral, certified as such by a duly authorized officer of the
Company, except that, with respect to the contracts listed on Schedule 3.14.1,
3.14.2, 3.14.4, and 3.14.5 of the Disclosure Letter, the Company has provided
access to such contracts to the Purchaser but has not provided copies thereof.
The foregoing notwithstanding, Schedule 3.14 of the Disclosure Letter includes
all of the following:
3.14.1 Any contract or commitment which requires services over the
term remaining after June 30, 1996 in excess of $500,000 to be provided or
performed by the Company or which authorizes others to perform services in
excess of $500,000 over the term remaining after June 30, 1996 for a third
party for, through or on behalf of the Company, other than those services
performed for customers and clients set forth on Schedule 3.19 of the
Disclosure Letter;
3.14.2 Any contract or commitment involving an obligation by the
Company in excess of $500,000 over the term remaining after June 30, 1996
which cannot, or in reasonable probability will not, be performed or
terminated within one year from the date as of which these representations
are made;
3.14.3 Any note receivable;
3.14.4 Any contract or commitment providing for payments based in any
manner upon the sales, purchases, receipts, income or profits of the
Company including, without limitation, any agreements with general agents
or with agents;
3.14.5 Any franchise agreement, marketing agreement or royalty
agreement (and with respect to each such agreement Schedule 3.14 of the
Disclosure Letter sets forth the aggregate royalties or similar payment
paid or payable thereunder by the Company as of the date hereof);
3.14.6 Any material contract or agreement with a creditor not made in
the ordinary course of business;
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3.14.7 Any employment contract or arrangement regarding an employee or
independent contractors which is not terminable by the Company within
thirty (30) days without payment of any amount for any reason whatsoever,
or without any continuing payment of any type or nature, including, without
limitation, any bonuses and vested commissions;
3.14.8 Any contract, agreement, understanding or arrangement
materially restricting the Company from carrying on its business anywhere
in the world;
3.14.9 Any material instrument or arrangement evidencing or related to
indebtedness for money borrowed or to be borrowed, whether directly or
indirectly, by way of purchase money obligation, guaranty, subordination,
conditional sale, lease-purchase or otherwise;
3.14.10 Any contract with any labor organization; and
3.14.11 Any material bond, suretyship arrangement, guarantee, letter
of credit or other performance guarantee document pursuant to which any
obligation of the Company is guaranteed or secured or pursuant to which the
Company has guaranteed or secured the performance or obligation of another
person.
All of the contracts, agreements, policies of insurance or instruments
described in Schedules 3.7, 3.14, 3.15.2(i), 3.15.2(ii), 3.18 or 3.21 of the
Disclosure Letter are valid and binding upon the Company and, to the knowledge
of the Company, the other parties thereto and are in full force and effect and
enforceable in accordance with their 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. Neither the Company
nor, to the knowledge of the Company, any other party to any such contract,
commitment or arrangement has materially breached any material provision of, or
is in material default under, the terms thereof.
3.15 Intellectual Property; Computer Software.
3.15.1 Schedule 3.15.1 of the Disclosure Letter sets forth a complete
and correct list and summary description of all material trademarks, trade
names, service marks, service names, brand names, copyrights and patents,
registrations thereof and applications therefor, applicable to or used in
the business of the Company, together with a complete list of all licenses
granted by or to the Company with respect to any of the above. All such
trademarks, trade names, service marks, service names, brand names,
copyrights and patents are owned by the Company, free and clear of all
liens, claims, security interests and encumbrances of any nature whatsoever
except those disclosed in Schedule 3.7 of the Disclosure Letter and except
Permitted Liens. The Company is not currently in receipt of any notice of
any violation of, and, to the knowledge of the Company, it is not
violating, the rights of others in any trademark, trade name, service mark,
copyright, patent, trade secret, know-how or other intangible asset.
3.15.2 (i) Schedule 3.15.2(i) of the Disclosure Letter contains a
complete and accurate list of all material computer software owned by the
Company (the "Owned Software"). Except as set forth on Schedule 3.15.2(i)
of the Disclosure Letter, the Company has exclusive title to the Owned
Software, free and clear of all claims, including claims or rights of
employees, agents, consultants, customers, licensees or other parties
involved in the development, creation, marketing, maintenance, enhancement
or licensing of such computer software, except those disclosed in Schedule
3.7 of the Disclosure Letter, except Permitted Liens, and except licenses
to customers in the ordinary course of business. Except as set forth on
Schedule 3.15.2(i) of the Disclosure Letter, the Owned Software is not
dependent on any Licensed Software (as defined in subsection (ii) below) in
order to fully operate in the manner in which it is intended. No Owned
Software has been published or disclosed to any other parties, except as
set forth on Schedule 3.15.2(i) of the Disclosure Letter, and except
pursuant to contracts requiring such other parties to keep the Owned
Software confidential. To the knowledge of the Company, no such other party
has breached any such obligation of confidentiality.
(ii) Schedule 3.15.2(ii) of the Disclosure Letter contains a complete
and accurate list of all material software under which the Company is a
licensee, lessee or otherwise has obtained the right to
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use software, other than licenses relating to standard "off the shelf"
software that is generally available from vendors and software made
generally available from such vendors on a "shrink-wrap license" basis (the
"Licensed Software"). Schedule 3.15.2(ii) of the Disclosure Letter also
sets forth a list of all license fees, rents, royalties or other charges
that the Company is required or obligated to pay with respect to Licensed
Software. The Company has the right and license to use, sublicense, modify
and copy Licensed Software, free and clear of any limitations or
encumbrances except as may be set forth in any license agreements listed in
Schedule 3.15.2(ii) of the Disclosure Letter. The Company is in compliance
in all material respects with all material provisions of any license, lease
or other similar agreement pursuant to which it has rights to use the
Licensed Software. Except as disclosed on Schedule 3.15.2(ii) of the
Disclosure Letter, none of the Licensed Software has been incorporated into
or made a part of any Owned Software or any other Licensed Software. The
Company has not published or disclosed any Licensed Software to any other
party.
(iii) The Owned Software and Licensed Software constitute all material
software necessary for use in the businesses of the Company, other than
licenses relating to standard "off the shelf" software that is generally
available from vendors and software made generally available from such
vendors on a "shrink-wrap license" basis, (the "Company Software").
Schedule 3.15.2(iii) of the Disclosure Letter sets forth a list of all
contract programmers, independent contractors, nonemployee agents and
persons or other entities (other than employees) who have performed
material computer programming services for the Company and identifies all
material contracts and agreements pursuant to which such services were
performed. Except as disclosed on Schedule 3.10 of the Disclosure Letter,
the transactions contemplated herein will not cause a material breach or
default under any licenses, leases or similar agreements relating to the
Company Software or materially impair the Surviving Corporation's ability
to use the Company Software in the same manner as such computer software is
currently used by the Company. The Company is not infringing any
intellectual property rights of any other person or entity with respect to
the Company Software, and to the knowledge of the Company, no other person
or entity is infringing any intellectual property rights of the Company
with respect to the Company Software.
3.16 Product Warranties and Liabilities. Except as listed on Schedule 3.16
of the Disclosure Letter, the Company has no forms of warranties or guarantees
of its products and services that are in effect or proposed to be used by it.
Schedule 3.16 of the Disclosure Letter sets forth a description of each pending
or, to the knowledge of the Company, threatened material action under any
warranty or guaranty against the Company. The Company has not incurred, nor does
the Company know or have any reason to believe there is any basis for alleging,
any material liability, damage, loss, cost or expense (in excess of any reserves
therefor) as a result of any material defect or other deficiency (whether of
design, materials, workmanship, labeling instructions or otherwise) ("Product
Liability") with respect to any product sold or services rendered by or on
behalf of the Company prior to the Effective Time, whether such Product
Liability is incurred by reason of any express or implied warranty (including,
without limitation, any warranty of merchantability or fitness), any doctrine of
common law (tort, contract or other), any statutory provision or otherwise and
irrespective of whether such Product Liability is covered by insurance.
3.17 Labor Matters. Schedule 3.17 of the Disclosure Letter sets forth a
list of all employees, consultants and independent contractors of the Company
whose compensation for 1995 or expected compensation for 1996 exceeds
$100,000.00 per annum and lists the compensation per annum for such persons.
Except as set forth on Schedule 3.17 of the Disclosure Letter, within the last
three (3) years, to the knowledge of the Company, the Company has not been the
subject of any union activity or labor dispute, nor has there been any strike of
any kind called or (to the knowledge of the Company) threatened to be called,
against the Company. Except as set forth on Schedule 3.17 of the Disclosure
Letter, the Company has not violated in any material respect any applicable
federal or state law or regulation relating to labor, labor practices or
immigration matters. The Company has no knowledge that there will be any
materially adverse change in relations with employees and independent
contractors of the Company as a result of the transactions contemplated by this
Agreement.
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3.18 Benefit Plans.
3.18.1 The Company's SEC Documents or, to the extent not disclosed
therein, Schedule 3.18 of the Disclosure Letter lists every pension,
retirement, profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus or other incentive plan,
any other written or unwritten employee program, arrangement, agreement or
understanding, (whether arrived at through collective bargaining or
otherwise), any medical, vision, dental or other health plan, any life
insurance plan or any other employee benefit plan or fringe benefit plan,
including, without limitation, any "employee benefit plan," as that term is
defined in Section 3(3) of ERISA, or any other plan, program, agreement,
arrangement, commitment and/or method of compensation, whether funded or
unfunded, currently maintained, sponsored in whole or in part or
contributed to by the Company or any Affiliate of the Company for the
benefit of employees, retirees, dependents, spouses, directors, officers,
independent contractors or other beneficiaries of the Company or an
Affiliate of the Company and under which employees, retirees, dependents,
spouses, directors, officers, independent contractors or other
beneficiaries of the Company or an Affiliate of the Company are eligible to
participate or under or in connection with which the Company may reasonably
be expected to have any contingent or noncontingent liability of any kind
(collectively, the "Benefit Plans"). Any of the Benefit Plans which is an
"employee pension benefit plan," as that term is defined in Section 3(2) of
ERISA, or an "employee welfare benefit plan" as that term is defined in
Section 3(1) of ERISA, is referred to herein as an "ERISA Plan." No Benefit
Plan is or has been a "multiemployer plan" within the meaning of Section
3(37) of ERISA. Neither the Company nor any Subsidiary has ever contributed
to or had an obligation to contribute to any multiemployer plan.
3.18.2 Schedule 3.18 of the Disclosure Letter also lists: (a) where
applicable, with respect to any such plans or plan amendments, the most
recent determination letters issued by the United States Internal Revenue
Service, (b) all rulings, opinion letters, information letters or advisory
opinions issued by the United States Department of Labor, the United States
Internal Revenue Service or the Pension Benefit Guaranty Corporation after
December 31, 1974, with respect to such Benefit Plan, (c) annual reports or
returns and audited or unaudited financial statements for the most recent
three plan years and any amendments thereto, and (d) the most recent
summary plan descriptions and any material modifications thereto, and any
other material written communications to employees or to any governmental
agency with respect to such Benefit Plans during the three most recent plan
years. Contemporaneous with the delivery of the Disclosure Letter, the
Company has delivered a true and complete copy of each such Benefit Plan or
summary description if such Benefit Plan is not in writing, agreements,
rulings, opinions, reports, returns, financial statements and summary plan
descriptions described in Sections 3.18.1 or 3.18.2 hereof which has not
been filed as a part of the Company SEC Documents, certified as such by a
duly authorized officer of the Company.
3.18.3 All the Benefit Plans and the related trusts subject to ERISA
comply with and have been administered in compliance in all material
respects with the provisions of ERISA, all provisions of the Code relating
to qualification and tax exemption under Code Sections 401(a) and 501(a) or
otherwise applicable to secure intended Tax consequences, all applicable
state or federal securities laws and all other applicable laws, rules and
regulations and collective bargaining agreements, and neither the Company
nor any Affiliate has received any notice from any governmental agency or
instrumentality questioning or challenging such compliance. All necessary
governmental approvals for the Benefit Plans have been obtained, including,
but not limited to, timely determination letters on the qualification of
the ERISA Plans and tax exemption of related trusts, as applicable, under
the Code and timely registration and disclosure under applicable securities
laws, and all such governmental approvals continue in full force and
effect. No event has occurred which will or could reasonably be expected to
give rise to disqualification of any such plan under sections 401(a) or
501(a) of the Code, adversely affect the qualified status of the Plan of
any such plan under Sections 401(a) or 501(a) of the Code or to a tax under
Section 511 of the Code. All contributions (including all employer
contributions and employee salary reduction contributions) which are due
have been paid to each Benefit Plan and have been paid on a timely basis.
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3.18.4 Neither the Company, any Affiliate nor (to the knowledge of the
Company) any administrator or fiduciary of any such Benefit Plan (or agent
or delegate of any of the foregoing) has engaged in any transaction or
acted or failed to act in any manner which could reasonably be expected to
subject the Company to any direct or indirect material liability (by
indemnity or otherwise) for a breach of any fiduciary, co-fiduciary or
other duty under ERISA. No oral or written representation or communication
with respect to any aspect of the Benefit Plans has been or will be made by
the Company to employees of the Company prior to the Closing Date which is
not in accordance with the written or otherwise preexisting terms and
provisions of such Benefit Plans in effect immediately prior to the Closing
Date. There are no unresolved material claims or disputes under the terms
of, or in connection with, the Benefit Plans, and the Company has not been
served with respect to or given written notice of or have knowledge of the
commencement of any legal or administrative action with respect to any
claim.
3.18.5 All annual reports or Returns, audited or unaudited financial
statements, actuarial valuations, summary annual reports and summary plan
descriptions issued with respect to the Benefit Plans are correct and
accurate in all material respects as of the dates thereof, and have been
timely filed or disseminated, as appropriate or required by applicable law,
and the Company has not failed to file any amendments to any of such
reports, returns, statements, valuations or descriptions that are required
to make the information therein true and accurate in all material respects.
3.18.6 No "party in interest" (as defined in Section 3(14) of ERISA)
or "disqualified person" (as defined in Section 4975(e)(2) of the Code) of
any Benefit Plan has engaged in any "prohibited transaction" (within the
meaning of Section 4975(c) of the Code or Section 406 of ERISA). There has
been no (a) "reportable event" (as defined in Section 4043 of ERISA), or
event described in Section 4062(f) or Section 4063(a) of ERISA or (b)
termination or partial termination, withdrawal or partial withdrawal with
respect to any of the ERISA Plans which the Company or an Affiliate of the
Company maintains or contributes to or has maintained or contributed to or
was required to maintain or contribute to or for the benefit of employees
of the Company or any Affiliate of the Company now or formerly in
existence.
3.18.7 The Company does not have any ERISA Plan which is an employee
pension benefit plan as defined in ERISA Section 3(2).
3.18.8 Except as set forth on Schedule 3.18.8 of the Disclosure
Letter, as of the date of the Company's most recent SEC Document which was
a quarterly or annual report, the Company did not have any current or
future material liability under any Benefit Plan that was not reflected in
such filing, and the liability of the Company in connection with any
Benefit Plan as of Closing will not exceed in any material respects the
amount recorded therefor on the books of the Company.
3.18.9 Except as set forth on Schedule 3.18.9 of the Disclosure
Letter, the Company does not maintain any Benefit Plan providing deferred
or stock based compensation which is not reflected in the Company SEC
Documents.
3.18.10 The Company has not maintained a Benefit Plan providing
welfare benefits (as defined in ERISA Section 3(1)) to employees after
retirement or other separation of service except to the extent required
under Part 6 of Title I of ERISA and Code Section 4980B, or except as set
forth in the Company SEC Documents or on Schedule 3.18.10 of the Disclosure
Letter.
3.18.11 Except as disclosed in the Company SEC Documents or on
Schedule 3.18.11 of the Disclosure Letter and except for the acceleration
of the vesting of outstanding options, the consummation of the transactions
contemplated by this Agreement will not (i) entitle any current or former
employee of the Company to severance pay, unemployment compensation or any
payment contingent upon a change in control or ownership of the Company, or
(ii) accelerate the time of payment or vesting, or increase the amount, of
any compensation due to any such employee or former employee.
3.18.12 All Benefit Plans subject to section 4980B of the Code from
time to time or Part 6 of Title I of ERISA or both have been maintained in
substantial compliance with the requirements of such laws and any
regulations (proposed or otherwise) issued thereunder.
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3.19 Customers and Clients. Schedule 3.19 of the Disclosure Letter
consists of a true and correct list of all of the customers and clients of the
Company during the 1996 fiscal year who generated revenues of more than
$1,000,000 during the 1996 fiscal year, setting forth as to each customer or
client its name and address. Except as set forth on Schedule 3.19 of the
Disclosure Letter, the Company has not received any notice, and does not have
reason to believe, that any such customer or client has taken or will take any
steps which could reasonably be expected to materially disrupt the business
relationship of the Company with such customer or client, or could reasonably be
expected to result in the material diminution in the value of the business of
the Company as a going concern.
3.20 Environmental Matters. Except as set forth in Schedule 3.20 of the
Disclosure Letter, no real property now or previously used by the Company or now
or previously owned or leased by the Company (the "Real Property") has been used
by the Company, or to the knowledge of the Company, any other party for the
handling, treatment, storage or disposal of any Hazardous Substance (as
hereinafter defined) except in compliance in all material respects with
applicable environmental laws. To the knowledge of the Company, except as set
forth in Schedule 3.20 of the Disclosure Letter, no release, discharge, spillage
or disposal by the Company into the environment of any Hazardous Substance and
no soil, water or air contamination by the Company of any Hazardous Substance
has occurred or is occurring in, from or on the Real Property. Except as set
forth in Schedule 3.20 of the Disclosure Letter, the Company has complied in all
material respects with all reporting requirements under any applicable federal,
state or local environmental laws and permits, and, to the knowledge of the
Company there are no existing violations by the Company of any such
environmental laws or permits. To the knowledge of the Company, there are no
claims, actions, suits, proceedings or investigations related to the presence,
release, production, handling, discharge, spillage, transportation or disposal
of any Hazardous Substance or ambient air conditions or contamination of soil,
water or air by any Hazardous Substance pending or, to the knowledge of the
Company, threatened with respect to the Real Property or otherwise against the
Company in any court or before any state, federal or other governmental agency
or private arbitration tribunal and, to the knowledge of the Company, there is
no basis for any such claim, action, suit, proceeding or investigation. To the
knowledge of the Company, there are no underground storage tanks on any Real
Property which is or was owned by the Company or is currently leased by the
Company. To the knowledge of the Company, no building or other improvement
included in any Real Property which is or was owned by the Company or is
presently leased by the Company contains any asbestos, and such buildings and
improvements are free from radon contamination. For the purposes of this
Agreement, "Hazardous Substance" shall mean any hazardous or toxic substance or
waste as those terms are defined by any applicable federal, state or local law,
ordinance, regulation, policy, judgment, decision, order or decree, including,
without limitation, the Comprehensive Environmental Recovery Compensation and
Liability Act, 42 U.S.C. 9601 et seq., the Hazardous Materials Transportation
Act, 49 U.S.C. sec. 1801 et. seq. and the Resource Conservation and Recovery
Act, 42 U.S.C. 6901 et seq., and petroleum, petroleum products and oil.
3.21 Insurance. Set forth in Schedule 3.21 of the Disclosure Letter is a
complete list of all insurance policies which the Company maintained, or was an
insured party under, with respect to its businesses, properties or employees
which are currently in force and effect together with a list of all such
policies which have been in effect during the last 36 months but have expired.
Schedule 3.21 of the Disclosure Letter lists the annual premium and renewal date
of all such insurance policies. Except as set forth in Schedule 3.21 of the
Disclosure Letter, since July 1, 1996, there has not been any change in the
Company's relationship with its insurers or in the premiums payable pursuant to
such policies.
3.22 Related Party Relationships. Except as set forth in Schedule 3.22 of
the Disclosure Letter, to the Company's knowledge, no officer or director of the
Company or any Affiliate thereof possesses, directly or indirectly, any
beneficial interest in, or is a director, officer or employee of, any
corporation, partnership, firm, association or business organization which is a
material client, supplier, customer, lessor, lessee, lender, creditor, borrower,
debtor or contracting party with or of the Company (except as a stockholder
holding less than a one percent interest in a corporation whose shares are
traded on a national or regional securities exchange or in the over-the-counter
market).
3.23 Opinion of Financial Advisor. The Company has received the opinion of
Robertson, Stephens & Company LLC, its financial advisor, to the effect that, as
of September 11, 1996, the consideration to be
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received by the Company Shareholders in the Merger is fair to the Company
Shareholders from a financial point of view. The Company has heretofore provided
a copy of such opinion to the Purchaser and such opinion has not been withdrawn,
revoked or modified.
3.24 Schedules. All Schedules set forth in the Disclosure Letter are true,
correct and complete in all material respects as of the date of this Agreement.
Matters disclosed on each Schedule in the Disclosure Letter shall be deemed
disclosed only for purposes of the matters to be disclosed on such Schedule and
shall not be deemed to be disclosed for any other purpose unless expressly
provided therein.
3.25 Disclosure and Absence of Undisclosed Liabilities. No statement
contained herein or in any certificate, Schedule of the Disclosure Letter, list,
Exhibit or other instrument furnished by the Company to the Purchaser or its
agents pursuant to the provisions hereof contains or will contain any untrue
statement of any material fact or omits or will omit to state a material fact
necessary in order to make the statements, taken as a whole, contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
IV.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
AND THE MERGER SUBSIDIARY
The Purchaser and the Merger Subsidiary represent and warrant to the
Company for the benefit of the Shareholders as follows:
4.1 Organization and Standing. The Purchaser and the Merger Subsidiary are
duly organized and validly existing corporations in good standing under the laws
of the State of Delaware.
4.2 Corporate Power and Authority. The Purchaser and the Merger Subsidiary
have the capacity and authority to execute and deliver this Agreement, to
perform hereunder and to consummate the transactions contemplated hereby without
the necessity of any act or consent of any other Person whomsoever. The
execution, delivery and performance by the Purchaser and the Merger Subsidiary
of this Agreement and each and every agreement, document and instrument provided
for herein have been duly authorized and approved by the respective Board of
Directors (or Executive Committee thereof pursuant to properly delegated
authority) of the Purchaser and the Merger Subsidiary. This Agreement and each
and every other agreement, document and instrument to be executed, delivered and
performed by the Purchaser or the Merger Subsidiary in connection herewith,
constitute or will, when executed and delivered, constitute the valid and
legally binding obligation of the Purchaser or the Merger Subsidiary (whichever
is applicable) enforceable against it 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.
4.3 Agreement Does Not Violate Other Instruments. The execution and
delivery of this Agreement by the Purchaser and the Merger Subsidiary do not,
and the consummation of the transactions contemplated hereby will not, violate
any provisions of the Certificate of Incorporation, as amended, or Bylaws, as
amended, of the Purchaser or the Merger Subsidiary, or violate or constitute an
occurrence of default under any provision of, or conflict with, result in
acceleration of any obligation under, or give rise to a right by any party to
terminate its obligations under, any mortgage, deed of trust, conveyance to
secure debt, note, loan, lien, lease, agreement, instrument or any order,
judgment, decree or other arrangement to which the Purchaser or the Merger
Subsidiary is a party or is bound or by which it or its assets are affected.
4.4 Capitalization. The authorized capital stock of the Purchaser consists
of 100,000,000 shares of common stock, par value $0.01 per share, 14,908,847
shares of which are issued and outstanding as of the date hereof, and 25,000,000
shares of preferred stock, par value $0.01 per share, none of which is issued
and outstanding as of the date hereof. All of the issued and outstanding shares
of common stock of the Purchaser have been duly authorized and validly issued,
and all such shares are fully paid, nonassessable and free of preemptive rights.
All of the outstanding shares of the Merger Subsidiary are owned by the
Purchaser. Except
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for options covering 795,000 shares of Purchaser Common Stock, as of the date
hereof there are no outstanding options, warrants, calls, commitments or plans
by the Purchaser or the Merger Subsidiary to issue any additional shares of its
capital stock, to pay any dividends on such shares or to purchase, redeem or
retire any outstanding shares of its capital stock, nor are there outstanding
any securities or obligations that are convertible into or exchangeable for any
shares of capital stock of the Purchaser or the Merger Subsidiary.
4.5 HealthPlan Services Corporation Shares. The Purchaser Common Stock
when issued in connection with the Merger will be duly and validly issued, fully
paid and nonassessable and will be issued to the Shareholders in accordance with
the terms of this Agreement free and clear of any preemptive rights or any lien
charge or encumbrance arising through the Purchaser or the Merger Subsidiary.
4.6 Purchaser SEC Documents. The Purchaser has filed with the SEC all
forms, reports, schedules, statements and other documents required to be filed
by it since the date of its initial public offering under the Securities
Exchange Act or the Securities Act (such documents, as supplemented and amended
since the time of filing through the date hereof, collectively, the "Purchaser
SEC Documents"). The Purchaser SEC Documents, including, without limitation, any
financial statements or schedules included therein, at the time filed (and, in
the case of registration statements and proxy statements, on the dates of
effectiveness and the dates of mailing, respectively) (a) did not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading, and (b)
complied in all material respects with the applicable requirements of the
Securities Exchange Act and the Securities Act, as the case may be. The
financial statements of the Purchaser included in the Purchaser SEC Documents at
the time filed (and, in the case of registration statements and proxy
statements, on the dates of effectiveness and the dates of mailing,
respectively) complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC), and fairly present (subject in the case of unaudited statements to
normal, recurring audit adjustments) the consolidated financial position of the
Purchaser as at the dates thereof and the consolidated results of its operations
and cash flows for the periods then ended. Since the date of the most recent
Form 10-Q or Form 10-K of the Purchaser filed with the SEC prior to the date
hereof, no event or series of events has occurred that has resulted or could
reasonably be expected to result in a Purchaser Material Adverse Effect. The
Purchaser has heretofore made available to the Company in the form filed with
the SEC (excluding any exhibits thereto, unless otherwise specifically requested
by the Company), the Purchaser SEC Documents.
4.7 Registration Statement. None of the information provided by the
Purchaser for inclusion in the Registration Statement, including the prospectus
relating to the Purchaser Common Stock to be issued in the Merger and the Proxy
Statement and form of proxy relating to the vote of the Company Shareholders
with respect to the Merger, contained therein, at the time the Registration
Statement becomes effective or, in the case of the Proxy Statement, at the date
of mailing, will contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. Each of the Registration Statement and Proxy Statement,
except for such portions thereof that relate only to the Company, will comply as
to form in all material respects with the provisions of the Securities Act and
Securities Exchange Act.
4.8 Disclosure and Absence of Undisclosed Liabilities. No statement
contained herein or in any certificate, list, Exhibit or other instrument
furnished by the Purchaser or the Merger Subsidiary to the Company, or its
agents, pursuant to the provisions hereof contains or will contain any untrue
statement of any material fact or omits or will omit to state a material fact
necessary in order to make the statements, taken as a whole, contained herein or
therein, in light of the circumstances under which they were made, not
misleading.
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V.
CONDITIONS
5.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
5.1.1 This Agreement and the transactions contemplated hereby shall
have been approved in the manner required by applicable law or by the
applicable regulations of any stock exchange or other regulatory body, as
the case may be, by the holders of the issued and outstanding shares of
capital stock of the Company.
5.1.2 The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
5.1.3 Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the
consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
5.1.4 The Registration Statement shall have become effective and shall
be effective at the Effective Time, and no stop order suspending
effectiveness of the Registration Statement shall have been issued, no
action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, or, to
the knowledge of the Purchaser or the Company, threatened, and all
necessary approvals under state securities laws relating to the issuance or
trading of the Purchaser Common Stock to be issued to the Company
stockholders in connection with the Merger shall have been received.
5.1.5 All consents, authorizations, orders and approvals of (or
filings or registrations with) any governmental commission, board or other
regulatory body required in connection with the execution, delivery and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to
be filed after the Effective Time and except where the failure to have
obtained or made any such consent, authorization, order, approval, filing
or registration would not have a Company Material Adverse Effect or a
Purchaser Material Adverse Effect.
5.1.6 The Purchaser's Common Stock to be issued to the Company
Stockholders in connection with the Merger shall have been approved for
listing on the NYSE, subject only to official notice of issuance.
5.2 Conditions to Obligations of the Purchaser and Merger Subsidiary to
Effect the Merger. All of the obligations of the Purchaser and the Merger
Subsidiary to consummate the transactions contemplated by this Agreement are
contingent upon and subject to the satisfaction, on or before the Closing Date,
of each and every one of the following conditions, all or any of which may be
waived, in whole or in part, by the Purchaser for purposes of consummating such
transactions, but without prejudice to any other right or remedy which the
Purchaser may have hereunder:
5.2.1 Representations True at Closing. The representations and
warranties made by the Company to the Purchaser in this Agreement, the
Schedules contained in the Disclosure Letter or any document or instrument
delivered to the Purchaser hereunder shall be true and correct in all
material respects on the Closing Date with the same force and effect as
though such representations and warranties had been made on and as of such
time, except for changes contemplated by this Agreement; provided, however,
that the failure of any such representations and warranties to be true and
correct in all material respects shall not permit the Purchaser to
terminate this Agreement or not consummate the Merger unless such failure
shall constitute a Company Material Adverse Effect.
5.2.2 Covenants of the Company. The Company shall have duly performed
in all material respects all of the covenants, acts and undertakings to be
performed by it on or prior to the Closing Date, and the
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President of the Company shall deliver to the Purchaser a certificate dated
as of the Closing Date certifying to the fulfillment of this condition and
the condition set forth in Section 5.2.1.
5.2.3 Opinion of Counsel. An opinion of Fredrikson & Byron, P.A.,
counsel for the Company, shall have been delivered to the Purchaser dated
as of the Closing Date, in form and substance acceptable to the Purchaser
and its lenders.
5.2.4 Consents, Approvals, and Waivers. The Purchaser shall have
received a true and correct copy of each and every consent, approval and
waiver required on the part of the Company that is (a) referred to in
Section 2.15 hereof, or (b) otherwise required for the execution of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby; provided, however, that the failure to
deliver any such consents, approvals and waivers shall not permit the
Purchaser to terminate this Agreement or not consummate the Merger unless
such failure shall constitute a Company Material Adverse Effect.
5.2.5 Absence of Adverse Changes. The Company and/or its Subsidiaries
shall not have suffered a Company Material Adverse Event which continues as
of the Effective Time or any series of events which when taken in the
aggregate have a Company Material Adverse Effect which continues as of the
Effective Time and which is not disclosed in a Company SEC Document filed
prior to the date of this Agreement or in the Disclosure Letter.
5.2.6 Employment Agreements. Each individual referenced in Section
2.16 shall, unless disabled or deceased, have executed an Employment
Agreement, substantially in the form required by Section 2.16.
5.2.7 Shareholder Approval/Dissenter's or Statutory Rights. Such
shareholders of the Company as are required by applicable law to have
approved the Merger shall have in fact approved the Merger and Shareholders
holding not more than 5% of the outstanding stock of the Company shall not
have notified the Company that such Shareholders intend to elect nor shall
have taken any other action to perfect any dissenter's or similar statutory
rights under the provisions of any state statute affording such Shareholder
such rights as a result of the Merger.
5.2.8 Company Options. After the Effective Time, no person shall, by
action of the Company taken prior to the Effective Time, have any right to
acquire any equity securities of the Company or any Subsidiary under any
stock option plan (or any option granted thereunder) or other plan, program
or arrangement in existence prior to or triggered by the Effective Time.
5.2.9 Affiliate Undertakings Letters. Each person who may be at the
Effective Time or was on the date of this Agreement an "affiliate" of the
Company for purposes of Rule 145 under the Securities Act, shall have
executed and delivered to the Purchaser at least 35 days prior to the date
of the meeting of the Company Shareholders to approve the Merger the
written undertakings in the form attached hereto as Exhibit 2.28.
5.2.10 Receipt of Tax Opinion. The Company shall have received the
opinion of Fredrikson & Byron, P.A., dated as of the Closing in form and
substance acceptable to the Purchaser, (based upon reasonably requested
representation letters) to the effect that the Merger should be treated as
a tax free reorganization pursuant to the provisions of Section
368(a)(1)(A) and (a)(2)(D) of the Code, and the Company's Shareholders
should recognize no gain on the exchange of their shares, except to the
extent that they receive consideration other than the Per Share Stock
Consideration.
5.2.11 Support/Voting Agreement to Remain In Effect. The
Support/Voting Agreement shall have remained in full force and effect
through the Effective Time.
5.3 Conditions Precedent To The Obligations Of The Company To Close. All
of the obligations of the Company to consummate the transactions contemplated by
this Agreement shall be contingent upon and subject to the satisfaction, on or
before the Closing Date, of each and every one of the following conditions, all
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or any of which may be waived, in whole or in part, by the Company for purposes
of consummating such transactions, but without prejudice to any other right or
remedy which they may have hereunder:
5.3.1 Representations True at Closing. The representations and
warranties made by the Purchaser and the Merger Subsidiary to the Company
in this Agreement or any document or instrument delivered to the Company
hereunder shall be true and correct in all material respects on the Closing
Date with the same force and effect as though such representations and
warranties had been made on and as of such date, except for changes
contemplated by this Agreement; provided, however, that the failure of any
such representation and warranties to be true and correct in all material
respects shall not permit the Company to terminate this Agreement or not
consummate the Merger unless such failure shall constitute a Purchaser
Material Adverse Effect.
5.3.2 Covenants of the Purchaser. The Purchaser and the Merger
Subsidiary shall have duly performed in all material respects all of the
covenants, acts and undertakings to be performed by it on or prior to the
Closing Date, and a duly authorized officer of the Purchaser shall deliver
a certificate dated as of the Closing Date certifying to the fulfillment of
this condition and the condition set forth under Section 5.3.1 above.
5.3.3 Opinion of Counsel. An opinion of Fowler, White, Gillen, Boggs,
Villareal & Banker, P.A., counsel for the Purchaser and Merger Subsidiary,
shall have been delivered to the Company dated as of the Closing Date,
substantially in form and substance acceptable to the Company.
5.3.4 Receipt by Shareholders of Tax Opinion. The Company shall have
received the opinion of Fredrikson & Byron, P.A., dated as of the Closing
in form and substance acceptable to the Company, (based upon reasonably
requested representation letters) to the effect that the Merger should be
treated as a tax free reorganization pursuant to the provisions of Section
368(a)(1)(A) and (a)(2)(D), and the Company's Shareholders should recognize
no gain on the exchange of their shares, except to the extent that they
receive Consideration other than the Per Share Stock Consideration.
5.3.5 Absence of Adverse Changes. The Purchaser shall not have
suffered a Purchaser Material Adverse Event which continues as of the
Effective Time or any series of events which when taken in the aggregate
have a Purchaser Material Adverse Effect which continues as of the
Effective Time and which is not disclosed in a Purchaser SEC Document filed
prior to the date of this Agreement.
5.3.6 Election of Directors. The Purchaser and/or the Merger
Subsidiary shall have taken such action as is necessary to elect Robert L.
Montgomery, Raymond G. Schultze, M.D., and Gary L. Damkoehler as directors
of the Surviving Corporation following the Merger and Gary L. McIlroy,
M.D., as a director of Purchaser following the Closing.
VI.
CLOSING
6.1 Time and Place of Closing. The Closing shall be held at the offices of
Fowler, White, Gillen, Boggs, Villareal & Banker P.A., 501 East Kennedy Blvd.,
Tampa, Florida, commencing at 10:00 a.m. Eastern Daylight Time, on the third
business day after the last to be fulfilled or waived of the conditions set
forth in Article V shall be fulfilled or waived in accordance with the
provisions hereof but in no event earlier than January 1, 1997, or such other
date, time and place as the parties shall mutually agree.
6.2 Transactions at Closing. At the Closing, each of the parties shall
deliver to the others such certificates and other documents as called for by the
terms of this Agreement or as otherwise reasonably requested by such parties and
their respective counsel. At the Closing, the Purchaser shall cause to be paid
the transactional fees and expenses of the Company, including but not limited to
the amount payable to the Company's financial advisor and the Company's
reasonable legal and accounting fees and expenses.
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VII.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES, AGREEMENTS AND COVENANTS AFTER
CLOSING
7.1 Survival of Representations and Warranties. All representations and
warranties of the parties in this Agreement or in any document or instrument
executed and delivered pursuant hereto, are only conditions to the Closing of
the transactions contemplated hereby and shall not survive the Closing
hereunder.
7.2 Survival of Agreements and Covenants. All agreements, covenants and
obligations made or undertaken by the parties in this Agreement that require
performance on or before the Closing Date shall be deemed to have been performed
or waived upon Closing, if Closing occurs, and shall not survive the Closing.
The foregoing notwithstanding, the provisions of the Certificate of Merger and
Articles of Merger, the Employment Agreements, the Affiliate Undertakings
Letters and the Legal Opinions delivered at Closing, and the agreements,
covenants and obligations contained herein that anticipate or require actions
following the Closing, shall survive the Closing for the term set forth therein
or herein.
VIII.
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the Stockholders of the Purchaser or the
Company, by the mutual consent of the Purchaser and the Company.
8.2 Termination by Either Purchaser or Company. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either the Purchaser or the Company if (a) the Merger shall not have been
consummated by January 31, 1997, or (b) the approval of the Company's
Shareholders required by Section 5.1.1 shall not have been obtained at a meeting
duly convened therefor or at any adjournment thereof, or (c) a United States
federal or state court of competent jurisdiction or United States federal or
state governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement and such order, decree, ruling, or other action shall have become
final and non-appealable; provided that the party seeking to terminate this
Agreement pursuant to this clause (c) shall have used all reasonable efforts to
remove such injunction, order or decree; and provided, in the case of a
termination pursuant to clause (a) above, that the terminating party shall not
have breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the failure to consummate
the Merger by January 31, 1997.
8.3 Termination by Company. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the shareholders of the Company referred to in
Section 8.2(b), by action of the Board of Directors of the Company, if (a) in
the exercise of its good faith judgment as to fiduciary duties to its
shareholders imposed by law, as advised by outside counsel, the Board of
Directors of the Company determines that such termination is required by reason
of an Alternative Proposal being made; provided that the Company shall notify
the Purchaser promptly of its intention to terminate this Agreement or enter
into a definitive agreement with respect to any Alternative Proposal; or (b)
there has been a breach by the Purchaser of any representation or warranty
contained in this Agreement which would have or would be reasonably likely to
have a Purchaser Material Adverse Effect; or (c) there has been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the Purchaser, which breach is not curable or, if curable, is not cured
within 30 days after written notice of such breach is given by the Company to
the Purchaser. Notwithstanding the foregoing, the Company's ability to terminate
this Agreement pursuant to Section 8.2 or this Section 8.3 is conditioned upon
the payment by the Company of any amounts owed by it pursuant to Section
8.5(a)(i) within 10 days after the date of termination.
8.4 Termination by Purchaser. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the approval by the shareholders of the Company
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referred to in Section 8.2(b), by action of the Board of Directors of the
Purchaser, if (a) the Board of Directors of the Company shall have withdrawn or
modified in a manner materially adverse to the Purchaser its approval or
recommendation of this Agreement or the Merger or shall have recommended an
Alternative Proposal to the Company stockholders, or (b) there has been a breach
by the Company of any representation or warranty contained in this Agreement
which would have or would be reasonably likely to have a Company Material
Adverse Effect, or (c) there has been a material breach of any of the covenants
or agreements set forth in this Agreement on the part of the Company, which
breach is not curable or, if curable, is not cured within 30 days after written
notice of such breach is given by the Purchaser to the Company.
8.5 Effect of Termination and Abandonment.
(a) In the event that any person shall have made an Alternative
Proposal for the Company and thereafter (i) this Agreement is terminated by
the Company pursuant to Section 8.3(a), or by the Purchaser pursuant to
Section 8.4(a) or (ii) this Agreement is terminated by the Company for any
other reason (other than (A) as permitted by Section 8.2(c), (B) the
occurrence of a Purchaser Material Adverse Event, (C) pursuant to Section
8.2(a) because of (x) the failure of a condition in Section 5.3 (other than
the condition set forth in Section 5.3.4, unless the failure of such
condition is caused by the failure of the Company's counsel to receive
reasonably requested representation letters from Purchaser), (y) the
failure of a condition in Section 5.1, other than the condition set forth
in Section 5.1.1, which is not caused by a failure of the Company to
respond to any inquiry of the Justice Department or to file its portion of
the HSR Notice or (D) pursuant to 8.2(b) if, at the time of the Shareholder
meeting there is not then pending and publicly announced an Alternative
Proposal and the Company has fulfilled all of its covenants with respect to
the calling of such meeting, has not withdrawn its endorsement and
recommendation of the transactions contemplated hereby and has actively
solicited approval of the transactions contemplated hereby at and prior to
such meeting) and, in the case of this clause (ii) only, a definitive
agreement with respect to such Alternative Proposal is executed within one
year after such termination, then the Company shall pay the Purchaser the
sum of $1,000,000 which amount shall be payable by wire transfer of same
day funds either on the date contemplated in the last sentence of Section
8.3 if applicable or, otherwise, within two business days after such amount
becomes due if under clause (ii) above plus an additional payment of the
sum of $3,000,000 upon the tenth day following consummation of a
transaction with the person making the Alternative Proposal or an affiliate
thereof giving rise to the initial $1,000,000 termination payment. The
Company acknowledges that the agreements contained in this Section 8.5(a)
are an integral part of the transactions contemplated in this Agreement,
and that, without these agreements, the Purchaser would not enter into this
Agreement; accordingly, if the Company fails to promptly pay the amount due
pursuant to this Section 8.5(a), and, in order to obtain such payment, the
Purchaser commences a suit which results in a judgment against the Company
for the fee set forth in this Section 8.5(a), the Company shall pay to the
Purchaser its costs and expenses (including reasonable attorneys' fees) in
connection with such suit, together with interest on the amount of the fee
at the rate of 12% per annum.
(b) In the event of termination of this Agreement and the abandonment
of the Merger pursuant to this Article VIII, all obligations of the parties
hereto shall terminate, except the obligations of the parties pursuant to
this Section 8.5 and except for the provisions of Article IX. Moreover, in
the event of termination of this Agreement pursuant to Section 8.3 or 8.4
(except in the event that the termination payment described in Section
8.5(a) is payable), nothing herein shall prejudice the ability of the non-
breaching party from seeking damages from any other party for any willful
and knowing material breach of this Agreement, including without
limitation, attorneys' fees and the right to pursue any remedy at law or in
equity.
8.6 Extension, Waiver. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
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agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
IX.
GENERAL PROVISIONS
9.1 Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be delivered by hand or mailed by
certified mail, return receipt requested, first class postage prepaid, or sent
by Federal Express or similarly recognized national overnight delivery service
with receipt acknowledged, addressed as follows:
9.1.1 If to the Company:
Health Risk Management, Inc.
8000 West 78th Street
Minneapolis, Minnesota 55439
Attn: Chief Executive Officer
and to:
Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
Attn: David C. Grorud, Esq.
9.1.2 If to Purchaser or Merger Subsidiary:
HealthPlan Services Corporation
3501 Frontage Road
Tampa, Florida 33607
Attn: President
and to:
Fowler, White, Gillen, Boggs,
Villareal and Banker, P.A.
501 East Kennedy Blvd., Suite 1700
Tampa, FL 33602
Attn: David C. Shobe, Esq.
9.1.3 If delivered personally, the date on which a notice, request,
instruction or document is delivered shall be the date on which such
delivery is made and, if delivered by mail or by overnight delivery
service, the date on which such notice, request, instruction or document is
received shall be the date of delivery. In the event any such notice,
request, instruction or document is mailed or shipped by overnight delivery
service to a party in accordance with this Section 10.1 and is returned to
the sender as nondeliverable, then such notice, request, instruction or
document shall be deemed to have been delivered or received on the fifth
day following the deposit of such notice, request, instruction or document
in the United States mail or the delivery to the overnight delivery
service.
9.1.4 Any party hereto may change its address specified for notices
herein by designating a new address by notice in accordance with this
Section 9.1.
9.2 Brokers. The Purchaser represents and warrants to the Company, and the
Company represents and warrants to the Purchaser that no broker or finder has
acted for it or them or any entity controlling, controlled by or under common
control with it or them in connection with this Agreement other than Bear
Stearns, which has acted as the Purchaser's broker, and Robertson, Stephens &
Company LLC, which has acted as the Company's advisor. The Purchaser agrees to
indemnify and hold harmless the Company against any fee, loss
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or expense arising out of any claim by any broker or finder employed or alleged
to have been employed by it, including the fees of Bear Stearns, and the Company
agrees to indemnify and hold harmless the Purchaser against any fee, loss, or
expense arising out of any claim by any broker or finder employed or alleged to
have been employed by it, including the fees of Robertson, Stephens & Company
LLC.
9.3 Waiver. Any failure on the part of any party hereto to comply with any
of its obligations, agreements or conditions hereunder may be waived by any
other party to whom such compliance is owed. No waiver of any provision of this
Agreement shall be deemed, or shall constitute, a waiver of any other provision,
whether or not similar, nor shall any waiver constitute a continuing waiver.
9.4 Expenses. Except as otherwise provided herein, all costs incurred by
the parties hereto in connection with or related to the authorization,
preparation and execution of this Agreement and the Closing of the transactions
contemplated hereby, including, without limitation of the generality of the
foregoing, all fees and expenses of agents, representatives, counsel and
accountants employed by any such party, shall be borne solely and entirely by
the party which has incurred the same; provided, however, that the Purchaser
shall be responsible for and shall promptly pay the fees and expenses incurred
by the Company if the transactions contemplated by this Agreement are not
consummated, because the Company terminates this Agreement pursuant to Section
8.2(a) because of the failure of a condition set forth in Section 5.3.1, 5.3.2
or 5.3.5 hereof when no Alternative Proposal is outstanding, or Section 8.3(b)
or (c) when no Alternative Proposal is outstanding.
9.5 Public Announcements. At all times at or before the Closing, the
Company, on the one hand, and the Purchaser, on the other hand, will consult
with one another before issuing or making any reports, statements, or releases
to the public with respect to this Agreement or the transactions contemplated
hereby and will use good faith efforts to agree on the text of a joint public
report, statement, or release or will use good faith efforts to obtain the other
parties' approval of the text of any public report, statement, or release to be
made solely on behalf of a party. If such parties are unable to agree on or
approve any such public report, statement, or release and such report,
statement, or release is, based on the advice of legal counsel to a party,
required by law or appropriate to discharge such party's disclosure obligations,
then such party may make or issue the legally required or appropriate report,
statement, or release upon prior notice to the other parties hereto.
9.6 Confidentiality. (a) The Company, its respective officers, directors,
employees, agents, and other representatives, will refrain from disclosing to
any other Person (i) any documents or information concerning the Purchaser or
its Affiliates furnished to it in connection with this Agreement or the
transactions contemplated hereby, and (ii) any documents or information
concerning the Company, unless (A) such disclosure is compelled by judicial or
administrative process or by other requirements of law and notice of such
disclosure is furnished to the Purchaser; or (B) such confidential documents or
information can be shown to have been (x) previously known by the Person
receiving such documents or information, or (y) in the public domain through no
fault of such Persons. If for any reason the contemplated Merger is not
consummated, the Purchaser and the Company agree that they will return any and
all such confidential information provided by any of them to the other party so
providing such information.
(b) The Purchaser, its respective officers, directors, employees, agents,
and other representatives, will refrain from disclosing to any other Person (i)
any documents or information concerning the Company or its Affiliates furnished
to it in connection with this Agreement or the transactions contemplated hereby,
and (ii) any documents or information concerning the Purchaser, unless (A) such
disclosure is compelled by judicial or administrative process or by other
requirements of law and notice of such disclosure is furnished to the Company;
or (B) such confidential documents or information can be shown to have been (x)
previously known by the Person receiving such documents or information, or (y)
in the public domain through no fault of such Persons. If for any reason the
contemplated Merger is not consummated, the Company and the Purchaser agree that
they will return any and all such confidential information provided by any of
them to the other party so providing such information.
9.7 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
executors, administrators, successors and assigns. The officers
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and directors of the Company shall be third-party beneficiaries of this
Agreement with respect to the provisions of Section 2.24 hereof, the employees
of the Company as of the Effective Time shall be third-party beneficiaries of
this Agreement with respect to the provisions of Section 2.19 hereof, and the
holders of Company Options shall be third-party beneficiaries of this Agreement
with respect to the provisions of Section 2.5 hereof, in each case with the
right to enforce such provisions of this Agreement, and no amendment to this
Agreement shall affect any such third-party beneficiary not agreeing thereto in
writing.
9.8 Headings; Construction. The section and other headings in this
Agreement are inserted solely as a matter of convenience and for reference, and
are not a part of this Agreement. The Company may, at its option and for
purposes of convenience or otherwise, include in its Schedules to this Agreement
items that are not material, and such inclusion shall not be an agreement or
admission by the Company that such items are material or be otherwise used to
interpret the meaning of such term for purposes of this Agreement and the
transactions contemplated herein.
9.9 Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto and supersedes and cancels any prior agreements,
representations, warranties, or communications, whether oral or written, among
the parties hereto relating to the transactions contemplated hereby or the
subject matter herein. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally, but only by an agreement in
writing signed by the party against whom or which the enforcement of such
change, waiver, discharge or termination is sought.
9.10 Governing Law; Forum. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware (regardless of the laws
that might be applicable under principles of conflicts of law) as to all matters
including, but not limited to, matters of validity, construction, effect and
performance. The venue for any suit or other action or proceeding brought
pursuant to or in connection with this Agreement shall be the County of
Hennepin, State of Minnesota, and the parties hereto consent to the jurisdiction
of the state and federal courts located therein.
9.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.12 Pronouns. All pronouns used herein shall be deemed to refer to the
masculine, feminine or neuter gender as the context requires.
9.13 Exhibits Incorporated. All Exhibits attached hereto are incorporated
herein by reference, and all blanks in such Exhibits, if any, will be filled in
as required in order to consummate the transactions contemplated herein and in
accordance with this Agreement.
9.14 Time of Essence. Time is of the essence in this Agreement.
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IN WITNESS WHEREOF, each party hereto has executed or caused this Agreement
to be executed on its behalf, all on the day and year first above written.
HEALTHPLAN SERVICES CORPORATION
/s/ PHILLIP S. DINGLE
--------------------------------------
By: Phillip S. Dingle
Title: Senior Vice President
HEALTH RISK MANAGEMENT, INC.
/s/ GARY T. MCILROY
--------------------------------------
By: Gary T. McIlroy
Title: Chairman of the Board and Chief
Executive Officer
HEALTHPLAN SERVICES ALPHA CORPORATION
/s/ JAMES K. MURRAY, III
--------------------------------------
By: James K. Murray, III
Title: Executive Vice President
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EXHIBIT 1.1 TO PLAN AND AGREEMENT OF MERGER
DEFINED TERMS
As used herein, the following terms shall have the following meanings
unless the context otherwise requires:
1. "Acts" shall mean the Delaware General Corporation Law and the Minnesota
Business Corporation Act.
2. "Affiliate" shall mean, with respect to a Person, any other Person which
is required to be aggregated with such Person under Code sec. 414(b), (c), (m)
and/or (o) at any time prior to the Closing Date.
3. "Affiliate Undertakings Letter" shall have the meaning ascribed thereto
in Section 2.28 hereof.
4. "Agreement" shall mean this Plan and Agreement of Merger.
5. "Alternative Proposal" shall have the meaning ascribed thereto in
Section 2.27.
6. "Benefit Plans" shall have the meaning set forth in Section 3.18.
7. "Certificates" shall have the meaning ascribed thereto in Section 2.4.2.
8. "Closing" shall mean the consummation of the transactions provided for
in this Agreement.
9. "Closing Date" shall mean the date on which the Closing occurs pursuant
to Section 6.1 hereof.
10. "Code" shall mean the Internal Revenue Code of 1986, as amended.
11. "Company" shall mean Health Risk Management, Inc., a Minnesota
corporation, and unless otherwise specified, shall be deemed to include all of
its Subsidiaries.
12. "Company Common Stock" shall mean the common stock of the Company.
13. "Company Material Adverse Effect" shall mean a material adverse effect
on the business, prospects, results of operation or condition (financial or
otherwise) of the Company and its Subsidiaries, taken as a whole, or on the
ability of the Company to consummate the transactions contemplated hereby,
provided that the following shall not be considered as a material adverse
effect: (i) changes relating to the economy in general or to the Company's
industry in general, (ii) changes relating to cancellations, terminations or
nonrenewals by Company customers, employees, representatives or others having
similar relationships with the Company, that occur from and after the date of
announcement of the transactions contemplated by this Agreement unless such
cancellations, terminations or nonrenewals are attributable to factors other
than the transactions contemplated hereby such as but not limited to loss of a
material customer through the normal bid process.
14. "Company Material Adverse Event" shall mean an event which causes a
Company Material Adverse Effect.
15. "Company Option" shall mean the options to purchase Company Common
Stock which are outstanding prior to the Effective Time pursuant to Section 2.5
hereof.
16. "Company SEC Documents" shall have the meaning ascribed thereto in
Section 3.5.
17. "Company Shareholders" or "Shareholders" shall mean the shareholders of
the Company at the Effective Time, each of which may be referred to individually
as a "Shareholder."
18. "Company Shares" shall mean shares of Company Common Stock.
19. "Company Software" shall have the meaning set forth in Section
3.15.2(iii).
20. "Disclosure Letter" shall mean the letter delivered to the Purchaser by
the Company simultaneously with the execution of this Agreement containing
certain requested disclosures concerning the Company.
21. "Dissenting Shares" shall have the meaning set forth in Section
2.3.1.6.
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22. "Effective Time" shall have the meaning set forth in Section 2.2
hereof.
23. "Employees" shall have the meaning set forth in Section 2.19.2.
24. "Employment Agreements" shall mean those Employment Agreements
referenced in Section 2.16, each of which may be referred to individually as an
"Employment Agreement."
25. "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
26. "ERISA Plan" shall have the meaning set forth in Section 3.18.
27. "Exchange Agent" shall mean First Union National Bank of North Carolina
or such other exchange agent as shall be designated by the Purchaser.
28. "Exchange Fund" shall have the meaning specified in Section 2.4.1
hereof.
29. "GAAP" shall mean Generally Accepted Accounting Principles formulated
by the American Institute of Certified Public Accountants as in effect from time
to time during the term of this Agreement.
30. "Hazardous Substance" shall have the meaning set forth in Section 3.20.
31. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act
of 1978, as amended.
32. "IRS" shall mean the United States Internal Revenue Service.
33. "Licensed Software" shall have the meaning set forth in Section
3.15.2(ii).
34. "Market Price" shall mean the weighted (by the daily trading volume)
average closing price of the Purchaser Common Stock on the New York Stock
Exchange Composite Tape for the five full trading days ending on the last full
trading day immediately prior to the Effective Time.
35. "Merger" shall mean the merger of the Company with and into the Merger
Subsidiary.
36. "Merger Subsidiary" shall mean HealthPlan Services Alpha Corporation, a
Delaware corporation.
37. "Merger Subsidiary Common Stock" shall mean the common stock of the
Merger Subsidiary.
38. "Merger Subsidiary Shares" shall mean shares of Merger Subsidiary
Common Stock.
39. "Owned Software" shall have the meaning set forth in Section 3.15.2(i).
40. "PBGC" shall mean the Pension Benefit Guaranty Corporation.
41. "Per Share Cash Consideration" shall mean an amount of cash equal to
$9.68603.
42. "Per Share Stock Consideration" shall mean 0.360208 shares of Purchaser
Common Stock; provided, however, that (i) if the Market Price is less than
$17.93, then the Per Share Stock Consideration shall be equal to 0.360208
multiplied by a fraction, the numerator of which is $17.93 and the denominator
of which is the Market Price, and (ii) if the Market Price is greater than
$30.00, then the Per Share Stock Consideration shall be equal to 0.360208
multiplied by a fraction, the numerator of which is $30.00 and the denominator
of which is the Market Price.
43. "Permitted Liens" means
(a) liens for taxes, assessments and other governmental charges or
levies (excluding any lien imposed pursuant to any of the provisions of
ERISA or environmental laws) not yet due or as to which the period of grace
(not to exceed thirty (30) days), if any, related thereto has not expired
or which are being contested in good faith and by appropriate proceedings
if adequate reserves are maintained to the extent required by GAAP;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals incurred
in the ordinary course of business (i) which are not overdue for a period
of more than thirty (30) days or (ii) which are being contested in good
faith and by appropriate proceedings;
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(c) liens consisting of deposits or pledges made in the ordinary
course of business in connection with, or to secure payment of, obligations
under workers' compensation, unemployment insurance or similar claims or to
secure the performance of tenders, bids, contracts, statutory obligations
and other similar obligations incurred in the ordinary course of business;
(d) liens constituting encumbrances in the nature of zoning
restrictions, easements, and rights or restrictions of record on the use of
real property, which in the aggregate are not substantial in amount and
which do not, in any case, materially detract from the value of such
property or impair the use thereof in the ordinary conduct of business; and
(e) extensions, renewals or replacements of any lien disclosed in the
Agreement or in the Disclosure Letter.
44. "Person" shall include, but is not limited to, an individual, a trust,
an estate, a partnership, an association, a company, a corporation, a limited
liability company, a sole proprietorship, a professional corporation or a
professional association.
45. "Plan Transfer Date" shall have the meaning set forth in Section
2.19.1.
46. "Product Liability" shall have the meaning ascribed thereto in Section
3.16.
47. "Proxy Statement/Prospectus" shall have the meaning ascribed thereto in
Section 2.26.
48. "Purchaser" shall mean HealthPlan Services Corporation, a Delaware
corporation.
49. "Purchaser Common Stock" shall mean the common stock of the Purchaser.
50. "Purchaser Material Adverse Effect" shall mean a material adverse
effect on the business, prospects, results of operation or condition (financial
or otherwise) of the Purchaser and its Subsidiaries, taken as a whole, provided
that changes relating to the economy in general or to the Purchaser's industry
in general shall not be considered as a material adverse effect.
51. "Purchaser Material Adverse Event" shall mean an event which causes a
Purchaser Material Adverse Effect.
52. "Purchaser SEC Documents" shall have the meaning ascribed thereto in
Section 4.6.
53. "Real Property" shall have the meaning set forth in Section 3.20.
54. "Registration Statement" shall have the meaning set forth in Section
2.26.
55. "Schedule" shall mean the schedules contained in the Disclosure Letter.
56. "SEC" shall mean the Securities and Exchange Commission.
57. "Securities Act" shall mean the Securities Act of 1933, as amended.
58. "Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
59. "Subsidiary" shall mean any entity, the controlling interest in which
is owned either directly or indirectly by the Company or the Purchaser, as
applicable.
60. "Surviving Corporation" shall have the meaning set forth in Section 2.1
hereof.
61. "Surviving Corporation Common Stock" shall mean common stock of the
Surviving Corporation.
62. "Surviving Corporation Shares" shall mean shares of Surviving
Corporation Common Stock.
63. "Tax Return" or "Return" shall mean any report, return, statement or
other written information required to be supplied to a taxing authority in
connection with Taxes.
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64. "Taxes" or "Tax" shall mean all taxes, charges, fees, levies, or other
similar assessments or liabilities including without limitation income, gross
receipts, inventory, ad valorem, excise, real property, personal property,
sales, use, transfer, withholding, deed, license, employment, payroll, and
franchise taxes imposed by any governmental authority (including any interest,
fines, penalties, or additions attributable to any such tax or any contest or
dispute thereof).
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FIRST AMENDMENT TO PLAN AND AGREEMENT OF MERGER
THIS FIRST AMENDMENT TO PLAN AND AGREEMENT OF MERGER (the "Agreement"),
made this 12th day of November, 1996, is entered into by and among HealthPlan
Services Corporation, a Delaware corporation (hereinafter referred to as the
"Purchaser"), HealthPlan Services Alpha Corporation, a Delaware corporation (the
"Merger Subsidiary"), and Health Risk Management, Inc., a Minnesota corporation
(the "Company").
WITNESSETH:
WHEREAS, pursuant to the terms of that certain Plan and Agreement of Merger
dated September 12, 1996 (the "Merger Agreement"), the respective Boards of
Directors of the Purchaser and the Company have approved the merger (the
"Merger") of the Company with and into the Merger Subsidiary in accordance with
the Delaware General Corporation Law and the Minnesota Business Corporation Act,
with the effect that the Company will become a wholly-owned subsidiary of the
Purchaser; and
WHEREAS, the parties hereto have agreed to modify the Merger Agreement to
extend the date at which the Merger Agreement may be terminated and the Merger
may be abandoned if the Merger shall not have been consummated by such date,
from January 31, 1997, to February 28, 1997.
NOW, THEREFORE, in consideration of the premises and the mutual promises,
representations, warranties and covenants hereinafter set forth, the parties
hereto agree as follows:
Section 8.2 of the Merger Agreement is hereby amended by deleting it in its
entirety and substituting in its place the following:
"8.2 Termination by Either Purchaser or Company. This Agreement may
be terminated and the Merger may be abandoned by action of the Board of
Directors of either the Purchaser or the Company if (a) the Merger shall
not have been consummated by February 28, 1997, or (b) the approval of the
Company's Shareholders required by Section 5.1.1 shall not have been
obtained at a meeting duly convened therefor or at any adjournment thereof,
or (c) a United States federal or state court of competent jurisdiction or
United States federal or state governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken
any other action permanently restraining, enjoining or otherwise
prohibiting the transactions contemplated by this Agreement and such order,
decree, ruling, or other action shall have become final and non-appealable;
provided that the party seeking to terminate this Agreement pursuant to
this clause (c) shall have used all reasonable efforts to remove such
injunction, order or decree; and provided, in the case of a termination
pursuant to clause (a) above, that the terminating party shall not have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the failure to
consummate the Merger by February 28, 1997."
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IN WITNESS WHEREOF, each party hereto has executed or caused this Agreement
to be executed on its behalf, all on the day and year first above written.
HEALTHPLAN SERVICES CORPORATION
/s/ James K. Murray, III
--------------------------------------
"PURCHASER"
By: James K. Murray, III
Title: Executive Vice President
HEALTH RISK MANAGEMENT, INC.
/s/ Gary T. McIlroy
--------------------------------------
"COMPANY"
By: Gary T. McIlroy
Title: Chairman of the Board and
Chief Financial Officer
HEALTHPLAN SERVICES ALPHA
CORPORATION
/s/ James K. Murray, III
--------------------------------------
"MERGER SUBSIDIARY"
By: James K. Murray, III
Title: Executive Vice President
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ANNEX B
[ROBERTSON STEPHENS & COMPANY LETTERHEAD]
September 11, 1996
PERSONAL & CONFIDENTIAL
Board of Directors
Health Risk Management, Inc.
8000 West 78th Street
Minneapolis, MN 55439
Members of the Board:
You have asked our opinion with respect to the fairness to the shareholders of
Health Risk Management, Inc. ("HRM" or the "Company"), from a financial point of
view and as of the date hereof, of the Consideration (as defined below) to be
received by the shareholders of HRM in connection with the proposed merger of
HRM with HealthPlan Services Corporation ("HPS"), pursuant to the draft Plan and
Agreement of Merger, dated as of September 10, 1996 (the "Draft Agreement").
Under the terms of the Draft Agreement, HRM shall be merged with and into a
subsidiary of HPS (the "Proposed Merger"). In the Proposed Merger, each
outstanding share of the common stock of the Company shall be converted into the
right to receive $9.68603 in cash (the "Cash Consideration") and 0.360208 shares
of common stock of HPS (the "Stock Consideration," and together with the Cash
Consideration, the "Consideration"), subject to certain adjustments to the
amount of the Stock Consideration based upon the market price of HPS common
stock. We understand that the Proposed Merger is intended to be accounted for as
a purchase and to qualify as a tax-free reorganization for federal income tax
purposes. The terms and conditions of the Proposed Merger are set out more fully
in the Draft Agreement.
For purposes of this opinion we have: (i) reviewed financial information on HRM
and HPS furnished to us by both companies, including certain internal financial
analyses and forecasts prepared by the managements of HRM and HPS; (ii) reviewed
publicly available information relating to HRM and HPS; (iii) held discussions
with the managements of HRM and HPS concerning the businesses, past and current
business operations, financial condition and future prospects of both companies,
independently and combined, including certain information provided by the
management of HPS concerning potential cost savings and synergies that could
result from the Proposed Merger; (iv) reviewed the Draft Agreement; (v) reviewed
the stock price and trading histories of both companies; (vi) reviewed the
contribution by each company to pro forma combined revenue, gross income,
earnings before interest and taxes, and net income; (vii) reviewed the
valuations of publicly-traded companies which we deemed comparable to HRM;
(viii) compared the financial terms of the Proposed Merger with other
transactions which we deemed relevant; and (ix) made such other studies and
inquiries, and reviewed such other data, as we deemed relevant.
In connection with our opinion, we have assumed and relied upon, without
independent verification, the accuracy and completeness of all
publicly-available information we reviewed and all other information furnished
(or made available) to us by or on behalf of HRM and HPS or otherwise used by us
in connection with our opinion. Furthermore, we did not obtain any independent
appraisal of the properties or assets or liabilities (contingent or otherwise)
of HRM or HPS, nor were we furnished with any such evaluations or appraisals.
With respect to the financial and operating forecasts (and the assumptions and
bases therefor) of HRM and HPS which we have reviewed, we have assumed that such
forecasts have been reasonably prepared in good faith on the basis of reasonable
assumptions, reflect the best available estimates and judgments of such
managements and that such projections and forecasts will be realized in the
amounts and in the time periods currently estimated by the managements of HRM
and HPS. In addition, we have relied upon estimates and
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judgments of the managements of HRM and HPS as to the future financial
performance of both companies. Further, we have assumed that the historical
financial statements of HRM and HPS that we have reviewed have been prepared and
presented in accordance with generally accepted accounting principles ("GAAP").
In addition, we have assumed that the Proposed Merger will be consummated upon
the terms set forth in the Draft Agreement without material alteration. While we
believe that our review, as described within, is an adequate basis for the
opinion that we express, this opinion is necessarily based upon market,
economic, and other conditions that exist and can be evaluated as of the date of
this letter, and on information available to us as of the date hereof.
Our opinion is limited to the fairness, from a financial point of view and as of
the date hereof, of the Consideration to be received by the shareholders of HRM
in connection with the Proposed Merger. We do not express any opinion regarding
the fairness of the Proposed Merger to HPS or to its shareholders. We do not
express any opinion as to the value of the HPS common stock at the time it is
issued to the shareholders of HRM pursuant to the Proposed Merger or the price
at which the HPS common stock will be traded at any time after the date hereof.
In this regard, we note that Noel Group, Inc. currently holds approximately 37%
of the outstanding shares of HPS common stock and has announced its intention to
adopt a plan of liquidation that may involve the sale or distribution of such
shares. We do not express any opinion as to the nature or timing of this
proposed liquidation or the potential effect that such liquidation (or any
subsequent or related transactions) might have on the trading price of HPS
common stock prior to or after the Proposed Merger.
Robertson, Stephens & Company may, from time to time, trade in the securities of
HRM and HPS for our own account and for the accounts of our customers and,
accordingly, may at any time hold long or short positions in such securities.
Furthermore, Robertson, Stephens & Company will receive a fee in connection with
the rendering of this opinion.
Our opinion is directed to the Board of Directors of the Company and is not
intended to be and does not constitute a recommendation to any stockholder of
the Company as to how such stockholder should vote on the Proposed Merger. We
hereby consent, however, to the inclusion of this opinion as an exhibit to any
proxy or registration statement distributed in connection with the Proposed
Merger.
Based upon and subject to the foregoing considerations, it is our opinion, as
investment bankers, that, as of the date hereof, the Consideration to be
received by the shareholders of HRM in connection with the Proposed Merger is
fair from a financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY LLC
By: ROBERTSON, STEPHENS & COMPANY
GROUP, L.L.C.
/s/ WILLIAM S. WISIALOWSKI
--------------------------------------
Authorized Signatory
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ANNEX C
MINNESOTA BUSINESS CORPORATION ACT
302A.471. RIGHTS OF DISSENTING SHAREHOLDERS
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation not made in
the usual or regular course of its business, but not including a
disposition in dissolution described in section 302A.725, subdivision 2, or
a disposition pursuant to an order of a court, or a disposition for cash on
terms requiring that all or substantially all of the net proceeds of
disposition be distributed to the shareholders in accordance with their
respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to vote on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
SUBD. 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert dissenters'
rights as to less than all of the shares registered in the name of the
shareholder, unless the shareholder dissents with respect to all the shares that
are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBD. 3. RIGHTS NOT TO APPLY. Unless the articles, the bylaws, or a
resolution approved by the board otherwise provide, the right to obtain payment
under this section does not apply to a shareholder of the surviving corporation
in a merger, if the shares of the shareholder are not entitled to be voted on
the merger.
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SUBD. 4. OTHER RIGHTS. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
302A.473. PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBD. 2. NOTICE OF ACTION. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
SUBD. 3. NOTICE OF DISSENT. If the proposed action must be approved by the
shareholders, a shareholder who wishes to exercise dissenters' rights must file
with the corporation before the vote on the proposed action a written notice of
intent to demand the fair value of the shares owned by the shareholder and must
not vote the shares in favor of the proposed action.
SUBD. 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the proposed
action has been approved by the board and, if necessary, the shareholders, the
corporation shall send to all shareholders who have complied with subdivision 3
and to all shareholders entitled to dissent if no shareholder vote was required,
a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBD. 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action takes
effect, or after the corporation receives a valid demand for payment, whichever
is later, the corporation shall remit to each dissenting shareholder who has
complied with subdivisions 3 and 4 the amount the corporation estimates to be
the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
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(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBD. 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
SUBD. 7. PETITION; DETERMINATION. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
SUBD. 8. COSTS; FEES; EXPENSES. (a) The court shall determine the costs
and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
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(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware (the "General
Corporation Law") grants each corporation organized thereunder the power to
indemnify its officers, directors, employees and agents on certain conditions
against liabilities arising out of any action or proceeding to which any of them
is a party by reason of being such officer, director, employee or agent. Section
102(b)(7) of the General Corporation Law permits a Delaware corporation, with
the approval of its stockholders, to include within its certificate of
incorporation a provision eliminating or limiting the personal liability of its
directors to such corporation or its stockholders for monetary damages resulting
from certain breaches of the directors' fiduciary duty of care, both in suits by
or on behalf of the corporation and in actions by stockholders of the
corporation.
HPS's certificate of incorporation (the "Certificate of Incorporation")
includes an Article which allows HPS to take advantage of Section 102(b)(7) of
the General Corporation Law. The Certificate of Incorporation also provides for
the indemnification, to the fullest extent permitted by the General Corporation
Law, of officers and directors of HPS. HPS currently maintains policies of
insurance under which the directors and officers of HPS are insured, within the
limits and subject to the limitations of the policies, against certain expenses
in connection with the defense of actions, suits or proceedings, to which they
are parties by reason of being or having been such directors or officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<C> <C> <S>
(a) The following exhibits are filed as part of this Registration
Statement:
2.1 -- Plan and Agreement of Merger dated September 12, 1996, as amended, among the
Registrant, HealthPlan Services Alpha Corporation and Health Risk Management, Inc.
(included as Annex A in the Proxy Statement/Prospectus included as part of this
Registration Statement)
5.1 -- Opinion of Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. as to the
legality of the securities being registered
8.1 -- Form of Opinion of Fredrikson & Byron, P.A. as to certain tax matters
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Bonanno, Savino & Davies, P.C.
23.4 -- Consent of Richard A. Eisner & Company, LLP
23.5 -- Consent of Ernst & Young LLP
23.6 -- Consent of Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. (included in
Exhibit 5.1)
*23.7 -- Consent of Fredrikson & Byron, P.A. (included in Exhibit 8.1)
23.8 -- Consent of Robertson, Stephens & Company LLC (included in Annex B in the Proxy
Statement/Prospectus included as part of this Registration Statement)
24.1 -- Power of attorney (included on the Signature Pages of this Registration Statement)
27.1 -- Financial Data Schedule
99.1 -- Form of Support/Voting Agreement dated September 12, 1996 between the Registrant and
certain officers and directors of Health Risk Management, Inc. (included as an
exhibit to the Registrant's Schedule 13D reporting Registrant's beneficial ownership
of shares of Health Risk Management, Inc. (Commission File No. 5-41329) and
incorporated herein by reference.)
99.2 -- Form of Proxy to be used by HRM Shareholders
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
Not applicable.
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<PAGE> 157
(c) Reports, Opinions and Appraisals Materially Related to the Transaction
Opinion of Robertson, Stephens & Company LLC is furnished as Annex B
to the Proxy Statement/ Prospectus forming a part of this Registration
Statement.
ITEM 22. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the Registration Statement through the date
of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
on November 12, 1996.
HEALTHPLAN SERVICES CORPORATION
By: /s/ WILLIAM L. BENNETT
------------------------------------
William L. Bennett
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the directors and/or executive
officers of HealthPlan Services Corporation whose signature appears below hereby
appoints William L. Bennett and James K. Murray, Jr., and each of them
severally, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below and to file with the Commission, any and all
amendments, including post-effective amendments to this registration statement,
making such changes in the registration statement as appropriate, and generally
to do all such things in their behalf in their capacities as officers and
directors to enable HealthPlan Services Corporation to comply with the
provisions of the Securities Act of 1933, and all requirements of the Securities
and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
/s/ WILLIAM L. BENNETT Chairman of the Board, November 12, 1996
- --------------------------------------------- Director
William A. Bennett
/s/ JAMES K. MURRAY, JR. President and Chief November 12, 1996
- --------------------------------------------- Executive Officer;
James K. Murray, Jr. Director (Principal
Executive Officer)
/s/ JAMES K. MURRAY, III Executive Vice President November 12, 1996
- --------------------------------------------- and Chief Financial
James K. Murray, III Officer (Principal
Financial and
Accounting Officer)
/s/ JOSEPH A. CALIFANO, JR. Director November 12, 1996
- ---------------------------------------------
Joseph A. Califano, Jr.
/s/ JOSEPH S. DIMARTINO Director November 12, 1996
- ---------------------------------------------
Joseph S. DiMartino
/s/ JOHN R. GUNN Director November 12, 1996
- ---------------------------------------------
John R. Gunn
/s/ CHARLES H. GUY, JR. Director November 12, 1996
- ---------------------------------------------
Charles H. Guy, Jr.
</TABLE>
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<PAGE> 159
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------ ---------------------
<C> <S> <C>
/s/ NANCY KANE Director November 12, 1996
- ---------------------------------------------
Nancy Kane
/s/ DAVID NIERENBERG Director November 12, 1996
- ---------------------------------------------
David Nierenberg
/s/ JAMES G. NIVEN Director November 12, 1996
- ---------------------------------------------
James G. Niven
/s/ SAMUEL F. PRYOR, IV Director November 12, 1996
- ---------------------------------------------
Samuel F. Pryor, IV
/s/ TREVOR G. SMITH Director November 12, 1996
- ---------------------------------------------
Trevor G. Smith
/s/ HOLYOKE L. WHITNEY Director November 12, 1996
- ---------------------------------------------
Holyoke L. Whitney
/s/ JAMES F. CARLIN Director November 12, 1996
- ---------------------------------------------
James F. Carlin
</TABLE>
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<PAGE> 160
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Plan and Agreement of Merger dated September 12, 1996, as amended, among the
Registrant, HealthPlan Services Alpha Corporation and Health Risk Management, Inc.
(included as Annex A in the Proxy Statement/Prospectus included as part of this
Registration Statement)
5.1 -- Opinion of Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. as to the
legality of the securities being registered
8.1 -- Form of Opinion of Fredrikson & Byron, P.A. as to certain tax matters
23.1 -- Consent of Price Waterhouse LLP
23.2 -- Consent of Coopers & Lybrand L.L.P.
23.3 -- Consent of Bonanno, Savino & Davies, P.C.
23.4 -- Consent of Richard A. Eisner & Company, LLP
23.5 -- Consent of Ernst & Young LLP
23.6 -- Consent of Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. (included in
Exhibit 5.1)
* 23.7 -- Consent of Fredrikson & Byron, P.A. (included in Exhibit 8.1)
23.8 -- Consent of Robertson, Stephens & Company LLC (included in Annex B in the Proxy
Statement/Prospectus included as part of this Registration Statement)
24.1 -- Power of attorney (included on the Signature Pages of this Registration Statement)
27.1 -- Financial Data Schedule
99.1 -- Form of Support/Voting Agreement dated September 12, 1996 between the Registrant
and certain officers and directors of Health Risk Management, Inc. (included as an
exhibit to the Registrant's Schedule 13D reporting Registrant's beneficial
ownership of shares of Health Risk Management, Inc. (Commission File No. 5-41329)
and incorporated herein by reference.)
99.2 -- Form of Proxy to be used by HRM Shareholders
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 5.1
NOVEMBER 13, 1996
HealthPlan Services Corporation
3501 Frontage Road
Tampa, Florida 33607
Gentlemen:
At your request, we have acted as counsel for HealthPlan Services
Corporation, a Delaware corporation (the "Company"), in the preparation of a
Registration Statement on Form S-4 (the "Registration Statement") relating to
the proposed issuance of up to 1,518,448 shares of the Company's Common Stock,
$.01 par value per share ("Common Stock"), in connection with the acquisition by
the Company of Health Risk Management, Inc., a Minnesota corporation.
In connection with the preparation of the Registration Statement, we have
examined originals or copies of such corporate records, documents and other
instruments relating to the authorization and issuance of such shares of Common
Stock as we have deemed relevant under the circumstances.
On the basis of the foregoing, it is our opinion that:
1. The Company is duly organized and incorporated and is validly
existing under the laws of the State of Delaware, with an authorized
capitalization consisting of 100,000,000 shares of Common Stock, $.01 par
value per share, and 20,000,000 shares of Preferred Stock, $.01 par value
per share.
2. The issuance of the shares of Common Stock pursuant to the terms
and provisions of the Merger Agreement described in the Registration
Statement has been duly authorized by the Board of Directors of the Company
and, when such shares are issued in accordance with the provisions thereof
after satisfaction of the conditions contained therein, will be legally and
validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and further consent to the use of our name under the
heading "Legal Matters" in the Registration Statement and the Proxy
Statement/Prospectus which is a part thereof.
Very truly yours,
FOWLER, WHITE, GILLEN, BOGGS,
VILLAREAL AND BANKER, P.A.
<PAGE> 1
EXHIBIT 8.1
[DRAFT]
[LETTERHEAD OF FREDRIKSON & BYRON, P.A.]
_____________, 1996
Health Risk Management, Inc.
8000 West 78th Street
Minneapolis, Minnesota 55439
Ladies and Gentlemen:
We have acted as counsel to Health Risk Management, Inc. ("HRM"), a
Minnesota corporation, in connection with (i) the proposed merger (the
"Merger") of HRM into HealthPlan Services Alpha Corporation ("Subcorp"), a
Delaware corporation, which is a wholly-owned subsidiary of HealthPlan Services
Corporation, a Delaware corporation ("HPS"), and will be the surviving
corporation in the Merger; and (ii) HPS's filing of a Registration Statement on
Form S-4 (the "Registration Statement") relating to the registration under the
Securities Act of 1933, as amended (the "1933 Act"), of shares of Common Stock
of HPS (the "HPS Shares") to be issued pursuant to the Merger. You have
requested our opinion with respect to certain United States federal income tax
consequences of the Merger.
In the course of our representation and for purposes of rendering this
opinion, we have examined the following documents and have relied on the
representations, warranties, and other information contained therein as true
without our having performed an independent verification as to the accuracy of
such representations and warranties:
1. Plan and Agreement of Merger (the "Merger Agreement") dated
September 12, 1996, among HPS, Subcorp, and HRM.
2. The Registration Statement, filed with the Securities and
Exchange Commission on November ___, 1996, which Registration Statement
includes the Prospectus of HPS and the Proxy Statement of HRM.
As to matters of fact material to this opinion, we have relied upon
(1) facts within our actual knowledge after an inquiry of the attorneys and
paralegals of this firm who have provided legal services to HRM within the past
12 months; (2) facts represented to us in certificates of officers of HRM; and
(3) the recitals, agreements, representations, warranties, and other
information contained in or made pursuant to the documents cited above. We
have also relied upon corporate and other records provided to us by HRM and
represented to us to be accurate and complete. We have assumed the due
authorization by all requisite action of the execution and delivery by such
parties of such documents and the validity and binding
<PAGE> 2
Health Risk Management, Inc.
____________, 1996
Page 2
effect thereof on such parties. We have made no other inquiry or investigation
as to factual matters.
A summary of the facts known to us relating to the Merger is set forth below:
(i) Pursuant to the Merger Agreement and Delaware and Minnesota
law, in the Merger, HRM will be merged with and into Subcorp, which will
succeed, insofar as permitted by law, to the rights, assets, liabilities and
obligations of HRM.
(ii) Pursuant to the Merger Agreement and Delaware and Minnesota
law, in the Merger, the shareholders of HRM will receive, in exchange for each
of their shares of stock of HRM ("HRM Shares"), an amount of cash equal to the
Per Share Cash Consideration plus a number of HPS Shares equal to the Per Share
Stock Consideration, as such terms are defined and described in greater detail
in the Merger Agreement. No other consideration will be received for their HRM
Shares, except that cash will be paid to HRM shareholders in lieu of any
fractional HPS Shares that they would otherwise receive in the Merger. No
fractional HPS Shares will be issued in the Merger.
(iii) Pursuant to the Merger Agreement and Minnesota law,
shareholders of HRM who dissent from the Merger will have such dissenters'
appraisal rights as are provided under Minnesota law.
The following representations have been made in connection with the
proposed Merger, upon which we have relied in rendering this opinion:
(a) The fair market value of the HPS Shares and other
consideration received by each HRM shareholder in the Merger will be
approximately equal to the fair market value of the HRM Shares surrendered in
the Merger.
(b) There is no plan or intention by the shareholders of HRM who
own five percent or more of the HRM Shares and, to the best knowledge of the
management of HRM, there is no plan or intention on the part of the remaining
shareholders of HRM to sell, exchange or otherwise dispose of a number of HPS
Shares received in the Merger that would reduce the HRM shareholders' ownership
of HPS Shares to a number of shares having a value, as of the date of the
Merger, of less than 40 percent of the value of all of the formerly outstanding
HRM Shares as of the same date. For purposes hereof, HRM Shares exchanged for
cash or other property, surrendered by dissenters or exchanged for cash in lieu
of fractional HPS Shares will be treated as outstanding HRM Shares on the date
of the Merger.
<PAGE> 3
Health Risk Management, Inc.
____________, 1996
Page 3
Moreover, HRM Shares and HPS Shares held by HRM shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Merger will be
considered in making this statement.
(c) Pursuant to the Merger, Subcorp will acquire at least 90
percent of the fair market value of HRM's net assets and 70 percent of the fair
market value of HRM's gross assets held immediately prior to the Merger. For
purposes hereof, amounts paid by HRM to dissenters, amounts paid by HRM to
shareholders who receive cash or other property, HRM assets used to pay its
reorganization expenses, and all redemptions and distributions (except for
regular, normal dividends) made by HRM immediately preceding the Merger will be
included as assets of HRM held immediately prior to the Merger.
(d) Prior to the merger of HRM into Subcorp (the "Merger"), HPS
will be in "control" of Subcorp within the meaning of section 368(c) of the
Internal Revenue Code of 1986, as amended to date (the "Code").
(e) Following the Merger, Subcorp (i) will not issue additional
shares of stock that would result in HPS losing "control" of Subcorp within the
meaning of section 368(c) of the Code; and (ii) will continue the historic
business of HRM or use a significant portion of HRM's business assets in a
business.
(f) HPS has no plan or intention to: (i) reacquire any of its
stock issued in the Merger; (ii) liquidate HRM; (iii) merge Subcorp with and
into another corporation; (iv) sell or otherwise dispose of the stock of
Subcorp; or (v) cause Subcorp to sell or otherwise dispose of any of the assets
of HRM acquired in the Merger, except for dispositions in the ordinary course
of business or transfers described in section 368(a)(2)(C) of the Code.
(g) The liabilities of HRM assumed by Subcorp, if any, and the
liabilities to which the transferred assets of HRM are subject, if any, were
incurred by HRM in the ordinary course of its business.
(h) Except as may be specifically provided for in the Merger
Agreement, each of the parties to the Merger will pay their respective
expenses, if any, incurred in connection with the Merger. HPS will pay or
assume only those expenses of HRM that are solely and directly related to the
Merger in accordance with the guidelines established in Revenue Ruling 73-54,
1973-1 C.B. 187.
<PAGE> 4
Health Risk Management, Inc.
____________, 1996
Page 4
(i) There is no intercorporate indebtedness existing between HPS
and HRM or between Subcorp and HRM that was issued, acquired or will be settled
at a discount.
(j) No two parties to the Merger are investment companies as
defined in section 368(a)(2)(F)(iii) and (iv) of the Code.
(k) HRM is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of section 368(a)(3)(A) of the Code.
(l) The fair market value of the assets of HRM transferred to
Subcorp in the Merger will equal or exceed the sum of the liabilities assumed
by Subcorp, plus the amount of liabilities, if any, to which the transferred
assets are subject.
(m) No stock of Subcorp will be issued in the Merger.
(n) The payment of cash to holders of HRM Shares in lieu of the
issuance of fractional HPS Shares in the Merger is solely for the purpose of
avoiding the expense and inconvenience to HPS of issuing fractional shares and
does not represent separately bargained-for consideration. The total cash
consideration that will be paid in the Merger to the HRM shareholders instead
of issuing fractional HPS Shares will not exceed one percent of the total
consideration that will be paid in the Merger to the HRM shareholders in
exchange for their HRM Shares. The fractional share interests of each HRM
shareholder will be aggregated, and no HRM shareholder will receive cash in an
amount equal to or greater than the value of one full HPS Share.
(o) None of the compensation received by any shareholder-employees
of HRM will be separate consideration for, or allocable to, any of their HRM
Shares; none of the HPS Shares received by any shareholder-employees of HRM
will be separate consideration for, or allocable to, any employment agreement;
and the compensation paid to any shareholder-employees of HRM on or before the
date of the Merger will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
We expressly assume, in giving this opinion, that the value of the HPS
Shares being issued to the HRM shareholders pursuant to the Merger will be, at
the time of the Merger, at least equal to 40 percent of the aggregate value of
the cash being paid and the HPS Shares being issued to the HRM shareholders.
<PAGE> 5
Health Risk Management, Inc.
____________, 1996
Page 5
Based solely on the factual information described above and our
analysis and examination of applicable federal income tax laws, rulings,
regulations and judicial precedents, and assuming further that the Merger is
carried out in the manner set forth in the Merger Agreement and as described
above, we are of the opinion as of this date that, for federal income tax
purposes:
1. The Merger will be treated for federal income tax purposes as
a reorganization within the meaning of sections 368(a)(1)(A) and 368(a)(2)(D)
of the Code.
2. HPS, Subcorp and HRM will each be a party to the reorganization
within the meaning of section 368(b) of the Code.
3. No income, gain or loss will be recognized for federal income
tax purposes by either HRM or HPS as a result of the consummation of the Merger.
4. No income, gain or loss will be recognized for federal income
tax purposes by shareholders of HRM upon the exchange in the Merger of HRM
Shares solely for HPS Shares. Assuming that the HRM Shares are held as a
capital asset, each HRM shareholder will be required to recognize, upon receipt
of HPS Shares and cash in exchange for such shareholder's HRM Shares, any
capital gain (but not loss) that such shareholder realizes in the transaction,
but only up to the amount of the cash received by such shareholder.
No opinion is expressed concerning the tax treatment of the Merger
under other provisions of the Code and the regulations thereunder or concerning
the tax treatment of any conditions existing at the time of, or effects
resulting from, the proposed transaction that are not specifically covered by
the above opinion.
An opinion of legal counsel represents an expression of legal
counsel's professional judgment regarding the subject matter of the opinion
and, unlike private letter rulings issued by the Internal Revenue Service, is
not binding upon the Internal Revenue Service and has no official status of any
kind. We can give no assurance that the Internal Revenue Service will not
challenge the opinions expressed herein or that, in the event the Internal
Revenue Service challenges the opinion expressed herein, it will not ultimately
prevail.
Our opinion has been requested by HRM and is being rendered to HRM
pursuant to sections 5.2.10 and 5.3.4 of the Merger Agreement. No other
individual or entity, whether or not a party to the Merger, may rely upon this
opinion without the express prior written consent of the undersigned. Our
opinion is limited to the matters discussed herein, and it
<PAGE> 6
Health Risk Management, Inc.
____________, 1996
Page 6
does not cover other federal income tax consequences of the Merger. Our
opinion does not deal with the specific circumstances of any particular
shareholder of HRM, nor does it cover the application of state, local, foreign
or other tax laws. You are advised that applicable statutes of some states
differ in some respects from their counterparts in the Code. Further, our
opinion is based upon existing laws, regulations, administrative authorities,
and judicial decisions, any or all of which could change at any time with
retroactive effect.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to its use as part of the Registration Statement and
to the reference to our firm under the captions "Certain Federal Income Tax
Consequences" and "Legal Matters" included in the Proxy Statement/Prospectus
constituting a part of the Registration Statement.
Very truly yours,
FREDRIKSON & BYRON, P.A.
By
--------------------------------------
Its Vice President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of HealthPlan
Services Corporation of our report dated February 16, 1996 appearing on page 22
of HealthPlan Services Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Tampa, Florida
November 12, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
HealthPlan Services Corporation on Form S-4 of our report dated December 2,
1994, on our audits of the financial statements of HealthPlan Services Division
(formerly Plan Services Division, a wholly-owned division of The Dun &
Bradstreet Corporation), as of September 30, 1994 and for the nine-month period
ended September 30, 1994 and the year ended December 31, 1993 which report is
included in the Annual Report on Form 10-K. We also consent to the reference to
our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Tampa Florida
November 11, 1996
<PAGE> 1
EXHIBIT 23.3
(BONANNO, SAVINO & DAVIES, P.C. LETTERHEAD)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the reference to our firm under the caption "EXPERTS" and
to the use in the Proxy Statement/Prospectus constituting part of this
Registration Statement on Form S-4 of HealthPlan Services Corporation of our
report dated March 15, 1996 relating to the financial statements of
Consolidated Group, Inc. and Affiliates, and of our report dated March 15, 1996
relating to the financial statements of Consolidated Health Coalition, Inc.
/s/ BONANNO, SAVINO & DAVIES, P.C.
Needham, Massachusetts
November 11, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated February 16, 1996 on
our audit of the financial statements of Harrington Services Corporation as at
December 31, 1995 and for the year ended in the Form 8-K/A filed September 13,
1996 and incorporated by reference in the registration statement of HealthPlan
Services Corporation on Form S-4. We also consent to the reference to our
firm under the caption "Experts".
Richard A. Eisner & Company, LLP
New York, New York
November 11, 1996
<PAGE> 1
EXHIBIT 23.5
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to the
use in the Proxy Statement/Prospectus constituting part of this Registration
Statement on Form S-4 of HealthPlan Services Corporation of our report dated
August 16, 1996 relating to the consolidated financial statements of Health
Risk Management, Inc.
ERNST & YOUNG LLP
Minneapolis, Minnesota
November 8, 1996
<PAGE> 1
EXHIBIT 99.2
HEALTH RISK MANAGEMENT, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON DECEMBER , 1996. The undersigned hereby appoints
and , and each of them with full power to act
alone, the true and lawful attorneys in fact and proxies of the undersigned to
vote all shares of common stock of Health Risk Management, Inc., a Minnesota
corporation ("HRM"), held by the undersigned, with full power of substitution,
with the same force and effect as the undersigned would be entitled to vote if
personally present, at the Special Meeting of Shareholders of HRM to be held at
HRM's corporate offices at 7900 West 78th Street, Fourth Floor, Minneapolis,
Minnesota on December , 1996, at a.m. (Minnesota time), and at any and all
adjournments or postponements thereof, as follows:
[X] PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE
1. Approval and adoption of the Plan and Agreement of Merger, dated as of
September 12, 1996, as amended (the "Merger Agreement"), by and among HealthPlan
Services Corporation, a Delaware corporation, HealthPlan Services Alpha
Corporation, a Delaware corporation, and HRM.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. OTHER MATTERS: Discretionary authority is hereby granted with respect to
such other business as may properly come before the meeting or any adjournment
or postponement thereof.
HRM'S BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY, USING THE
ENCLOSED ENVELOPE. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE
MANNER DIRECTED HEREIN. IF THIS PROXY IS SUBMITTED, BUT NO DIRECTIONS ARE MADE,
THIS PROXY WILL BE VOTED "FOR" THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
of Shareholders and the related Proxy Statement/Prospectus furnished herewith.
Dated: , 1996
----------------
--------------------------------
Signature
--------------------------------
Signature(s) (If held jointly)
--------------------------------
Title or Authority
IMPORTANT: Please sign your name
exactly as it appears hereon.
When signing as attorney, agent,
executor, administrator,
trustee, guardian or corporate
officer, please give your full
title as such. Each joint owner
should sign the proxy. If
executed by a partnership, this
proxy should be signed by
authorized partner.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,444
<SECURITIES> 15
<RECEIVABLES> 18,274
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<PP&E> 48,629
<DEPRECIATION> 27,642
<TOTAL-ASSETS> 249,878
<CURRENT-LIABILITIES> 81,614
<BONDS> 65,378
0
0
<COMMON> 149
<OTHER-SE> 101,399
<TOTAL-LIABILITY-AND-EQUITY> 249,878
<SALES> 0
<TOTAL-REVENUES> 129,876
<CGS> 0
<TOTAL-COSTS> 110,272
<OTHER-EXPENSES> 37,928
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,310
<INCOME-PRETAX> (19,634)
<INCOME-TAX> (7,239)
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