-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DHb2DB551MwJKkV+sOApOd5skp8B/w8f5TjEKgsnWtaUhgA7L9hqneV8CJO8e0GR G2b6Gd1b5oy+wtyS8neNTg== 0000950123-01-001212.txt : 20010214 0000950123-01-001212.hdr.sgml : 20010214 ACCESSION NUMBER: 0000950123-01-001212 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20001031 FILED AS OF DATE: 20010213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH MANAGEMENT SYSTEMS INC CENTRAL INDEX KEY: 0000861179 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 132770433 STATE OF INCORPORATION: NY FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20946 FILM NUMBER: 1538004 BUSINESS ADDRESS: STREET 1: 401 PARK AVE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126854545 MAIL ADDRESS: STREET 1: 401 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10016 10-K 1 y45381e10-k.txt HEALTH MANAGEMENT SYSTEMS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-20946 HEALTH MANAGEMENT SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEW YORK 13-2770433 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER) INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 401 PARK AVENUE SOUTH 10016 NEW YORK, NEW YORK (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (212) 685-4545 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the registrant's common stock held by non-affiliates as of January 24, 2001 was $26,491,256 based on the closing price on the Nasdaq National Market System on that day. Number of shares outstanding of the registrant's common stock, $.01 par value, on January 24, 2001 was 17,832,431. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENT WHERE INCORPORATED PROXY STATEMENT FOR THE ANNUAL MEETING PART III TO BE HELD ON MARCH 29, 2001 2 TABLE OF CONTENTS
PAGE CONTENTS NUMBER - -------- ------ Cover Page ......................................................................................... i PART I Item 1. Business ................................................................................ 1 Item 2. Properties .............................................................................. 10 Item 3. Legal Proceedings ....................................................................... 10 Item 4. Submission of Matters to a Vote of Security Holders ..................................... 12 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ................... 12 Item 6. Selected Financial Data ................................................................. 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risks ............................. 24 Item 8. Financial Statements and Supplementary Data ............................................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 25 PART III Item 10. Directors and Executive Officers of the Registrant ...................................... 25 Item 11. Executive Compensation .................................................................. 25 Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 25 Item 13. Certain Relationships and Related Transactions .......................................... 25 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 26 Signatures ....................................................................................... 27 Exhibit Index .................................................................................... 52
ii 3 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. AMONG THE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE THOSE RISKS IDENTIFIED IN "ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - CERTAIN FACTORS THAT MIGHT AFFECT FUTURE OPERATING RESULTS" AND OTHER RISKS IDENTIFIED IN THIS FORM 10-K AND FROM TIME TO TIME IN THE COMPANY'S REPORTS AND REGISTRATION STATEMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. PART I ITEM 1. BUSINESS OVERVIEW Health Management Systems, Inc. (the "Company" or "HMSY") furnishes proprietary information management, data processing, and software (including consulting) services to healthcare providers and payors, including government health service agencies. The Company's product and service offerings benefit its clients by enhancing revenue (achieved through improved reimbursability, profitability, and/or collectability), accelerating cash flow, reducing operating and administrative costs, and improving decision-making capabilities (by supplying advanced information analytics). These services include decision support, payor information systems and revenue enhancement, including business office outsourcing, addressing the various types of data generated by the interaction of the participants in the healthcare delivery process: the providers of care, the third-party payors, and the patients. Through its product and service offerings, the Company acts as an outsourcer of information management functions addressing the operational, administrative, financial, and clinical data that result from the rendering of healthcare services to patients. The Company is currently reassessing its strategy for, and commitment to, certain of its products, services, and business segments. See separate section on Business Strategy below. Healthcare providers receive payment for services from patients, third-party payors, or a combination thereof. Third-party payors include commercial insurance companies, governments or their fiscal agents and intermediaries, health maintenance organizations, preferred provider organizations, third-party administrators for self-insured companies, and managed care companies. Although patients generally retain primary responsibility for payment for all healthcare services, third-party payors bear the preponderance of the responsibility for many charges for care. Obtaining reimbursement from third-party payors has become increasingly difficult for providers because of frequent changes in reimbursement formulae and contractual requirements for pre-admission certification and utilization review, and administrative procedures instituted by third-party payors in an effort to control costs. To be successful in obtaining payment from third-party payors, hospitals and other healthcare providers require regulatory knowledge and technical skills to manage complex data collection, integration, analysis, and accounts receivable management functions. To ensure that reimbursable costs are not greater than necessary, third-party payors require knowledge and skills analogous to those required by providers. Using the operational, financial, administrative, and clinical data generated as part of the healthcare delivery process, HMSY applies proprietary software and other analytical tools to transform data into valuable information that clients use to (i) minimize operating and administrative costs while improving profitability, (ii) measure the quality of care, and (iii) increase revenue by optimizing the outcome of the transfer payment processes linking payors, providers, and patients. The Company believes its customers benefit from the Company's unique understanding of the healthcare delivery and associated transfer payment processes, from the perspective of both providers and payors. COMPANY HISTORY In fiscal year 1999, each of the Company's subsidiaries adopted use of the corporate name, Health Management Systems, as part of an initiative to strengthen the corporate identity. The Company is organized into two divisions: the Revenue Services Division ("Revenue Services Division") and the Software Systems and Services Division ("Software Division"). The Revenue Services Division comprises two business units: the Provider Revenue Services Group and the Payor Revenue Services Group. The Company's Software Division also comprises two business units: the Decision Support Group and the Payor Systems Group. Within the Revenue Services Division, the Provider Revenue Services Group has delivered Retroactive Claims Reprocessing ("RCR")(SM) services since 1974 and began to deliver Comprehensive Account Management Services ("CAMS")(SM) in 1986 and Electronic Data Interchange ("EDI") services with the acquisition in 1990 of Quality Medi-Cal Adjudication, Incorporated ("QMA"). Effective January 1, 2001, the Company sold its EDI business, consisting of substantially all of the assets of the Company's QMA subsidiary and certain of the assets of its Health Receivables Management, Inc. subsidiary. See Note 21 of Notes to Consolidated Financial Statements. In 1997, the Company acquired a computerized medical record-based processing system for managed care public health and ambulatory care facilities as part of its purchase of substantially all the assets of Global Health Systems, Inc. and GHS Management Services, Inc. (collectively "Global"). In 1997, the Company formed a Business Office Outsourcing unit and in 1998 consolidated this unit with the remainder of what is currently entitled the Provider Revenue Services Group. In 1999, the Company's Quality Standards in Medicine, Inc. ("QSM") subsidiary acquired substantially all of the assets and specified liabilities of Health Receivables Management, LLC ("Old HRM"), an Illinois based company that furnishes Medicaid applications service, electronic billing, eligibility verification, accounts receivable management, and collections services to providers. In connection with the transaction, QSM changed its name to Health Receivables Management, Inc. ("HRM"). The Company offers pre-collection and collections services through HRM. The Revenue Services Division's Payor Revenue Services Group began delivery of Third Party Liability Recovery ("TPLR")(SM) services in 1985 and augmented its product line in 1996 with the acquisition of CDR Associates, Inc. ("CDR"). CDR is a provider of hospital-based claim audits to payors, principally Blue Cross and Blue Shield organizations. The Company entered the software business in 1995, merging with Health Care microsystems, Inc. ("HCm"), a company furnishing microcomputer-based distributed decision support software systems and services (including consulting) to healthcare providers and payors. HCm now constitutes the Decision Support Group. In 1996, the Decision Support Group acquired QSM and integrated QSM's clinical information systems with HCm's decision support offerings. In 1997, the Company, which had owned a 43% equity interest in Health Information Systems Corporation ("HISCo"), acquired from Welsh, Carson, Anderson & Stowe ("WCAS") and various of its affiliates, independent investors, and from certain of the Company's executive officers and directors, the remaining 57% of HISCo's equity. At the time of acquisition, HISCo merged with its sole operating subsidiary, Health Systems Architects, Inc., and was renamed HSA Managed Care Systems, Inc. ("HSA"). This entity now constitutes the Payor Systems Group and furnishes automated business and information solutions, including software systems and services, to healthcare providers and payors. The HCm, CDR, and QSM mergers were accounted for using the pooling of interest method, while the QMA, HISCo, Global, and HRM acquisitions were accounted for using the purchase method. HEALTHCARE REFORM AND REGULATORY MATTERS The healthcare reimbursement landscape continues to change. Federal, state, and local governments, as well as other third-party payors, continue their efforts to reduce the rate of healthcare expenditures. Many of these 2 4 policy initiatives have contributed to the complex and time-consuming nature of obtaining healthcare reimbursement for medical services. Changes occurring in the healthcare industry have created an increasingly complex reimbursement environment that impacts both providers and payors. This environment is made even more complex as the historical distinction between providers and payors has become less clear. Today, emphasis is placed on improving the level of provider and payor accountability for both the delivery and the utilization of healthcare services. Providers must ensure that they are properly reimbursed by third-party payors for healthcare services rendered in accordance with pre-established contracts. Likewise, payors must ensure that they are making payments for only those services for which they are responsible and in the dollar amounts specified by these pre-established contracts. Although the Company cannot predict the nature of future healthcare reforms that will be adopted by federal, state, and local governments, the Company believes that the shifting of traditional insurance risk to providers of care, the consolidation of providers, and the resulting additional information management requirements placed on providers and payors should increase the demand for the Company's offerings. Moreover, the Company believes that providers, payors, and patients -- both separately and together -- will benefit from the Company's integration of cost and other financial and clinical data, enabling identification and management by all participants (providers, payors, and patients) of the outcomes (benefits and costs) achieved. The Company observes the continuing intensification of interest in ensuring compliance by providers and payors with the statutory, regulatory, and contractual requirements of managed care. The Company believes that the intensifying concern regarding compliance has increased its costs, as the Company seeks to ensure its own compliance and that of its customers. At the same time, the Company believes that the increased focus on compliance creates a potential market for its products and services. The Company's services also are subject to regulations pertaining to billing services, which primarily involve recordkeeping requirements and other provisions designed to prevent fraud. The Company believes that it operates in a manner consistent with such regulations, the enforcement of which is increasingly more stringent. The Medicare program is administered by the Health Care Financing Administration ("HCFA"), an agency of the United States Department of Health and Human Services. HCFA currently contracts with numerous intermediaries and fiscal agents to process regional claims for reimbursement. Although HCFA has established the regulatory framework for Medicare claims administration, Medicare intermediaries have the authority to develop independent procedures for administering the claims reimbursement process. The Medicaid program is subject to regulation by HCFA, but is administered by state governments. State governments provide for Medicaid claims reimbursement either through the establishment of state-owned and operated processing centers or through contractual arrangements with third-party fiscal agents who own and operate their own processing centers. The requirements and procedures for reimbursement implemented by Medicaid differ from state to state. Similar to the claims administration processes of Medicare and Medicaid, many national health insurance companies and self-insured employers administer reimbursement of claims through local or regional offices. Consequently, because guidelines for the reimbursement of claims are generally established by third-party payors at local or regional levels, hospital and other provider reimbursement managers must remain current with the local procedures and requirements of third-party payors. The ownership and operation of hospitals is subject to comprehensive federal and state regulation, which affects hospital reimbursement. In 1999, Medicaid and Medicare revenue represented the majority of hospital income. Since adoption, the Medicare and Medicaid programs have undergone significant and frequent changes, and it is realistic to expect additional changes in the future. The Balanced Budget Refinement Act of 1999 (BBRA) provides relief of approximately $17 billion to the healthcare industry through 2004. The bill was enacted to partially restore funds that were reduced as a result of the Balanced Budget Act of 1997 (BBA). Current industry estimates suggest that the reduction in Medicare outlay due to the Balanced Budget Act of 1997 even after the relief expected from the Balanced Budget Refinement Act of 1999 exceed $110 billion. On December 15, 2000, the 3 5 Medicare, Medicaid, SCHIP Benefits Improvement and Protections Act of 2000 (BIPA) was enacted, including provisions that increase certain Medicaid reimbursements. While the Balanced Budget Act of 1997, as modified by the Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid, SCHIP Benefits Improvement and Protections Act of 2000, could still have an adverse effect on the operations of hospitals and other providers of healthcare and consequently reduce the amount of the Company's revenue, the Company believes that healthcare organizations can use the Company's products and services to reduce costs while maintaining or improving the quality of care (thereby compensating, in part or whole, for losses in revenue due to the Balanced Budget Act of 1997). In addition, the Social Security Act imposes certain requirements on the Company with regard to confidentiality and disclosure of Medicare and Medicaid provider and beneficiary data. Specifically, the Company is prohibited from disclosing information that is obtained by or from the Department of Health and Human Services except as otherwise provided by regulations or other federal law. Generally, the Company is required to maintain standards of confidentiality that are comparable to those of an agency administering the Medicare or Medicaid program when the Company uses data obtained from such programs. Finally, the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") requires the Secretary of Health and Human Services to adopt national standards for certain types of electronic health information transactions and the data elements used in such transactions and to adopt standards to ensure the integrity and confidentiality of health information. All providers, payors, and clearinghouses will be mandated to use HIPAA standards when electronically exchanging health data covered by HIPAA. Any material restriction on the ability of healthcare providers and payors to obtain or disseminate health information could adversely affect the Company's business, financial condition, and results of operations. With the release of the Final HIPAA Privacy Rule in December 2000 and the pending release of the Final HIPAA Security Rule, the "protection of individually identifiable healthcare information" becomes a key component of the way that covered healthcare entities perform their day-to-day business. Some of the industry's current projections suggest that it will cost healthcare providers 2-4 times the Y2K-Project expenditures to properly implement the HIPAA regulatory requirements and many of those healthcare providers will seek assistance from outside vendors to either facilitate the implementation and/or provide clearinghouse translation capabilities as a method to reduce those costs and/or meet the required mandatory implementation dates. As such, while HIPAA could continue to have an adverse affect on the operations of providers and payors and consequently reduce the amount of the Company's revenue, the Company believes it possesses technical and managerial knowledge and skills that could benefit healthcare organizations seeking to establish compliance with HIPAA requirements. The Company has begun a needs analysis to determine the extent to which it may need to alter its systems to comply with these regulations. The Company believes that the rapidity of consolidation within the healthcare industry will continue to create opportunities for the Company in its role as a data consolidator. Yet the rapidity of change suggests that some of the consolidation may have been overdone and may be undone over the next several years, as providers downsize and integrated delivery networks ("IDN's") begin to unbundle. The Company believes these dynamics constitute both a risk to its existing business relationship with its larger clients, and an opportunity for new business in the future. PRINCIPAL PRODUCTS AND SERVICES PROVIDER REVENUE SERVICES GROUP The Company's Provider Revenue Services Group offers information management solutions across the accounts receivable spectrum, with offerings performed on retroactive, concurrent, and prospective bases. This Group's clients include large public and voluntary hospitals, public health clinics, and outpatient treatment facilities. Fees are tailored to the particular configuration of service furnished to the client, with the preponderance of the Group's remuneration based upon contingent fee arrangements. 4 6 The Company's first product, RCR, entails the retroactive recovery of third-party payments due provider healthcare organizations, principally large public and voluntary hospitals. RCR services are used by a hospital (most commonly for its emergency room and outpatient clinics) to realize third-party revenue from patient accounts after the hospital has expended its own best efforts at billing and collection, but before the accounts are referred to a collection agency. The Company's specialized data aggregation, data purification, data editing, and electronic claim preparation and transmission routines are designed to facilitate the reimbursement of accounts that remain unpaid because necessary billing information was missing or because third-party coverage was not known. RCR services require the hospital to provide the Company with copies of existing data files, demand minimal hospital staff support, and generally involve no patient contact. Through the application of the Company's proprietary technology, the Company's RCR services produce, for its hospital clients, incremental revenue which otherwise would remain uncollected. Field Work services are provided, where an expert recovery team is placed onsite at the hospital and works with the hospital's existing systems to review unbilled or unreimbursed accounts. These accounts are billed following a detailed review of the client's aged trial balance, remittances, explanations of benefits, medical records, physician documentation, pre-certifications and other details. Field Work services are offered as a discrete project or as a component of a larger RCR engagement, combining electronic analysis with onsite follow-up. Field Work services offer a solution to short-term backlogs caused by system transitions or staffing problems, or the challenges of handling difficult or complex billings. Using database-driven methodologies developed in connection with RCR, the Provider Revenue Services Group offers a range of additional recovery services to healthcare providers. Cost Report reimbursement services include Medicare Bad Debt Recovery, in which the Company assists providers in isolating coinsurance and deductible amounts that qualify for Bad Debt reimbursement, and Disproportionate Share services, in which, among other services, the Company identifies and recalculates improperly classified claims that are eligible for Federal Financial Participation. The Group also supports clients' substantiation of future claims for Medicare Bad Debt by establishing appropriate concurrent operating processes. The Provider Revenue Services Group's Comprehensive Accounts Receivable Services ("CARS"), facilitates the Company's ability to liquidate aged accounts from a client's outgoing patient accounting system while the client's new patient accounting system is being installed. CARS also assists providers in liquidating aged accounts before they are transferred to a collection agency. In conjunction with the Decision Support Group, the Provider Revenue Services Group provides Managed Care Recovery Services (formerly referred to as "underpayment recovery services") to assist healthcare providers in the recovery of underpayments due from managed care payors. RCR services have evolved from a strictly background process to a process that can also be performed concurrently and integrated with clients' internal processes, entailing onsite support, designed to maximize results through targeted review, analysis, and opportunity identification. In contrast to RCR services, which retrospectively reprocess patient accounts receivable data delivered to healthcare providers, the Company's CAMS offering provides concurrent third-party claim identification, editing, claim preparation, electronic claims submission, bill follow-up, denial reprocessing, and remittance management services thereby offering a hospital an opportunity to improve the effectiveness (enhanced revenue and accelerated cash flow) of its accounts receivable management program while decreasing its administrative costs. Remittance management services automate and support remittance-based provider activities including deposit reconciliation, accounts receivable management and denial management. The Company is in the process of significantly enhancing these services to expand its market, although there can be no assurances that the Company will produce such results. 5 7 Using its medical records-based, practice-management processing system acquired from Global, the Provider Revenue Services Group is also able to provide products and services on a concurrent basis to municipal public health agencies. Through its HRM acquisition, the Company also provides pre-collection and collections services to providers, and offers Medicaid Application Services, which assist eligible patients in properly enrolling in public aid, ensuring that providers receive reimbursement for care rendered to indigent patients. Expanding transfer payment consulting services include: Charge Description Master and Charge Capture Analysis services (which update and monitor a hospital client's Charge Description Master and charge capture processes to assess the accuracy of service codes to optimize the integrity of their inclusion on submitted claims); Ambulatory Payment Classification ("APC") Analysis services (which evaluate a client's utilization and costs and assign competitive pricing for charge items to assist clients with their transition to the APC payment model for outpatient services); and Appeals Management Outsourcing services, which investigate the reasons behind reduced payment on individual claims and appeal adverse payment reductions with the third-party payors on the hospital's behalf. PAYOR REVENUE SERVICES GROUP In 1985, the Company began to offer TPLR services principally to state Medicaid agencies, as a means of identifying third parties with prior liability for Medicaid claims. In addition, via its 1996 acquisition of CDR, the Company provides hospital-based claims audits on behalf of payors, for the purpose of recovering credit balances and duplicate payments. Such services are offered to state Medicaid agencies as well as to Medicaid HMO's and to Blue Cross/Blue Shield organizations and commercial insurers (including managed care payors). The Payor Revenue Services Group applies its proprietary information management and coordination of benefits methodologies used in TPLR to examine paid claims datasets in order to identify duplicate payments, overpayments, compliance-related erroneous payments, and other inappropriate payments on behalf of payor organizations, with the preponderance of the Group's remuneration based upon contingent fee arrangements. DECISION SUPPORT GROUP The growth of managed care and the consolidation of healthcare institutions is significantly increasing the complexity of the industry and the associated demand for decision support systems. In the managed care environment, the Company believes decision support to still be an important ingredient for integrating, analyzing, and understanding key operational, financial, administrative, and clinical data obtained from institutions' transaction-based healthcare information systems. As such, decision support systems and services are increasingly being relied upon to guide the management practices of providers (in areas ranging from managed care contracting and clinical pathways development to physician profiling) to ensure the success and financial and operational viability of their organizations. The current clients for the Decision Support Group include approximately 450 hospitals and IDN's located primarily in the United States. These hospitals generally range in size from 50 to more than 1,000 beds, and include many of the most progressive and complex health systems in the country, as well as some of the largest multi-site hospital chains, managed care organizations, and long-term care institutions. Developed in collaboration with several major healthcare organizations, the Company's suite of decision support software and related consulting services, called Alliance for Decision Support(TM) ("Alliance"), was released to the market in June 1998. Alliance enables healthcare providers to perform contract modeling and net revenue management, costing and clinical financial analytics, and physician profiling and quality management from the perspective of the provider, payor, and/or third-party administrator. Employing advanced systems integration, data validation, and distribution methods, Alliance supports evolving data warehousing and information systems initiatives. Alliance was built with an open system architecture, running on a variety of platforms that support client server processing and World Wide Web applications. In addition to purchasing a license to use the 6 8 Company's software, customers have the option of outsourcing the processing of part or all of the Alliance system to the Company. The Company continues to integrate clinical quality measures within Alliance. The Decision Support Group dedicates considerable resources to providing a wide variety of related consulting applications, including decision support planning and implementation services, and decision support outsourcing and management. The Decision Support Group provides clients with prospective, concurrent, and retrospective decision support applications and services, including a concurrent managed care contract profiler and payment calculator system. As a result, proper calculation of anticipated contractual allowances are now provided as an integrated component of the managed care reimbursement process. Through Alliance for Financial Management(TM) ("FM"), the Decision Support Group offers healthcare organizations an enterprise-wide financial analysis and modeling application, with capabilities including employee-level budget and productivity support, operating and capital budget support, and long-range strategic planning. FM version 6.3 was released during fiscal year 2000, and incorporates web publishing and a Microsoft(R) Excel spreadsheet add-in for ease of use and quicker access to data. The application also incorporates multi-dimensional, on-line analytical processing technology, integrated with electronic mail applications and standard spreadsheet tools to support communications and analysis. The Decision Support Group provides related application consulting services, focusing on analysis and development of cost accounting, contract management, budgeting, business lines, and treatment patterns. PAYOR SYSTEMS GROUP The Payor Systems Group provides large-scale transaction processing systems and services to large and medium-sized commercial payors and managed care plans, including some large Blue Cross/Blue Shield organizations. Both public and private entities have embraced managed care health plans as a means of providing and managing the delivery and cost of healthcare services. To support their businesses, these payors require systems to: manage patient membership, provider contracts, and networks; process and adjudicate claims; manage risk; and perform medical management. The three principal offerings of the Payor Systems Group are: ProAlliance(TM); CapAlliance(TM); and Alliance for Claims Outsourcing(TM) ("ACO"). ProAlliance is a data repository of integrated provider information, enabling proactive management of complex process such as credentialing, accreditation, and pricing arrangements via an open system architecture and web user interface. CapAlliance, the Company's stand-alone capitation offering, manages the payment to providers of pre-negotiated per capita amounts. Alliance for Claims Outsourcing is a risk management solution for payors seeking a strategy to manage their own health plans and market their own products, providing data processing for plans offering a full spectrum of products, from traditional indemnity coverage through complete managed care programs. Comprised of modular systems, Alliance for Claims Outsourcing automates four major areas of healthcare administration: membership and billing, provider administration, capitation, and benefits and claims. Through its ACO offering, the Company provides its managed care functionality, including hardware and software, in an outsourcing or applications service provider mode. In fiscal year 1999, the Payer Systems Group consummated a multi-year strategic partnership with Medical Mutual of Ohio for the design and development of Alliance for Managed Care, which will expand the current functionality of the Company's existing managed care systems to incorporate graphical and web interfaces, a component-based architecture, and the use of relational database technology. Having substantially completed the first of four Java-based Alliance for Managed Care modules for this next generation system, this Group's development partner's agreement is subject to review during the Company's fiscal year 2001. There can be no assurances that the development partner will continue to participate in the development of this system although there are contractual penalties in the event of early termination. The Company's Payor Systems Group offerings are sold on a stand-alone basis, or can be integrated into existing systems, the latter option enabling payors to preserve their investments in information technology. The Company believes that these offerings dramatically reduce the cost of processing claims through auto-adjudication. 7 9 CUSTOMERS The Company's client base includes hospitals, IDN's, multi-hospital systems, one of the country's largest public health systems, long-term care facilities, large commercial payors, Blue Cross/Blue Shield organizations, and state Medicaid agencies. The Company also has a limited number of overseas clients. Among the Company's domestic clients are three of the nation's largest public health systems and one of the largest proprietary hospital corporations. No single client of the Company accounted for 10% or more of the Company's total revenue in fiscal year 2000. The Company's largest client is HCA - - The Healthcare Company ("HCA"), a customer of the Decision Support Group. This client accounted for 7%, 9%, and 10% of the Company's total revenue in fiscal years 2000, 1999, and 1998, respectively. The Company provides its services to HCA primarily pursuant to annual work order agreements. There is no assurance that any of these agreements will be renewed. The clients constituting the Company's ten largest clients change periodically. The concentration of revenue in such accounts has decreased, accounting for approximately 45%, 48%, and 50% of the Company's revenue in fiscal years 2000, 1999, and 1998, respectively. In many instances, including governmental clients, the Company provides its services pursuant to agreements subject to competitive re-procurement. All of these agreements periodically expire between fiscal year 2001 and 2004. There is no assurance that any of these agreements will be renewed and, if renewed, that the fee rates will be equal to those currently in effect. The Company works with selected customers and other development partners in the development and testing of its software products and services. MARKET TRENDS/OPPORTUNITIES The healthcare industry continues to face unrelenting financial pressure, as provider reimbursement is constrained and payor costs are under pressure. Where providers trim staff in response to these pressures, they are more challenged to handle the volumes and complexities of reimbursement. Thus, information relating to reimbursement, costs, and quality of care is of increasing importance. Administrative costs within the healthcare industry remain high and constitute a continuing target of opportunity for the Company. The demands of managing the delivery of patient care with ever increasing qualitative and quantitative rigor will continue to drive the need for increased amounts of operational, financial, administrative, and clinical information. The Company believes that it possesses the data content, analytic tools, technology, communications, and process management skills required to respond to the current and anticipated needs of provider and payor clients for tools and services to manage this evolving complexity. Cost pressures continue to drive horizontal and vertical integration of providers and payors alike. Consolidation among healthcare organizations is creating larger healthcare delivery systems, with greater regional market power. This phenomenon is creating a new market for the Company's products, with fewer but larger client prospects. Despite some belief that the rapidity of this change may be undone over the next several years, as providers are downsized and IDN's begin to unbundle, the Company believes that it has the opportunity to leverage its products and services across larger enterprises, making the Company's products and services more cost effective for clients. The World Wide Web is a readily available means of enhancing communications among the various participants in the healthcare delivery process. Previously disenfranchised consumers, or patients, may now connect readily with their providers of healthcare and the payors for care. Previously isolated individual and small practitioners may now connect readily with larger providers and with their payors. In the short term, the enhanced connectivity should render various types of data more readily available, while in the longer term the enhanced 8 10 connectivity has the potential to facilitate partial or full amelioration of existing inefficiencies in the clinical, operational, financial, and administrative aspects of healthcare. The Company views the Internet as a conduit for additional data, thereby enabling the Company to increase its value-added impact on the marketplace. COMPETITION Although the Company's products and services involve various proprietary aspects, its business is highly competitive and some of the Company's larger competitors have been acquired by larger organizations. While the Company believes that no one company competes with all aspects of its business, several companies, some of which may be larger and have greater financial resources than the Company, compete with the Company in providing one or more of the Company's offerings. The Company also encounters competition from companies attempting to expand the scope of their products and services within or into the healthcare information management services industry. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors - Competition. PROVIDER REVENUE SERVICES GROUP The Company's Provider Revenue Services Group competes with many regional small companies offering accounts receivables recovery services, as well as large companies, including hospital computer systems vendors (such as McKesson HBOC, Inc. ("MCK") and Shared Medical Systems Corporation ("SMS")), QuadraMed Corporation ("QMDC"), and national public accounting firms. The Company competes on the basis of its proprietary systems, existing relationships, long-standing reputation in the provider market segment, and pricing. PAYOR REVENUE SERVICES GROUP The Company's Payor Revenue Services Group targets federal and state healthcare agencies, large commercial payors, and managed care organizations and competes primarily with national public accounting firms, Public Consulting Group and, to some degree, Maximus. The Company competes on the basis of its proprietary systems, data mining capabilities, historically high recovery rates, and pricing. DECISION SUPPORT GROUP The Company's Decision Support Group competes with products provided by Eclipsys Corporation ("ECLP"), MCK, QMDC, Kreg Information Systems, and SRC Software. Companies that offer general-purpose financial management products, including Hyperion Software and PeopleSoft, Inc., are also competitors. The Company competes on the basis of its quality, proprietary software and value-added management consulting services. PAYOR SYSTEMS GROUP The Company's Payor Systems Group competes against multiple companies, including Health Systems Design Corporation, a subsidiary of Perot Systems Corporation, Synertech, and ERISCO, Inc, as well as with payors' in-house systems development groups. The Company sells its products to large payor organizations. The Company's Payor Systems Group competes on the basis of its proprietary software, healthcare software development expertise, and large-scale project management capabilities. RESEARCH AND DEVELOPMENT The Company's performance in the healthcare information technology and services arenas requires it to devote resources to research and development to continue the acceptance of the Company's products in the 9 11 marketplace. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors - New Product Development and System Enhancement. BUSINESS STRATEGY The Company's current strategy includes (1) a thorough examination of current businesses to reconfigure products and services under a centric business plan that will incorporate more effective marketing and selling, and leverage the Company's knowledge and know-how of the transfer payment process; (2) divest non-strategic assets; (3) further reduce costly infrastructure and overhead, including reengineering of its information systems "IT" platform with the emphasis on utilizing more advanced technology to provide customers additional solutions for managing their complex data needs; and (4) continue the development of its new planned provider product opportunity. The Company believes that some of its initiatives will reduce revenue streams in the near term in order to become more product-focused and thereby become a more formidable leader in its remaining core business. In its fiscal fourth quarter ended October 31, 2000, the Company began a restructuring in order to refocus its business and generate increased operating profitability in fiscal year 2001. The Company also expects to implement a plan to restructure and re-engineer its operating information systems and administrative infrastructures in fiscal year 2001. The Company's business strategy is to accelerate growth both internally and through selective acquisitions thereafter. As the Company divests non-strategic assets and builds on new services offerings, it may seek to acquire companies that supply targeted healthcare providers and/or payors with information management software, systems, or services if the offerings of the Company or such companies would benefit from access to the other's technology, software applications, or client base. The Company believes that such acquisition opportunities exist due, in part, to competitive pressures on local service businesses that lack adequate capital, technical, and management resources. EMPLOYEES As of October 31, 2000, the Company employed approximately 825 employees. No employees are covered by a collective bargaining agreement or are represented by a labor union. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Specific financial information with respect to the Company's industry segments is provided in Note 18, Segment and Geographical Information, of Notes to Consolidated Financial Statements. ITEM 2. PROPERTIES The Company's New York City offices consist of approximately 149,000 square feet. In addition, the Company leases approximately 170,000 square feet of office space in approximately 21 locations throughout the United States. See Note 14 of Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS The settlement of the following litigation became final in August 2000. In April and May 1997, five purported class action lawsuits were commenced in the United States District Court for the Southern District of New York against the Company and certain of its present and former officers and directors alleging violations of the Securities Exchange Act of 1934 in connection with certain allegedly false and misleading statements. These lawsuits, which sought damages in an unspecified amount, were consolidated into a single proceeding captioned In re Health Management Systems, Inc. Securities Litigation (97 CIV-1965 (HB)) and a Consolidated Amended Complaint was filed. Defendants made a motion to dismiss the Consolidated Amended Complaint, which was submitted to the Court on December 18, 1997 following oral argument. On May 27, 1998, the Consolidated 10 12 Amended Complaint was dismissed by the Court for failure to state a claim under the federal securities laws, with leave for the plaintiffs to replead. On July 17, 1998, a Second Consolidated Amended Complaint was filed in the United States District Court for the Southern District of New York, which reiterated plaintiffs' allegations in their prior Complaint. On September 11, 1998, the Company and the other defendants filed a motion to dismiss the Second Consolidated Amended Complaint. The motion was fully briefed in late November 1998, at which time the motion was submitted to the Court. The consolidated proceeding was reassigned to another Judge. The Court heard oral argument on the motion to dismiss on June 11, 1999. Prior to rendering its decision on the motion to dismiss, the Court ordered the parties to attempt to settle the case, and meetings toward that end were conducted. On December 20, 1999, the parties reached a tentative agreement on the principal terms of settlement of the litigation against all defendants. Pursuant to the settlement understanding, without admitting any wrongdoing, certain of the defendants agreed to pay, in complete settlement of this lawsuit, the sum of $4,500,000, not less than 75 percent of which was to be paid by the Company's insurance carriers. For the fiscal year ended October 31, 1999, the Company has recorded a charge of $845,000 related to this settlement. As noted, on August 14, 2000, the Court signed an Order and Final Judgment approving the settlement. See Note 19 of Notes to Consolidated Financial Statements and Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal Years Ended October 31, 1999 and 1998. On June 28, 1998, eight holders of promissory notes (the "Notes") of HHL Financial Services, Inc. ("HHL") commenced a lawsuit against the Company and others in the Supreme Court of the State of New York, County of Nassau, alleging various breaches of fiduciary duty on the part of the defendants against HHL. The complaint alleges that, as a result of these breaches of duty, HHL was caused to make substantial unjustified payments to the Company which, ultimately, led to defaults on the Notes and to HHL's filing for Chapter 11 bankruptcy protection. On June 30, 1998, the same Note holders commenced a virtually identical action (the "Adversary Proceeding") in the United States Bankruptcy Court for the District of Delaware, where HHL's Chapter 11 proceeding is pending. The Adversary Proceeding alleges the same wrongdoing as the New York State Court proceeding and seeks the same damages, i.e., $2,300,000 (the unpaid amount of the Notes) plus interest. Plaintiffs have moved in the Bankruptcy Court to have the Court abstain from hearing the Adversary Proceeding in deference to the New York State Court action. The Company has opposed plaintiffs' motion for abstention and on September 15, 1998 filed a motion in the Bankruptcy Court to dismiss the Adversary Proceeding. This motion was briefed in December 1998. Oral argument on the motions was heard by the Court on April 22, 1999 and the motions are now sub judice. The Company intends to continue its vigorous defense of this lawsuit. Management believes the risk of loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company's financial position or cash flows, although it could be material to the Company's operating results in any one accounting period. In May 2000, the Company commenced an action in the Supreme Court of the State of New York, County of New York ("New York Supreme Court"), for summary judgment in lieu of complaint against The Institutes for Health & Human Services, Inc. ("IHHS") seeking judgment in the amount of $270,000 on an unpaid promissory note. In July 2000, the Court granted the Company judgment in that amount (together with interest and attorneys' fees assessed at an inquest in January 2001 in the amount of $27,000), but stayed enforcement of the judgment pending assertion and resolution of claims IHHS represented it had against the Company. Later in July, IHHS asserted such claims against the Company in an action filed in New York Supreme Court. The complaint alleged that the Company fraudulently withheld information from IHHS to induce it to enter into various specified contracts with the Company, and that the Company breached various contractual obligations to IHHS. The complaint sought an aggregate of $9,100,000 in compensatory damages, and punitive damages in an unspecified amount. The action came on for trial in January, 2001, at which time the Court directed entry for judgement, dismissing the case, and awarding the Company damages on its counterclaims in an amount to be assessed at an inquest. On September 13, 2000, the Company was served with a complaint in a lawsuit commenced by Davis & Associates, Inc. ("D&A") in the United States District Court for the Southern District of New York. The complaint 11 13 alleges, among other things, that the Company breached contractual obligations to D&A, wrongfully induced D&A to enter into various contracts with the Company, and wrongfully interfered with D&A's ability to perform under several contracts and pursue unspecified business opportunities. D&A seeks compensatory and punitive damages in unspecified amounts and injunctive and other equitable relief. The Company believes D&A's claims to be without merit, intends to contest them vigorously and has moved for summary judgment dismissing the case. Management believes that a loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company's financial position or cash flows, although it could be material to the Company's operating results in any one accounting period. Other legal proceedings to which the Company is a party, in the opinion of the Company's management, are not expected to have a material adverse effect on the Company's financial position, results of operations, or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is included in the NASDAQ-AMEX National Market System (symbol: HMSY). As of the close of business on January 11, 2001, there were approximately 9,000 holders of the Company's common stock, including the individual participants in security position listings. The Company has not paid any cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. The Company's current intention is to retain earnings to support the future growth of its business. The Company's credit agreement with its bank contains limitations on the Company's ability to pay cash dividends. The table below summarizes the high and low sales prices per share for the Company's common stock for the fiscal year periods indicated, as reported on the NASDAQ-AMEX National Market System.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------- 2000: HIGH $ 7.88 7.00 4.38 3.31 LOW 3.88 3.75 2.75 1.38 1999: HIGH $ 10.13 8.00 6.63 6.09 LOW 6.13 4.13 4.44 3.81
12 14 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA (a) (In Thousands, Except Per Common Share Data)
Years Ended October 31, 2000 1999 1998 1997 1996 =================================================================================================================================== STATEMENT OF OPERATIONS DATA: Revenue: Revenue Services Division Provider Revenue Services Group $ 44,736 $ 41,536 $ 34,987 $ 39,007 $ 55,410 Payor Revenue Services Group 20,113 26,414 22,251 16,849 26,406 - ----------------------------------------------------------------------------------------------------------------------------------- 64,849 67,950 57,238 55,856 81,816 Software Division Decision Support Group 21,781 22,542 25,499 24,873 19,510 Payor Systems Group 11,457 23,563 22,515 8,788 -- - ----------------------------------------------------------------------------------------------------------------------------------- 33,238 46,105 48,014 33,661 19,510 - ----------------------------------------------------------------------------------------------------------------------------------- 98,087 114,055 105,252 89,517 101,326 Cost of services, including restructuring charges 104,321(b) 102,918 95,628 88,355 87,873 - ----------------------------------------------------------------------------------------------------------------------------------- Operating margin (loss) before amortization of (6,234) 11,137 9,624 1,162 13,453 intangibles Amortization of intangibles (c) 948 840 1,964 1,331 204 - ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (7,182) 10,297 7,660 (169) 13,249 Net interest income 1,158 1,277 1,700 2,755 987 Other income (loss) -- -- 597 (856)(e) (1,371)(f) - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes and cumulative effect of change in accounting principle (6,024) 11,574 9,957 1,730 12,865 Income tax expense (benefit) (2,563) 4,091 3,869 (351) 5,574 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle (3,461) 7,483 6,088 2,081 7,291 Cumulative effect of change in accounting principle, net of tax 21,965(d) -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (25,426) $ 7,483 $ 6,088 $ 2,081 $ 7,291 =================================================================================================================================== PER COMMON SHARE DATA: Diluted loss per share before cumulative effect of change in accounting principle $ (0.20) $ 0.43 $ 0.34 $ 0.12 $ 0.39 Diluted loss per share on cumulative effect of change in accounting principle (1.26) -- -- -- -- Diluted earnings (loss) per share after cumulative effect of change in accounting principle $ (1.46) $ 0.43 $ 0.34 $ 0.12 $ 0.39 Weighted average common shares and common share equivalents 17,467 17,419 17,833 17,979 18,494 - -----------------------------------------------------------------------------------------------------------------------------------
As of October 31, 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Cash and short-term investments $ 16,740 $ 33,817 $ 28,402 $ 39,080 $ 39,521 Working capital 30,562 58,437 56,703 53,799 54,753 Total assets 85,333 130,921 117,802 109,694 109,643 Shareholders' equity $ 65,598 $ 91,232 $ 83,269 $ 79,806 $ 74,612 ===================================================================================================================================
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (a) Included in each respective year's amounts are the revenue and costs associated with the following acquisitions, accounted for using the purchase method of accounting (see Item 1. Business - Company History): HRM, since June 1999 acquisition; Global, since July 1997 acquisition; and HISCo/HSA, since 13 15 March 1997 acquisition. In accordance with the pooling method of accounting, financial data for fiscal year 1996 has been restated to reflect the merger with QSM in fiscal year 1997. (b) Restructuring costs of $3.5 million include the costs associated with changes in corporate and information systems management, including a one-time charge related to a severance arrangement with the Company's co-founder and former Chief Executive Officer, specific reductions in staff, and vacating of portions of office space in two cities. See Item 1. Business - Business Strategy, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors - Restructuring, and Note 12 of Notes to Consolidated Financial Statements. (c) Intangible assets were principally recorded in connection with the Company's fiscal year 1989 recapitalization, its acquisition of QMA in fiscal year 1990, its HISCo and Global acquisitions in fiscal year 1997, and its HRM acquisition in fiscal year 1999. The amortization of software related to the HISCo acquisition was completed during fiscal year 1999. See Item 1. Business - Company History and Notes 1(e) and 8 of Notes to Consolidated Financial Statements. (d) After analyzing the SEC's "Frequently Asked Questions and Answers" bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), the Company has elected early adoption for its fiscal year ended October 31, 2000, implementing a change in accounting in regard to revenue generated from clients seeking reimbursement from third-party payors where the Company's fees are contingent upon the client's collections from third parties. As of November 1, 1999, the Company recognizes revenue pertaining to such clients once the third-party payor has remitted payment to its client, thereby eliminating unbilled receivables and substantially reducing deferred tax liabilities. The change reduced revenue by $3.0 million and increased net loss by $503,000 for fiscal year 2000, excluding the cumulative effect of the change. The cumulative effect pertaining to this change as of the beginning of the Company's fiscal year 2000 is $22.0 million, net of tax benefit. See Notes 1(h), 5, 9, 18 and 20 of Notes to Consolidated Financial Statements. (e) Includes costs associated with the Company's merger with QSM, and acquisition of the remaining outstanding shares of HISCo not already owned by the Company. See Item 1. Business - Company History and Note 1(e) of Notes to Consolidated Financial Statements. (f) Includes costs associated with the Company's merger with CDR. See Item 1. Business - Company History. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL YEARS ENDED OCTOBER 31, 2000 AND 1999 Consolidated revenue for the fiscal year ended October 31, 2000 was $98,087,000 under the new accounting policy as compared to $114,055,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. See footnote (d) of Item 6. Selected Consolidated Financial Data and Notes 1(h) and 5 of Notes to Consolidated Financial Statements. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, revenue year-over-year would have been approximately $98.1 million for fiscal year 2000 and $98.9 million for fiscal year 1999. See Risk Factors - Variability of Operating Results; Length of Sales Cycles; Terminability of Customer Contracts, New Product Development and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below. The Revenue Services Division, comprised of the Provider Revenue Services Group and the Payor Revenue Services Group, generated revenue of $64,849,000 under the new accounting policy as compared to $67,950,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior 14 16 fiscal year 1999, revenue year-over-year would have been approximately $64.8 million for fiscal year 2000 and $54.3 million for fiscal year 1999, an increase of 19% from the prior year. The Provider Revenue Services Group generated revenue of $44,736,000 under the new accounting policy as compared to $41,536,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, revenue year-over-year would have been approximately $44.7 million for fiscal year 2000 and $36.8 million for fiscal year 1999, an increase of 21% from the prior year. Of this increase, the Provider Revenue Services Group included $7.3 million in revenue growth attributable to the HRM acquisition in July 1999. The increases in revenue achieved as a result of the growth in the Company's fieldwork offering and the recapture of the balance of the RCR engagement previously lost to a competitor for one of the Company's ten largest clients, partially offset by the previously reported discontinuance of two large but unprofitable engagements, and the Group's disappointment in not recognizing additional revenue pertaining to an existing revenue maximization engagement for the District of Columbia and in generating lower than expected sales of additional revenue maximization services. See Risk Factors - Variability of Operating Results; Length of Sales Cycles; Terminability of Customer Contracts, New Product Development and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below. The Payor Revenue Services Group generated revenue of $20,113,000 under the new accounting policy as compared to $26,414,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, revenue year-over-year would have been approximately $20.1 million for fiscal year 2000 and $17.5 million for fiscal year 1999, an increase of 15% from the prior year. Nevertheless, the Company aspired to generate better recovery results and substantially greater sales of new State recovery projects although recognizing the rather elongated sales cycle associated with government contracts. With a new business unit manager in place during the fourth quarter, the Company is reassessing its sales strategy and strategic focus in regard to this Group. See Risk Factors - Variability of Operating Results; Length of Sales Cycles; Terminability of Customer Contracts, New Product Development and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below. The Software Services Division, comprised of the Payor Systems Group and the Decision Support Group, generated revenue of $33,238,000 under the new accounting policy as compared to $46,105,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, revenue year-over-year would have been approximately $33.2 million for fiscal year 2000 and $44.5 million for fiscal year 1999. This Division's decline in revenue was attributable entirely to the Payor Systems Group, as the Decision Support Group's revenue increased over the prior year. The Payor Systems Group continued to be severely affected by the perceived industry-wide softness in new sales of existing claims software systems and consulting services while the Group is developing its next generation claims adjudication system. This Group produced revenue of $11,457,000 for fiscal year 2000 as compared to $23,563,000 for fiscal year 1999 with virtually no impact on the prior year periods had the new SEC guideline been in effect previously. As previously reported, the decline was due to a combination of (1) the winding down of an outsourcing engagement by a Blue Cross client which was acquired and converted to its new affiliate's internal data center, (2) the wind-down of a multi-year project with a single customer, (3) the completion of the initial implementation for a single customer and (4) the non-recurrence of substantial amounts of Y2K remediation work accomplished for the Payor Systems Group's clients last year. See Risk Factors - Variability of Operating Results; Length of Sales Cycles; Terminability of Customer Contracts, New Product Development and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below. 15 17 The Decision Support Group generated revenue of $21,781,000 under the new accounting policy as compared to $22,542,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, revenue year-over-year would have been approximately $21.8 million for fiscal year 2000 and $21.0 million for fiscal year 1999. This Group's rate of closing new sales increased in fiscal year 2000 and the Group has demonstrated an ability to install new sales rapidly, both of which produced the added benefit of continuing to reduce the concentration of revenue in this Group's largest account, which appears to be making a concerted effort to reverse its dependence on the Company as an "outside IT" vendor. See Risk Factors - Variability of Operating Results; Length of Sales Cycles; Terminability of Customer Contracts, New Product Development and System Enhancement, Competition, Healthcare Payment Complexity, Healthcare Regulation and Reform, Dependence upon Key Personnel, and Restructuring, below. Cost of services for fiscal year 2000 was $104,321,000 including restructuring charges, as compared to $102,918,000 for fiscal year 1999. The increase of $1.4 million from the prior year was a direct result of the $3.5 million of restructuring costs associated with changes in corporate and information systems management, including a one-time charge related to a severance arrangement with the Company's co-founder and former Chief Executive Officer, specific reductions in staff, and vacating of portions of office space in two cities. See Item 1. Business - Business Strategy, Risk Factors - Restructuring and Note 12 of Notes to Consolidated Financial Statements. Compensation expense, the largest component of cost of services, was $62,986,000 for the fiscal year ended October 31, 2000, reflecting a decrease of $1.3 million from the prior year, principally attributable to specific annual employee performance bonuses being earned in the prior year and not in fiscal year 2000. Data processing expense for the fiscal year 2000 was $4,488,000 as compared to $6,746,000 for the prior year, with the decrease primarily attributable to the Company's continued consolidation of its data processing platforms, reduced support of older versions of its systems, products and services, and the capitalization of additional software development costs incurred to enhance existing products and introduce new offerings, including the development costs of the Company's Payor Systems Group previously mentioned multi-year joint development project. During fiscal year 2000, the Company received approximately $1.7 million from this development partner which reduced capitalized software costs. See Item 1. Business - Overview, Healthcare Reform and Regulatory Matters, Principal Products and Services, Customers, Research and Development, and Business Strategy; see also Risk Factors - New Product Development and System Enhancement and Notes 1(f) and 7 of Notes to Consolidated Financial Statements. Occupancy costs increased from $9,377,000 in fiscal year 1999 to $10,788,000 in fiscal year 2000 principally attributable to the first full year of occupancy costs related to the acquisition of HRM in July 1999. Other operating costs increased from $11,328,000 in fiscal year 1999 to $11,389,000 in fiscal year 2000. Fiscal year 2000 included costs incurred for the Company's formal strategic planning process and increases in advertising, marketing and travel costs to support the Company's sales efforts while fiscal year 1999 included an $845,000 charge for the previously reported settlement of the Company's class action litigation. Principally as a result of the above factors, the Company generated a loss before income taxes for the fiscal year ended October 31, 2000 of $6,024,000 under the new accounting policy and including restructuring charges, as compared to income before income taxes of $11,574,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. Had the new SEC guidelines been in effect in the Company's prior fiscal year, the loss before income taxes year-over-year would have been approximately $6.0 million for fiscal year 2000 and $2.0 million for fiscal year 1999 with the change principally attributable to the impact of the restructuring charges. As previously noted, the Company implemented a change in accounting in regard to revenue generated from clients seeking reimbursement from third-party payors where the Company's fees are contingent upon the client's collections from third parties. The Company now recognizes revenue pertaining to such clients once the third-party payor has remitted payment to its client, thereby eliminating unbilled receivables and substantially reducing deferred tax liabilities. The cumulative effect of this change in accounting principle as of the beginning of 16 18 the Company's fiscal year 2000 is $22.0 million, net of tax benefit. See footnote (d) of Item 6. Selected Consolidated Financial Data and Notes 1(h), 5, 9, 18 and 20 of Notes to Consolidated Financial Statements. Principally as a result of the above factors, net loss for the fiscal year ended October 31, 2000 was $25.4 million, a loss per share of $0.20 before the cumulative effect of the change in accounting principle and $1.46 per share after the cumulative effect of this change. FISCAL YEARS ENDED OCTOBER 31, 1999 AND 1998 (both years reported under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature) Consolidated revenue for the fiscal year ended October 31, 1999 was $114,055,000, an increase of $8,803,000 or 8.4% over prior year revenue of $105,252,000. The Revenue Services Division, comprised of the Provider Revenue Services Group and the Payor Revenue Services Group, achieved revenue of $67,950,000, an increase of $10,712,000 or 19% from the prior year. Of these amounts, the Provider Revenue Services Group produced revenue of $41,536,000, including the $1,800,000 in revenue growth attributable to the HRM acquisition in July 1999, an increase of $6,549,000 or 19% from the prior year. The Payor Revenue Services Group produced revenue of $26,414,000, an increase in revenue of $4,163,000 or 19% from the prior year. Other than the revenue growth attributable to the HRM acquisition, the balance of the revenue growth realized by each of the two groups comprising the Revenue Services Division was internally generated from both (1) "new clients," defined as clients generating revenue in the fiscal year 1999 who did not generate revenue in fiscal year 1998, and (2) delivery of services of expanded scope to "existing clients," defined as clients who generated revenue in the comparable prior period. Revenue from the Software Division was $46,105,000, a decrease of $1,909,000 or 4% compared with the prior year. Revenue from the Decision Support Group was $22,542,000, a decrease of $2,957,000 or 11.6% from the prior year, while revenue from the Payor Systems Group increased $1,048,000 to $23,563,000, an increase of 5% from the prior period. Overall, the increased revenue realized in the Payor Systems Group was offset by the decrease in revenue from the Decision Support Group. The decrease in this Division's revenue was the result of an elongated sales cycle, attributable to clients' reluctance to make decisions regarding the implementation of new software while facing their own internal Y2K conversion, partially offset by the revenue earned from the Company's recurring base of clients and implementation of its sales backlog. Cost of services for the fiscal year ended October 31, 1999 was $102,918,000, an increase of $7,290,000 or 8% from the prior year. The increase was attributable to higher compensation costs, and direct project subcontractors, partially offset by lower data processing, occupancy, and other employee related operating expenses. Compensation expense, the largest component of cost of services, was $64,253,000 for the fiscal year ended October 31, 1999, reflecting an increase of $4,965,000 or 8% over the prior year. As a percentage of total revenue, compensation expense remained constant at 56% of total revenue in the fiscal years ended October 31, 1999 and 1998, respectively. Increased compensation expense was principally attributable to increases in average salaries to reflect prevailing market conditions, and an increase in personnel associated with the acquisition of HRM. Data processing expense for the fiscal year ended October 31, 1999 was $6,746,000, a decrease of $2,025,000 from the prior year. The decrease was primarily attributable to the Company's continued consolidation of its data processing platforms, reduced support of older versions of the Company's systems, products and services, the capitalization of additional software development costs incurred to enhance existing products, and the timing differences associated with amortization of multiple-period maintenance and software license fees. Direct project costs were $11,214,000 for the fiscal year ended October 31, 1999, reflecting an increase of $6,146,000 over the prior year, primarily attributable to the Company's increased use of revenue-generating subcontractor services to support the growth in the Revenue Services Division. Other operating expenses were $11,328,000 for the fiscal year ended October 31, 1999 including $845,000 reserved for settlement of the Company's class action litigation (see Note 19 of Notes to Consolidated Financial Statements), reflecting a decrease of $1,510,000 over the 17 19 prior year. The change was primarily attributable to lower professional fees and employee related costs, including recruiting costs. Principally as a result of the above factors, operating margin before amortization of intangible assets for the fiscal year ended October 31, 1999 was $11,137,000, an increase of $1,513,000 or 16% from the $9,624,000 realized in fiscal year 1998. The Company's operating margin rate before amortization of intangible assets was 10%, compared to 9% in the years ended October 31, 1999 and 1998, respectively. Amortization of intangible assets for the fiscal year ended October 31, 1999 was $840,000, a decrease of $1,124,000 from the prior year. This decrease was due primarily to completion, in fiscal year 1999, of the amortization of the excess purchase price related to the HISCo acquisition in fiscal year 1997 allocated to certain revenue contracts. Net interest and other income for the fiscal year ended October 31, 1999 was $1,277,000, a decrease of $1,020,000 over the prior year, based upon the combination of lower cash balances and interest rates, the HRM acquisition transaction, and a $600,000 capital gain on investment recorded in the prior fiscal year. The Company's income tax expense for the fiscal year ended October 31, 1999 was $4,091,000, resulting in an effective tax rate of approximately 35.3%. This compared to an income tax expense of $3,869,000 and an effective tax rate of approximately 38.9% for fiscal year 1998. The increased income tax expense was due primarily to the Company's higher pre-tax profit, offset by a more favorable effective tax rate realized from the Company's ability to file consolidated state tax returns in specific jurisdictions and from the newly enacted provision of the tax code pertaining to utilization of existing prior year net operating tax loss carryforwards, for which the Company had previously provided a valuation allowance. The Company reduced its valuation allowance by $372,000 related to this matter. Principally as a result of the above factors, net income for the fiscal year ended October 31, 1999 increased to $7,483,000, an increase of $1,395,000 or 23% from the prior year. Resultant diluted earnings per share was $0.43 in fiscal year 1999, compared to $0.34 in fiscal year 1998. LIQUIDITY AND CAPITAL RESOURCES At October 31, 2000, the Company had $30,562,000 in net working as compared to $58,437,000 for the prior fiscal year under the Company's historical accounting policies pre-dating the release of the SAB 101 current accounting literature. As previously noted, under this new accounting principle, unbilled receivables are no longer recognized. Had the new SEC guidelines been in effect in the Company's prior fiscal year 1999, working capital year-over-year would have been approximately $30.6 million for fiscal year 2000 and $32.7 million for fiscal year 1999, a decrease of $2.1 million from the prior year. The Company has historically devoted increasingly more resources to product and system development and enhancements and believes that significant continuing development efforts will be necessary to adapt to changing marketplace requirements, to sustain its operations, and to integrate the products and technologies of acquired businesses. The Company invested $7.2 million, $6.8 million, and $4.4 million in capitalized software development and fixed asset purchases in fiscal years 2000, 1999, and 1998 respectively. The Company's principal sources of liquidity at October 31, 2000 consisted of cash, cash equivalents, and short-term investments aggregating $16,740,000, and net accounts receivable of $24,261,000. In regard to use of cash and cash equivalents and short-term investments, the Company's use declined from a peak of approximately $7.9 million in the second quarter, to $4.7 million in the third quarter, to less than $800,000 in the fourth quarter, while it continued to invest in major product and system development and enhancements. This trend may not be indicative of future results. As previously noted, the Company, while continuing to invest in specific product and systems development and enhancements, is in the process of reassessing its strategy for, and commitment to, 18 20 certain of its products, services, and business segments; commenced a restructuring in the fourth quarter; and anticipates additional restructuring in fiscal year 2001. See Item 1. Business - Business Strategy and Risk Factors below. The increase in accounts receivable billed, net at October 31, 2000 over October 31, 1999 is principally attributable to the increase in invoicing generated in the fourth quarter of fiscal year 2000. The Company was, however, disappointed not to have yet received in excess of $2.7 million in payments from the District of Columbia and from which it was expecting to retire various subcontractor advances made to Davis and Associates during the year. See Note 19 of Notes to Consolidated Financial Statements. The Company's credit facility with a major N.Y. money center institution expires on February 13, 2001. Since the Company has not drawn on this facility and has no current expectations to do so, the Company is in the process of reassessing its strategy in regards to a potential new facility. The Company's financial institution also waived the need for compliance with a fiscal year-end financial ratio after giving effect to the change in accounting principle. Should the Company pursue securing a new credit facility with its financial institution, there can also be no assurance that the Company will be able to do so on terms that are consistent with the current credit facility or terms that are acceptable to the Company. On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of its common stock that have an aggregate purchase price not in excess of $10,000,000. The Company may repurchase these shares from time to time on the open market or in negotiated transactions at prices deemed appropriate by the Company. Repurchased shares are deposited in the Company's treasury and used for general corporate purposes. Since the inception of the repurchase program in June 1997, the Company has repurchased 1,311,666 shares having an aggregate purchase price of $8,300,000, including 262,666 shares repurchased in fiscal year 2000 from the co-founder and former Chief Executive Officer of the Company under the terms of a separation agreement. See Note 10 to Notes to Consolidated Financial Statements. In addition, the Company has made a commitment, as a condition of employment, to provide for its new Chief Executive Officer to acquire approximately 7% of the Company's common shares directly from the Company. In January 2001, the Company's Accelerated Claims Processing, Inc. subsidiary, a Delaware corporation, provided the financing for purchase of 550,000 shares of the Company's common stock in exchange for a full recourse loan for $721,875, bearing interest at the rate of 6.5% per annum, payable annually in two equal installments commencing January 9, 2002 and the Company granted such executive stock options to purchase 750,000 shares at $1.3125 per share under the Company's 1999 Long-Term Incentive Stock Plan. The Company has also made commitments to certain key employees to induce them to stay during the Company's restructuring which may result in a charge in fiscal year 2001 of up to $2.6 million, depending on the completion of divestitures. As previously noted, the Company is considering divesting some of its non-strategic assets. Effective January 1, 2001, the Company sold its EDI business, consisting of substantially all of the assets of the Company's QMA subsidiary and certain of the assets of its Health Receivables Management, Inc. subsidiary. While the Company does not view this particular sale as significant, the Company has also hired Cain Brothers and Company to assist in other potential divestitures. As the Company divests non-strategic assets and builds on new services offerings, it may seek to acquire companies that supply targeted healthcare providers and/or payors with information management software, systems, or services if the offerings of the Company or such companies would benefit from access to the other's technology, software applications, or client base. The Company believes that such acquisition opportunities exist due, in part, to competitive pressures on local service businesses that lack adequate capital, technical, and management resources. See Item 1. Business - Business Strategy, Risk Factors - Divestitures, Related Marketing and Sales Partnerships and Acquisitions, Dependence upon Key Personnel, and Restructuring and Notes 12, 14 and 21 of Notes to Consolidated Financial Statements. 19 21 INFLATION Historically, inflation has not been a material factor affecting the Company's revenue, and general operating expenses have been subject to normal inflationary pressure. Notwithstanding, the Company's business is labor intensive. Wages and other employee-related expenses increase during periods of inflation and when shortages in the skilled labor market occur. Although the moderate inflation rates of the past several years have not imposed significant problems for the Company, in light of current shortages in the skilled labor market, the Company has implemented selective wage increases, and other retention compensation in fiscal year 2000 to promote retention of qualified personnel in key areas of its operations. The Company also has a performance-based bonus plan to foster retention of and incent certain employees. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criteria for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The effective date of SFAS No. 133 was delayed to the Company's fiscal year beginning November 1, 2000 by the issuance of SFAS No. 137. The Company has determined that the effect of adopting this new standard is insignificant to the consolidated financial statements. RISK FACTORS PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS In passing the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Congress encouraged public companies to make "forward-looking statements" by creating a safe harbor to protect companies from securities law liability in connection with forward-looking statements. The Company intends to qualify both its written and oral forward-looking statements for protection under the Reform Act and any other similar safe harbor provisions. "Forward-looking statements" are defined by the Reform Act. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, prospective investors are urged not to place undue reliance on written or oral forward-looking statements of the Company. The Company undertakes no obligation to update or revise this safe harbor compliance statement for forward-looking statements to reflect future developments. In addition, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. The Company provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Reform Act and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the following: 20 22 VARIABILITY OF OPERATING RESULTS; LENGTH OF SALES CYCLES; TERMINABILITY OF CUSTOMER CONTRACTS. The Company's revenue and operating results may vary significantly from quarter to quarter as a result of a number of factors, including the number and timing of systems sales; the termination of, or a reduction in, offerings of the Company's products and services; the loss of customers due to consolidation in the healthcare industry; the length of the sales cycles and delays in the implementation process; the timing of periodic revenue enhancement projects; the timing and delays in third-party payors' adjudication of claims and ultimate payment to the Company's clients where the Company's fees are contingent upon such collections; and general economic conditions. The Company experiences sales cycles of approximately three to eighteen months. As a result, the Company's results of operations are subject to significant fluctuations and its results of operations for any particular quarter or fiscal year may not be indicative of results of operations for future periods. A significant portion of the Company's operating expenses is fixed, and planned expenditures are based primarily on sales forecasts. Any inability of the Company to reduce spending or to compensate for any failure to meet sales forecasts or receive anticipated revenues could magnify the adverse impact of such events on the Company's operating results. Further, the commencement of one or more major implementations could generate a large increase in revenue and net income for any given quarter or fiscal year, which increase may prove anomalous when compared to changes in revenue and net income in other periods, and which may not provide a valid basis for future projections. The Company's ability to complete implementation of its systems and recognize revenue is dependent on certain factors outside the control of the Company, including its customers' ability to allocate internal resources to the implementation process and, with respect to certain customers, the need to obtain necessary approvals upon completion of work but prior to customer acceptance. In addition, many of the Company's agreements with its customers may be terminated under certain circumstances upon 30 to 90 days notice. The termination of customer and/or development partnership agreements, if not replaced, could have a material adverse effect on the Company's business, financial condition and results of operations. NEW PRODUCT DEVELOPMENT AND SYSTEM ENHANCEMENT The Company's future performance will depend in large part upon the Company's ability to provide the increasing functionality required by its customers through the timely development and successful introduction of new products and enhancements to its existing suite of products. The Company has historically devoted increasingly more resources to product and system development and enhancements and believes that significant continuing development and enhancement efforts will be necessary to adapt to changing marketplace requirements, to sustain its operations, and to integrate the products and technologies of acquired businesses. There can be no assurance that the Company will successfully or in a timely manner develop, acquire, integrate, introduce, and market new product enhancements or products, or that product enhancements or new products developed by the Company will meet the requirements of hospitals or other healthcare providers and payors and achieve or sustain market acceptance. LIMITED PROPRIETARY RIGHTS; RISK OF INFRINGEMENT The Company's success is dependent to a significant extent on its ability to maintain the proprietary and confidential aspects of its data processing and computer software technology. The Company relies on a combination of trade secrets, copyright and trademark laws, nondisclosure and other contractual provisions to protect its proprietary rights. There can be no assurance that the measures taken by the Company to protect its intellectual property will be adequate or that the Company's competitors will not independently develop products and services that are substantially equivalent or superior to those of the Company. Substantial litigation regarding intellectual property rights exists in the software industry, and the Company expects that software products may be increasingly subject to third-party infringement claims as the number of competitors in the Company's industry segment grows and the functionality of products overlaps. Although the Company believes that its products do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future or that 21 23 a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. In addition, any claim may require the Company to incur substantial litigation expenses or subject the Company to significant liabilities and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be successful in its defense of any such claims. RISK OF PRODUCT DEFECTS; FAILURE TO MEET PERFORMANCE CRITERIA Products and services such as those offered by the Company at times contain errors or failures, especially when initially introduced or when new versions are released or processes implemented. Although the Company conducts extensive testing, software errors are sometimes discovered in certain enhancements and products and services after their introduction. There can be no assurance that, despite testing by the Company and by current and potential customers, errors or performance failures will not occur in products and services under development or in other enhancements or products after commencement of commercial shipments or implementations, resulting in loss of revenue and customers, delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service and warranty costs, any of which could have a material adverse effect upon the Company's business, financial condition and results of operations. DIVESTITURES, RELATED MARKETING AND SALES PARTNERSHIPS AND ACQUISITIONS The Company's strategy includes divestitures of non-core assets and the subsequent expansion of its business through selective acquisitions and marketing and sales partnerships. In pursuing divestitures, there can be no assurance that such divestitures will be successful or sufficient to allow the Company to generate improved operating results or financial position in future periods. In addition, divestiture plans could generate potential disruptions to the business, which could materially adversely affect the Company's operating results and financial position. In pursuing subsequent expansion opportunities, the Company competes with others, some of which may have greater financial resources than the Company. There can be no assurance that suitable opportunities will be identified or can be consummated or integrated successfully into the Company's operations. In addition, future expansion transactions by the Company could result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other tangible assets, any of which could materially adversely affect the Company's operating results and financial position. Growth through acquisition entails certain risks in that acquired operations could be subject to unanticipated business uncertainties or legal liabilities. The Company seeks to minimize these risks through investigation and evaluation of the operations proposed to be acquired and through transaction structure and indemnification. The various risks associated with the acquisitions and operational integration of future acquisitions and the subsequent performance of such acquired operations may adversely affect the Company's results of operations. The ability of the Company to acquire additional operations may depend upon its ability to obtain appropriate financing and personnel. COMPETITION The business of providing information management and data processing products and services to hospitals and other healthcare providers and to government health service agencies and other healthcare payors is highly competitive. The Company's competitors vary in the size, scope and breadth of the products and services they offer. There can be no assurance that competitors will not develop or offer products with superior functionality, or that other features of competitive products will not be preferred by the Company's customers. Several of the Company's competitors have significantly greater financial, technical, product development and marketing resources than the Company. In the future, additional competitors could enter the market, including providers of information systems to other segments of the healthcare industry, and compete with the Company. A substantial amount of the 22 24 Company's sales are derived from competitive procurement processes managed directly by sophisticated clients or consultants that require specific, highly detailed presentations from several qualified vendors. There can be no assurance that future competition will not have a material adverse effect on the Company's business, financial condition and results of operations. HEALTHCARE PAYMENT COMPLEXITY The complexity of the healthcare transfer payment process, and the experience of the Company in offering services that improve the ability of its customers to recover incremental revenue through that process, have been contributing factors to the success of the Company's service offerings. Complexities of the healthcare transfer payment process include multiple payors, the coordination and utilization of clinical, operational, financial and/or administrative review instituted by third-party payors in an effort to control costs and manage care. If the payment processes associated with the healthcare industry are simplified, the need for services such as those offered by the Company could be reduced, and there could be a resulting adverse effect on the Company's business, results of operations or financial condition. HEALTHCARE REGULATION AND REFORM The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. The Company's products are designed to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. During the past several years, the healthcare industry has been subject to increasing levels of governmental regulation of, among other things, reimbursement rates, certain capital expenditures, and data confidentiality and privacy. From time to time, certain proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for the Company's clients. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for the Company's products and services. The Company cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on its results of operations, financial condition or business. DEPENDENCE UPON KEY PERSONNEL As the Company's success depends upon the continued contributions of its senior management, the loss of services of certain of the Company's executive officers could have an adverse effect on the Company's business. The Company has entered into a three-year employment agreement with its Chief Executive Officer as of October 2, 2000. Although the Company does not have long term service agreements with its other executive officers, the Company's policy is to enter into confidentiality, non-compete and non-solicitation agreements with its employees. In general, such agreements (i) require the employee to protect the confidential and proprietary information of the Company and (ii) preclude the employee from soliciting other employees of the Company or competing with the Company for periods of up to three years following termination of employment. In addition, the Company believes that its continued success also will depend in large part on its ability to attract and retain highly skilled management, technology, marketing, and sales personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel as necessary. Furthermore, the Company's ability to manage change and growth successfully will require the Company to continue to improve its management expertise as well as its financial systems and controls. Additions of new personnel, and departures of existing skilled employees, can be disruptive and could have a material adverse effect on the Company's business, financial condition and results of operations. 23 25 POSSIBLE VOLATILITY OF STOCK PRICES The market price of the Company's common stock has been subject in the past and could be subject in the future to significant fluctuations in response to variations in the Company's quarterly operating results and other factors, such as announcements of technological innovations or new products by the Company or by the Company's competitors, adoption of new or amended government regulations, challenges to or changes in patent or other proprietary rights, divestitures, acquisitions, and developments in the Company's relationships with its customers. In addition, the stock market has in recent years experienced and continues to experience significant price fluctuations. These fluctuations often have been unrelated to the operating performance of the specific companies whose stock is traded. Broad market fluctuations, as well as fluctuating economic conditions generally, may adversely affect the market price of the Company's common stock. CERTAIN ANTI-TAKEOVER PROVISIONS The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined by the Company's Board of Directors. Accordingly, the Company's Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or, other rights of holders of the Company's common stock. In the event of issuance, preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of preferred stock, there can be no assurance that the Company will not do so in the future. In addition, the Company's by-laws provide for a classified Board of Directors, which provision could also have the effect of discouraging a change of control of the Company. LITIGATION The Company is a party to various proceedings as described under Item 3, "Legal Proceedings," of this Report, which description is incorporated herein by reference. Although the Company believes that it has meritorious defenses to the claims of liability or for damages in the actions against the Company, there can be no assurance that an outcome favorable to the Company will be reached in any of these litigations or that additional lawsuits will not be filed against the Company. Further, there can be no assurance that these lawsuits will not have a disruptive effect upon the operations of the business, that the defense of the lawsuits will not consume the time and attention of the senior management of the Company, or that the resolution of the lawsuits will not have a material adverse effect upon the Company, including without limitation, the Company's results of operations, financial position and cash flow. RESTRUCTURING There can be no assurance that the restructuring activities described elsewhere in this Annual Report on Form 10-K will be successful or sufficient to allow the Company to generate improved operating results in future periods. It is possible that additional changes in the Company's business or in its industry may necessitate additional restructurings in the future. The necessity for additional restructuring activities may result in expenses that adversely affect reported results of operations in the period the restructuring plan is adopted, and require incremental cash payments. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's holdings of financial instruments are comprised of federal, state and local government debt. All such instruments are classified as securities available for sale. The Company does not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. The Company's debt security portfolio represents funds held temporarily, pending use in the Company's business and operations. The Company 24 26 manages these funds accordingly. The Company seeks reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while, at the same time, seeking to achieve a favorable rate of return. The Company's market risk exposure consists principally of exposure to changes in interest rates. The Company's holdings are also exposed to the risks of changes in the credit quality of issuers. The Company typically invests in the shorter-end of the maturity spectrum or highly liquid investments. The table below presents the historic cost basis, and the fair value for the Company's investment portfolio as of October 31, 2000, and the related weighted average interest rates by year of maturity:
Fiscal year Fiscal year Total Total 2001 2002 Historical Cost Fair value - ----------------------------------------------------------------------------------------------- Fixed income assets: Governmental Securities $ 5,216,000 $ 1,140,000 $ 6,356,000 $ 6,167,000 Average interest rate 5.61% 5.63% 5.62% - -----------------------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 is found on pages 30 to 51 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 will be included in the Company's Proxy Statement for the 2000 Annual Meeting of Shareholders (the "Proxy Statement"), which will be mailed within 120 days after the close of the Company's fiscal year ended October 31, 2000, and is hereby incorporated herein by reference to such Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 will be included in the Proxy Statement, which will be mailed within 120 days after the close of the Company's fiscal year ended October 31, 2000, and is hereby incorporated herein by reference to such Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 will be included in the Proxy Statement, which will be mailed within 120 days after the close of the Company's fiscal year ended October 31, 2000, and is hereby incorporated herein by reference to such Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 will be included in the Proxy Statement, which will be mailed within 120 days after the close of the Company's fiscal year ended October 31, 2000, and is hereby incorporated herein by reference to such Proxy Statement. 25 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Financial Statements: See Index to Consolidated Financial Statements on page 28 B. Schedule: Schedule II - Valuation and Qualifying Accounts on page 51 C. Reports on Form 8-K: None D. Exhibits: See Exhibit Index on page 52 26 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HEALTH MANAGEMENT SYSTEMS, INC. ------------------------------ (REGISTRANT) BY: /S/ WILLIAM F. MILLER III ---------------------------- William F. Miller III President and Chief Executive Officer DATE: February 13, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ---- /S/ WILLIAM F. MILLER III Chairman, President, February 13, 2001 - -------------------------- Chief Executive Officer, William F. Miller III and Director /S/ ALAN L. BENDES Senior Vice President and February 13, 2001 - ------------------ Chief Financial Officer Alan L. Bendes /S/ RANDOLPH G. BROWN Director February 13, 2001 - --------------------- Randolph G. Brown /S/ ROBERT V. NAGELHOUT Director, and President of Software February 13, 2001 - ----------------------- Systems and Services Division Robert V. Nagelhout /S/ WILLIAM W. NEAL Director February 13, 2001 - ------------------- William W. Neal /S/ GALEN D. POWERS Director February 13, 2001 - ------------------- Galen D. Powers /S/ ELLEN A. RUDNICK Director February 13, 2001 - -------------------- Ellen A. Rudnick /S/ RICHARD H. STOWE Director February 13, 2001 - -------------------- Richard H. Stowe
27 29 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE CONSOLIDATED FINANCIAL STATEMENTS : NUMBER - ----------------------------------- ------ Independent Auditors' Report 29 Consolidated Balance Sheets as of October 31, 2000 and 1999 30 Consolidated Statements of Operations for the Years Ended October 31, 2000, 1999, and 1998 31 Consolidated Statements of Comprehensive Income (loss) for the Years Ended October 31, 2000, 1999, and 1998 32 Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 2000, 1999, and 1998 33 Consolidated Statements of Cash Flows for the Years Ended October 31, 2000, 1999, and 1998 34 Notes to Consolidated Financial Statements 35 FINANCIAL STATEMENT SCHEDULE: Schedule II - Valuation and Qualifying Accounts 51
28 30 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Health Management Systems, Inc.: We have audited the accompanying consolidated financial statements of Health Management Systems, Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 financial position of Health Management Systems, Inc. and subsidiaries as of October 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ KPMG LLP New York, New York January 5, 2001 29 31 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ In Thousands, Except Per Share Amounts)
October 31, ------------------------- 2000 1999 --------- --------- Assets Current assets: Cash and cash equivalents $ 10,573 $ 16,310 Short-term investments 6,167 17,507 Accounts receivable, billed, net 24,261 17,001 Accounts receivable, unbilled, net -- 41,661 Income tax receivable 829 588 Prepaid expenses and other current assets 6,921 3,928 --------- --------- Total current assets 48,751 96,995 Property and equipment, net 7,216 7,766 Capitalized software costs, net 9,922 7,286 Goodwill, net 12,055 12,762 Deferred income taxes, net 6,643 3,797 Notes receivable from officer -- 900 Other assets 746 1,415 --------- --------- Total assets $ 85,333 $ 130,921 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued expenses $ 14,502 $ 18,050 Deferred revenue 3,687 4,541 Deferred income taxes, net -- 15,967 --------- --------- Total current liabilities 18,189 38,558 Other liabilities 1,546 1,131 --------- --------- Total liabilities 19,735 39,689 --------- --------- Commitments and contingencies Shareholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued and outstanding -- -- Common stock - $.01 par value; 45,000,000 shares authorized; 18,563,922 shares issued and 17,252,256 shares outstanding at October 31, 2000; 18,450,737 shares issued and 17,401,737 shares outstanding at October 31, 1999 186 184 Capital in excess of par value 72,170 71,714 Retained earnings 1,652 27,078 Accumulated other comprehensive income (loss) (110) 6 --------- --------- 73,898 98,982 Less treasury stock, at cost (1,311,666 shares and 1,049,000 shares at October 31, 2000 and October 31, 1999, respectively) (8,300) (7,750) --------- --------- Total shareholders' equity 65,598 91,232 --------- --------- Total liabilities and shareholders' equity $ 85,333 $ 130,921 ========= =========
See accompanying notes to consolidated financial statements. 30 32 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Amounts)
Years ended October 31, ----------------------------------------- 2000 1999 1998 --------- --------- --------- Revenue: $ 98,087 $ 114,055 $ 105,252 --------- --------- --------- Cost of services: Compensation 62,986 64,253 59,288 Data processing 4,488 6,746 8,771 Occupancy 10,788 9,377 9,663 Direct project costs 11,187 11,214 5,068 Other operating costs 11,389 11,328 12,838 Restructuring costs 3,483 -- -- --------- --------- --------- 104,321 102,918 95,628 --------- --------- --------- Operating margin (loss) before amortization of intangibles (6,234) 11,137 9,624 Amortization of intangibles 948 840 1,964 --------- --------- --------- Operating income (loss) (7,182) 10,297 7,660 --------- --------- --------- Other income: Interest income, net 1,158 1,277 1,700 Other income, net -- -- 597 --------- --------- --------- 1,158 1,277 2,297 --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (6,024) 11,574 9,957 Income tax expense (benefit) (2,563) 4,091 3,869 --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (3,461) 7,483 6,088 Cumulative effect of change in accounting principle, net of tax benefit ("cumulative effect") 21,965 -- -- --------- --------- --------- Net income (loss) $ (25,426) $ 7,483 $ 6,088 ========= ========= ========= Earnings per share data: Basic: Basic earnings (loss) per share before cumulative effect $ (0.20) $ 0.43 $ 0.35 Basic earnings (loss) per share on cumulative effect (1.26) -- -- --------- --------- --------- Basic earnings (loss) per share after cumulative effect $ (1.46) $ 0.43 $ 0.35 ========= ========= ========= Weighted average common shares outstanding 17,467 17,357 17,366 ========= ========= ========= Diluted: Diluted earnings (loss) per share before cumulative effect $ (0.20) $ 0.43 $ 0.34 Diluted earnings (loss) per share on cumulative effect (1.26) -- -- --------- --------- --------- Diluted earnings (loss) per share after cumulative effect $ (1.46) $ 0.43 $ 0.34 ========= ========= ========= Weighted average common shares and common share equivalents 17,467 17,419 17,833 ========= ========= ========= Pro forma net income (loss) assuming new accounting principle is applied retroactively $ (3,461) $ (1,297) $ 476 ========= ========= ========= Pro forma basic and diluted earnings (loss) per share assuming new accounting principle is applied retroactively $ (0.20) $ (0.07) $ 0.03 ========= ========= =========
See accompanying notes to consolidated financial statements. 31 33 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ($ IN THOUSANDS)
Years ended October 31, -------------------------------------- 2000 1999 1998 -------- -------- -------- Net income (loss) $(25,426) $ 7,483 $ 6,088 Other comprehensive loss, net of tax: Change in net unrealized depreciation on short-term investments (116) (101) (574) -------- -------- -------- Comprehensive income (loss) $(25,542) $ 7,382 $ 5,514 ======== ======== ========
See accompanying notes to consolidated financial statements. 32 34 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ($ IN THOUSANDS)
Common Stock ------------------- Accumulated Number of Capital In Other Total Shares Par Excess Of Retained Comprehensive Treasury Shareholders' Outstanding Value Par Value Earnings Income Stock Equity ----------- ----- --------- -------- ------ ----- ------ Balance at October 31, 1997 17,459,153 $178 $67,304 $ 13,507 $ 681 ($1,863) $ 79,807 Net income -- -- -- 6,088 -- -- 6,088 Stock option activity 440,316 4 2,713 -- -- -- 2,717 Employee stock purchase plan activity 118,398 -- 515 -- -- -- 515 Treasury stock acquisition (734,500) 1 -- -- -- (5,887) (5,886) Disqualifying dispositions -- -- 602 -- -- -- 602 Change in net unrealized depreciation on short-term investments -- -- -- -- (574) -- (574) ---------- ---- ------- -------- ----- ------- -------- Balance at October 31, 1998 17,283,367 183 71,134 19,595 107 (7,750) 83,269 Net income -- -- -- 7,483 -- -- 7,483 Stock option activity 41,247 -- 210 -- -- -- 210 Employee stock purchase plan activity 77,123 1 337 -- -- -- 338 Disqualifying dispositions -- -- 33 -- -- -- 33 Change in net unrealized depreciation on short-term investments -- -- -- -- (101) -- (101) ---------- ---- ------- -------- ----- ------- -------- Balance at October 31, 1999 17,401,737 184 71,714 27,078 6 (7,750) 91,232 Net loss -- -- -- (25,426) -- -- (25,426) Stock option activity 67,090 1 309 -- -- -- 310 Employee stock purchase plan activity 46,095 1 134 -- -- -- 135 Treasury stock acquisition (262,666) -- -- -- -- (550) (550) Disqualifying dispositions -- -- 13 -- -- -- 13 Change in net unrealized depreciation on short-term investments -- -- -- -- (116) -- (116) ---------- ---- ------- -------- ----- ------- -------- Balance at October 31, 2000 17,252,256 $186 $72,170 $ 1,652 ($110) $(8,300) $ 65,598 ========== ==== ======= ======== ===== ======= ========
See accompanying notes to consolidated financial statements. 33 35 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS)
Years ended October 31, ---------------------------------- 2000 1999 1998 -------- -------- -------- Operating activities: Net income (loss) $(25,426) $ 7,483 $ 6,088 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of capitalized software 5,138 3,755 3,520 Amortization of intangibles 948 840 1,964 Provision for doubtful accounts 397 690 838 Deferred tax expense (benefit) (2,247) 4,166 4,022 Disqualifying dispositions 13 33 602 Cumulative effect of change in accounting principle, net of tax 21,965 -- -- Changes in assets and liabilities: Increase in accounts receivable (7,657) (2,496) (16,312) (Increase) decrease in income tax receivable (241) 1,752 (1,830) (Increase) decrease in prepaid expenses and other current assets (1,893) 133 (1,147) Increase (decrease) in accounts payable and accrued expenses (1,519) 491 (289) Increase (decrease) in deferred revenue (854) (401) 754 Increase (decrease) in other assets and liabilities, net 844 (477) (511) -------- -------- -------- Net cash provided by (used in) operating activities (10,532) 15,969 (2,301) -------- -------- -------- Investing activities: Software capitalization (4,672) (4,107) (3,138) Capital asset expenditures (2,552) (2,720) (1,263) Net sales (purchases) of short-term investments 11,224 (3,089) 3,295 Acquisition of net assets of Health Receivables Management, LLC, net of cash acquired -- (4,024) -- Net repayment (borrowing) from officer 900 (150) (750) -------- -------- -------- Net cash provided by (used in) investing activities 4,900 (14,090) (1,856) -------- -------- -------- Financing activities: Proceeds from issuance of common stock 135 338 515 Proceeds from exercise of stock options 310 210 2,717 Common stock repurchases (550) -- (5,886) -------- -------- -------- Net cash provided by (used in) financing activities (105) 548 (2,654) -------- -------- -------- Net increase (decrease) in cash and cash equivalents (5,737) 2,427 (6,811) Cash and cash equivalents at beginning of period 16,310 13,883 20,694 -------- -------- -------- Cash and cash equivalents at end of period $ 10,573 $ 16,310 $ 13,883 ======== ======== ========
See accompanying notes to consolidated financial statements. 34 36 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Health Management Systems, Inc. (the "Company") furnishes proprietary information management, data processing, and software (including consulting) services to healthcare providers and payors, including government health service agencies. The Company is organized into two divisions: the Revenue Services Division ("Revenue Services Division") and the Software Systems and Services Division ("Software Division"). The Revenue Services Division comprises two business units: the Provider Revenue Services Group and the Payor Revenue Services Group. The Company's Software Division also comprises two business units: the Decision Support Group and the Payor Systems Group. (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents For purposes of financial reporting, the Company considers all highly liquid investments purchased with an original maturity of three months or less (including money market instruments of $9,341,000 and $11,461,000 at October 31, 2000 and 1999, respectively) to be cash equivalents. (c) Short-Term Investments Short-term investments are recorded at fair value. Included in short-term investments are investments classified as available for sale and carried at fair value. Debt securities that the Company does not have the intent and ability to hold to maturity are classified either as "available for sale" or as "trading" and are carried at fair value. Unrealized gains and losses on securities classified as available for sale are carried as a separate component of shareholders' equity. Unrealized gains and losses on securities classified as trading are reported in earnings. Management determines the appropriate classification of its investments in debt and equity securities at the time of purchase and reevaluates such determination at each balance sheet date. (d) Depreciation and Amortization of Property and Equipment Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the property and equipment utilizing the straight-line method. Amortization of leasehold improvements is provided over the estimated useful lives of the assets or the terms of the leases, whichever is shorter, utilizing the straight-line method. The estimated useful lives are as follows: Equipment 3-5 years Leasehold improvements 5-10 years Furniture and fixtures 5-7 years
(e) Intangible Assets Intangible assets have been recorded primarily as a result of the recapitalization of the Company in 1989, the acquisition of Quality Medi-Cal Adjudication, Incorporated ("QMA") in 1990, the acquisition of the remaining shares of Health Information Systems Corporation ("HISCo") in March 1997, the acquisition of the assets of Global Health Systems, Inc. and GHS Management Services, Inc. (collectively "Global") in July 1997, and the acquisition of the assets of Health Receivables Management, LLC ("Old HRM") in July 1999. Intangible assets consist primarily of goodwill, which are being amortized on a straight-line basis between ten and forty years. (f) Software Development Cost The Company capitalizes software development costs incurred related to software developed for resale subsequent to the establishment of technological feasibility until the product is released for commercial use. Similarly, costs incurred to develop upgrades are capitalized until the upgrades are commercially released. Before technological feasibility has been established, the Company expenses all costs incurred for the product. Any cash received from a development partner is recorded first as an offset to any previously capitalized software development costs on the related development project before revenue is recognized. During fiscal year 2000, the 35 37 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company received approximately $1.7 million from a development partner, which reduced capitalized software costs. No revenue was recognized related to the Company's software development partnerships during fiscal year 2000. The Company also capitalizes certain software development costs related to software developed for internal use while in the application development stage. All other costs incurred to develop software for internal use, either in the preliminary project stage or post implementation stage are expensed as incurred. Amortization of software development costs is calculated on a straight-line basis over the expected economic life of the product, generally estimated to be 36-48 months. (g) Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of the Company's financial instruments included in the accompanying consolidated balance sheets approximate estimated fair value as of October 31, 2000 and 1999. (h) Revenue Recognition After analyzing the SEC's "Frequently Asked Questions and Answers" bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), the Company elected early adoption in its fourth quarter for its fiscal year ended October 31, 2000, implementing a change in accounting in regard to revenue generated from clients seeking reimbursement from third-party payors where the Company's fees are contingent upon the client's collections from third parties. As of November 1, 1999, the Company recognizes revenue pertaining to such clients once the third-party payor has remitted payment to its client, thereby eliminating unbilled receivables and substantially reducing deferred tax liabilities. In previous years, prior to SAB 101, the Company recognized revenue pertaining to clients seeking reimbursement from third-party payors when billings were submitted to clients or their third-party payors or intermediaries as a consequence of completion and acceptance of services performed by the Company for a client. Certain of these clients' contracts contain periodic fee limitations or fixed-fees. The fees allowable under these contracts are recognized once cash is collected by the client on a straight-line basis over the fee limitation or fixed-fee period and amounts billed in excess in any one period are deferred. Transaction-related revenue is recognized based upon the completion of those transactions or services rendered during a given period. Revenue from consulting, technical and training services is recognized as the services are provided. Revenue from software products sold to customers under license agreements is deferred and recognized as revenue primarily upon software installation and satisfaction of significant Company obligations, if any, and when collection of the resulting receivable is reasonably assured. Revenue from ongoing maintenance agreements is deferred and recognized as revenue on a straight-line basis over the periods of the respective maintenance agreements. (i) Income Taxes Income taxes are accounted for under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. (j) New Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new standard requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives will be reported in the statement of operations or as a deferred item, depending on the use of the derivatives and whether they qualify for hedge accounting. The key criteria for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The 36 38 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS effective date of SFAS No. 133 was delayed to the Company's fiscal year beginning November 1, 2000 by the issuance of SFAS No. 137. The Company has determined that the effect of adopting this new standard is insignificant to the consolidated financial statements. (k) Net Income Per Common Share Basic earnings per share is based on the net income for the relevant period divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the net income for the relevant period divided by the weighted average number of common shares and common stock equivalents outstanding during the period. The Company had weighted average common shares and common stock equivalents outstanding during fiscal years 2000, 1999, and 1998 of 17,467,000, 17,357,000, and 17,366,000 and of 10,000, 62,000, and 467,000, respectively. The common stock equivalents for fiscal year 2000 are excluded from the weighted average shares as it would be antidilutive to the per share calculation. The Company's common stock equivalents consist of stock options. (l) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reported period. The actual results could differ from those estimates. (m) Reclassifications Certain reclassifications were made to prior year amounts to conform to the current presentation. (n) Stock-Based Compensation The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On October 31, 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro-forma net income and pro-forma earnings per share disclosures for employee stock option grants made in fiscal 1996 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro-forma disclosure provisions of SFAS No. 123. (o) Accounting for the Impairment of Long-Lived Assets The Company reviews its long-lived assets, certain identifiable intangibles, and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future discounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. 2. BUSINESS COMBINATIONS In June 1999, the Company's Quality Standards in Medicine, Inc. ("QSM") subsidiary acquired substantially all of the assets and assumed specified liabilities of Old HRM for $4,024,000, net of cash acquired and subject to certain purchase price adjustments. In connection with the transaction, QSM changed its name to Health Receivables Management, Inc. ("HRM"). HRM currently furnishes Medicaid application services, electronic billing, eligibility verification, accounts receivable management and collection services to healthcare providers, principally in the State of Illinois. 37 39 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The acquisition was accounted for using the purchase method of accounting and, accordingly, the results of operations of HRM from the date of acquisition through October 31, 1999 are included in the accompanying consolidated financial statements. Its results are included in the Provider Revenue Services Group. The $1,618,000 excess of the purchase price over the fair market value of the identifiable assets acquired was recorded as goodwill and is being amortized over a period not to exceed 15 years. The following unaudited pro forma financial information presents the combined results of operations of the Company and HRM as if the acquisition had occurred as of the beginning of fiscal years 1999 and 1998, after giving effect to certain adjustments. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and HRM constituted a single entity during such periods.
(Unaudited) Year ended October 31, 1999 1998 ----------------------------------------------------------------------- Revenue $119,209,000 $113,066,000 Net income 7,556,000 5,571,000 Basic earnings per share 0.41 0.32 Diluted earnings per share $ 0.40 $ 0.31 -----------------------------------------------------------------------
3. SHORT-TERM INVESTMENTS The Company's holdings of financial instruments are comprised of federal, state and local government debt, and corporate debt. All such instruments are classified as securities available for sale. The Company does not invest in portfolio equity securities or commodities or use financial derivatives for trading purposes. The Company's debt security portfolio represents funds held temporarily, pending use in the Company's business and operations. The Company manages these funds accordingly. The Company seeks reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities while, at the same time, seeking to achieve a favorable rate of return. The Company's market risk exposure consists principally of exposure to changes in interest rates. The Company's holdings are also exposed to the risks of changes in the credit quality of issuers. The Company typically invests in the shorter-end of the maturity spectrum or highly liquid investments. The table below presents the historical cost basis, and the fair value for the Company's investment portfolio as of October 31, 2000 (by year of maturity) and as of October 31,1999:
Fiscal year Fiscal year Total October 31, 2000 2001 2002 Historical Cost Fair value - ------------------------------------------------------------------------------------------------ Fixed Income Governmental Securities $ 5,216,000 $ 1,140,000 $ 6,356,000 $ 6,167,000 - ------------------------------------------------------------------------------------------------
Total October 31, 1999 Historical Cost Fair value - -------------------------------------------------------------------------------- Fixed income assets Governmental Securities $17,276,000 $17,005,000 Corporate debt 500,000 502,000 - -------------------------------------------------------------------------------- $17,776,000 $17,507,000 - --------------------------------------------------------------------------------
4. ACCOUNTS RECEIVABLE Accounts receivable are reflected net of an allowance for doubtful accounts of $1,848,000 and $1,823,000 at October 31, 2000 and 1999, respectively. 5. CHANGE IN ACCOUNTING PRINCIPLE FOR REVENUE RECOGNITION After analyzing the SEC's "Frequently Asked Questions and Answers" bulletin released on October 12, 2000 pertaining to Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), 38 40 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the Company elected early adoption in its fourth quarter for its fiscal year ended October 31, 2000, implementing a change in accounting in regard to revenue generated from clients seeking reimbursement from third-party payors where the Company's fees are contingent upon the client's collections from third parties. As of November, 1999, the Company recognizes revenue pertaining to such clients once the third-party payor has remitted payment to its client, thereby eliminating unbilled receivables and substantially reducing deferred tax liabilities. In previous years, prior to SAB 101, the Company recognized revenue pertaining to clients seeking reimbursement from third-party payors when billings were submitted to clients or their third-party payors or intermediaries as a consequence of completion and acceptance of services performed by the Company for a client. Accounts receivable, unbilled, net, in the prior year, represents amounts recognized for services rendered but not yet invoiced and was based on the Company's estimate of the fees that would have been invoiced upon receipt of remittance data. Accounts receivable, billed, net, represents amounts invoiced to clients. As of October 31, 1999, the Company had unbilled accounts receivable of approximately $41.7 million under its historic accounting policy, pre-dating the SEC release of SAB 101. Of this amount, $24.6 million completed its cycle and was included in the Company's revenue and operating results during fiscal year 2000 in accordance with the Company's early adoption of SAB 101. The consolidated statement of operations for the year ended October 31, 2000 has been presented in the accompanying financial statements based on this newly adopted revenue recognition policy. The change reduced revenue by $3.0 million and increased net loss by $503,000 for fiscal year 2000, excluding the cumulative effect of the change. The cumulative effect pertaining to this change as of the beginning of the Company's fiscal year 2000 is $22.0 million, net of tax benefit. The $22.0 million cumulative effect reflects $41.7 million of unbilled receivables offset by $1.5 million of related direct costs and $18.2 million of income tax benefit. The proforma effects to net income and related per share amounts for the years ended October 31, 1999 and 1998 are also presented in the accompanying consolidated statements of operations. 6. PROPERTY AND EQUIPMENT Property and equipment as of October 31, 2000 and 1999 consisted of the following:
1999 2000 ------------ ------------ Equipment $ 15,516,000 $ 19,022,000 Leasehold improvements 6,190,000 6,161,000 Furniture and fixtures 5,227,000 5,192,000 ------------ ------------ 26,933,000 30,375,000 Less accumulated depreciation and amortization (19,717,000) (22,609,000) ------------ ------------ Property and equipment, net $ 7,216,000 $ 7,766,000 ============ ============
Depreciation and amortization expense related to property and equipment charged to operations for the years ended October 31, 2000, 1999, and 1998 was $3,102,000, $2,731,000, and $2,564,000, respectively. Of the $30,375,000 of property and equipment as of October 31, 1999, $5,994,000 were fully depreciated and no longer in use as of October 31, 2000 and are excluded from the balances as of October 31, 2000. 7. CAPITALIZED SOFTWARE COSTS Capitalized software costs as of October 31, 2000 and 1999 consisted of the following:
2000 1999 ------------ ------------ Capitalized software costs $ 15,672,000 $ 11,000,000 Less accumulated amortization (5,750,000) (3,714,000) ------------ ------------ Capitalized software costs, net $ 9,922,000 $ 7,286,000 ============ ============
Amortization expense for the years ended October 31, 2000, 1999, and 1998 was $2,036,000, $1,024,000, and $956,000, respectively. 39 41 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets as of October 31, 2000 and 1999 consisted of the following:
2000 1999 ---------- ---------- Goodwill $ 15,811,000 $ 15,916,000 Less accumulated amortization (3,756,000) (3,154,000) ------------ ------------ Goodwill, net 12,055,000 12,762,000 ============ ============ Other intangible assets 1,443,000 1,443,000 Less accumulated amortization (1,213,000) (973,000) ------------ ------------ Other intangible assets, net $ 230,000 $ 470,000 ============ ============
Amortization expense related to intangible assets charged to operations for the years ended October 31, 2000, 1999, and 1998, was $948,000, $840,000, and $1,964,000, respectively. During fiscal year 2000, the Company completed amortization of the $105,000 of goodwill related to the QMA acquisition in fiscal year 1990 and is no longer reflected in the balances as of October 31, 2000. During fiscal year 1999, the Company completed the amortization of the $5,593,000 of excess purchase price allocated to certain revenue contracts related to the HISCo acquisition in fiscal year 1997 and is no longer reflected in the balances as of October 31, 2000 and 1999, respectively. 9. INCOME TAXES Income tax expense (benefit) related to income before income taxes and cumulative effect of the change in accounting principle for the years ended October 31, 2000, 1999, and 1998 was comprised of the following (fiscal years 1999 and 1998 reflect the previously noted historical accounting policy related to revenue recognition, pre-dating the SEC release of SAB 101):
2000 1999 1998 ---------- ---------- ---------- Current tax expense (benefit): Federal $ (608,000) $ (145,000) $ (577,000) State and local 292,000 70,000 423,000 ----------- ----------- ----------- (316,000) (75,000) (154,000) ----------- ----------- ----------- Deferred tax expense (benefit): Federal (1,424,000) 3,254,000 3,505,000 State and local (823,000) 912,000 518,000 ----------- ----------- ----------- (2,247,000) 4,166,000 4,023,000 ----------- ----------- ----------- Income tax expense (benefit), net $(2,563,000) $ 4,091,000 $ 3,869,000 ============ =========== ===========
40 42 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation of the income tax expense (benefit) related to income before income taxes and cumulative effect of the change in accounting principle to the applicable federal statutory rates follows:
2000 1999 1998 ----------------------- ---------------------- ----------------------- Income tax expense (benefit): Computed at federal statutory rate $(2,049,000) (34.0%) $ 3,951,000 34.1% $ 3,386,000 34.0% State and local tax expense, net (345,000) (5.7) 647,000 5.6 621,000 6.2 of federal benefit Amortization of goodwill 56,000 0.9 56,000 0.5 83,000 0.8 Municipal interest (186,000) (3.1) (199,000) (1.7) (181,000) (1.8) Decrease in valuation allowance (93,000) (1.5) (372,000) (3.2) -- -- Amortization of software -- -- -- -- 104,000 1.0 Tax contingency -- -- -- -- (261,000) (2.6) Other, net 54,000 0.9 8,000 -- 117,000 1.3 ----------- ------ ----------- ------ ----------- ------ Total income tax expense (benefit) $(2,563,000) (42.5)% $ 4,091,000 35.3% $ 3,869,000 38.9% =========== ====== =========== ====== =========== ======
Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities. The tax effect of temporary differences that give rise to a significant portion of the deferred tax assets and deferred tax liabilities at October 31, 2000 and 1999 were as follows:
2000 1999 ------------ ------------ Deferred tax assets: Accounts receivable/deferred revenue $ 948,000 $ 193,000 Allowance for doubtful accounts 887,000 777,000 Property and equipment 3,739,000 3,732,000 HHL one-time charges 300,000 325,000 Accounts payable and accrued expenses 154,000 203,000 Federal, state and local net operating loss carryforward 10,358,000 7,261,000 Minimum tax credit -- 572,000 Other 1,559,000 684,000 ------------ ------------ Total deferred tax assets before valuation allowance 17,945,000 13,747,000 Less: Valuation allowances (931,000) (1,024,000) ------------ ------------ Total deferred tax assets after valuation allowance 17,014,000 12,723,000 ------------ ------------ Deferred tax liabilities: Accounts receivable/deferred items -- 18,446,000 Capitalized software development cost 4,909,000 3,194,000 Federal impact of state and local net operating losses 1,537,000 1,207,000 Other 2,314,000 2,046,000 ------------ ------------ Total deferred tax liabilities 8,760,000 24,893,000 ============ ============ Total net deferred tax asset (liabilities) $ 8,254,000 $(12,170,000) ============ ============ Net current deferred tax asset (liabilities) $ 1,611,000 $(15,967,000) Net non-current deferred tax asset 6,643,000 3,797,000 ------------ ------------ Total net deferred tax asset (liabilities) $ 8,254,000 $(12,170,000) ============ ============
The valuation allowances for the fiscal years ended October 31, 2000, 1999, and 1998 were $931,000, $1,024,000 and $1,396,000, respectively. At October 31, 2000, the Company had a net operating loss carryforward of $16,000,000 and $20,000,000, which is available to offset future federal and state/local taxable income, respectively. Of the federal amount, $3,998,000 is subject to annual limitation of $266,000 under Internal Revenue Code Section 382. The federal and state/local net operating loss carryforwards expire between fiscal years 2012 through 2020, and fiscal years 2012 through 2015, respectively. The Company's management believes that the utilization of certain net operating loss carryforward is not more likely than not to be realized, and therefore has maintained a valuation allowance of $931,000 at October 31, 2000. The Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation of allowance, specifically based upon: (a) an existing work-in-progress backlog, (b) cost cutting efforts being implemented, including the commencement of a restructuring effect as a result of the completion of its first full scale strategic planning process, and (c) certain 41 43 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS tax planning strategies which the Company is considering which would result in accelerated taxable income allowing for further assurance of the realization of the deferred tax benefit. Cash payments attributable to income taxes for the years ended October 31, 2000, 1999, and 1998 were $166,000, $522,000, and $2,412,000, respectively. The Company has had disqualifying disposition transactions during the three years ended October 31, 2000. The tax benefit derived from disqualifying dispositions increased shareholders' equity by $13,000, $33,000, and $602,000 during the fiscal years ended October 31, 2000, 1999, and 1998, respectively. 10. NOTES RECEIVABLE FROM OFFICER During October 1998, the Company's HSA subsidiary, a Delaware corporation, made two loans to Paul J. Kerz, an officer and director of HSA, who was also, at the time, the Company's Chairman and Chief Executive Officer. One loan, in the principal amount of $500,000, was secured by a pledge of 162,666 shares of the Company's common stock owned by Mr. Kerz, while the other loan, in the principal amount of $250,000, was unsecured. Both loans bore interest at the rate of 5.3125% per annum, payable semi-annually commencing April 30, 1999, and were due as to principal and all then accrued but unpaid interest on October 31, 2000. During October 1999, HSA (i) extended the due date of both loans to December 31, 2001 and (ii) increased the total principal amount of the unsecured loan to $1,000,000, of which a total of $400,000 was outstanding as of October 31, 1999. During November 1999, Mr. Kerz drew down the remaining $600,000 of the unsecured loan. In addition, the interest rate on the amended loans was increased to 5.9686% per annum. The amendments to the loans were unanimously approved by the Board of Directors of HSA and the Company as the sole stockholder of HSA, following the recommendation of the Compensation Committee of the Company's Board of Directors that the amendment to the loans was in the best interest of HSA and the Company, and the unanimous approval of the amendment to the loans by the independent members of the Company's Board of Directors. The loans were repaid in full from a portion of the compensation received by Mr. Kerz under the terms of a separation agreement as of October 2, 2000. Pursuant to the terms of separation, Mr. Kerz received separation compensation of $1.5 million and an additional payment of $150,000 in exchange for his non-compete through April 2006. In addition, the Company purchased 262,666 shares of his common stock at fair market value as reflected in the treasury stock classification on the balance sheet, will provide full salary continuation for two years, a consulting arrangement for $50,000 per year thereafter until April 2006, health insurance coverage for the related periods, and Mr. Kerz surrendered all of his unexercised stock options. The total charge of approximately $2.7 million related to this separation was included in restructuring charges for fiscal year 2000. 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses as of October 31, 2000 and 1999 consisted of the following:
2000 1999 ----------- ----------- Accounts payable $ 4,192,000 $ 5,922,000 Accrued compensation 3,694,000 5,113,000 Accrued direct project costs 4,072,000 3,112,000 Accrued restructuring costs 1,165,000 -- Accrued other expenses 1,379,000 3,903,000 ----------- ----------- $14,502,000 $18,050,000 =========== ===========
12. RESTRUCTURING In the fourth quarter of fiscal year 2000, having completed a full-scale strategic planning process, the Company began implementation of a restructuring plan and recorded a restructuring charge of $3,483,000. The amount accrued included the costs associated with changes in corporate and information systems management and specific reductions in staff (17 employees representing $3,041,000), including a charge related to a separation arrangement with the Company's co-founder and former Chief Executive Officer (see Note 10 of Notes to 42 44 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS consolidated financial statements, and the planned vacating of portions of office space in two cities ($442,000). Of the restructuring charges relating to occupancy costs, all $442,000 remains as a liability at October 31, 2000 and of the $3,041,000 restructuring charge relating to compensation, $1,329,000 is the remaining liability at October 31, 2000, of which $606,000 is recorded as a long-term liability. 13. CREDIT FACILITY The facility is comprised of a $10 million committed revolver and a $20 million advised line of credit with a major money center bank. The facility expires on February 13, 2001. The interest rate and unused commitment fee on the revolver were LIBOR plus 87.5 basis points, and 37.5 basis points, respectively through October 31, 2000 and LIBOR plus 1.125 percent and 0.625 percent, respectively thereafter. The revolving facility contains, among other things, restrictions on additional borrowings, capital expenditures, leases, sales of assets, and payments of dividends and contains covenants that require the Company, among other things, to maintain minimum cash, asset, debt coverage, and consolidated tangible shareholders' equity, as defined in the agreement. The Company's financial institution waived the need for compliance with a fiscal year-end financial ratio after giving effect to the change in accounting principle and any outstanding amounts would be secured by the Company's marketable securities. As of October 31, 2000 and 1999, no amounts were outstanding under this or the predecessor credit facility. Cash interest payments including bank charges attributable to the aforementioned credit facility for the years ended October 31, 2000, 1999, and 1998 were $59,000, $105,000, and $102,000, respectively. 14. COMMITMENTS (a) Lease commitments The Company leases office space and data processing equipment under operating leases that expire at various dates through 2013. The lease agreements provide for rent escalations. Rent expense, net of sublease income, for the years ended October 31, 2000, 1999, and 1998, including escalations, was $7,943,000, $6,806,000, and $6,801,000, respectively. Sublease income was $826,000, $1,401,000 and $751,000 for the years ended October 31, 2000, 1999, and 1998, respectively. Minimum annual lease payments to be made and sublease payments to be received for each of the next five years ending October 31 and thereafter are as follows:
Year Payments Sublease Payments ---- ----------- ----------------- 2001 $ 7,002,000 $1,066,000 2002 6,405,000 1,067,000 2003 5,051,000 1,066,000 2004 4,604,000 1,067,000 2005 3,914,000 1,066,000 'Thereafter 14,626,000 178,000 ----------- ---------- Total $41,602,000 $5,510,000 =========== ==========
(b) Retention Compensation The Company has made commitments to certain key employees to induce them to stay during the Company's restructuring which may result in a charge in fiscal year 2001 of up to $2.6 million, depending on the completion of divestitures. (c) Employment Commitment The Company made a commitment, as a condition of employment, to provide for its new Chief Executive Officer to acquire approximately 7% of the Company's common shares directly from the Company. In January 2001, the Company's Accelerated Claims Processing, Inc. subsidiary, a Delaware corporation, provided the 43 45 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS financing for purchase of 550,000 shares of the Company's common stock in exchange for a full recourse loan for $721,875, bearing interest at the rate of 6.5% per annum, payable annually in two equal installments commencing January 9, 2002 and the Company granted such executive stock options to purchase 750,000 shares at $1.3125 per share under the Company's 1999 Long-Term Incentive Stock Plan. 15. EQUITY On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of its common stock that have an aggregate purchase price not in excess of $10,000,000. The Company is authorized to repurchase these shares from time to time on the open market or in negotiated transactions at prices deemed appropriate by the Company. Repurchased shares are deposited in the Company's treasury and used for general corporate purposes. In fiscal year 2000, the Company repurchased a total of 262,666 shares of common stock for $550,000, or $2.09 per share. Since the inception of the repurchase program in June 1997, the Company has repurchased 1,311,666 shares of common stock at an average price of $6.33 per share having an aggregate purchase price of $8,300,000. The Company's certificate of incorporation, as amended, authorizes the issuance of up to 5,000,000 shares of "blank check" preferred stock with such designations, rights and preferences as may be determined by the Company's Board of Directors. 16. PROFIT SHARING AND 401(K) PLAN Effective October 31, 1997, the Company terminated its profit sharing plan, including the 401(k) plan. A replacement, but identical, 401(k) plan was established as of November 1, 1997. Having obtained approval by the Internal Revenue Service, an initial distribution of the assets of the terminated profit sharing plan was completed on December 18, 1998; the majority of the individual accounts were distributed in March 1999. At its discretion, the Company may make annual contributions to the 401(k) plan for the benefit of participating employees. For the years ended October 31, 2000, 1999, and 1998, 401(k) plan expense was $1,120,000, $1,102,000, and $959,000, respectively. 17. STOCK-BASED COMPENSATION PLANS At October 31, 2000, the Company had three stock-based compensation plans, which are described below. The Company has adopted the disclosure-only provisions of SFAS 123 and applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no employee compensation costs have been recognized for its stock purchase plan and stock option plans. Had compensation costs for the Company's three stock-based compensation plans been determined consistent with the fair value method prescribed by SFAS 123, the Company's net income (loss) and related per share amounts would have been adjusted to the pro forma amounts indicated below:
(In Thousands, Except Per Common Share Amounts) 2000 1999 1998 - --------------------------------------------------------------------------------------------------- Net income (loss) As reported $(25,426) $7,483 $6,088 Pro forma (27,759) 6,325 2,189 Net income (loss) per basic share As reported (1.46) 0.43 0.35 Pro forma (1.59) 0.36 0.13 Net income (loss) per diluted share As reported (1.46) 0.43 0.34 Pro forma $ (1.59) $0.36 $0.12 - ---------------------------------------------------------------------------------------------------
The effect noted above by applying the disclosure-only provisions of SFAS 123 may not be representative of the pro forma effect in future years. 44 46 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of the stock options granted in 2000, 1999, and 1998 is estimated at the grant date using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 0% (the Company does not pay dividends); expected volatility of 271.3%, 58.3%, and 48.9%; a risk-free interest rate of 6.1%, 4.7%, and 5.7%; and expected lives of 3.70, 4.76, and 4.91 years, respectively. The Company's 1999 Long-Term Incentive Stock Plan (the "Plan"), which replaced the Health Management Systems, Inc. Stock Option and Restricted Stock Purchase Plan terminated in May 1999, was approved by its shareholders at the Annual Meeting of Shareholders held on March 9, 1999. The primary purposes of the Plan are (i) to promote the interests of the Company and its shareholders by strengthening the Company's ability to attract and retain highly competent individuals to serve as Board of Directors, officers and other key employees and (ii) to provide a means to encourage stock ownership and proprietary interest by such persons. The Plan provides for the grant of (a) options to purchase shares of the Company's common stock at an exercise price no less than 100% of the estimated fair market value of the Company's common stock; (b) stock appreciation rights ("SAR") representing the right to receive a payment, in cash, shares of common stock, or a combination thereof, equal to the excess of the fair market value of a specified number of shares of the Company's common stock on the date the SAR is exercised over the fair market value of such shares on the date the SAR was granted; or (c) stock awards made or valued, in whole or in part, by reference to shares of common stock. Options are granted under the Plan with various vesting provisions, including time based and/or performance based vesting periods. Stock options currently outstanding become exercisable and expire at various dates through October 2010. As of October 31, 2000, no SAR's or stock purchase awards had been granted. The Plan authorizes the issuance of up to 4,751,356 shares of common stock. The Plan expires in January 2009. The Company's 1995 Non-Employee Director Stock Option Plan (the "NEDP") was adopted by the Board of Directors on November 30, 1994, which action was subsequently approved by shareholders at the Annual Meeting of Shareholders held on March 7, 1995. Under the NEDP, directors of the Company who are not employees of the Company or its subsidiaries are granted options to purchase 1,500 shares of common stock of the Company during the fourth fiscal quarter of each year commencing with fiscal year 1995. Options for the purchase of up to 112,500 shares of common stock may be granted under the NEDP and the Company will reserve the same number of shares for issuance. The options available for grant are automatically increased to the extent any granted options expire or terminate unexercised. Presented below is a summary of the stock option plans for the years ended October 31, 2000, 1999, and 1998:
2000 1999 1998 --------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares Price Shares price --------- ------- --------- -------- --------- -------- Outstanding at beginning of year 3,335,928 $ 6.85 1,801,098 $ 7.50 1,925,856 $ 7.82 Granted 536,000 4.79 1,965,250 6.16 541,504 6.57 Exercised (67,090) 4.59 (41,247) 5.09 (440,316) 6.17 Cancelled (935,716) 8.22 (389,173) 6.58 (225,946) 10.63 --------- ------ --------- ------ --------- ------ Outstanding at end of year 2,869,122 $ 6.06 3,335,928 $ 6.85 1,801,098 $ 7.50 ========= ====== ========= ====== ========= ====== Weighted average Grant-date fair value of options Granted (Black-Scholes) $ 4.74 $ 2.30 $ 3.17 ====== ====== ======
45 47 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information for stock options outstanding at October 31, 2000:
Total outstanding options Outstanding exercisable options - ----------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Number average average average Range of outstanding remaining exercise Number exercise exercise prices as of 10/31/00 contractual life price exercisable price - ----------------------------------------------------------------------------------------------------------------- $ 1.30 - 4.70 683,542 8.57 $ 4.47 264,642 $ 4.42 4.76 - 6.32 837,986 7.04 5.97 648,975 6.05 6.44 - 6.44 1,195,184 8.04 6.44 216,899 6.44 6.67 - 23.00 152,268 5.47 10.59 116,393 11.01 70.51 - 70.51 142 5.25 70.51 114 70.51 - ----------------------------------------------------------------------------------------------------------------- $1.30 - $70.51 2,869,122 7.73 $ 6.06 1,247,023 $ 6.24 =================================================================================================================
On May 28, 1997, the Board of Directors authorized a stock option exchange program for employee participants in the Plan. Eligible employees who held stock options ("Old Options") with exercise prices in excess of $10.00 per share were able to exchange them for stock options ("New Options") exercisable for a lesser number of shares with an exercise price of $5.88 per share, the average price of the Company's common stock on the NASDAQ-Amex National Market System on June 2, 1997 ("Grant Date"). Approximately 1,600,000 Old Options were eligible to be exchanged for 900,000 New Options. At the end of the exchange program, 1,288,000 Old Options were exchanged for 609,000 New Options. The New Options received in the exchange entailed a new vesting schedule where one quarter vested immediately on the Grant Date, with an additional quarter vesting on each of November 1, 1998, 1999, and 2000, respectively. To the extent that the fair market value of the Company's common stock exceeded $12.50 on each day for ten consecutive trading days, the vesting of all New Options not otherwise vested would become accelerated and 100% fully vested. On March 30, 1998, these New Options became fully vested as a consequence of the fair market value of the Company's common stock having exceeded $12.50 for the requisite ten consecutive trading day period. On May 28, 1993, the Board of Directors adopted the Health Management Systems, Inc. Employee Stock Purchase Plan (the "ESPP"), which was subsequently approved by shareholders at the Annual Meeting of Shareholders held on February 28, 1994. The Company has reserved for issuance up to 1,125,000 shares of common stock pursuant to the ESPP, which is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986. The ESPP provides that all full-time employees of the Company and its subsidiaries may elect to participate in the ESPP without regard to length of service if their customary employment is a minimum of 20 hours per week. For the years ended October 31, 2000, 1999, and 1998, the Company had sold 46,095, 77,123, and 118,398 shares, respectively, of common stock pursuant to the ESPP for aggregate consideration of $135,000, $338,000, and $515,000, respectively, which activity is reflected in the accompanying consolidated financial statements. The weighted-average fair value of those purchase rights granted in 2000, 1999, and 1998, respectively, based on the Black-Scholes model was $2.83, $2.35, and $3.52 respectively. 18. SEGMENT AND GEOGRAPHICAL INFORMATION In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of An Enterprise and Related Information." SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and in interim financial reports issued to stockholders. (a) Segment Information The Company measures the performance of its operating segments through "Operating Income" as defined in the accompanying consolidated statements of operations (1999 and 1998 reflect the previously noted historic accounting policy related to revenue recognition, pre-dating the SEC release of SAB 101). 46 48 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TOTAL Provider Payor REVENUE Revenue Revenue TOTAL Decision Payor TOTAL SERVICES Services Services SOFTWARE Support Systems ($ In Thousands) HMS DIVISION Group Group DIVISION Group Group - ---------------------------------------------------------------------------------------------------------------- 2000 Revenue $98,087 $64,849 $44,736 $20,113 $33,238 $21,781 $11,457 Operating income (loss) (7,182) (9,350) (4,203) (5,147) 2,168 2,438 (270) Total assets 85,333 40,997 26,996 14,001 44,336 24,790 19,546 Depreciation and Amortization 6,086 2,338 1,852 486 3,748 2,350 1,398 Capital expenditures and Software capitalization 7,234 4,146 2,508 1,638 3,088 2,005 1,083 - ---------------------------------------------------------------------------------------------------------------- 1999 Revenue 114,055 67,950 41,536 26,414 46,105 22,542 23,563 Operating income (loss) 10,297 2,150 (2,988) 5,138 8,147 4,328 3,819 Total assets 130,921 84,948 41,850 43,098 45,973 25,846 20,127 Depreciation and Amortization 4,595 2,263 1,611 652 2,332 1,408 924 Capital expenditures and Software capitalization 6,827 2,177 1,562 615 4,650 3,165 1,485 - ---------------------------------------------------------------------------------------------------------------- 1998 Revenue 105,252 57,238 34,987 22,251 48,014 25,499 22,515 Operating income (loss) 7,660 1,481 (1,620) 3,101 6,179 4,645 1,534 Total assets 117,802 77,515 40,448 37,067 40,287 22,516 17,771 Depreciation and Amortization 5,484 2,343 1,559 786 3,141 1,285 1,856 Capital expenditures and Software capitalization $4,401 $687 $420 $267 $3,714 $2,941 $773 - ----------------------------------------------------------------------------------------------------------------
Corporate assets, including cash, prepaid expenses, property and equipment and goodwill that are not specifically identified by segment have been allocated to identified segments based upon actual usage, occupancy, percentage of each segment's revenue to the consolidated revenue or other correlations with operating metrics. Fiscal 1999 and 1998 amounts include reclassifications to conform to the Company's refined current methodology. (b) Geographic Information The Company operates within the continental United States. The Company also has a limited number of overseas clients. Substantially all identifiable assets of the Company are located and safeguarded throughout the continental United States. (c) Major Customers No single client of the Company accounted for 10% or more of the Company's total revenue in fiscal year 2000. The Company's largest client is HCA-The Healthcare Company ("HCA"), a customer of the Decision Support Group. This client accounted for 7%, 9%, and 10% of the Company's total revenue in fiscal years 2000, 1999, and 1998, respectively. The Company provides its services to HCA primarily pursuant to annual work order agreements. There is no assurance that any of these agreements will be renewed. (d) Concentration of Revenue The clients constituting the Company's ten largest clients change periodically. The concentration of revenue in such accounts has decreased; accounting for approximately 45%, 48%, and 50% of the Company's 47 49 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS revenue in fiscal years 2000, 1999, and 1998, respectively. In many instances, including governmental clients, the Company provides its services pursuant to agreements subject to competitive re-procurement. All of these agreements periodically expire between fiscal year 2001 and 2004. There is no assurance that any of these agreements will be renewed and, if renewed, that the fee rates will be equal to those currently in effect. 19. LEGAL The settlement of the following litigation became final in August 2000. In April and May 1997, five purported class action lawsuits were commenced in the United States District Court for the Southern District of New York against the Company and certain of its present and former officers and directors alleging violations of the Securities Exchange Act of 1934 in connection with certain allegedly false and misleading statements. These lawsuits, which sought damages in an unspecified amount, were consolidated into a single proceeding captioned In re Health Management Systems, Inc. Securities Litigation (97 CIV-1965 (HB)) and a Consolidated Amended Complaint was filed. Defendants made a motion to dismiss the Consolidated Amended Complaint, which was submitted to the Court on December 18, 1997 following oral argument. On May 27, 1998, the Consolidated Amended Complaint was dismissed by the Court for failure to state a claim under the federal securities laws, with leave for the plaintiffs to replead. On July 17, 1998, a Second Consolidated Amended Complaint was filed in the United States District Court for the Southern District of New York, which reiterated plaintiffs' allegations in their prior Complaint. On September 11, 1998, the Company and the other defendants filed a motion to dismiss the Second Consolidated Amended Complaint. The motion was fully briefed in late November 1998, at which time the motion was submitted to the Court. The consolidated proceeding was reassigned to another Judge. The Court heard oral argument on the motion to dismiss on June 11, 1999. Prior to rendering its decision on the motion to dismiss, the Court ordered the parties to attempt to settle the case, and meetings toward that end were conducted. On December 20, 1999, the parties reached a tentative agreement on the principal terms of settlement of the litigation against all defendants. Pursuant to the settlement understanding, without admitting any wrongdoing, certain of the defendants agreed to pay, in complete settlement of this lawsuit, the sum of $4,500,000, not less than 75 percent of which was to be paid by the Company's insurance carriers. For the fiscal year ended October 31, 1999, the Company has recorded a charge of $845,000 related to this settlement. As noted, on August 14, 2000, the Court signed an Order and Final Judgment approving the settlement. On June 28, 1998, eight holders of promissory notes (the "Notes") of HHL Financial Services, Inc. ("HHL") commenced a lawsuit against the Company and others in the Supreme Court of the State of New York, County of Nassau, alleging various breaches of fiduciary duty on the part of the defendants against HHL. The complaint alleges that, as a result of these breaches of duty, HHL was caused to make substantial unjustified payments to the Company which, ultimately, led to defaults on the Notes and to HHL's filing for Chapter 11-bankruptcy protection. On June 30, 1998, the same Note holders commenced a virtually identical action (the "Adversary Proceeding") in the United States Bankruptcy Court for the District of Delaware, where HHL's Chapter 11 proceeding is pending. The Adversary Proceeding alleges the same wrongdoing as the New York State Court proceeding and seeks the same damages, i.e., $2,300,000 (the unpaid amount of the Notes) plus interest. Plaintiffs have moved in the Bankruptcy Court to have the Court abstain from hearing the Adversary Proceeding in deference to the New York State Court action. The Company has opposed plaintiffs' motion for abstention and on September 15, 1998 filed a motion in the Bankruptcy Court to dismiss the Adversary Proceeding. This motion was briefed in December 1998. Oral argument on the motions was heard by the Court on April 22, 1999 and the motions are now sub judice. The Company intends to continue its vigorous defense of this lawsuit. Management believes the risk of loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company's financial position or cash flows, although it could be material to the Company's operating results in any one accounting period. In May 2000, the Company commenced an action in the Supreme Court of the State of New York, County of New York ("New York Supreme Court"), for summary judgment in lieu of complaint against The Institutes for Health & Human Services, Inc. ("IHHS") seeking judgment in the amount of $270,000 on an unpaid promissory 48 50 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS note. In July 2000, the Court granted the Company judgment in that amount (together with interest and attorneys' fees assessed at an inquest in January 2001 in the amount of $27,000), but stayed enforcement of the judgment pending assertion and resolution of claims IHHS represented it had against the Company. Later in July, IHHS asserted such claims against the Company in an action filed in New York Supreme Court. The complaint alleged that the Company fraudulently withheld information from IHHS to induce it to enter into various specified contracts with the Company, and that the Company breached various contractual obligations to IHHS. The complaint sought an aggregate of $9,100,000 in compensatory damages, and punitive damages in an unspecified amount. The action came on for trial in January, 2001, at which time the Court directed entry for judgement, dismissing the case, and awarding the Company damages on its counterclaims in an amount to be assessed at an inquest. On September 13, 2000, the Company was served with a complaint in a lawsuit commenced by Davis & Associates, Inc. ("D&A") in the United States District Court for the Southern District of New York. The complaint alleges, among other things, that the Company breached contractual obligations to D&A, wrongfully induced D&A to enter into various contracts with the Company, and wrongfully interfered with D&A's ability to perform under several contracts and pursue unspecified business opportunities. D&A seeks compensatory and punitive damages in unspecified amounts and injunctive and other equitable relief. The Company believes D&A's claims to be without merit, intends to contest them vigorously and has moved for summary judgment dismissing the case. Management believes that a loss is not probable and accordingly has not recognized any accrued liability for this matter. Although the outcome of this matter cannot be predicted with certainty, the Company believes that any liability that may result will not, in the aggregate, have a material adverse effect on the Company's financial position or cash flows, although it could be material to the Company's operating results in any one accounting period. Other legal proceedings to which the Company is a party, in the opinion of the Company's management, are not expected to have a material adverse effect on the Company's financial position, results of operations, or liquidity. 20. QUARTERLY FINANCIAL DATA (UNAUDITED) The table below summarizes the Company's unaudited quarterly operating results for its last two fiscal years. Fiscal year 1999 reflects the previously noted historical accounting policy related to revenue recognition, pre-dating the SEC release of SAB 101, as reported in the Company's Quarterly Reports on Form 10-Q and Annual Report on Form 10-K relating to fiscal year 1999. Fiscal year 2000 reflects the restated first three quarters in accordance with the early adoption of SAB 101 implemented in the Company's fourth quarter, as described in Note 5 of consolidated financial statements.
First Second Third Fourth ($ In Thousands, Except Per Common Share Amounts) Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------- 2000: Revenue $ 24,523 $ 24,314 $ 21,858 $27,392 Operating loss (1,335) (2,552) (1,477) (1,818)(a) Net loss (22,556) (1,335) (675) (860)(a) Basic and diluted loss per share $ (1.29) $ (0.08) $ (0.04) $ (0.05)(a) - ---------------------------------------------------------------------------------------------------------------- 1999: Revenue $ 27,369 $ 8,857 $ 27,655 $ 30,174 Operating income 2,415 2,831 2,844 2,207 Net income 1,606 1,803 2,068 2,006 Basic and diluted earnings per share $ 0.09 $ 0.10 $ 0.12 $ 0.12 - ----------------------------------------------------------------------------------------------------------------
(a) Includes restructuring costs of $3,483,000 as described in Note 12 to the consolidated financial statements 49 51 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below reflects the effect of the change in accounting principle on each of the previous unaudited Quarterly Reports of Form 10-Q.
First Second Third Fourth ($ In Thousands, Except Per Common Share Amounts) Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------------------------------------------------- Net income (loss) under historical accounting principle $299 $709 $497 ($4,463)(a) Effect of change in accounting principle (890) (2,044) (1,172) 3,603 Cumulative effect of change in accounting principle, net of tax (21,965) -- -- -- -------------------------------------------- Net loss after effect of change in accounting principle ($22,556) ($1,335) ($675) ($860)(a) - ----------------------------------------------------------------------------------------------------------------- Basic and Diluted Earnings Per Share: Earnings (loss) per share, under historical accounting principle $0.02 $0.04 $0.03 ($0.26)(a) Effect of change in accounting principle (0.05) (0.12) (0.07) 0.21 Cumulative effect of change in accounting principle, net of tax (1.26) -- -- -- ----------------------------------------------- Loss per share after effect of change in accounting principle ($1.29) ($0.08) ($0.04) ($0.05)(a) - -----------------------------------------------------------------------------------------------------------------
(a) Including restructuring costs of $3,483,000 as described in Note 12 to the consolidated financial statements 21. SUBSEQUENT EVENT Effective January 1, 2001, the Company sold its EDI business, consisting of substantially all of the assets of the Company's QMA subsidiary and certain of the assets of its HRM subsidiary, to Medi, Inc. ("Medi"), a privately held entity. The purchase price of $2.8 million was comprised of a cash down payment of $450,000, a one-year secured promissory note in the principal amount of $275,000 and $2.1 million of service credits, which the Company will offset against subcontracted services to be rendered to it by Medi. The Company's EDI business generated a net loss of approximately $200,000 on $4.0 million in revenue for fiscal year 2000 and total assets at October 31, 2000 were approximately $2.5 million. 50 52 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Allowance for doubtful accounts: Balance, October 31, 1997 $ 1,428,000 Provision 838,000 Recoveries -- Charge-offs (413,000) ------------- Balance, October 31, 1998 1,853,000 Provision 690,000 Recoveries -- Charge-offs (720,000) ------------- Balance, October 31, 1999 1,823,000 Provision 397,000 Recoveries -- Charge-offs (372,000) ------------- Balance, October 31, 2000 $ 1,848,000 -------------
51 53 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER 2.1 Agreement and Plan of Merger dated as of January 18, 1995 among Health Management Systems, Inc., HCm Acquisition Corp., and all the shareholders of Health Care microsystems, Inc., as amended (Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended October 31, 1994 and to Exhibit 10.2 to the Company's Registration Statement on Form S-3, file no. 33-91518) 2.2 Agreement and Plan of Merger, dated as of April 29, 1996 among Health Management Systems, Inc., CDR Acquisition Corp., CDR Associates, Inc., and all the shareholders of CDR Associates, Inc. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated April 29, 1996) 2.2(i) First Amendment to Agreement and Plan of Merger, dated as of April 29, 1996, among Health Management Systems, Inc., CDR Acquisition Corp., CDR Associates, Inc., and all the shareholders of CDR Associates, Inc. (Incorporated by reference to Exhibit 2.2(i) to the Company's Annual Report on Form 10-K for the year ended October 31, 1996 (the "1996 Form 10-K")) 2.3 Agreement and Plan of Merger, dated as of September 3, 1996, by and among Health Management Systems, Inc., QSM Acquisition Corporation and Quality Standards in Medicine, Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Registration Statement on Form S-4, File No. 333-13513 (the "S-4")) 2.3(i) Amendment to Agreement and Plan of Merger, dated as of November 20, 1996, by and among Health Management Systems, Inc., QSM Acquisition Corporation, and Quality Standards in Medicine, Inc. (Incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No. 1 to the S-4) 2.4 Agreement and Plan of Merger, dated as of March 18, 1997, by and among Health Management Systems, Inc., HISCo Acquisition Corp., Health Information Systems Corporation and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997 (the "April 1997 Form 10-Q")) 2.5 Asset Purchase Agreement, dated as of March 10, 1997, by and among GHS, Inc., Global Health Systems, Inc. GHS Management Services, Inc., Health Management Systems, Inc. and Global Health Acquisition Inc. (Incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 (the "July 1997 Form 10-Q")) 2.5(i) Assignment and Assumption Agreement, dated as of July 15, 1997, between Global Health Acquisition Corp. and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 2.2 to the July 1997 Form 10-Q) 2.6 Asset Purchase Agreement, dated as of June 30, 1999, by and among ARC Ventures, LLC, and Health Receivables Management, LLC and Health Management Systems, Inc., and Quality Standards In Medicine, Inc. (Incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999 (the "July 1999 Form 10-Q")) *2.7 Asset Purchase Agreement, dated as of January 1, 2001, by and among Medi, Inc. and Health Management Systems, Inc., Quality Medi-Cal Adjudication Incorporated and Health Receivables Management, Inc.
52 54 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER 3.1 Amended and Restated Certificate of Incorporation of Health Management Systems, Inc. (Incorporated by reference to Exhibit 3.1 to Amendment No. 1 (Amendment No. 1) to the Company's Registration Statement on Form S-1, File No. 33-4644 (the Registration Statement) and Exhibit 3(i) to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996 (the "January 1996 Form 10-Q")) 3.2 By-Laws of Health Management Systems, Inc. (Incorporated by reference to Exhibit 3.2 to Amendment No. 1) 10.1 Amendment, dated as of September 1, 1995, to Master Software License, dated June 29, 1992, by and between Health Care microsystems, Inc. and Columbia/HCA. (Incorporated by reference to Exhibit 10.2(ii) to the Company's Annual Report on Form 10-K for the year ended October 31, 1997 (the "1997 Form 10-K")) 10.2(i) Health Management Systems, Inc. Stock Option and Restricted Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 10.3 to the Registration Statement, to Exhibit 10.3 to Amendment No. 2 (Amendment No. 2) to the Registration Statement, Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1994 (the "January 1994 Form 10-Q") and Exhibit 10 to the January 1996 Form 10-Q) 10.2(ii) Amendment No. 6, dated as of December 2, 1997, to the Health Management Systems, Inc., Stock Option and Restricted Stock Purchase Plan. (Incorporated by reference to Exhibit 10.3(iii) to the 1997 Form 10-K) 10.2(iii) Health Management Systems, Inc. Employee Stock Purchase Plan, as amended (Incorporated by reference to Exhibit 10.2 to the January 1994 Form 10-Q and to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1995 (the "January 1995 Form 10-Q")) 10.2(iv) Health Management Systems, Inc. 1995 Non-Employee Director Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the January 1995 Form 10-Q) 10.2(v) Health Management Systems, Inc. Profit Sharing Plan (Incorporated by reference to Exhibit 10.3(iv) to the Company's Annual Report on Form 10-K for the year ended October 31, 1995 (the "1995 Form 10-K")) 10.2(vi) Health Management Systems, Inc. Profit Sharing Plan, as amended (Incorporated by reference to Exhibit 10.3(vi) to the 1995 Form 10-K) 10.2(vii) Health Management Systems, Inc. 1999 Long-Term Incentive Stock Plan (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8, File No. 333-77121) 10.3(i) Credit Agreement and Guaranty Among Health Management Systems, Inc., as Borrower, Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care microsystems, Inc., and CDR Associates, Inc., as Guarantors, and The Chase Manhattan Bank, as Bank (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1996 (the "July 1996 Form 10-Q")) 10.3(ii) First Amendment to Credit Agreement and Waiver (Incorporated by reference to Exhibit 10.1(i) to the July 1996 Form 10-Q)
53 55 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER 10.3(iii) Guaranty Agreement, dated as of April 16, 1997, between Health Management Systems, Inc. and The Chase Manhattan Bank (Incorporated by reference to Exhibit 10.1 to the April 1997 Form 10-Q) 10.3(iv) Second Amendment to Credit Agreement and Guaranty, dated as of April 16, 1997, among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medical Adjudication, Incorporated, Health Care microsystems, Inc., CDR Associates, Inc., and The Chase Manhattan Bank (Incorporated by reference to Exhibit 10.1 to the July 1997 Form 10-Q) 10.3(v) Third Amendment to Credit Agreement and Guaranty, dated as of June 30, 1997, among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medical Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associate, Inc., HSA Managed Care Systems, Inc., Quality Standards in Medicine, Inc. and The Chase Manhattan Bank (Incorporated by reference to Exhibit 10.1 to the July 1997 Form 10-Q) 10.3(vi) Fourth Amendment To Credit Agreement And Guaranty, dated as of July 15, 1999 among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates Inc., HSA Managed Care Systems, Inc., Quality Standards In Medicine, Inc. and The Chase Manhattan Bank (Incorporated by reference to Exhibit 2 to the July 1999 Form 10-Q) 10.3(vii) Fifth Amendment To Credit Agreement And Guaranty, dated as of September 30, 1999, among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. and The Chase Manhattan Bank (Incorporated by reference to Exhibit 10.4(vii) to the Company's Annual Report on Form 10-K for the year ended October 31, 1999) 10.3(viii) Sixth Amendment to Credit Agreement and Guaranty, dated as of December 30, 1999, among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. and The Chase Manhattan Bank ) Incorporated by reference to Exhibit 10.4(viii) to the 1999 Form 10-K) 10.4 Credit Agreement and Guaranty, dated as of February 15, 2000, among Health Management Systems, Inc. as Borrower, Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care microsystems, Inc., CDR Associates, Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. as Guarantors, and The Chase Manhattan Bank, as Bank (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 2000 (the "January 2000 Form 10-Q")) 10.4(i) Advised line of credit (Incorporated by reference to Exhibit 10.2 to the January 2000 Form 10-Q) 10.4(ii) Amendment No. 1 to the Credit Agreement and Guaranty, dated as of February 15, 2000, among Health Management Systems, Inc., as Borrower, Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates, Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. as Guarantors, and The Chase Manhattan Bank as Bank (Incorporated by reference to Exhibit 10.3 to Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 2000)
54 56 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER *10.4(iii) Amendment No. 2 to the Credit Agreement and Guaranty, dated as of January 12, 2001, among Health Management Systems, Inc., as Borrower, Accelerated Claims Processing, Inc., Quality Medi-Cal Adjudication, Incorporated, Health Care Microsystems, Inc., CDR Associates, Inc., HSA Managed Care Systems, Inc., Health Receivables Management, Inc. as Guarantors, and The Chase Manhattan Bank as Bank 10.5(i) Leases, dated February 1, 1980, September 24, 1981, September 24, 1982, and January 6, 1986, as amended, between 401 Park Avenue South Associates and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.13 to the Registration Statement and to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1994) 10.5(ii) Lease, dated as of March 15, 1996, by and between 387 PAS Enterprises, as Landlord, and Health Management Systems, Inc., as Tenant (Incorporated by reference to Exhibit 10.2 to the July 1996 Form 10-Q) 10.5(iii) Fifth Amendment, dated May 30, 2000 to the lease for the entire eighth, ninth, and tenth floors and part of the eleventh and twelfth floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.1 to Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000 (the July 2000 Form 10-Q")) 10.5(iv) Sixth Amendment, dated May 1, 2000 to the lease for the entire eighth, ninth, and tenth floors and part of the eleventh and twelfth floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. Tenant (Incorporated by reference to Exhibit 10.2 to the July 2000 Form 10-Q) 10.5(v) Third Amendment, dated May 30, 2000 to the lease for a portion of the eleventh floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.3 to the July 2000 Form 10-Q) 10.5(vi) Fourth Amendment, dated May 1, 2000 to the lease for a portion of the eleventh floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.4 to the July 2000 Form 10-Q) 10.5(vii) Sixth Amendment, dated May 30, 2000 to the lease for a portion of the twelfth floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.5 to the July 2000 Form 10-Q) 10.5(viii) Seventh Amendment, dated May 1, 2000 to the lease for a portion of the twelfth floor between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.6 to the July 2000 Form 10-Q) 10.5(ix) Fifth Amendment, dated May 30, 2000 to the lease for the fourth floor and the penthouse between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.7 to the July 2000 Form 10-Q) 10.5(x) Sixth Amendment, dated May 1, 2000 to the lease for the fourth floor and the penthouse between 401 Park Avenue South Associates, LLC and Health Management Systems, Inc. (Incorporated by reference to Exhibit 10.8 to the July 2000 Form 10-Q)
55 57 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER 10.6 Lease, dated September 1996, by and between Pacific Corporate Towers LLC, Health Management Systems, Inc., and Health Care microsystems, Inc. (Incorporated by reference to Exhibit 10.13 to the 1996 Form 10-K) 10.7 Agreement and Release of Claims dated as of October 29, 1996, by and among HHL Financial Services, Inc., Health Management Systems, Inc., and the First National Bank of Chicago (Incorporated by reference to Exhibit 10.12 to the 1996 Form 10-K) 10.8 Sublease Agreement, dated December 23, 1997, between Health Management Systems, Inc. and Shandwick USA, Inc. (Incorporated by reference to Exhibit 10.1 to the company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1998 (the "January 1998 Form 10-Q")) 10.9 Consent to Sublease, dated December 23, 1997, by 387 P.A.S. Enterprises to the subletting by Health Management Systems, Inc. to Shandwick USA, Inc. (Incorporated by reference to Exhibit 10.2 to the January 1998 Form 10-Q) 10.10 Promissory note, dated as of October 15, 1998, in the principal amount of $500,000 between Paul J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended October 31, 1998 (the "1998 Form 10-K") 10.11 Promissory note, dated as of October 15, 1998, in the principal amount of $250,000 between Paul J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 10.17 to the 1998 Form 10-K) 10.12 Security Agreement, dated as of October 15, 1998, between Paul J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 10.18 to the 1998 Form 10-K) 10.13 Amended and restated promissory note, dated as of October 1999, in the principal amount of $500,000 between Paul J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 10.16 to the 1999 Form 10-K) 10.14 Amended and restated promissory note, dated as of October 1999, in the principal amount of $1,000,000 between Paul J. Kerz and HSA Managed Care Systems, Inc. (Incorporated by reference to Exhibit 10.17 to the 1999 Form 10-K) *10.15 Separation Agreement and Release, dated as of October 2, 2000, between Health Management Systems, Inc. and Paul J. Kerz *10.16 Employment Letter, dated January 29,1999, between Health Management Systems, Inc. and Alan Bendes *10.17(i) Employment Agreement, dated as of October 2, 2000, between Health Management Systems, Inc. and William F. Miller III *10.17(ii) Restricted Stock Purchase Agreement for 550,000 Common Shares dated January 10, 2001, between Health Management Systems, Inc. and William F. Miller III *10.17(iii) Pledge Agreement, dated January 10, 2001, between Accelerated Claims Processing, Inc. and William F. Miller III
56 58 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT NUMBER *10.17(iv) Promissory note, dated January 10, 2001, in the principal amount of $721,875 between William F. Miller III and Accelerated Claims Processing, Inc. *11 Computation of Earnings per Share *21 List of subsidiaries of Health Management Systems, Inc. *23 Consent of KPMG LLP, independent certified public accountants
* Filed herewith 57 EX-2.7 2 y45381ex2-7.txt ASSET PURCHASE AGREEMENT 1 Exhibit 2.7 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into as of the 5th day of January 2001, by and among MEDI, INC., a California corporation ("PURCHASER") and HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation ("HMS"), and its wholly owned subsidiaries, QUALITY MEDI-CAL ADJUDICATION INCORPORATED, a California corporation ("CA SUB") and HEALTH RECEIVABLES MANAGEMENT, INC., a Delaware corporation ("DE SUB"). HMS, CA Sub and DE Sub are collectively referred to herein as "SELLER." The parties, intending to be legally bound, agree as follows: 1. DEFINITIONs. 1.1 Certain Definitions. All capitalized terms defined in this Agreement shall have the defined meanings when used in this Agreement or in any Transaction Contract or other document made or delivered pursuant to this Agreement, unless otherwise defined or the context otherwise requires. The following terms shall have the following meanings: "ACTION" means any litigation, action, suit, proceeding, arbitration or claim before any court or Governmental Authority, or any investigation by any Governmental Authority. "AFFILIATE" shall mean, with respect to any specified Person, (i) any other Person who, directly or indirectly, owns or controls, is under common ownership or control with, or is owned or controlled by, such specified Person, (ii) any other Person who is a director, officer, manager, member, partner or trustee of the specified Person or a Person described in clause (i) of this definition or any spouse of the specified Person or any such other Person, or (iii) any relative of the specified Person or any other Person described in clause (ii) of this definition. "BEST EFFORTS" shall mean the efforts that a prudent Person desirous of achieving a result would use in similar circumstances to ensure that the result is achieved as expeditiously as practicable under the circumstances; provided, however, that an obligation to use Best Efforts under this Agreement does not require the Person subject to that obligation to (i) take actions that would result in a material adverse change in the benefits to such Person under this Agreement or the transactions contemplated by this Agreement, (ii) make any significant cash payments or (iii) incur any significant liability or obligation. "BEST KNOWLEDGE" with respect to any Person shall mean and include (i) actual knowledge of the Person, which for Seller shall mean the actual knowledge of Richard Brown, Carrie Cunningham and William Lucia and (ii) that knowledge which a prudent businessperson could have obtained in the management of his business after making due inquiry, and after exercising due diligence, with respect thereto. 2 "BUSINESS" means the EDI business of Seller, consisting of, without limitation, the EDI business conducted by Seller at its Sacramento, California facility and Chicago, Illinois facility and the Business Office Services business conducted at its Sacramento, California facility. "BUSINESS IP" shall mean all IP that Seller owns, licenses and/or uses in connection with the Business. "CHARTER DOCUMENTS" shall mean the Certificate or Articles of Incorporation and By-Laws of a corporation. "CONTRACT" shall mean any written or oral note, bond, debenture, mortgage, license, agreement, commitment, contract or understanding. "COPYRIGHTS" shall mean all United States and foreign copyrights, whether or not registered. "CURRENT BALANCE SHEET" shall mean the unaudited balance sheet of the Business as at October 31, 2000. "CURRENT FINANCIAL STATEMENTS" shall mean the Current Balance Sheet and the income statement related unaudited statement of operations of the Business for the year ended October 31, 2000. "EMPLOYEE PLANS" with respect to any Person shall mean any plan, arrangement or Contract providing compensation or benefits to, for or on behalf of employees and/or directors of such Person, including employment, deferred compensation, retirement or severance Contracts; plans pursuant to which Equity Securities are issued, including, without limitation, stock purchase, stock option and stock appreciation rights plans; and bonus, thrift, pension, savings, insurance, profit sharing, severance, loan guaranty, employee loan or incentive compensation plans or arrangements; and supplemental unemployment benefit, hospitalization or other medical, life, dental, vision, health care or other insurance. "ENVIRONMENTAL LAWS" shall mean all laws, licenses, permits, approvals, plans, authorizations, concessions, franchises, and similar items, of all Governmental Authorities and all applicable judicial, administrative, and regulatory decrees, judgments, and orders relating to Hazardous Substances or the protection of the environment in any respect, including, without limitation: (i) all requirements, including, without limitation, those pertaining to notification, warning, reporting, licensing, permitting, investigation, and remediation of Hazardous Substances; (ii) all requirements pertaining to the protection of employees or the public from exposure to Hazardous Substances or injuries or harm associated therewith; and (iii) the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.Section 9601 et seq.), the Resource Conservation and Recovery Act (49 U.S.C.Section 6901 et seq.), the Hazardous Materials Transportation Act (49 U.S.C.Section 1801 et seq.), the Clean Air Act (42 U.S.C.Section 7401 et seq.), the Occupational Safety and Health Act (29 U.S.C.Section 600 et seq.), and all 2 3 similar federal, state, local and municipal Laws as they may from time to time be modified, amended or superseded. "EQUITY SECURITIES" of any Person shall mean the capital stock, partnership interests or membership interests of such Person and/or any Stock Equivalents of such Person. "EXPLOIT" shall mean manufacture, advertise, license, market, merchandise, promote, publicize, sell, use, supply or distribute, and "EXPLOITATION" and "EXPLOITED" shall have a correlative meaning. "GAAP" shall mean generally accepted accounting principles, consistently applied. "GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "HAZARDOUS SUBSTANCE" means those substances defined as hazardous substances in 42 U.S.C. Section 9601(14) and all other substances defined as hazardous under other applicable Laws. "INDEBTEDNESS" means, with respect to any Person, (i) any liability, contingent or otherwise, (a) for borrowed money, capitalized lease obligations, purchase money obligations or other obligations relating to the deferred purchase price of assets or property or (b) evidenced by a note, bond, debenture, letter of credit or similar instrument given in connection with the acquisition, other than in the ordinary course of business consistent with past practice, of any property, assets, securities or otherwise, including, without limitation, indebtedness created or arising under conditional sale or other title retention agreements (even though the rights and remedies of Seller or lender under the agreements in the event of default are limited to repossession or sale of the property), (ii) any liability of others described in the preceding clause which such Person has guaranteed or which otherwise is its legal liability, (iii) all indebtedness referred to above secured by (or for which the holder of the indebtedness has an existing right, contingent or otherwise, to be secured by), any Lien upon the property of such Person, whether or not the obligations secured thereby have been assumed, and (iv) any amendment, renewal, extension or refunding of any liability referred to in clauses (i), (ii) and (iii) above; provided, however, that Indebtedness does not include any trade payables of any Person incurred in the ordinary course of business consistent with past practice. The amount of Indebtedness of any Person at any date shall be the outstanding balance at the date of all unconditional obligations as described above and the maximum amount of any contingent obligations at such date. "IP" shall mean Patents, Trademarks, Copyrights, Know-How and other rights and property commonly referred to as intellectual property, and rights or licenses to use the same, and any and all applications therefor. 3 4 "KNOW-HOW" shall mean all inventions, processes, systems, methodologies, controls, trade secrets, know-how (including, without limitation, proprietary know-how and use and application know-how), product designs, drawings, technology, other intangibles, technical information, safety information, engineering data and design and engineering specifications, research records, market surveys, promotional literature, supplier and customer lists, similar data and formulas and processes. "LAW" shall mean any federal, state or local statute, law, rule, regulation, ordinance, order, code, policy or rule of common law, now or hereafter in effect, and in each case as amended, and any judicial or administrative interpretation thereof by a Governmental Authority or otherwise, including, without limitation, any judicial or administrative order, consent, decree or judgment. "LIEN" shall mean any mortgage, deed of trust, pledge, security interest, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), or preference, priority, or other security agreement or preferential arrangement, charge, or encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable law of any jurisdiction to evidence any of the foregoing). "MATERIAL ADVERSE EFFECT" means any change or effect that is, or is reasonably likely to be, materially adverse to the Business and the Assets, taken as a whole. "NOTE" shall mean the note, attached hereto as Exhibit A, providing for a payment in the aggregate amount of approximately $275,000 by Purchaser to Seller. "PATENTS" shall mean all patents (including, without limitation, all reissues, divisions, continuations, continuations in part and extensions thereof), patent applications and patent disclosures docketed and all other patent rights. "PERSON" shall mean an individual or a partnership, corporation, trust, association, limited liability company, Governmental Authority or other entity. "PREMISES" shall mean the premises located at 10381 Old Placerville Road, Sacramento, California 95827 and 10370 Old Placerville Road, No. 1074, Sacramento, California 95827. "SECURITY AGREEMENT" shall mean the Security Agreement attached hereto as Exhibit B. "SERVICE AGREEMENT" shall mean the exclusive EDI Service Agreement attached hereto as Exhibit C. 4 5 "SERVICE CREDITS" shall mean credits available to offset up to fifty percent (50%) of the fees and other amounts charged under the Service Agreement, to be applied pursuant to the terms of the Service Agreement, in the aggregate amount of $2,063,000; provided, that such amount shall be adjusted either upwards or downwards, on a dollar for dollar basis, to the extent the dollar amount of the Accounts Receivable, fixed assets and prepaid expenses reflected on Schedule 2.1.2 is either greater than (upward adjustment) or less than (downward adjustment) the dollar amount of the Accounts Receivable, fixed assets and prepaid expenses reflected on the Current Balance Sheet and the notes and schedules thereto. "STOCK EQUIVALENTS" of any Person shall mean options, warrants, calls, rights, commitments, convertible securities and other securities pursuant to which the holder, directly or indirectly, has the right to acquire (with or without additional consideration) capital stock, partnership interests or membership interests of such Person. "SUBSIDIARY" of any Person shall mean any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by such Person. "SYSTEMS" shall mean all items, products or systems of Seller used in the operation of the Business which incorporate the processing of dates and date-related data (including, without limitation, calculating, comparing and sequencing) that are operationally material to the Business as conducted by Seller or its agents or other third Persons, including, without limitation, computer systems, infrastructure items, software applications, hardware, and related equipment and utilities. "TRADEMARKS" shall mean all trademark, service mark and trade name rights, including, without limitation, all registrations of trademarks and of other marks, all registrations of trade names, labels and other trade rights and applications for any of the foregoing. "TRANSACTION CONTRACTS" shall mean this Agreement, the Security Agreement, the Service Agreement, the Transitional Services Agreement, the Note and each other Contract executed and delivered by any party hereto in connection with the transactions contemplated by this Agreement. "TRANSFER" shall mean sell, assign, transfer, pledge, license, grant a security interest in, or otherwise dispose of, with or without consideration, and "TRANSFERRED" shall have a correlative meaning. "TRANSITION SERVICES AGREEMENT" shall mean the Transition Services Agreement attached hereto as Exhibit D. "YEAR 2000 COMPLIANT" shall mean that all Systems accurately process dates and date-related data (including, without limitation, calculating, comparing and sequencing) in all material respects before, during and after the year 2000. 5 6 1.2 Other Definitions. The following terms shall have the meanings given the terms in the Sections set forth below:
TERM SECTION - ---- ------- Accounts Receivable 2.1 Acquisition Proposal 8.3 Assets 2.1 Associated Costs 3.3 Assumed Contracts 2.1 Assumed Liabilities 3.1 Claim 12.4 Claim Notice 12.4 Closing 5.1 Closing Date 5.1 Damages 12.2 Direct Claim 12.4 Employees 6.17 Excluded Assets 2.2 Excluded Contracts 2.2 Excluded Liabilities 3.2 Floor 12.7 Indemnified Party 12.4 Indemnifying Party 12.4 Notices 16.1 Permits 2.1
6 7 Purchase Price 4 Purchaser Indemnified Party 12.2 Purchaser Indemnified Parties 12.2 Records 11.4 Seller Disclosure Letter 6 Severance Payments 11.5 Software 2.1 Tangible Personal Property 2.1 Third Party Claim 12.4 Transferred Employees 11.5 Uncollectable Accounts 11.6 Unpaid Liability 3.3
2. SALE AND PURCHASE OF ASSETS. 2.1 Transfer of Assets. On the terms and subject to the conditions of this Agreement, at the Closing, Seller shall sell, assign, transfer, convey and deliver to Purchaser (or to any Subsidiary of Purchaser to whom such right is assigned), and Purchaser shall purchase from Seller, all of Seller's right, title and interest in, under and to all of the assets, properties and rights of every kind, nature and description, tangible or intangible, real or personal, and the goodwill of and relating to the Business (the "ASSETS"), including, but not limited to, the following: 2.1.1 all furniture, fixtures, machinery, equipment, office materials and supplies, vehicles, computer hardware, data processing equipment and other tangible personal property necessary for or used in the Business and all related warranties and similar rights, including, without limitation, all such items listed on Schedule 2.1.1 (the "TANGIBLE PERSONAL PROPERTY"); 2.1.2 all accounts and other receivables relating to the Business which are outstanding at the Closing (collectively, the "ACCOUNTS RECEIVABLE"), which Accounts Receivable and an aging schedule relating thereto shall be listed on Schedule 2.1.2 to be provided to Purchaser by Seller at the Closing; 7 8 2.1.3 all prepaid and deferred expenses and deposits relating to the Business or the Assets, including prepaid insurance relating specifically to the Business or the Assets, all such items listed on Schedule 2.1.3. 2.1.4 all Business IP; 2.1.5 all computer databases and software owned by, or licensed to, Seller for use in connection with the Business ("SOFTWARE"); 2.1.6 all Contracts relating to the Business that are identified as an "ASSUMED CONTRACT" on Schedule 2.1.6; provided, however, that if Purchaser, after the Closing discovers a Contract that Purchaser deems in good faith material to the Business, but such Contract is not identified as an "Assumed Contract," Seller agrees to assign (promptly upon the request of Purchaser) such Contract to Purchaser for no additional payment; 2.1.7 all lists, records, files, books and documents (including, without limitation, credit information) in whatever form or medium (electronic, paper or otherwise) relating to past, current or prospective customers, suppliers, subscribers, agents, publishers, clearing houses and other Persons relating to the Business or the Assets, and other business and financial records, files, books and documents in whatever form or medium (electronic, paper or otherwise) held by Seller relating to the Business or the Assets, but excluding all primarily relating to Excluded Liabilities or minute books, capital records and other documents of Seller that are not reasonably of use to Purchaser in the conduct of the Business; 2.1.8 all governmental franchises, licenses, approvals, authorizations and permits (collectively, "PERMITS") that are held or used by Seller in connection with the Business or the Assets; 2.1.9 the ownership and/or leasehold interest and all improvements (leasehold or otherwise) of Seller in the Premises; 2.1.10 all claims, causes of action, rights of recovery and rights of set-off of any kind of Seller relating primarily to the Business or the Assets, including, without limitation, any Liens for the benefit of or any rights to payment or to enforce payment in connection with the Business or the Assets; 2.1.11 all rights to and under any noncompetition, confidentiality, trade secret or other similar agreements or arrangements of Seller and relating to the Business or the Assets, including, without limitation, all causes of action or rights to sue for past infringement or breaches thereunder possessed by Seller; and 2.1.12 all other assets of the Business (except the Excluded Assets), wherever located, tangible or intangible. 8 9 2.2 Excluded Assets. The parties to this Agreement expressly understand and agree that the Assets shall not include, and Seller is not under this Agreement selling, assigning, transferring or conveying to Purchaser, the following assets (the "EXCLUDED ASSETS"): 2.2.1 prepaid state income or franchise taxes, prepaid federal income taxes and prepaid insurance not relating specifically to the Business or Assets; 2.2.2 all insurance policies maintained by or on behalf of Seller not relating primarily to the Business or the Assets; 2.2.3 any right, title or interest of Seller in any refunds or credits of income taxes receivable after the Closing not relating primarily to the Business; 2.2.4 all rights of Seller under any Transaction Contract; 2.2.5 the records relating to the organization of Seller and the operation of Seller as a corporation that are not reasonably of use to Purchaser in the conduct of the Business; 2.2.6 all rights of Seller under any Contracts which are identified as "EXCLUDED CONTRACTS" on Schedule 2.2.6 or relate to Indebtedness of Seller; and 2.2.7 the assets identified on Schedule 2.2.7. 2.3 Delivery of Possession of Assets. At the Closing, Seller shall, at Seller's expense, deliver possession of the Assets being transferred by Seller to Purchaser at the Premises and 820 West Jackson Blvd., No. 725, Chicago, Illinois 60607. If at any time after the Closing Date Seller comes into possession of any Asset, Seller shall promptly notify Purchaser and promptly deliver possession of the Asset to Purchaser at such location as is designated by Purchaser. 2.4 Right of Endorsement. After the Closing Date, Purchaser shall have the absolute and unconditional right and authority to endorse, without recourse, the name of Seller on any check or any other evidence of indebtedness received by Purchaser exclusively on account of any of the Assets, and Seller shall deliver to Purchaser at the Closing a letter of instruction executed by Seller sufficient to permit Purchaser to deposit such checks or other evidences of indebtedness in bank accounts in the name of Purchaser. 2.5 Consent to Assignment. This Agreement shall not constitute an agreement to assign any interest in any Contract or Permit or any claim, right or benefit arising thereunder or resulting therefrom, if an attempted assignment thereof without the consent required or necessary of any third Person would constitute a breach or violation thereof or affect adversely the rights of Purchaser or Seller thereunder. If a consent of any third Person which is required in order to assign any such interest is not obtained prior to the Closing Date, 9 10 or if an attempted assignment would be ineffective or would adversely affect the ability of Seller to convey its interest to Purchaser or the rights of Purchaser thereunder, Seller shall cooperate with Purchaser in any lawful arrangement to provide that Purchaser shall receive Seller's entire interest in the benefits under any such Contract or Permit, including, without limitation, enforcement for the benefit of Purchaser of any and all rights of Seller against any other party thereto arising out of the breach or cancellation thereof by such party or otherwise; provided, however, that nothing contained in this Section 2.5 shall affect the liability, if any, of Seller pursuant to this Agreement for failing to have disclosed the need for such consent or approval; and provided, further, that nothing contained in this Section 2.5 shall obligate Purchaser to waive the satisfaction of the conditions precedent set forth in Section 9 of this Agreement, including, without limitation, Section 9.4 of this Agreement. 3. ASSUMED LIABILITIES. 3.1 Assumed Liabilities. Subject to the provisions of this Agreement, Purchaser agrees that upon transfer of the Assets on the Closing Date, it shall assume, perform and fulfill as they become due, to the extent not paid, satisfied, performed, discharged or fulfilled by Seller on or before the Closing Date, the executory obligations of Seller to be performed after the Closing Date under the Assumed Contracts that are actually transferred to Purchaser hereunder, excluding any obligations or liabilities arising from any breach, default, or other act or omission thereunder or noncompliance therewith by Seller on or before the Closing Date (the "ASSUMED LIABILITIES"). It is not the intention of either Purchaser or Seller that the assumption by Purchaser of the Assumed Liabilities shall in any way enlarge the rights of third Persons under any Contracts with Purchaser or Seller. Nothing contained in this Agreement shall in any way prevent Purchaser from contesting in good faith any of the Assumed Liabilities; provided no such contest shall relieve Purchaser of its obligations under this Agreement to Seller with respect thereto. 3.2 Liabilities Not Assumed. Purchaser shall not and does not assume any liabilities, obligations or commitments of Seller of any kind, known or unknown, contingent or otherwise, of whatsoever kind or nature, not specifically included within the Assumed Liabilities, and the same shall remain the sole responsibility of Seller (which liabilities, obligations and commitments are referred to in this Agreement as the "EXCLUDED LIABILITIES"). The Excluded Liabilities include, without limitation, the following liabilities that are expressly excluded from the liabilities, obligations, and commitments being assumed by Purchaser pursuant to Section 3.1: 3.2.1 any Indebtedness of Seller, other than the Assumed Liabilities set forth in Section 3.1, regardless of whether it is related to the Business; 3.2.2 any liabilities or obligations of Seller for the fees and expenses of its counsel, accountants and other agents and representatives and all other expenses incurred by Seller (including, without limitation, broker's fees) incident to the negotiation, preparation and execution of the Transaction Contracts and the performance by Seller of its obligations thereunder; 10 11 3.2.3 any liabilities or obligations of Seller arising out of or related to local, state, federal or foreign income taxes or assessments, including, without limitation, any such taxes arising by virtue of the transactions contemplated by this Agreement; 3.2.4 all claims, penalties, fines, or other liabilities arising from any violation or alleged violation of any law, rule, regulation or order from any federal, state, local or foreign governmental authority, including but not limited to the Federal Trade Commission or any similar or related state agencies governing interstate and intrastate trade; 3.2.5 any liabilities or obligations of Seller with respect to employee compensation or employee benefits of any nature, including, without limitation, accrued wages, retirement benefits, vacation and sick pay, and severance, owed to any of Seller's employees or former employees or their beneficiaries that arise out of the employment relationship between Seller and any of its employees or former employees or the termination of that relationship (provided, this Section 3.2.6 shall not be interpreted to limit Purchaser's obligation under Section 11.5.2); and 3.2.6 any payroll taxes payable by Seller. 3.3 Right of Set Off. If Seller fails to make any payment with respect to any of the Excluded Liabilities (each, an "UNPAID LIABILITY"), Purchaser may elect to pay such Unpaid Liability, and any other costs and charges, if any, associated with the Unpaid Liability (the "ASSOCIATED COSTS"), if Purchaser determines, in its sole discretion, that such payment is necessary or desirable to allow the Business to continue on an uninterrupted basis; provided, however, that Purchaser shall have provided Seller with not less than ten (10) days' prior written notice of its intent to pay the Unpaid Liability and/or Associated Costs, and Seller shall have failed to pay the Unpaid Liability and/or Associated Costs and/or that, with respect to any Unpaid Liability, Seller notifies Purchaser in writing within such ten (10) day period that Seller intends to defend or contest the Unpaid Liability, and Seller fails to discharge said Unpaid Liability within ten (10) days after the Unpaid Liability is reduced to a final judgment or otherwise becomes a Lien on any assets of Purchaser or the Business. If Purchaser pays any Unpaid Liability or Associated Costs, Purchaser shall have the right (in addition to Purchaser's rights to indemnification under Section 12.2 hereof) to offset the amount of such Unpaid Liability and/or Associated Costs, up to a maximum amount of $100,000, against the Service Credits or any other amounts owing Seller under the provisions of any Transaction Contract. 3.4 Right of Enforcement and Settlement. From and after the Closing Date, Purchaser shall have complete control over the payment, settlement or other disposition of the Assumed Liabilities and the right to commence, conduct and control all negotiations and proceedings with respect thereto. Seller shall notify Purchaser promptly of any claim made with respect to any Assumed Liability, and no Seller Party shall, except with Purchaser's prior written consent, which consent may be withheld by Purchaser in its absolute discretion, voluntarily make any payment of, settle or offer to settle, or consent to any compromise or admit liability with respect to, any Assumed Liability. Each Seller Party 11 12 shall cooperate with Purchaser in any reasonable manner requested by Purchaser in connection with any negotiations or proceedings involving any Assumed Liabilities. 4. PURCHASE PRICE. The purchase price to be paid by Purchaser for the Assets (the "PURCHASE PRICE") shall consist of: (a) cash in the amount of $450,000; plus (b) the Note; plus (c) the Service Credits; plus (d) the assumption by Purchaser on the Closing Date of the Assumed Liabilities. 5. CLOSING AND DELIVERIES. 5.1 The Closing. The closing of the purchase and sale of the Assets and the assumption of the Assumed Liabilities pursuant to Sections 2 and 3 of this Agreement (the "CLOSING") shall take place on January 12, 2001 at 10:00 a.m., Los Angeles time, or at such other place or time as the parties to this Agreement shall mutually agree upon in writing. The date of the Closing is referred to in this Agreement as the "CLOSING DATE". Notwithstanding the actual Closing Date, Purchaser and Seller have agreed that the purchase and sale of the Assets and the Assumption of the Assumed Liabilities shall be deemed to be effective as of January 1, 2001. 5.2 Deliveries by Purchaser at the Closing. At the Closing, Purchaser shall deliver to Seller: 5.2.1 $450,000 by delivery of a cashiers check or by wire transfer to an account designated by Seller; 5.2.2 the Note; 5.2.3 the fully executed copies of the Transaction Contracts; and 5.2.4 a bill of sale and an assignment and assumption agreement. 5.3 Deliveries by Seller at the Closing. At the Closing, Seller shall deliver or cause to be delivered to Purchaser: 5.3.1 such bills of sale, endorsements, assignments, subleases, and other good and sufficient instruments of conveyance, transfer and assignment, including, without limitation, a bill of sale, as shall be necessary to vest in Purchaser good title in and to the Assets free and clear of any and all Liens; and 5.3.2 possession of the Assets in accordance with Section 2.3. 5.4 Further Assurances. At the Closing, each party to this Agreement shall deliver or cause to be delivered, as appropriate, such further certificates, consents and other documents as may be necessary to carry out the terms of this Agreement. 6. REPRESENTATIONS AND WARRANTIES OF SELLER. 13 Except as set forth in the disclosure letter delivered by Seller to Purchaser concurrently with the execution and delivery of this Agreement, which letter shall refer to the relevant Sections of this Agreement (the "SELLER DISCLOSURE LETTER"), Seller represents and warrants to Purchaser as follows: 6.1 Organization, Standing and Corporate Power. Seller is a corporation duly organized, validly existing and in good standing under the laws of their states of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. 6.2 Authority; Enforceability; Effect of Agreement. 6.2.1 Seller has full power and authority to enter into, execute and deliver each Transaction Contract to which it is a party and perform its obligations thereunder. Each Transaction Contract to which Seller is a party has been duly authorized by all necessary corporate action of Seller. This Agreement has been, and at the Closing each other Transaction Contract to which Seller is a party will be, duly executed and delivered by Seller. Assuming each Transaction Contract to which Seller is a party is duly executed and delivered by Purchaser to the extent it is a party thereto, this Agreement constitutes and, at the Closing, each other Transaction Contract to which Seller is a party will constitute, a valid and legally binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally, or the availability of equitable remedies. 6.2.2 The execution and delivery by Seller of each Transaction Contract to which Seller is a party does not, and compliance by Seller with the provisions of each such Transaction Contract will not, (A) conflict with or result in a breach or default under the Charter Documents of Seller or any of the terms, conditions or provisions of any Assumed Contract or any other Contract to which Seller is a party or otherwise bound, or to which the Business or Asset are subject; (B) violate any Law applicable to Seller or the Business; or (C) result in the creation or imposition of any Lien on any Assets. 6.3 Assets. 6.3.1 Seller has good and marketable title to all of the Assets. At the Closing, Purchaser shall receive good and marketable title to the Assets, free and clear of all Liens. 6.3.2 The Assets consist of all of the properties and assets used or usable in the conduct of the Business, including, without limitation, all of the properties and assets reflected on the Current Balance Sheet. Each item of Tangible Personal Property included in the Assets is in good operating condition and repair, ordinary wear and tear excepted, for the requirements of the Business as currently conducted. 14 6.4 Accounts Receivable. The Seller Disclosure Letter sets forth a true and complete schedule of the Accounts Receivable of the Business as of the date of the Current Balance Sheet, including, without limitation, the names of the account debtors, the balance amount and aging as of the date indicated therein. The Accounts Receivable, whether reflected on the Current Balance Sheet or subsequently created, and all books, records and documents relating to such Accounts Receivable, are genuine and accurate. All Accounts Receivable of Seller, whether reflected on the Current Balance Sheet or subsequently created: (A) constitute bona fide and valid rights of Seller to collect payments from other Persons; (B) represent credit extended in a manner consistent with Seller's trade practices; (C) are not subject to any defense, counterclaim or offset; and (D) except for reserves for bad debts set forth in the Current Balance Sheet, are fully collectable within twelve (12) months of the respective dates on which such Accounts Receivable were billed. Since the date of the Current Balance Sheet: (i) there have not been any write-offs as uncollectable of any Accounts Receivable of Seller; and (ii) Seller has not taken, or caused to be taken, any action to accelerate collection of any of its Accounts Receivable. 6.5 Assumed Contracts. True and correct copies of each Assumed Contract so identified on Schedule 2.1.6, including, without limitation, all amendments and modifications thereof and waivers thereunder, have been made available to Purchaser or its counsel. The Assumed Contracts constitute all Contracts pursuant to which Business receives income or revenues or are otherwise material to the Business. Each Assumed Contract is in full force and effect unless otherwise indicated on Schedule 2.1.6, and is the valid and binding obligation of the Seller and, to the Best Knowledge of Seller, each other party to the Assumed Contract and are fully assignable to Purchaser. Seller has performed all of the obligations required to be performed by it to date under each Assumed Contract to which it is a party or is otherwise subject, and Seller is not in breach of or default under any Assumed Contract, and no event has occurred or circumstance exists which, with notice or lapse of time or both, would constitute a breach of or default by Seller under any Assumed Contract, except for a breach or default which would not reasonably have a Material Adverse Effect on the Business or the Assets. To the Best Knowledge of Seller, each other party to each Assumed Contract has performed all of the obligations required to be performed by it to date under each Assumed Contract and is not in breach of or in default under such Assumed Contract, and no event has occurred or circumstance exists which, with notice or lapse of time or both, would constitute a breach of or default by such other party under any Assumed Contract. 6.6 Intellectual Property. 6.6.1 The Seller Disclosure Letter contains a true and complete list of all Patents, Trademarks and registered Copyrights included as part of the Business IP. The Business IP constitutes all IP that is required to enable Seller to conduct the Business as now conducted. Seller has not received any written notice of infringement or other written complaint or is otherwise aware of any complaint to the effect that Seller or any of its Affiliates has violated or infringed the IP or any other proprietary rights of others. Seller has full right and authority to utilize the Business IP in the manner currently utilized and as may be required to operate the Business as currently operated. No royalties, honoraria, damages or fees are payable by Seller to other Persons by reason of the ownership or use by Seller of any 2 15 Business IP. To the Best Knowledge of Seller, no Person has interfered with, infringed upon, misappropriated, or otherwise violated any IP right of Seller relating to the Business or the Assets. 6.6.2 Except as set forth on the Seller Disclosure Letter, Seller is the sole and exclusive owner (legal and beneficial) of the Business IP, including the Trademarks identified on Section 6.6 of the Seller Disclosure Letter in any and all forms and embodiments thereof in each Jurisdiction, and to the goodwill attached to such Trademarks in each Jurisdiction, in the class or classes identified on Section 6.6 of the Seller Disclosure Letter with respect to such Jurisdiction. Section 6.6 of the Seller Disclosure Letter sets forth a list of all countries, states or other jurisdictions in which each such Trademark is registered or in which registration applications are pending (the "JURISDICTIONS"), the date(s) of registration (or application), the class(es) of registration and the name of the Person in which each such Trademark is registered. 6.6.3 Seller agrees for the express benefit of Purchaser, that following the Closing it will have no continuing right, title or interest in or to any the Business IP. 6.7 Financial Statements. 6.7.1 Seller has delivered the Current Financial Statements to Purchaser. The Current Financial Statements have been prepared from the books and records of Seller in accordance with GAAP consistently applied throughout the periods involved and fairly present the financial position and results of operations of the Business as at the dates of and for the periods set forth in the Current Financial Statements in accordance with GAAP. Both parties agreed that the presentation of the Current Financial Statements are solely prepared for the consummation of this Transaction and is not in accordance with GAAP. 6.7.2 Seller does not have any material liabilities or obligations relating to the Business, either accrued, absolute, contingent or otherwise, which have not been reflected on the Current Balance Sheet, other than trade payables and obligations incurred in the ordinary course of business consistent with past practice after the date of the Current Balance Sheet. Both parties agreed that the presentation of the Current Financial Statements are solely prepared for the consummation of this Transaction and is not in accordance with GAAP. 6.8 Absence of Certain Changes and Events. 6.8.1 Since November 1, 2000, Seller has conducted the Business only in the ordinary course of business consistent with past practice and there has not been (i) any material damage, destruction or loss relating to the Tangible Personal Property, whether or not insured, (ii) any material liability created or incurred with respect to the Business, other than accounts payable, accrued expenses and deferred revenues created or incurred in the ordinary course of business consistent with past practice and in amounts not unusual in respect of the Business as customarily conducted, (iii) any Lien created on any Asset, (iv) 3 16 except in the ordinary course of business consistent with past practice, any material increase in, or commitment or plan adopted to increase, the wages, salaries, compensation, pension or other benefits or payments to any employees engaged in the Business, (v) any material capital expenditures or commitment to make any such expenditures with respect to the Assets or the Business, (vi) any rights of substantial value waived with respect to the Assets or the Business which could reasonably have a Material Adverse Effect on the Business or the Assets, (vii) any transfer of any material assets of the Business other than in the ordinary course of business consistent with past practice, or (viii) any material adverse change in the Business or Assets. 6.9 Litigation and Proceedings. There is no pending or, to the Best Knowledge of Seller, threatened Action (or basis for any Action) to which Seller is a party or involving the Business or any of the Assets. Neither Seller nor the Business nor the Assets is subject to any judgment, order, writ, injunction, decree or regulatory directive or agreement of any Governmental Authority. 6.10 Brokers. Seller has not retained or otherwise engaged or employed any broker, finder or any other Person, or paid or agreed to pay any fee or commission to any agent, broker, finder or other Person, for or on account of acting as a finder or broker in connection with this Agreement or the transactions contemplated hereby. 6.11 Creditor Issues. The transfer of the Assets to Purchaser is not being made with the actual intent to hinder, delay or defraud any creditor of Seller. Seller believes it is receiving reasonably equivalent value in exchange for the transfer of the Assets. Seller is not engaged or about to engage in a business or a transaction following the Closing for which the remaining assets of Seller would be unreasonably small in relation to the business or transaction, and Seller has not incurred, nor shall it incur debts beyond its ability to pay them as they become due. Seller is not insolvent nor shall it become insolvent as a result of the transactions contemplated by this Agreement. 6.12 No Consents Required. There are no approvals, authorizations, consents, orders or other actions of, or filings with, any Person that are required to be obtained or made by Seller in connection with the execution of, and the consummation of the transactions contemplated under, this Agreement and the other Transaction Contracts, including, but not limited to, the assignment of the Assumed Contracts. 6.13 Environmental Compliance Matters. (i) Seller is, and at all times has been, in full compliance with, and has not been and is not in violation of or liable under, any Environmental Law; (ii) the Premises constitute all of the real property used or occupied by Seller in connection with the Business; (iii) Seller has inspected the Premises and, to its Best Knowledge, there are no Hazardous Substances incorporated in or deposited, stored or buried at or upon the Premises; (iv) to the Best Knowledge of Seller the Premises have never been used as a waste disposal site or a storage site for petroleum products or chemicals; (v) to the Best Knowledge of Seller no existing structures on the Premises contain asbestos; (vi) to the Best Knowledge of Seller there are no underground storage tanks on the Premises; (vii) Seller has not knowingly allowed any Person occupying the Premises to bring Hazardous Substances onto the Premises or to process or store any Hazardous Substances on the Premises and no 4 17 Hazardous Substance has been released into the environment by Seller; (viii) to the Best Knowledge of Seller, there are no complaints on file or matters pending in any federal or state environmental protection offices involving any allegation of Hazardous Substances on the Premises or other violations of Environmental Laws; and (ix) Seller has not received notice from any environmental board, agency or authority requiring the removal of any Hazardous Substances or other alleged harmful materials or wastes, or advising of any pending or contemplated search or investigation of the Premises or any portion of the Premises with respect the removal of any Hazardous Substances or other alleged harmful materials or wastes or the violation of any Environmental Law. 6.14 Compliance With Applicable Law. Seller has complied with, and the Business has been conducted in compliance with, all applicable Laws in all material respects; except where such noncompliance could not reasonably have a Material Adverse Effect on the Business or the Assets. 6.15 Permits. The Seller Disclosure Letter lists all federal, state, local and foreign Permits issued by any Governmental Authority in respect of the Business or the Assets. Seller has all Permits and other rights that are required in order for Seller to conduct the Business as presently conducted, and to the Best Knowledge of Seller there is no basis for the denial of any Permits or other rights in the future. 6.16 Employee Benefits. All Employee Plans of any kind or nature maintained by or on behalf of Seller comply with and are and have been operated in compliance with all applicable Laws including Employment Retirement Income Security Act of 1974, as amended. 6.17 Employees. 6.17.1 Seller is and has been in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such Laws respecting employment discrimination, sexual harassment, occupational safety and health, immigration status, and unfair labor practices. There are no pending or, to the Best Knowledge of Seller, threatened unfair labor practice charges or employee grievance charges against or otherwise directly affecting Seller. 6.17.2 There is no request for union representation, labor strike, dispute, slowdown or stoppage pending or, to the Best Knowledge of Seller, threatened against or directly affecting Seller. 6.17.3 No grievance or arbitration proceeding arising out of or under collective bargaining agreements is pending and no claims therefor exist before any Governmental Authority. 5 18 6.17.4 Seller has no employment contracts with its employees and the employment of Seller's employees is terminable at will without cost to Seller except for payment of accrued salaries or wages and vacation pay 6.17.5 There is no collective bargaining agreement that is binding on Seller or other written or oral agreement with respect to collective bargaining with any union or group of employees. 6.17.6 Seller has not experienced any material work stoppage in the last thirty-six (36) months. 6.17.7 Seller is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to the date hereof or amounts required to be reimbursed to such employees. 6.17.8 The Seller Disclosure Letter lists the name, job title, current base salary or hourly wage and date of hire of all employees employed by Seller in connection with the Business, including, without limitation, individuals on short-term disability who were so employed immediately before their disability (collectively, the "EMPLOYEES"). As to any individual on short-term disability, the Seller Disclosure Letter indicates the reason for such absence and the date the individual is reasonably expected to return to active employment. The Seller will pay all accumulated vacation pay accrued for each Employee through the Closing Date. Seller has not taken any actions that were calculated to dissuade, or have the effect of dissuading, any present employees, representatives or agents of Seller from commencing an association with Purchaser after the Closing Date. To the Best Knowledge of Seller, no Employee intends to terminate his or her employment with Seller. 6.18 Tax Matters. All tax returns required to be filed by Seller have been filed and all such returns are true, complete, and correct in all material respects, and all taxes that are due or claimed to be due from Seller have been paid other than those (i) currently payable without penalty or interest or (ii) being contested in good faith and by appropriate proceedings and for which adequate reserves, if necessary, have been established in accordance with GAAP. None of the tax returns of Seller is currently being examined by the United States Internal Revenue Service or any other Governmental Authority. 6.19 Customers and Suppliers. No material customer or supplier of the Business has canceled or otherwise terminated, or notified Seller in writing that it intends to cancel or terminate, its relationship with Seller or the Business, and Seller does not have any knowledge that any material customer or supplier of the Business intends to cancel or otherwise terminate its relationship with Seller or the Business. 6.20 Other Relationships. Neither of Seller nor its Affiliates has any interest (other than as a holder of less than five percent (5%) of the outstanding securities of a publicly traded company), either directly or indirectly, in any Person (whether as an employee, officer, director, shareholder, agent, independent contractor, security holder, creditor, consultant, or 6 19 otherwise) that presently (i) provides any services or products, or engages in any activity which is the same, similar to or competitive with any activity or business in which the Business is now engaged; (ii) is a supplier of, customer of, creditor of, or has an existing contractual relationship with the Business; or (iii) has any direct or indirect interest in any Asset. 6.21 Conflicts of Interest. Neither Seller nor any officer, employee, agent or any other Person acting on behalf of Seller has, directly or indirectly, given or agreed to give or receive any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business consistent with past practice) to or from any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Authority or other Person who was, is, or may be in a position to help or hinder the Business (or assist in connection with any actual or proposed transaction therewith) which (i) might subject Purchaser or Seller to any Damages in any Action, (ii) if not given in the past, might have had a Material Adverse Effect on the Business or (iii) if not continued in the future, might have a Material Adverse Effect on the Business. 6.22 Year 2000. All Systems are Year 2000 Compliant provided that all other technology used with the Systems properly exchange data with them. 6.23 Material Misstatements and Omissions. No representations and warranties by Seller in this Agreement, or any exhibit, schedule or certificate furnished by Seller to Purchaser pursuant to this Agreement, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. 7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Seller as follows: 7.1 Organization, Standing and Corporate Power. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and corporate authority to own, lease and operate its properties and assets and to carry on its business as now being conducted. 7.2 Authority; Enforceability; Effect of Agreement. 7.2.1 Purchaser has full corporate power and corporate authority to enter into, execute and deliver each Transaction Contract to which it is a party and perform its obligations thereunder. Each Transaction Contract to which Purchaser is a party has been duly authorized by all necessary corporate action of Purchaser. This Agreement has been, and at the Closing each other Transaction Contract to which Purchaser is a party will be, duly executed and delivered by Purchaser. Assuming each Transaction Contract to which Purchaser is a party is duly executed and delivered by Seller to the extent it is a party thereto, this Agreement constitutes and, at the Closing, each other Transaction Contract to which Purchaser is a party will constitute, a valid and legally binding obligation of Purchaser, 7 20 enforceable against Purchaser in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws relating to or affecting creditors' rights generally, or the availability of equitable remedies. 7.2.2 The execution and delivery by Purchaser of each Transaction Contract to which it is a party do not, and compliance by Purchaser with the provisions thereof will not, (A) conflict with or result in a breach or default under the Charter Documents of Purchaser or any of the terms, conditions or provisions of any Contract to which Purchaser is a party or otherwise bound; or (B) violate any Law applicable to Purchaser ; or (C) result in the creation or imposition of any Lien on any asset of Purchaser. 7.3 Brokers. Purchaser has not retained or otherwise engaged or employed any broker, finder or any other Person, or paid or agreed to pay any fee or commission to any agent, broker, finder or other Person, for or on account of acting as a finder or broker in connection with this Agreement or the transactions contemplated hereby. 7.4 No Consents Required. There are no approvals, authorizations, consents, orders or other actions of, or filings with, any Person that are required to be obtained or made by Purchaser in connection with the execution of, and the consummation of the transactions contemplated under, this Agreement. 7.5 Material Misstatements and Omissions. No representations and warranties by Purchaser in this Agreement, or any exhibit, schedule or certificate furnished by Purchaser to Seller pursuant to this Agreement, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading. 8. CONDUCT AND TRANSACTIONS PRIOR TO THE CLOSING. 8.1 Conduct of Business. Prior to the Closing, except as contemplated by the Transaction Contracts or with the prior written consent of Purchaser, Seller agrees: 8.1.1 to conduct the Business according to its ordinary and usual course of business consistent with past practice; 8.1.2 not to Transfer any material Assets; 8.1.3 not to amend, modify or terminate, or grant any waiver of any right under, any Assumed Contract; 8.1.4 to comply with all of its obligations and duties under each Assumed Contract and not to create or permit to exist any default or event of default on behalf of Seller under any Assumed Contract, or any event or circumstance which, with lapse of time or notice, or both, would constitute a default under an Assumed Contract which could reasonably have a Material Adverse Effect on the Business or the Assets; 8 21 8.1.5 to use its Best Efforts to preserve intact the Business and its goodwill, keep available the services of all Employees and maintain satisfactory relationships with those Persons having business relationships with the Business; 8.1.6 to duly comply in all material respects with all Laws applicable to Seller and to the conduct of the Business; 8.1.7 to maintain the Assets in a good condition and state of repair; 8.1.8 not to incur any fixed or contingent obligation or enter into any material Contract or other transaction or arrangement relating to the Business or the Assets which (i) may not be terminated by Seller on thirty (30) days' notice or less without cost or liability, (ii) which is not in the ordinary course of the business consistent with past practice, and (iii) which is not transferable or assignable to Purchaser; 8.1.9 not to commit any act or omit to do any act which would be or result in a breach of any of its obligations, duties, agreements or representations under any Contract to which it is a party or to which it enters into subsequent to the date of this Agreement which would reasonably be expected to have a Material Adverse Effect on the Business or the Assets; 8.1.10 to bear the risk of loss or damage to the Assets on and prior to the Closing Date; and, if any Asset is damaged on or prior to the Closing Date by any casualty, Seller shall give Purchaser immediate written notice of such damage, and, if such damage or destruction in the aggregate is material, shall afford Purchaser, in its sole and absolute discretion, the right to cancel, terminate or delay the Closing under this Agreement; provided, however, if Purchaser does not elect to cancel, terminate or delay the Closing, Seller shall, at Purchaser's election, either (i) restore such Asset to its condition prior to such damage, or (ii) if Purchaser elects not to require Seller to restore such Asset to its prior condition, or if the same is for any other reason not so restored to the reasonable satisfaction of Purchaser prior to the Closing Date, pay to Purchaser at the Closing an amount equal to the difference between the replacement cost of such Asset (determined as the price at which a substantially similar item could then be purchased plus all applicable taxes and shipping, installation and related costs) and the book value of such Asset on the date of such casualty; any amount payable by Seller to Purchaser under this Section 8.1.10 shall be credited against the Purchase Price otherwise payable by Purchaser on the Closing Date; 8.1.11 to maintain the books, records and accounts of the Business in the ordinary course of business consistent with past practice; 8.1.12 not to enter into any Contract of any kind or nature concerning the Business with any Affiliate of Seller; and 8.1.13 not to enter into any transaction or perform any act which would reasonably be anticipated to make any of the representations, warranties or agreements 9 22 of Seller contained in this Agreement false or misleading in any material respect if made again immediately after such transaction or act. 8.2 Inspection of Records. Between the date of this Agreement and the Closing, Seller shall allow the duly authorized officers, attorneys, accountants and other representatives of Purchaser access at all reasonable times to the records and files, correspondence, audits and properties, as well as to all information in each case relating to the Business and the Assets. 8.3 Acquisition Proposals. During the period from the date of this Agreement and extending through the earlier of termination of this Agreement or the Closing, Seller agrees that (i) Seller shall not, and Seller shall direct and cause its officers, directors, employees, agents and representatives (including, without limitation, any investment banker, attorney or accountant) not to, initiate, solicit, intentionally encourage or accept the submission of any proposal or offer with respect to an acquisition, sale, consolidation or similar transaction involving all or any significant portion of the Assets or the Business (any such proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL") or engage in any negotiations or discussions concerning, or provide any confidential information or data to, any Person relating to an Acquisition Proposal, and (ii) Seller will notify Purchaser immediately if any Acquisition Proposal is received by Seller or any negotiations or discussions relating to a potential Acquisition Proposal are sought to be initiated or continued with Seller. 8.4 Other Agreements. Purchaser and Seller each agree to enter into the Service Agreement and Transitional Services Agreement at the Closing. 8.5 Best Efforts. Between the date of this Agreement and the Closing, each of the parties to this Agreement will use its or his Best Efforts to cause the conditions to the obligations of the other parties set forth in Sections 9 or 10 of this Agreement, as the case may be, to be satisfied. 8.6 Notices. Seller shall promptly notify Purchaser of: (i) any material development concerning the Business; (ii) any material change in the Assets or financial condition of the Business or event which Seller believes could cause a material change in the Assets or financial condition of the Business; and (iii) any Action regarding the Business. 9. CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligation of Purchaser to take the actions required to be taken by it at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Purchaser in writing, in whole or in part): 9.1 Representations and Warranties. The representations and warranties of Seller contained in this Agreement subject to materiality or Material Adverse Effect qualifications shall be true and correct, and those not so qualified shall be true and correct in all material respects, on the Closing Date with the same force and effect as though made on and as of the Closing Date, except that any such representation or warranty made as of a 10 23 specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. 9.2 Performance. Seller shall have performed in all material respects all obligations and complied in all material respects with all covenants required by any Transaction Contract to be performed or complied with by Seller on or prior to the Closing Date. 9.3 Release of Liens. Seller shall have delivered to Purchaser any required releases and/or termination statements, releasing all Liens in favor of any third Person in or to any of the Assets, except those which relate to the Assumed Liabilities. 9.4 Consents. Seller shall have delivered to Purchaser all consents and approvals of Governmental Authorities and other Persons necessary for the Seller's unconditional consummation of the transactions contemplated hereby. 9.5 Certificate. Seller shall have delivered to Purchaser a certificate, dated the Closing Date and executed by Seller, certifying that the conditions specified in Sections 9.1, 9.2, 9.3 and 9.4 have been satisfied. 9.6 No Actions. No Action pertaining to the transactions contemplated by this Agreement or to their consummation shall have been instituted or threatened on or prior to the Closing Date. 9.7 Service Agreement. Seller shall have executed and delivered to Purchaser the Service Agreement. 9.8 Transitional Services Agreement. Seller, and if appropriate, certain former employees of Seller, shall have executed and delivered to Purchaser the Transitional Services Agreement. 9.9 Assumed Contracts At Closing. All Assumed Contracts with any of the parties listed on Schedule 9.9 hereto shall have been transferred and assigned to Purchaser or provision shall have been made, satisfactory to Purchaser, for the transfer or assignment of each such Assumed Contract. The parties agree that a verbal consent from the Client with respect to each such assignment shall satisfy the condition set forth in this Section 9.9. 10. CONDITIONS TO THE OBLIGATIONS OF SELLER. The obligation of Seller to take the actions required to be taken by it at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller in writing, in whole or in part): 10.1 Representations and Warranties. The representations and warranties of Purchaser contained in this Agreement subject to materiality or Material Adverse Effect qualifications shall be true and correct, and those not so qualified shall be true and correct in all material respects, on the Closing Date with the same force and effect as though made on 11 24 and as of the Closing Date, except that any such representation or warranty made as of a specified date (other than the date of this Agreement) shall only need to have been true on and as of such date. 10.2 Performance. Purchaser shall have performed all obligations and complied with all covenants required by any Transaction Contract to be performed or complied with by it on or prior to the Closing Date. 10.3 Consents. Purchaser shall have delivered to Seller all consents and approvals of Governmental Authorities and other Persons necessary for the Purchaser's unconditional consummation of the transactions contemplated hereby. 10.4 Certificate. Purchaser shall have delivered to Seller a certificate, dated the Closing Date and executed by Purchaser, certifying that the conditions specified in Sections 10.1, 10.2 and 10.3 have been satisfied. 10.5 No Actions. No Action pertaining to the transactions contemplated by this Agreement or to their consummation shall have been instituted or threatened on or prior to the Closing Date. 10.6 Security Agreement. Purchaser shall have executed and delivered to Seller the Security Agreement. 10.7 Service Agreement. Purchaser shall have executed and delivered to Seller the Service Agreement. 10.8 Transition Services Agreement. Purchaser shall have executed and delivered to Seller the Transition Services Agreement. 10.9 Note. Purchaser shall have executed and delivered to Seller the Note. 11. FURTHER AGREEMENTS OF THE PARTIES. 11.1 Further Agreements of Seller. Seller shall upon the request of Purchaser from time to time execute and deliver to Purchaser such further bills of sales, endorsements and other good and sufficient instruments of title, conveyance, transfer and assignment as may be necessary or desirable in order to vest in Purchaser, free and clear of all Liens except for Liens relating to the Assumed Liabilities, all right, title and interest in and to any and all of the Assets. 11.2 Purchase Price Allocation. Seller and Purchaser agree that the Purchase Price shall be allocated among the Assets as set forth on Schedule 11.2 to this Agreement. 11.3 Confidentiality. Purchaser and Seller hereby acknowledge and agree that any and all information which has been disclosed by one to the other, its directors, partners, members, managers, employees, consultants, agents and shareholders during the 12 25 discussions and negotiations leading to the execution of this Agreement, and all information to be disclosed by one to the other, its directors, employees, consultants and agents and shareholders during the period commencing on the date of execution of this Agreement through the Closing or termination of this Agreement, shall constitute confidential information and trade secrets of the disclosing party, and as such are secret, confidential and unique and constitute the exclusive trade secrets and property of such party. Such information has been made known and available to the other party and its respective employees, consultants and agents strictly in connection with the negotiation and execution of this Agreement and the consummation of the transactions provided for herein. Each party hereby acknowledges and agrees that any use or disclosure of any such confidential information or trade secrets, other than pursuant to this Agreement, would be wrongful and would cause irreparable injury to the other. Accordingly, each party hereby expressly agrees, for itself and on behalf of its shareholders, partners, members and directors, if any, and its principal officers, managers, employees, agents, consultants and representatives, that it and they will not at any time prior to the Closing or at any time thereafter, use or disclose, other than in accordance with the terms and provisions of this Agreement, any of such confidential information or trade secrets; provided, that any of the parties hereto may use or disclose such confidential information or secrets of another party without restriction if such information or secrets (i) were or are available to such party on a non-confidential basis from a source other than the other party, or (ii) were or become generally available to the public (other than as a result of an impermissible disclosure by such party or its Affiliates); and provided, further, that if a party is required (by oral question, interrogatories, requests for information or documents, subpoena or similar process) to disclose any of such information or secrets of another party, such disclosure be made without liability hereunder (although notice of such requirement shall be given to the other party so that, if practicable, the other party may seek a protective order against such disclosure). Notwithstanding the foregoing, no provision of this Section 11.3 shall in any manner whatsoever prevent or inhibit Purchaser from using or disclosing any such confidential information relating to the Business or the Assets in any manner Purchaser shall deem fit from and after the Closing; provided further, Seller agrees, for itself or himself and its or his Affiliates, officers, managers, partners, members, employees, agents, consultants and representatives, that it or they will not at any time from and after the Closing Date use or disclose any such confidential information which either (i) concerns Purchaser or its business or operations or (ii) relates to the Business or is included in the Assets. Notwithstanding the foregoing, no provision of this Section 11.3 shall in any manner whatsoever prevent Seller from making the disclosure, if any, required by the Securities and Exchange Act of 1934, as amended. Each party acknowledges that, in the event of a violation by the other of the terms and provisions of this Section 11.3, the remedies at law would not be adequate; and accordingly, in such event such party may proceed to protect and enforce its rights under this Section 11.3 by a suit in equity for specific performance and temporary, preliminary and permanent injunctive relief from violation of any of the provisions of this Section 11.3 from any court of competent jurisdiction without the necessity of proving the amount of any actual damages to the party resulting from the breach. 11.4 Access to Books and Records. Purchaser and Seller shall grant to each other access to the books, records, papers and documents relating to the business of Seller (i) 13 26 in the case of Purchaser, included in the Assets, and (ii) in the case of Seller, not included in the Assets which relate, directly or indirectly, to the operation of the Business (the "RECORDS"). Such access shall be given upon the reasonable request of the requesting party during normal business hours and upon five (5) business days prior notice. Each party shall maintain the Records in its possession for a period of three (3) years from and after the Closing Date, and each shall first offer to the other such of the Records as it may hereafter desire to dispose of or destroy at least thirty (30) days prior to initiating any disposition or destruction whether prior to or following the aforementioned three (3) year period. 11.5 Employees. 11.5.1 Effective as of the first business day following the Closing Date, Seller shall terminate those Employees selected by Purchaser that are listed on Schedule 11.5.1. Effective as of the first business day following the Closing Date, Purchaser shall offer employment to such Employees on such terms and conditions as Purchaser shall determine in its sole discretion. All Employees to whom Purchaser offers employment and who accept such employment are herein referred to as the "TRANSFERRED EMPLOYEES." Nothing in this Section 11.5 shall limit Purchaser's authority to terminate the employment of any Transferred Employee at any time for whatever reason after the Closing Date. 11.5.2 Seller shall be solely responsible for any liability, claim or expense (including, without limitation, reasonable attorneys' fees) with respect to employee compensation or employee benefits of any nature owed to any of Seller's employees or former employees or their beneficiaries that arise out of the employment relationship between Seller and any of their employees or former employees or the termination of that relationship and Seller shall indemnify and hold Purchaser harmless to the extent Purchaser incurs any such liability, claim or expense relating thereto. Notwithstanding the foregoing, to the extent the actual severance payments paid to the employees listed on Schedule 11.5.2 (the "SEVERANCE PAYMENTS"), on or after the Closing Date, are greater than $50,000 in the aggregate, Purchaser agrees to pay to Seller in cash at Closing, , an amount equal to fifty percent (50%) of the amount by which the Severance Payments exceeds $50,000. 11.6 Accounts Receivable. Purchaser shall provide a report to the Seller approximately ninety (90) days after the Closing Date concerning the collection status of the Accounts Receivable listed on Schedule 2.1.2 and notify the Seller of the potential uncollectible accounts (the "UNCOLLECTIBLE ACCOUNTS") defined as those that the Client is disputing for Seller's failure to perform and those that the Seller has identified as "at-risk" on Schedule 11.6. Seller will use its Best Efforts in assisting the Purchaser on collecting funds from the Uncollectible Accounts. If any Uncollectible Accounts remain outstanding twelve (12) months after the Closing Date, the Seller shall purchase the remaining Uncollectible Accounts, immediately upon the request of Purchaser, for a purchase price equal to the face value of such Uncollectible Accounts. The purchase price for such Uncollectible Accounts shall be paid, at the election of Purchaser, with either cash, cashiers check, wire transfer or a dollar for dollar reduction of the Service Credits. The purchase obligation of Seller contained in this Section 11.6 is the sole remedy of Purchaser with respect to any Uncollectible Accounts. 14 27 12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY. 12.1 Survival of Representations and Warranties. All representations and warranties made in this Agreement or made in any document delivered pursuant to this Agreement by or on behalf of any party as well as the indemnifications set forth in Sections 12.2 and 12.3 shall survive the execution and delivery of this Agreement and the Closing, regardless of notice of or any investigation or right of investigation made prior to or after the date of this Agreement by or on behalf of any party, for a period of eighteen (18) months. 12.2 Indemnification By Seller. Seller shall indemnify, save and hold harmless Purchaser and each of its respective officers, directors, employees, agents and Affiliates, and each of its successors and assigns (individually, a "PURCHASER INDEMNIFIED PARTY" and collectively, the "PURCHASER INDEMNIFIED PARTIES") from and against any and all costs, losses, claims, liabilities, fines, penalties, incidental and consequential damages, lost profits and expenses (including, without limitation, interest which may be imposed in connection therewith and court costs and reasonable fees and disbursements of counsel) ("DAMAGES") incurred in connection with, arising out of, resulting from or incident to: 12.2.1 all liabilities of or claims against the Purchaser Indemnified Parties of any nature, whether accrued, absolute, contingent or otherwise, arising out of the Assets or the Business and attributable to any state of facts existing or any event occurring at or prior to the Closing (whether known or unknown to Seller or Purchaser), to the extent not included in the Assumed Liabilities; 12.2.2 any breach of, or any inaccuracy in any of, the representations or warranties, or any default in any agreements, made by Seller in any Transaction Contract, any exhibit or schedule thereto or any certificate, instrument or writing delivered in connection therewith; 12.2.3 any taxes of any kind whatsoever, or expenses, interest or penalties relating thereto, which arise out of or result from the transactions contemplated by this Agreement, other than sales tax and taxes relating to the conduct of the business of Purchaser from and after the Closing Date; or 12.2.4 any Action, compromise, settlement, assessment or judgment arising out of or incidental to any of the matters indemnified against in this Section 12.2. If, by reason of the claim of any third Person relating to any of the matters subject to indemnification under this Section 12.2, a Lien, attachment, garnishment or execution is placed upon any of the property or assets of any Purchaser Indemnified Party, Seller shall also, promptly upon demand, furnish an indemnity bond satisfactory to such Purchaser Indemnified Party to obtain the prompt release of such Lien, attachment, garnishment or execution. 12.3 Indemnification By Purchaser. Purchaser shall indemnify, save and hold harmless Seller and each of its respective officers, directors, partners, members, managers, employees, agents and Affiliates, and each of their successors and assigns 15 28 (individually, a "SELLER INDEMNIFIED PARTY" and collectively, the "SELLER INDEMNIFIED PARTIES") from and against any and all Damages incurred in connection with, arising out of, resulting from or incident to: 12.3.1 all liabilities of or claims against the Seller Indemnified Parties of any nature, whether accrued, absolute, contingent or otherwise, (a) with respect to the Assumed Obligations or (b) attributable to any state of facts existing or any event occurring after the Closing Date (whether known or unknown to Seller or Purchaser), to the extent arising out of the operation by Purchaser of the Business acquired from Seller hereunder, except, in each case, if such liability or claim results from or arises in connection with the breach of any of the representations, warranties, covenants or agreements made by Seller in any Transaction Contract, any schedule or exhibit thereto or any certificate or instrument delivered in connection therewith; 12.3.2 any breach of, or any inaccuracy in any of, the representations or warranties, or any default in any agreements, made by Purchaser in any Transaction Contract, any exhibit or schedule thereto or any certificate, instrument or writing delivered in connection therewith; or 12.3.3 any Action, compromise, settlement, assessment or judgment arising out of or incidental to any of the matters indemnified against in this Section 12.3. If, by reason of the claim of any third Person relating to any of the matters subject to indemnification under this Section 12.3, a Lien, attachment, garnishment or execution is placed upon any of the property or assets of any Seller Indemnified Party, Purchaser shall also, promptly upon demand, furnish an indemnity bond satisfactory to such Seller Indemnified Party to obtain the prompt release of such lien, attachment, garnishment or execution. 12.4 Notice of Claim. If a claim for Damages (a "CLAIM") is to be made by a party entitled to indemnification hereunder (the "INDEMNIFIED PARTY") against the indemnifying party (the "INDEMNIFYING PARTY"), the Indemnified Party shall give written notice (the "CLAIM NOTICE") to the Indemnifying Party, which notice shall specify whether the Claim arises as a result of a claim by a Person against the Indemnified Party (a "THIRD PARTY CLAIM") or whether the Claim does not so arise (a "DIRECT CLAIM"), and shall also specify (to the extent that the information is available) the factual basis for the Claim and the amount of the Damages, if known. If the Claim is a Third Party Claim, the Indemnified Party shall provide the Claim Notice as soon as practicable after such party becomes aware of any fact, condition or event which may give rise to Damages for which indemnification may be sought hereunder. If any Action is filed against any Indemnified Party, written notice thereof shall be given to the Indemnifying Party as promptly as practicable (and in any event within fifteen (15) days after the service of the citation or summons). The failure of any Indemnified Party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the Indemnifying Party has been damaged by such failure. 12.5 Defense of Claims. With respect to a Third Party Claim, if after receipt of the Claim Notice the Indemnifying Party acknowledges in writing to the Indemnified Party that the Indemnifying Party shall be obligated under the terms of its 16 29 indemnity hereunder in connection with such Third Party Claim, the Indemnifying Party shall be entitled, if it so elects at its own cost, risk and expense, (i) to take control of the defense and investigation of such Action, (ii) to employ and engage attorneys of its own choice, but, in any event, reasonably acceptable to the Indemnified Party, to handle and defend the same unless the named parties to such action or proceeding (including, without limitation, any impleaded parties) include both the Indemnifying Party and the Indemnified Party and the Indemnified Party has been advised in writing by counsel that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, in which event the Indemnified Party shall be entitled, at the Indemnifying Party's cost, risk and expense, to separate counsel of one firm (in addition to appropriate local counsel) of its own choosing, and (iii) to compromise or settle such Action, which compromise or settlement shall be made only with the written consent of the Indemnified Party, such consent not to be unreasonably withheld or delayed. If the Indemnifying Party fails to assume the defense of such Claim within fifteen (15) days after receipt of the Claim Notice, the Indemnified Party against which such Claim has been asserted will (upon delivering notice to such effect to the Indemnifying Party) have the right to undertake, at the Indemnifying Party's cost and expense, the defense, compromise or settlement of such Claim on behalf of and for the account and risk of the Indemnifying Party. If the Indemnified Party assumes the defense of the Claim, the Indemnified Party will keep the Indemnifying Party reasonably informed of the progress of any such defense, compromise or settlement. The Indemnifying Party shall be liable for any settlement of any action effected pursuant to and in accordance with this Section 12.5 and for any final judgment (subject to any right of appeal) and the Indemnifying Party agrees to indemnify and hold harmless the Indemnified Party from and against any Damages by reason of such settlement or judgment. 12.6 Offset Against Service Credits. Seller hereby recognizes, acknowledges and agrees that, notwithstanding anything to the contrary contained in this Agreement, and in addition to any other remedy which is otherwise available at law, in equity, by statute or otherwise, Purchaser may reduce the amount of the Service Credits or any amount owed by Purchaser to Seller in satisfaction of Seller's indemnification obligations set forth in Section 12 to the extent a final judgment has been issued against the Seller. 12.7 Limitations. Neither the Purchaser Indemnified Parties nor the Seller Indemnified Parties shall be entitled to recover under Sections 12.2 or 12.3 unless the aggregate amount of indemnifiable Damages incurred by Purchaser Indemnified Parties on the one hand or the Seller Indemnified Parties on the other hand exceeds $50,000 (the "FLOOR"), at which time such claim for indemnification may be made for all Damages, in excess of the Floor. In addition, neither the Purchaser Indemnified Parties nor Seller Indemnified Parties shall be entitled to recover an amount hereunder with respect to all Damages in excess of the Purchase Price. Notwithstanding anything to the contrary herein contained, the limitations contained in this Section 12.7 shall not be interpreted to limit an Indemnifying Party's liability in the event of fraud by such Indemnifying Party in connection with this Agreement. Notwithstanding the foregoing, the provision of this Section 12.7 shall in no way affect the rights of the parties under Section 3.3. 17 30 13. TAXES. 13.1 Payment of Taxes; Filing of Returns. Seller shall remain liable for the filing of all tax returns and reports and for the payment of all foreign, federal, state and local taxes of Seller relating to the operation of the business of Seller and to the Assets for any period ending on or prior to the Closing Date, and for the payment of all taxes attributable to or relating to the consummation of the transactions contemplated herein, and Seller shall, jointly and severally, indemnify and hold Purchaser harmless from and against all liability in connection therewith. 13.2 Sales Taxes. Purchaser and Seller believe that no sales tax is required to be paid to any taxing authority. However, in the event that any taxing authority shall determine otherwise and shall assess sales tax against Seller, all sales and use taxes, including interest, penalties and any other additions to such sales and use taxes, imposed by any governmental or taxing authority upon or incurred by any of the parties hereto in connection with this Agreement and the transactions contemplated hereby shall be borne by Purchaser, and the Seller and Purchaser shall then be mutually responsible for the filing of all necessary tax returns and reports with respect to any such taxes. 14. NONCOMPETITION. 14.1 Covenant Not to Compete. For a period of three years from the Closing Date, Seller shall not, directly or indirectly, (i) engage anywhere in the world in a business which competes with the Business, or (ii) induce or attempt to induce (A) any employee of Purchaser to leave the employ of Purchaser or in any way interfere adversely with the relationship between any such employee and Purchaser, (B) any employee of Purchaser to work for, render services or provide advice to or supply confidential business information or trade secrets of Purchaser to any third Person, or (C) any customer, supplier, agent, publisher, clearing house, licensee, licensor or other business relation of Purchaser to cease doing business with Purchaser or in any way interfere with the relationship between any such customer, supplier, agent, publisher, clearing house, licensee, licensor or other business relation and Purchaser. Except as otherwise provided by this Agreement or the other Transaction Contracts, for a period of three years from the Closing Date, Purchaser shall not, directly or indirectly, engage anywhere in the world in a business which competes with the remaining business of Seller as it is currently conducted with its current existing clients. The Purchaser will be allowed to compete with the Seller on any potential future clients who have elected to solicit an open bid from prospective service provider. The ownership by Seller or Purchaser of five percent (5%) or less of the outstanding capital stock of any corporation engaged in any business which competes with any line of business engaged in by Purchaser or Seller, where the capital stock of the corporation is listed on a national securities exchange or actively quoted on the Nasdaq Stock Market, shall not be deemed a violation by Seller or Purchaser of this Section 14. 14.2 Remedies. Seller acknowledges and agrees that, in the event of a violation by it of the terms and provisions of this Section 14, the remedies at law would not be adequate. Accordingly, in such event Purchaser may proceed to protect and enforce its rights 18 31 under this Section 14 by a suit in equity for specific performance and temporary, preliminary and permanent injunctive relief from violation of any of the provisions of this Section 14 from any court of competent jurisdiction without the necessity of proving the amount of any actual damages to Purchaser resulting from the breach. 14.3 Modification. If for any reason there should be a determination by a court of competent jurisdiction that the provisions of this Section 14 are too broad or unreasonable (or otherwise objectionable) and therefore unenforceable, the provisions of this Section 14 shall be deemed modified, and fully enforceable as so modified, to the extent that the court would find them to be fair, reasonable and enforceable under the circumstances. 14.4 Transfers to Third Parties. The parties acknowledge that Seller is currently considering a possible restructuring of its business, which restructuring may result in a transfer of certain of Seller's assets or operations to unaffiliated entities involved in the EDI business. The parties agree that such transfers shall not be deemed to constitute violations of the provisions of this Section 14 or analogous provisions contained in any other Transaction Contract. 15. TERMINATION. 15.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual agreement, in writing, of each of the parties to this Agreement. 15.2 Termination by Purchaser. Purchaser may (but shall not be obligated to) terminate this Agreement prior to the Closing by giving written notice to Seller if: 15.2.1 there has been a material violation or breach by Seller of any agreement, covenant, representation or warranty contained in any Transaction Contract, which violation or breach shall not have been cured or corrected within ten (10) days after receipt of notice thereof; 15.2.2 the Closing does not occur on or prior to January 31, 2001, or such later date as may be agreed to in writing by the parties; 15.2.3 Purchaser exercises its termination rights under Section 8.1 hereof; or 15.2.4 any of the conditions in Section 9 have not been satisfied as of the Closing or if Purchaser is made aware and determines in its reasonable discretion that any condition in Section 9 will not be satisfied as of the Closing (other than through the failure of Purchaser to comply with its obligations under any Transaction Contract) and Purchaser has not expressly waived such condition in writing on or before the Closing. 19 32 15.3 Termination by Seller. Seller may (but shall not be obligated to) terminate this Agreement on behalf of itself prior to the Closing by giving written notice to Purchaser if: 15.3.1 there has been a material violation or breach by Purchaser of any agreement, covenant, representation or warranty contained in any Transaction Contract, which violation or breach shall not have been cured or corrected within ten (10) business days after receipt of notice thereof; 15.3.2 the Closing does not occur on or prior to January 31, 2001, or such later date as may be agreed to in writing by the parties; or 15.3.3 any of the conditions in Section 10 have not been satisfied as of the Closing or if Seller is made aware and determines in its reasonable discretion that any condition in Section 10 will not be satisfied as of the Closing (other than through the failure of Seller to comply with its obligations under any Transaction Contract) and Seller has not expressly waived such condition in writing on or before the Closing. 15.3.4 Effect of Termination. In the event of such termination, no party shall have any obligation or liability to any other party in respect to this Agreement, except for any breach of this Agreement occurring prior to such termination, and provided that Sections 11.3 and 16.9 shall remain in full force and effect. 16. MISCELLANEOUS. 16.1 Notices. All notices, requests, demands and other communications (collectively, "NOTICES") given pursuant to this Agreement shall be in writing, and shall be delivered by personal service, courier, facsimile transmission (which must be confirmed) or by United States first class, registered or certified mail, postage prepaid, to the following addresses: (i) if to Purchaser, to: Medi, Inc. 241 Lombard Street Thousand Oaks, California 91360 Facsimile No.: (805) 777-7084 Attn: Larry Lai with a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P. 2029 Century Park East, 24th Floor Los Angeles, California 90067 Facsimile No.: (310) 728-2243 Attn: V. Joseph Stubbs 20 33 (ii) if to Seller to: Health Management Systems, Inc. 401 Park Avenue South New York, New York 10016 Facsimile No.: (212) 857-5009 Attn: Richard B. Brown with a copy to: Coleman, Rhine & Goodwin LLP 750 Lexington Avenue, 26th Floor New York, NY 10022 Facsimile No.: [(212) 317-1970 Attn: Bruce S. Coleman, Esq. Any Notice, other than a Notice sent by registered or certified mail, shall be effective when received; a Notice sent by registered or certified mail, postage prepaid return receipt requested, shall be effective on the earlier of when received or the third (3rd) day following deposit in the United States mails. Any party may from time to time change its address for further Notices hereunder by giving notice to the other parties in the manner prescribed in this Section. 16.2 Entire Agreement. This Agreement, the other Transaction Contracts and the exhibits and schedules thereto contain the sole and entire agreement and understanding of the parties with respect to the entire subject matter of this Agreement, and any and all prior discussions, negotiations, commitments and understandings, whether oral or otherwise, related to the subject matter of this Agreement are hereby merged herein. Nothing in this Agreement, express or implied, is intended to confer upon any person other than the parties hereto any rights or remedies under or by way of this Agreement. 16.3 Assignment. No party may assign its rights or obligations under this Agreement, and any attempted or purported assignment or any delegation of any party's duties or obligations arising under this Agreement to any Person shall be deemed to be null and void, and shall constitute a material breach by such party of its duties and obligations under this Agreement. This Agreement shall inure to the benefit of and be binding upon any successors of each party by way of merger or consolidation. 16.4 Waiver and Amendment. No provision of this Agreement may be waived unless in writing signed by all the parties to this Agreement, and waiver of any one provision of this Agreement shall not be deemed to be a waiver of any other provision. This Agreement may be amended only by a written agreement executed by all of the parties to this Agreement. 16.5 Governing Law. This Agreement shall be construed in accordance with the laws of the State of California without giving effect to the principles of conflicts of law thereof. 21 34 16.6 Severability. Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be or become prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. 16.7 Captions. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. 16.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 16.9 Costs and Attorneys' Fees. If any Action is instituted to remedy, prevent or obtain relief from a default in the performance by any party to this Agreement of its obligations under this Agreement, the prevailing party shall recover its reasonable attorneys' fees incurred in each and every such Action, including, without limitation, any and all appeals or petitions therefrom. 16.10 Rights Cumulative. No right granted to the parties under this Agreement on default or breach is intended to be in full or complete satisfaction of any Damages arising out of such default or breach, and each and every right under this Agreement, or under any other document or instrument delivered hereunder, or allowed by law or equity, shall be cumulative and may be exercised from time to time. 16.11 Judicial Interpretation. Should any provision of this Agreement require judicial interpretation, it is agreed that a court interpreting or construing the same shall not apply a presumption that the terms hereof shall be more strictly construed against any Person by reason of the rule of construction that a document is to be construed more strictly against the Person who itself or through its agent prepared the same, it being agreed that all parties have participated in the preparation of this Agreement. 22 35 IN WITNESS WHEREOF, this Agreement has been made and entered into as of the date and year first above written. MEDI, INC., a California corporation By: ------------------------------ Name: Larry Lai Title: Chief Executive Officer HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation By: ------------------------- Name: Richard B. Brown Title: Division Vice President HEALTH RECEIVABLES MANAGEMENT, INC., a Delaware corporation By: ------------------------- Name: Richard B. Brown Title: Division Vice President QUALITY MEDI-CAL ADJUDICATION INCORPORATED, a California corporation By: ------------------------- Name: Richard B. Brown Title: Division Vice President 23 EX-10.4.III 3 y45381ex10-4_iii.txt AMENDMENT NO. 2 TO THE CREDIT AGREEMENT 1 Exhibit 10.4(iii) AMENDMENT NO. 2 AMENDMENT NO. 2 dated as of January 12, 2001 among the following: (a) HEALTH MANAGEMENT SYSTEMS, INC., a corporation duly organized and validly existing under the laws of the State of New York (the "Borrower"); (b) each of the Subsidiaries of the Borrower identified under the caption "Guarantors" on the signature pages hereto (individually, a "Guarantor" and, collectively, the "Guarantors"); and (c) THE CHASE MANHATTAN BANK, a New York State bank (the "Bank"). The Borrower, the Guarantors and the Bank are parties to a Credit Agreement and Guaranty dated as of February 15, 2000 (as heretofore modified and supplemented and in effect on the date hereof, the "Credit Agreement"), providing, subject to the terms and conditions thereof, for extensions of credit (by making loans and issuing letters of credit) to be made by the Bank to the Borrower in an aggregate principal or face amount not exceeding $10,000,000. The Borrower, the Guarantors and the Bank wish to amend the Credit Agreement in certain respects and, accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Except as otherwise defined in this Amendment No. 2, terms defined in the Credit Agreement are used herein as defined therein. Section 2. Amendments. Subject to the satisfaction of the conditions precedent specified in Section 4 below, but effective as of the date hereof, the Credit Agreement shall be amended as follows: 2.01 Definitions. Section 1.01 of the Credit Agreement shall be amended by adding the following definitions in the appropriate alphabetical location: "`Medi' shall mean Medi, Inc., a California corporation." "`EDI Disposition' shall mean the sale by the Borrower to Medi of all of the assets and liabilities of the EDI business of the Borrower for a consideration consisting of (a) $450,000, (b) the EDI Note, and (c) certain credits in respect of services that may be provided by Medi to the Borrower." "`EDI Note' shall mean a promissory note of Medi in a principal amount equal to $275,000 delivered to the Borrower as partial consideration for the EDI Disposition." 2.02 Conditions Precedent to New Extensions of Credit. Section 5.02 of the Credit Agreement shall be amended by adding the following at the end thereof: "In addition, the obligation of the Bank to provide any Loan or to issue any Standby Letter of Credit shall be subject to the condition precedent that the Borrower's obligations in respect of such Loan or such Standby Letter of Credit be secured by a first priority perfected Lien on marketable securities satisfactory to the Bank in an amount satisfactory to the Bank." -1- 2 2.03 Sale of Assets. Section 8.05 of the Credit Agreement shall be amended by deleting the word "and" immediately before clause (3) thereof, replacing the period at the end thereof with ", and" and by adding the following new clause (4): "(4) that the Borrower may consummate the EDI Disposition." 2.04 Investments. Section 8.06 of the Credit Agreement shall be amended by deleting the word "and" at the end of clause (6) thereof, by replacing the period at the end of clause (7) thereof with "; and" and by adding the following new clause (8) to read as follows: "(8) the EDI Note." 2.05 Minimum Liquidity Covenant. The Credit Agreement shall be amended by adding the following new Section 9.06 to read as follows: "SECTION 9.06. Minimum Liquidity. The Borrower will not permit the sum of the following for the Borrower and its Consolidated Subsidiaries to be less than $10,000,000 at any time: (a) cash on hand and in bank accounts; and (b) Investments of the type described in clauses (a)(obligations of the United States), (b)(commercial paper), (c)(bank certificates of deposit), (d)(corporate debt securities) and (e)(government debt securities) of Section 8.06 hereof." Section 3. Representations and Warranties. Each of the Borrower and the Guarantors represents and warrants to the Bank that the representations and warranties set forth in Article VI of the Credit Agreement are true and complete on the date hereof as if made on and as of the date hereof and as if each reference in said Article VI to "this Agreement" or the "Loan Documents" included reference to this Amendment No. 2. Section 4. Conditions Precedent. As provided in Section 2 above, the amendments to the Credit Agreement set forth in said Section 2 shall become effective, as of the date hereof, upon the satisfaction of the following conditions precedent: 4.01. Execution by All Parties. This Amendment No. 2 shall have been executed and delivered by each of the parties hereto. 4.02. Receipt of Documents. The Bank shall have received copies of each of each document evidencing or governing the EDI Disposition and the EDI Note. 4.03. Amendment Fee. The Borrower shall have paid to the Bank an amendment fee in an amount equal to $3,500, and a waiver fee in an amount equal to $5,000. 4.04. Legal Fees and Expenses. The Borrower shall have paid to the Bank the reasonable fees and expenses of the Bank's counsel in connection with this Amendment No. 2. Section 5. Waiver. The Bank hereby waives compliance by the Borrower with its obligations under Section 9.02 of the Credit Agreement for the period ending on October 31, 2000. This waiver is limited solely to the provision specified and solely for the determination of said provision as of the date specified and shall not extend to any other provision or for any other date or period of time. -2- 3 Section 6. Miscellaneous. Except as herein provided, the Credit Agreement shall remain unchanged and in full force and effect. This Amendment No. 2 may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Amendment No. 2 by signing any such counterpart. This Amendment No. 2 shall be governed by, and construed in accordance with, the law of the State of New York. -3- 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to be duly executed and delivered as of the day and year first above written. BORROWER HEALTH MANAGEMENT SYSTEMS, INC. By _________________________ Alan L. Bendes Senior Vice President and Chief Financial Officer GUARANTORS ACCELERATED CLAIMS PROCESSING, INC. By_________________________ Name: Title: QUALITY MEDI-CAL ADJUDICATION INCORPORATED By_________________________ Name: Title: HEALTH CARE MICROSYSTEMS, INC. By _________________________ Name: Title: CDR ASSOCIATES, INC. By_________________________ Name: Title: HSA MANAGED CARE SYSTEMS, INC. By_________________________ Name: Title: -4- 5 HEALTH RECEIVABLES MANAGEMENT, INC. By _________________________ Name: Title: BANK THE CHASE MANHATTAN BANK By _________________________ Dele Akinla II Vice President -5- EX-10.15 4 y45381ex10-15.txt SEPARATION AGREEMENT AND RELEASE 1 Exhibit 10.15 SEPARATION AGREEMENT AND RELEASE SEPARATION AGREEMENT AND RELEASE, dated as of October 2, 2000, between HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation (the "Company"), and PAUL J. KERZ ("Kerz"), an individual residing at 126 East 65th Street, New York, New York 10021. WHEREAS Kerz resigned as President and Chief Executive Officer of the Company on October 2, 2000; and WHEREAS, as provided herein, Kerz is resigning from his positions as an officer and director of any subsidiaries or affiliates of the Company; and WHEREAS the Company and Kerz wish to set forth their mutual understanding and agreement regarding the termination of Kerz's employment as President and Chief Executive Officer of the Company and to resolve any and all matters arising out of or relating to such employment; NOW, THEREFORE, in consideration of the mutual promises, releases and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the parties hereby covenant and agree as follows: 1. Resignation. Kerz hereby confirms his resignation as President and Chief Executive Officer of the Company on October 2, 2000 and hereby resigns from his positions as an officer or director of all subsidiaries and affiliates of the Company effective as of 5:00 p.m. on October 1, 2000 (the "Effective Date"). 2. Salary and Certain Benefits. In consideration of Kerz's execution and delivery of this Agreement and his agreement to abide by its terms, the Company agrees to employ Kerz as a senior advisor to the Company until the second anniversary of the Effective Date and to make the following payments and to provide the following benefits to Kerz: (i) Salary. During the period commencing on the Effective Date and ending on the second anniversary thereof, the Company shall pay Kerz monthly payments at the per annum rate of $364,000. (ii) Consulting Fee. Commencing on the second anniversary of the Effective Date and ending on April 20, 2006 (the "Final Termination Date"), the Company shall 2 engage Kerz as an independent contractor and pay Kerz a monthly consulting fee at the per annum rate of $50,000. (iii) Home Office Expenses. The Company will reimburse Kerz for up to $4,000 in expenses incurred by him in establishing and equipping a home office. (iv) Automobile Arrangements. The Company has previously made available to Kerz for his use (i) the car described under the caption "Owned Car" on Annex I hereto (the "Owned Car") and (ii) the car described under the caption "Leased Car" on said Annex I (the "Leased Car"). The Company agrees to sell the Owned Car to Kerz for the purchase price specified on Annex I hereto, and Kerz agrees to purchase the Owned Car for such price, at a closing to take place on a mutually convenient date not later than December 15, 2000. The Company also agrees to assign and transfer to Kerz, and Kerz agrees to assume all obligations under, the lease (as described in Annex I) for the Leased Car, such assignment and assumption to take place not later than December 15, 2000. (v) Season Tickets. The Company will make available to Kerz under the Company's existing season ticket subscription to the New York Knicks tickets for up to 12 regular season games, to be selected on a basis mutually satisfactory to the Company and Kerz. Kerz agrees to pay the cost of any playoff tickets made available to the Company under the subscription and to afford the Company the right to use two-thirds of such tickets (for which the Company shall reimburse Kerz at cost). The Company does not intend to retain the Company's existing season ticket subscription following the end of this playing season. At the request of Kerz, the Company will use reasonable efforts, at the sole cost and expense of Kerz, to change the mailing address for such subscription to Kerz's residence and to assign to Kerz any rights the Company may have to subscribe for such season tickets following the end of the season. The Company makes no representations or warranties whatsoever as to whether such an assignment will be permitted under the agreements governing such a subscription. (vi) Other Benefits. Commencing on the Effective Date and continuing until the earlier of Kerz's 65th birthday or his death, the Company shall, except as provided below, continue to provide health insurance for Kerz and his dependents under the Company's current health insurance plan or, with respect to any period immediately prior to Kerz's 65th birthday, under a COBRA arrangement paid for by the Company, provided that, if the Company changes insurers, there will be no exclusion for pre-existing conditions of Kerz or any of his dependents and the benefits provided by the new insurer to Kerz and his dependents shall be substantially similar to the health insurance currently offered by the Company to such persons. The obligation to provide health insurance to Kerz pursuant to this paragraph (vi) shall terminate upon Kerz becoming eligible for similar benefits with a subsequent employer. 2 3 (vii) Legal Expenses. The Company will reimburse Kerz for up to $7,500 in legal fees incurred by him in connection with the negotiation of this Agreement. 3. Promissory Notes and Transfer of Shares and Options; Certain Additional Payments by the Company. (i) The Company and Kerz have agreed that, as of the Effective Date, the Amended and Restated Promissory Note (Secured Loan) dated as of October 19, 1999 (the "Secured Note") made by Kerz in favor of HSA Managed Care Systems, Inc., a subsidiary of the Company ("HSA"), in the aggregate outstanding principal amount of $500,000, and the Amended and Restated Promissory Note (Unsecured Loan) dated as of October 19, 1999 (the "Unsecured Note" and collectively with the Secured Note, the "Promissory Notes") made by Kerz in favor of HSA, in the aggregate outstanding principal amount of $1,000,000, shall be marked paid. The Company shall cause HSA to so mark the Promissory Notes and return such Promissory Notes to Kerz. (i) The Company and Kerz have also agreed that, as of the Effective Date, Kerz will transfer, assign and deliver to the Company and/or its designees the securities, rights and other property described below (collectively, the "Transferred Assets"). The Transferred Assets shall consist of the following: (A) 162,666 shares of the Company's Common Stock, $.01 par value ("Common Stock"), owned by Kerz and pledged to secure repayment of the Secured Note pursuant to the Security Agreement dated as of October 29, 1998 between Kerz and HSA; (B) an additional 100,000 shares of Common Stock now owned by Kerz; and (C) any and all of Kerz's right, title and interest in (including, without limitation, the right to exercise or vest any interest in) all stock options to purchase shares of Common Stock of the Company granted to Kerz by the Company, whether vested or unvested as of the date hereof. (ii) As of the Effective Date (i) Kerz shall deliver to the Company the shares of Common Stock and agreements evidencing the options described in clauses (1), (2) and (3) above, together with stock powers duly executed in blank in the form provided by the Company. Kerz hereby represents and warrants to the Company that (x) he is the registered holder of the shares of Common Stock described in clauses (A) and (B) above (collectively, the "Common Shares") and (y) he has good and valid title to the Common Shares, in each case free and clear of any and all pledges, security interests, liens, charges or other encumbrances (other than security interests in favor of HSA). 3 4 (iii) As consideration for the transfer and assignment of the Transferred Assets and the other covenants and agreements of Kerz contained herein, the Company agrees to pay Kerz, upon delivery of the Transferred Assets, the sum of $700,000 in cash. Of such amount, $549,996, representing the fair market value as of the Effective Date of the shares described in clauses (A) and (B) above shall be allocated to the purchase of such Transferred Assets and the balance shall be allocated to the covenant contained in Section 9. 4. Tax Withholding. The amounts otherwise payable to Kerz pursuant to Sections 2(i), 2(ii) and 3(iv) shall be reduced by the amount of any federal, state and local income and employment taxes required to be withheld by the Company, pursuant to its regular payroll practices, in respect of any compensation income recognized by Kerz in respect of the matters described in Sections 2 and 3 above. To the extent that the aggregate amount of such withhold ing taxes exceeds the amounts otherwise payable pursuant to said Sections 2(i), 2(ii) and 3(iv), then Kerz agrees to furnish cash funds or make other arrangements satisfactory to the Company regarding such payment. 5. Acknowledgment by Kerz. Kerz acknowledges and agrees that, from and after the Effective Date, he will not be entitled to any compensation, bonus, contribution, benefit, pension or other payment from the Company or any of its subsidiaries or affiliates, in cash, in securities, or in kind, other than as set forth in this Agreement, and furthermore agrees that he will forever forbear from making any claim against the Company or any such subsidiary or affiliate for such other compensation, bonus, contribution, benefit, pension or other payment. 6. Resignation. As of the Effective Date Kerz shall execute and deliver to the Company, simultaneously with the execution and delivery of this Agreement, a letter of resignation substantially in the form annexed hereto as Exhibit A. Kerz understands that the Company does not intend to re-nominate him as a candidate for election as a director of the Company following the end of his current term. 7. Survival of Certain Indemnification Obligations. The Company acknowledges and agrees that nothing in this Agreement, including, without limitation, the mutual releases and covenants contained in Section 8 below, shall limit or affect in any manner the obligation of the Company to indemnify Kerz as a former officer and director of the Company or of any subsidiary or affiliate thereof (and the Company agrees that it will so indemnify Kerz) to the fullest extent provided in the By-Laws and Certificate of Incorporation of the Company in effect at the Effective Time (copies of the relevant portions of which are annexed to this Agreement and incorporated herein) and in accordance with the laws of the jurisdiction in which the Company is organized. In addition to and notwithstanding the foregoing, the Company agrees that in no event shall the terms and conditions of the indemnification rights afforded to Kerz be less favorable to him than those afforded by the Company to any other person similarly situated with respect to any claim asserted against Kerz and such other person in relation to or in connection with their acting as officers or directors of the Company or of any subsidiary or affiliate thereof. In the event any action is brought against Kerz for which indemnification is 4 5 sought hereunder, Kerz agrees that he will cooperate in the defense of such action by the Company and will provide to the Company any and all such assistance as it shall reasonably request in connection therewith. Kerz further agrees that he will cooperate in the defense of the pending claims made by IHHS and Davis and Associates against the Company and provide all such assistance in that regard as the Company shall reasonably request. 8. Mutual Release and Covenants. (i) Except as provided in Section 8(iii) below and with respect to any indemnification obligation imposed on the Company as described in Section 7 above, effective as of the Effective Date, Kerz irrevocably and unconditionally releases and discharges the Company, its past and present officers, directors, agents, attorneys, repre- sentatives, employees, servants, subsidiaries, affiliates, shareholders, successors and assigns, and all persons acting by, through, under or in concert with any of them (collectively, the "Company Releasees"), jointly and severally, from any and all claims, demands, rights, liabilities, debts, liens, damages, punitive damages, costs, losses, expenses and/or compensation, covenants, contracts, controversies, agreements, promises, actions and causes of action, of every kind and nature whatsoever, at law or in equity, including, but not limited to, rights arising under the United States Constitution and/or under statute (both state and federal), rule, regulation, or ordinance (including, without limitation, Title VII of the Civil Rights Act of 1964, the Rehabilitation Act of 1973, including Section 504 thereof, the Civil Rights Act of 1866, 42 U.S.C. Section 1981, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, the Equal Pay Act, The Fair Labor Standards Act and the Employee Retirement Income Security Act ("ERISA"), all as amended), at common law, whether in tort, in contract or otherwise, known or unknown, suspected or unsuspected, disclosed or undisclosed, which against the Company Releasees, or any of them, Kerz ever had, now has or hereafter can, shall or may have for, upon, or by reason of any act, omission, matter, cause or thing whatsoever, from the beginning of time to the date of this Release. (ii) Except as provided in Section 8(c) below, effective as of the Effective Date, the Company, on behalf of itself and each of the Company Releasees, irrevocably and unconditionally releases and discharges Kerz, his past and present agents, attorneys, representatives, employees, servants, partners, successors and assigns, and all persons acting by, through, under or in concert with any of them (collectively, the "Kerz Releasees"), jointly and severally, from any and all claims, demands, rights, liabilities, debts, liens, damages, punitive damages, costs, losses, expenses and/or compensation, covenants, contracts, controversies, agreements, promises, actions and causes of action, of every kind and nature whatsoever, at law or in equity, under statute (both state and federal), rule, regulation, or ordinance, at common law whether in tort, in contract or otherwise, known or unknown, suspected or unsuspected, disclosed or undisclosed, which against the Kerz Releasees, the Company ever had, now has or hereafter can, shall or may 5 6 have for, upon, or by reason of any act, omission, matter, cause or thing whatsoever, from the beginning of time to the date of this Release. (iii) Nothing in this Section 8 is intended to or constitutes a release or waiver of any rights or obligations any party may have under this Agreement, and all such rights and obligations are expressly preserved. (iv) Kerz acknowledges that the payments and benefits to be provided to him pursuant to this Agreement exceed those to which he would otherwise be entitled. He further acknowledges that the agreement by the Company to provide such payments and other benefits is expressly conditioned upon his compliance with all the terms and conditions of this Agreement. (v) Kerz represents and warrants (i) that he has not filed or commenced, individually or collectively, any actions, charges or claims against the Company or its present and former shareholders, partners, officers, directors, employees, agents, subsidiaries and affiliates released pursuant to this Section 8, and that he will not, in the future, file or commence, individually or collectively, any such actions, charges or claims; (ii) that he has made no transfer, assignment, conveyance or other disposition to any other person or entity any claims against or any interest in claims against the Company Releasees (iii) that no other person or entity has an interest in any such claims; and (iv) and that he is fully entitled to give his full and complete release of all such claims. (vi) The Company represents and warrants (i) that it has not filed or commenced, individually or collectively, any actions, charges or claims against Kerz released pursuant to this Section 8, and that it will not, in the future, file or commence, individually or collectively, any such actions, charges or claims; (ii) that it has made no transfer, assignment, conveyance or other disposition to any other person or entity any claims against or any interest in claims against the Kerz Releasees (iii) that no other person or entity has an interest in any such claims; and (iv) and that it is fully entitled to give its full and complete release of all such claims. 9. Confidentiality and Noncompete Agreement. (i) Kerz acknowledges and agrees that the Company and its subsidiaries have developed and are currently providing to hospitals, health care institutions and third-party payors throughout the United States a number of unique and proprietary technology-based products. By reason of the services rendered by Kerz during the course of his employment, he has acquired and has been given access to secret and confidential information concerning these products and systems and the proprietary methods and processes by which these systems are installed and operated by the Company and its subsidiaries in the Company's client institutions. Kerz further acknowledges that these systems, and the method of installation and operation of these systems, are unique, secret 6 7 and confidential and constitute trade secrets and proprietary information of the Company. Kerz hereby agrees that during the period commencing on the Effective Date and ending on the Final Termination Date (the "Restricted Period"), he will not directly or indirectly furnish, disclose or divulge any such information, methods, processes or trade secrets or any other confidential or proprietary information of the Company and its subsidiaries (collectively, the "Confidential Information") to any other party or use such Confidential Information for his own benefit or the benefit of any other person or entity without the prior written consent of the Company given after the Effective Date. (ii) During the Restricted Period, Kerz shall not compete with the Company or any of its subsidiaries, either directly or indirectly, or engage in any business directly or indirectly competitive with the Business (as hereinafter defined). This Section 9(ii) shall not be construed to prohibit (i) Kerz's future pursuit of a career or job opportunity in data processing or related industries, so long as the focus of the career or job opportunity is not in competition with the Business, (ii) Kerz's acting as a consultant to an investment firm with regard to investments in the healthcare services industry, so long as such role does not involve any investment or strategic advice or operational responsibility with respect to entities in direct competition with the Business or (iii) Kerz's ownership of up to 5% of the outstanding common stock of any publicly traded company that competes with the Business, so long as Kerz's involvement with such company is limited to such investment. (iii) During the Restricted Period, Kerz shall not solicit or induce any employee of the Company or any of its subsidiaries to terminate his or her employment with the Company or such subsidiary or compete with the Company or any of its subsidiaries in any manner, directly or indirectly. (iv) For purposes of this Section 9, "Business" means the businesses conducted by the Company and its subsidiaries as of the date hereof, including, without limitation, the business related to the aggregation and application of eligibility data to charge information required to effect those transfer payments associated with the delivery of health care. (v) Kerz acknowledges and agrees that the remedies of the Company at law, if any, for any breach or threatened breach of the provisions of this Section 9 would be inadequate and, therefore, agrees that the Company shall be entitled to appropriate injunctive and other equitable relief from a court of competent jurisdiction, as such court may determine. In any such action, Kerz waives his rights, if any, to the posting of a bond or other security by the Company. 10. Confirmation of Certain Matters. By signing this Agreement, Kerz acknowledges and agrees that: 7 8 (i) he has been afforded a reasonable and sufficient period of time to review this Agreement and conduct such investigation and make such inquiries as he deems appropriate, for deliberation and for negotiation of the terms hereof, that he has consulted with legal counsel of his choice before signing it, and that such counsel has represented him in negotiating the terms of this Agreement; (ii) he has carefully read and understands the terms of this Agreement, which have been fully explained to him by his legal counsel; (iii) he has signed this Agreement freely and voluntarily and without duress or coercion of any kind, and with full knowledge of its significance and consequences and of the rights relinquished, surrendered, released and discharged hereunder; (iv) the only consideration for entering into this Agreement are the terms stated herein, and no other promise, statement or representation of any kind has been made to Kerz by any person or entity whatsoever to cause him to sign this Agreement; and (v) all waiting, "cooling off" or other periods during which this Agreement could be re-considered, revoked or rescinded, if any, have, subject to the proviso set forth below, expired as of the date of his execution of this Agreement, and, to the extent any such period has not expired, Kerz waives, to the fullest extent permitted by law, any such right to re-consider, revoke or rescind this Agreement; provided, however, that, anything in this clause (e) to the contrary notwithstanding, Kerz may revoke his agreement to release claims under the Age Discrimination in Employment Act if he does so within seven days of executing this Agreement and this Agreement shall not be binding on the Company until expiration of such seven-day revocation period. 11. Communications. Kerz and the Company agree that they will not make any communications or statements to the press or other third parties, including without limitation to any hospitals and health care organizations or officials, denigrating or impugning the character, ethics, integrity, or present or future business or financial performance, ability, position or circumstances of the other or of any of the Company's officers, directors, employees, agents or representatives. 12. Amendments, Etc. It is expressly understood and agreed that this Agree ment may not be altered, amended, modified or otherwise changed in any respect whatsoever, except by a writing duly executed by the parties or their authorized representatives. The parties acknowledge and agree that they will make no claim at any time or place that this Agreement has been orally altered or modified in any respect whatsoever. This Agreement shall not be effective until it has been fully executed and delivered by all the parties and the seven-day revocation period provided by Section 10 has expired. 8 9 13. Notices. All notices that are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if (i) delivered personally, (ii) mailed by registered or certified mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier service or (iv) if applicable, sent via facsimile confirmed in writing to the recipient, in each case as follows: If to the Company, to: Health Management Systems, Inc. 401 Park Avenue South New York, New York 10016 Attention: President and with a copy to: Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Attention: Robert A. Schwed, Esq. Facsimile: (212) 841-5725 If to Kerz, to: Mr. Paul J. Kerz 126 East 65th Street New York, New York 10021 and with a copy to: Coleman, Rhine and Goodwin LLP 750 Lexington Avenue, 26th Floor New York, New York 10022 Attention: Bruce S. Coleman, Esq. Facsimile: (212) 317-1970 14. Severability. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired. 15. Waiver. No delay or omission by any party hereto in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. 9 10 16. Entire Agreement. This Agreement embodies the entire agreement between the Company and Kerz with respect to the matters referred to herein, and, except as otherwise expressly provided herein or therein, this Agreement shall not be affected by reference to any other document. 17. Binding Agreement. This Agreement shall be binding upon, and inure to the benefit of, each of the parties hereto and their respective successors, heirs, devisees, legatees, executors, administrators, permitted assigns, trustees, and agents. 18. Counterparts. This Agreement may be executed in one or more counter parts, each of which shall constitute a duplicate of the original, and which together shall constitute one document. 19. Assignability. Neither this Agreement nor any of the parties' rights hereunder shall be assignable by either party hereto without the prior written consent of the other party hereto. 20. Governing Law. This Agreement shall in all respects be interpreted, enforced and governed under the laws of the United States and of the State of New York. 21. Consent to Jurisdiction. All judicial proceedings brought against any party to this Agreement arising out or relating to this Agreement or any obligation hereunder shall be brought in any state or federal court of competent jurisdiction in the state, county and city of New York. By executing and delivering this Agreement, each party hereto hereby irrevocably: (i) accepts generally and unconditionally the exclusive jurisdiction and venue of such courts and waives any defense of forum non conveniens; (ii) agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt re quested, to the party at the address specified in this Agreement; (iii) agrees that service as provided in clause (ii) above is sufficient to confer personal jurisdiction over such party in any such proceeding in any such court, and otherwise constitutes effective and binding service in every respect; and (iv) agrees that the provisions of this Section 16 relating to jurisdiction and venue shall be binding and enforceable to the fullest extent permissible under New York General Obligations Law Section 5-1402 or otherwise. 10 11 IN WITNESS WHEREOF, the Company and Kerz have executed and delivered this Separation Agreement and Release as of the day and year first above written. HEALTH MANAGEMENT SYSTEMS, INC. By: ------------------------------ Name: Title ------------------------------ Paul J. Kerz 11 12 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the ______ day of December 2000, before me personally came Paul J. Kerz, to me known, and known to be the same person described herein and who executed the foregoing Separation Agreement and Release, and who duly acknowledged to me that he executed the same. ------------------------------ Notary Public 13 ANNEX I Owned and Leased Cars
Owned Car - --------- Description 1999 Blue Mercedes Benz E320S/4 wagon with vehicle ID. No. WDBJH82F6XX021920 having NY License Plate 6UK399 Purchase Price: Purchased by HMS on 4/14/99 for $61,082.25 with a book value at 10/31/00 of $30,776.99 Monthly Depreciation is $750.66 Leased Car - ---------- Description: 1995 Gray Mercedes Benz E320A Cabrolet with vehicle ID No. WDBEA66E4SC244226 having NY License Plate G156BK Description of Lease: Leased through Mercedez Benz Credit Corporation Capital Lease Number 500-1240-08442-9 which has 36 monthly payments of $1,677.59 with last payment due on 10/20/01
14 EXHIBIT A October 2, 2000 To the Board of Directors of Health Management Systems, Inc. I hereby resign from any and all positions I hold as a director and/or officer of any subsidiaries or affiliates of Health Management Systems, Inc. (the "Company") effective immediately. I also confirm my resignation as President and Chief Executive officer of the Company on October 2, 2000. Very truly yours, Paul J. Kerz EX-10.16 5 y45381ex10-16.txt EMPLOYMENT LETTER 1 Exhibit 10.16 29 January 1999 Mr. Alan Bendes 104 Walnut Drive Tenafly, New Jersey 07670 Dear Mr. Bendes: Welcome to Health Management Systems, Inc. (hereinafter referred to as either of "HMS" or the "Company"). We are delighted that you have accepted our offer of employment and will begin work on 1 February 1999. This letter will serve as confirmation of the terms and conditions of your employment with the Company. 1. Scope of Responsibilities. You will be employed as senior vice president and chief financial officer of HMS, reporting to Paul J. Kerz, chief executive officer of HMS. As the Company's chief financial officer, you will be a member of the senior executive management team and a regular invitee to meetings of the Board of Directors and its Audit Committee. 2. Monthly Salary. Your initial and continuing minimum salary will be $17,916.67 per month: a minimum annual salary of $215,000. You will receive your first formal performance review in August 1999, followed by a second formal performance review in October 2000, with any increase in monthly salary to be effective 1 November 2000, if warranted by the performance review. 3. Incentive Compensation. You will be eligible to participate in the Company's incentive compensation plan in accordance with the rules otherwise governing administration of the plan. In fiscal year 1999 you will receive a bonus of not less than $40,000, which minimum amount shall be paid you by 10 February 1999. 4. Equity Compensation. You will be awarded options (in the form of Incentive Stock Options to the maximum extent permitted by law) to purchase 105,000 shares of HMS common stock. The options will be subject to the following vesting schedule: options on 21,000 shares will vest on 1 February 1999; and, in order to maximize the Incentive Option qualification, vesting of the remaining options for 84,000 shares will be elongated to vest on 31 January 2003, rather than on 31 October 2001 2 Mr. Alan Bendes 29 January 1999 Page 2 subject to accelerated vesting of: (a) 21,000 options to 31 January 2000 subject only to your continued employment by the Company, (b) 10,500 options to each of 31 January 2001 and 2002, respectively, upon realization by the Company of the revenue budget for each of fiscal years 2000 and 2001, respectively; and, (c) 10,500 options to each of 31 January of 2001and 2002, respectively, upon realization by the Company of the operating margin budget for each of fiscal years 2000 and 2001, respectively and (d) 21,000 options to 31 January 2003 subject only to your continued employment. All options whose vesting has not otherwise been accelerated pursuant to the foregoing will vest on 31 January 2003, subject only to your continued employment by the Company. 5. Benefits. You will accrue vacation at a rate of 1.67 days per month and will receive that number of paid personal days each calendar year as is accorded to HMS employees in that year (3 personal days are accorded HMS employees in calendar year 1999). You will be eligible for participation in those benefits available to HMS executives, in accordance with the rules of eligibility in effect. 6. Car Allowance and Expenses. You will receive a car allowance of $800 per month. To the extent you elect to utilize corporate parking facilities available through a Company lease, the monthly car allowance will be reduced by the monthly cost to the Company of such parking space. You will be reimbursed for those reasonable expenses you incur in the normal course of business in connection with your employment by HMS, in accordance with existing Company rules and regulations. 7. Severance. In the event you are discharged by the Company without cause (as defined below) or if your employment ceases as a consequence of a change of corporate control or if your employment ceases due to relocation of Company headquarters further than 25 miles from its current location, you will be entitled to a severance period of twelve (12) months, during which time you will continue to receive, at the end of each month, your then current monthly salary and will retain eligibility for the Company's medical group insurance plan (with the understanding that continuation in the Company's medical plan will not constitute continuation of medical benefits pursuant to the provisions of COBRA, for which you may then thereafter elect). In the event you are discharged by the Company without cause you shall be entitled to any stock options already vested, any stock options whose vesting has already or would have been accelerated during the severance period, and the stock options for 10,500 shares and 21,000 shares that were otherwise due to be vested on 31 January 2002 and 31 January 2003 respectively; if your employment ceases as a consequence of a change of corporate 3 Mr. Alan Bendes 29 January 1999 Page 3 control or due to relocation of Company headquarters further than 25 miles from its current location, you shall be entitled to any stock options already vested and the vesting of any stock options not otherwise vested shall be accelerated to the last date of your employment. In any event, you shall have until the end of the severance period to exercise any options which have vested but remain unexercised. For purposes of this letter, "cause" shall mean that you have committed either of: (a) an intentional act of fraud, embezzlement or theft in connection with your duties or in the course of your employment by the Company; (b) intentional wrongful damage to property of the Company; (c) intentional violation of civil rights or employment law; (d) intentional wrongful disclosure of secret processes or confidential information of the Company, or (e) intentional gross dereliction of duty. In this regard, no act or failure to act on your part shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, and shall be deemed "intentional" only if done or omitted to be done by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company and which shall have resulted in material harm to the Company. If discharged for cause, the date of your termination of employment will be effective upon three (3) days' notice. 8. Legal Status to Work. As a condition of employment, HMS is required to certify the legal status of employees. Therefore, on your first day of employment, it is imperative that you provide documentation substantiating both your identity and authorization to work. Enclosed is a list of documents which constitute adequate proof of these conditions. 9. Patient Confidentiality. Concerns regarding the confidentiality of patient clinical and financial records is receiving intensifying attention from current and prospective clients of HMS. In response to these concerns, you are requested to sign the appended Patient Confidentiality Agreement and return it along with other requisite forms on your first day of employment by HMS. 10. Forms. Enclosed herewith is a package containing various forms required for your entry in our payroll and health plans. Please complete these forms and bring them with you on your first day of employment. As well, enclosed is your non-disclosure and non-compete agreement, which you are requested to read, execute and return along with the other forms. 4 Mr. Alan Bendes 29 January 1999 Page 4 As indicated at the outset of this letter, we are delighted that you will begin as our new chief financial officer on Monday, 1 February 1999. There is much to be done, so we eagerly look forward to your joining us with a high degree of energy and commitment; in this regard, we reaffirm our understanding that you, after an initial period of general orientation, will formulate and work in accordance with a work schedule which gives mutual consideration to the demands of the job and your preferences with regard to your times of travel and work out of the office. Please let me know if you have any question in the above regard. Sincerely yours, Paul J. Kerz President cc: Lewis D. Levetown, HMS Enclosures EX-10.17.I 6 y45381ex10-17_i.txt EMPLOYMENT AGREEMENT 1 Exhibit 10.17 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of October 2, 2000, by and between HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation (the "Company"), and WILLIAM F. MILLER III (the "Employee"). W I T N E S S E T H: WHEREAS the Company desires to induce the Employee to enter into employment with the Company for the period provided in this Agreement, and the Employee is willing to accept such employment with the Company on a full-time basis, all in accordance with the terms and conditions set forth below; NOW, THEREFORE, for and in consideration of the premises hereof and the mutual covenants contained herein, the parties hereto hereby covenant and agree as follows: 1. Employment. (a) The Company hereby agrees to employ the Employee, and the Employee hereby agrees to accept such employment with the Company, beginning on the date hereof and continuing for the period set forth in Section 2 hereof, all upon the terms and conditions hereinafter set forth. (b) The Employee affirms and represents that as of the commencement of his employment by the Company on the date hereof he is under no obligation to any former employer or other party that is in any way inconsistent with, or that imposes any restriction upon, the Employee's acceptance of employment hereunder with the Company, the employment of the Employee by the Company, or the Employee's undertakings under this Agreement. 2. Term of Employment. (a) Unless earlier terminated as provided in this Agreement, the term of the Employee's employment under this Agreement shall be for a period beginning on the date hereof and ending on the third anniversary of the date hereof (the "Initial Term"). (b) The term of the Employee's employment under this Agreement may be renewed for additional one-year terms (each a "Renewal Term") upon the expiration of the Initial Term or any Renewal Term if the Company and the Employee delivers to the other, at least 30 days prior to the expiration of the Initial Term or the then current Renewal Term, as the case may be, a written notice specifying that the term of the Employee's employment will be renewed at the end of the Initial Term or such Renewal Term, as the case may be. The period from the date hereof until the third anniversary of said date or, in the event that the Employee's employment hereunder is earlier terminated as provided herein or renewed as provided in this Section 2(b), such shorter or longer period, as the case may be, is hereinafter called the "Employment Term". 2 3. Duties. The Employee shall be employed as the President and Chief Executive Officer of the Company, shall faithfully and competently perform such duties as inhere in such positions and as are specified in the By-laws of the Company and shall also perform and discharge such other executive employment duties and responsibilities as the Board of Directors of the Company shall from time to time determine. The Employee shall perform his duties principally at such offices of the Company and its subsidiaries as their respective businesses shall require, from time to time, with such travel to such other locations from time to time as the Board of Directors of the Company may reasonably prescribe. Except as may otherwise be approved in advance by the Board of Directors of the Company, and except during vacation periods and reasonable periods of absence due to sickness, personal injury or other disability, the Employee shall devote his full business time throughout the Employment Term to the services required of him hereunder. The Employee shall render his business services exclusively to the Company and its subsidiaries during the Employment Term and shall use his best efforts, judgment and energy to improve and advance the business and interests of the Company and its subsidiaries in a manner consistent with the duties of his positions. Nothing contained in this Section 3 shall preclude the Employee from serving as an outside director of up to three companies or from performing services for charitable or not-for-profit community organizations, provided that such activities do not interfere with the Employee's performance of his duties and responsibilities under this Agreement. 4. Salary and Bonus. (a) Salary. As compensation for the performance by the Employee of the services to be performed by the Employee hereunder during the Employment Term, the Company shall pay the Employee a base salary at the annual rate of Four Hundred Thousand Dollars ($400,000) (said amount, together with any increases thereto as may be determined from time to time by the Board of Directors of the Company in its sole discretion, being hereinafter referred to as "Salary"). Any Salary payable hereunder shall be paid in regular intervals in accordance with the Company's payroll practices from time to time in effect. (b) Bonus. The Employee shall receive a minimum bonus from the Company in respect of each of the first two fiscal years (or portion thereof) occurring during the Employment Term (pro rated for any portion of a fiscal year occurring during the Employment Term), payable on the December 15 following the end of such fiscal year, in the following amounts:
Minimum Fiscal Year Ending Oct. 31, Bonus --------------------------- ------- 2001 $80,000 2002 40,000
3 In addition, the Employee shall be eligible to receive bonus compensation from the Company in respect of each fiscal year (or portion thereof) during the Employment Term, in each case as may be determined by the Board of Directors of the Company in its sole discretion on the basis of performance-based or such other criteria as may be established from time to time by the Board of Directors of the Company in its sole discretion. 5. Other Benefits. During the Employment Term, the Employee shall: (i) be eligible to participate in employee fringe benefits and pension and/or profit sharing plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (ii) be eligible to participate in any medical and health plans or other employee welfare benefit plans that may be provided by the Company for its senior executive employees in accordance with the provisions of any such plans, as the same may be in effect from time to time; (iii) be entitled to the number of paid vacation days in each calendar year determined by the Company from time to time for its senior executive officers, provided that such number of paid vacation days in each calendar year shall not be less than twenty work days (four calendar weeks); the Employee shall also be entitled to all paid holidays given by the Company to its senior executive officers; (iv) be eligible for consideration by the Board of Directors of the Company for awards of stock options under any stock option plan that may be established by the Company for its and its subsidiaries' key employees, the amount, if any, of shares for which options may be granted to Employee to be in the sole discretion of the Board of Directors of the Company; (v) be entitled to sick leave, sick pay and disability benefits in accordance with any Company policy that may be applicable to senior executive employees from time to time; and (vi) be entitled to reimbursement for all reasonable and necessary out-of-pocket business expenses incurred by the Employee in the performance of his duties hereunder in accordance with the Company's normal policies from time to time in effect (including, without limitation, reimbursement of the annual dues of professional organizations approved by the Board of Directors and relocation expenses if the Employee decides to relocate his principal residence); 3 4 (vii) be entitled, so long as the Employee shall maintain his current residence in Dallas, Texas, to the occasional use of an apartment in the New York City area on terms to be agreed upon by the Employee and the Compensation Committee of the Board of Directors; (viii) be entitled to a travel allowance in a reasonable amount to be agreed upon by the Employee and the Compensation Committee of the Board of Directors for regular weekend travel between the Employee's home in Dallas, Texas and New York City; and (ix) be entitled to acquire a 7% interest in the outstanding Common Stock of the Company, as to be provided in arrangements to be entered into by the Company and the Employee. 6. Confidential Information. The Employee hereby covenants, agrees and acknowledges as follows: (a) The Employee has and will have access to and will participate in the development of or be acquainted with confidential or proprietary information and trade secrets related to the business of the Company and any present or future subsidiaries or affiliates of the Company (collectively with the Company, the "Companies"), including but not limited to (i) customer lists; claims histories, adjustments and settlements and related records and compilations of information; the identity, lists or descriptions of any new customers, referral sources or organizations; financial statements; cost reports or other financial information; contract proposals or bidding information; business plans; training and operations methods and manuals; personnel records; software programs; reports and correspondence; and management systems, policies or procedures, including related forms and manuals; (ii) information pertaining to future developments such as future marketing or acquisition plans or ideas, and potential new business locations; (iii) confidential or non-public information relating to business operations and strategic plans of third parties with which the Companies have or may be assessing commercial arrangements ("Third Party Information") and (iv) all other tangible and intangible prop- erty, that are used in the business and operations of the Companies but not made public. The information and trade secrets relating to the business of the Companies described hereinabove (including Third Party Information) in this paragraph (a) are hereinafter referred to collectively as the "Confidential Information", provided that the term Confidential Information shall not include any information (x) that is or becomes generally publicly available (other than as a result of violation of this Agreement by the Employee), (y) that the Employee receives on a nonconfidential basis from a source (other than the Companies or their representatives) or, in the case of Third Party Information, from a source (other than the Companies, the third parties to which such information relates or their respective representatives) that is not known by him to be 4 5 bound by an obligation of secrecy or confidentiality to any of the Companies (or such third parties, in the case of Third Party Information) or (z) that was in the possession of the Employee prior to disclosure by the Companies (or such third parties, in the case of Third Party Information). (b) The Employee shall not disclose, use or make known for his or another's benefit any Confidential Information or use such Confidential Information in any way except as is in the best interests of the Companies in the performance of the Employee's duties under this Agreement. The Employee may disclose Confidential Information when required by a third party and applicable law or judicial process, but only after providing immediate notice to the Company at any third party's request for such information, which notice shall include the Employee's intent with respect to such request. (c) The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of this Section 6 would be inadequate and, therefore, agrees that the Companies shall be entitled to injunctive relief in addition to any other available rights and remedies in case of any such breach or threatened breach by the Employee (and the Employee hereby waives any requirement that any of the Companies provide a bond or other security in connection with the issuance of any such injunction); provided, however, that nothing contained herein shall be construed as prohibiting the Companies from pursuing any other rights and remedies available for any such breach or threatened breach. (d) The Employee agrees that, upon termination of his employment with the Company for any reason, the Employee shall forthwith return to the Company all Confidential Information in whatever form maintained (including, without limitation, computer discs and other electronic media). (e) The obligations of the Employee under this Section 6 shall, except as otherwise provided herein, survive the termination of the Employment Term and the expiration or termination of this Agreement. (f) Without limiting the generality of Section 10 hereof, the Employee hereby expressly agrees that the foregoing provisions of this Section 6 shall be binding upon the Employee's heirs, successors and legal representatives. 7. Termination. (a) The Employee's employment hereunder shall be terminated upon the occurrence of any of the following: (i) the death of the Employee; 5 6 (ii) the Employee's inability to perform his duties on account of disability or incapacity for a period of one hundred eighty (180) or more days, whether or not consecutive, within any period of twelve (12) consecutive months; (iii) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated "for cause" (as defined below); (iv) the Company giving written notice, at any time, to the Employee that the Employee's employment is being terminated other than pursuant to clause (i), (ii) or (iii) above; or (v) the Employee terminates his employment hereunder for any reason whatsoever (whether by reason of retirement, resignation or otherwise). The following actions, failures and events by or affecting the Employee shall constitute "cause" for termination within the meaning of clause (iii) above: (A) a conviction of the Employee of, or the entering of a plea of nolo contendere by the Employee with respect to, a felony, (B) dependence on, or habitual abuse of, controlled substances or alcohol (in the case of alcohol abuse, that has a material adverse affect on Employee's performance of his obligations under this Agreement) or acts of dishonesty by the Employee that are materially detrimental to one or more of the Companies, (C) wilful misconduct by the Employee that materially damages the business of one or more of the Companies, (D) gross negligence by the Employee in the performance of, or wilful disregard by the Employee of, his material obligations under this Agreement or otherwise relating to his employment, which gross negligence or wilful disregard continues unremedied for a period of fifteen (15) days after written notice thereof to the Employee or (E) failure by the Employee to obey the reasonable and lawful orders and policies of the Board of Directors that are material to and consistent with the provisions of this Agreement (provided that, in the case of an indictment described in clause (A) above, and in the case of clauses (B), (C) and (E) above, the Employee shall have received written notice of such proposed termination (which notice shall state the Sections of this Agreement pursuant to which such termination is being effected and a description of the facts supporting such termination) and a reasonable opportunity (together with the Employee's counsel) to discuss the matter with the Board of Directors of the Company, followed by a notice that the Board of Directors of the Company adheres to its position). (b) In the event that the Employee's employment terminates pursuant to clause (i) or (ii) of Section 7(a) above or is terminated by the Company pursuant to clause (iv) of Section 7(a) above, or the Employee terminates his employment within 45 days of a Change of Control Transaction (as hereinafter defined), in each case whether during the Initial Term or during any Renewal Term pursuant to Section 2(b) above, then (i) during the period beginning on the date of such termination and ending on the last day of the Applicable Period (as defined in Section 9(a)), the Company shall pay to the Employee, as severance pay or liquidated damages or both, 6 7 monthly payments equal to one-twelfth of the rate per annum of his Salary at the time of such termination, provided, however, that no such payments shall be required to be made if the Employee fails to comply with his obligations under Section 9 below; and (ii) the Company shall continue to provide the Employee with the health insurance benefits provided to other employees of the Company (including employer contributions) from the date of such termination until the earlier to occur of (x) the last day of the Applicable Period and (y) the date upon which the Employee becomes eligible for coverage under the health insurance plan of another employer. For purposes of this Agreement, a "Change of Control Transaction" means the sale or transfer of all or substantially all of the assets of the Company or any merger, consolidation or other transaction that would result in the transfer, directly or indirectly, of more than 50% of the then outstanding capital stock of the Company to holders who were not holders of its capital stock immediately prior to such merger. It is understood by the Company and the Employee that "a sale of substantially all" the Company's assets may occur, for purposes of the New York Business Corporation Law, but that such an event will not constitute a "Change of Control Transaction" for purposes of this Agreement unless the Company has sold all its significant lines of business and intends to limit its future activities to the distribution of the proceeds of such transaction. (c) Notwithstanding anything to the contrary expressed or implied herein, except as required by applicable law and except as set forth in Section 7(b) above, the Company (and its affiliates) shall not be obligated to make any payments to the Employee or on his behalf of whatever kind or nature by reason of the Employee's cessation of employment (including, without limitation, by reason of termination of the Employee's employment by the Company's for "cause"), other than (i) such amounts, if any, of his Salary as shall have accrued and remained unpaid as of the date of said cessation and (ii) such other amounts, if any, that may be then otherwise payable to the Employee pursuant to the terms of the Company's benefits plans. (d) No interest shall accrue on or be paid with respect to any portion of any payments hereunder. 8. Non-Assignability. (a) Neither this Agreement nor any right or interest hereunder shall be assignable by the Employee or his beneficiaries or legal representatives without the Company's prior written consent; provided, however, that nothing in this Section 8(a) shall preclude the Employee from designating a beneficiary to receive any benefit payable hereunder upon his death or incapacity. (b) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to exclusion, attachment, levy or similar process or to assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 7 8 9. Restrictive Covenants. (a) Competition. During the Employment Term and during the Applicable Period (as defined below), the Employee shall not directly or indirectly (as a director, officer, executive employee, manager, consultant, independent contractor, advisor or otherwise) engage in competition with, or own any interest in, perform any services for, participate in or be connected with any business or organization that engages in competition with the Company or any of its subsidiaries within the meaning of Section 9(d), provided, however, that the provisions of this Section 9(a) shall not be deemed to prohibit the Employee's ownership of not more than two percent (2%) of the total outstanding shares of common stock of any publicly held company, or ownership, whether through direct or indirect stock holdings or otherwise, of one percent (1%) or more of the equity of any other business. For purposes of this Agreement, the "Applicable Period" shall mean the twenty-four (24) month period following the termination of the Employee's employment hereunder for any reason whatsoever. (b) Non-Solicitation. During the Employment Term and during the Applicable Period, the Employee shall not directly or indirectly induce or attempt to induce any employee of the Company or any of its subsidiaries to leave the employ of the Company or such subsidiary, or in any way interfere with the relationship between the Company or any of its subsidiaries and any employee thereof. (c) Non-Interference. During the Employment Term and during the Applicable Period, the Employee will not directly or indirectly hire, engage, send any work to, place orders with, or in any manner be associated with any supplier, contractor, subcontractor or other business relation of the Company or any of its subsidiaries if such action would be known by him to have a material adverse effect on the business, assets or financial condition of the Company or any of its subsidiaries or materially interfere with the relationship between any such person or entity and the Company or any of its subsidiaries. (d) Certain Definitions. For purposes of this Section 9, a person or entity (including, without limitation, the Employee) shall be deemed to be a competitor of the Company or any of its subsidiaries, or a person or entity (including, without limitation, the Employee) shall be deemed to be engaging in competition with the Company or any of its subsidiaries, if such person or entity engages in any business engaged in by the Company or such subsidiary at the time of termination of the Employee's employment with the Company, in either case in the geographic region encompassing the service areas in which the Company or any of its subsidiaries conduct, or had an established plan to begin conducting, their businesses at the time of termination of the Employee's employment with the Company. (e) Certain Representations of the Employee. In connection with the foregoing provisions of this Section 9, the Employee represents that his experience, capabilities and circumstances are such that such provisions will not prevent him from earning a livelihood. The 8 9 Employee further agrees that the limitations set forth in this Section 9 (including, without limitation, time and territorial limitations) are reasonable and properly required for the adequate protection of the current and future businesses of the Company and its subsidiaries. It is understood and agreed that the covenants made by the Employee in this Section 9 (and in Section 6 hereof) shall survive the expiration or termination of this Agreement. (f) Injunctive Relief. The Employee acknowledges and agrees that a remedy at law for any breach or threatened breach of the provisions of Section 9 hereof would be inadequate and, therefore, agrees that the Company and any of its subsidiaries shall be entitled to injunctive relief in addition to any other available rights and remedies in cases of any such breach or threatened breach (and the Employee hereby waives any requirement that the Company or any such subsidiary provide a bond or other security in connection with the issuance of any such injunction); provided, however, that nothing contained herein shall be construed as prohibiting the Company or any of its subsidiaries from pursuing any other rights and remedies available for any such breach or threatened breach. 10. Binding Effect. Without limiting or diminishing the effect of the provisions affecting assignment of this Agreement, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives and assigns. 11. Notices. All notices that are required or may be given pursuant to the terms of this Agreement shall be in writing and shall be sufficient in all respects if given in writing and (i) delivered personally, (ii) mailed by certified or registered mail, return receipt requested and postage prepaid, (iii) sent via a nationally recognized overnight courier or (iv) sent via facsimile confirmed in writing to the recipient, if to the Company at the Company's principal place of business, and if to the Employee, at his home address most recently filed with the Company, or to such other address or addresses as either party shall have designated in writing to the other party hereto, provided, however, that any notice sent by certified or registered mail shall be deemed delivered on the date of delivery as evidenced by the return receipt. 12. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 13. Severability. The Employee agrees that in the event that any court of competent jurisdiction shall finally hold that any provision of Section 6 or 9 hereof is void or constitutes an unreasonable restriction against the Employee, the provisions of such Section 6 or 9 shall not be rendered void but shall apply with respect to such extent as such court may judicially determine constitutes a reasonable restriction under the circumstances. If any part of this Agreement other than Section 6 or 9 is held by a court of competent jurisdiction to be invalid, illegible or incapable of being enforced in whole or in part by reason of any rule of law or public policy, such part shall be deemed to be severed from the remainder of this Agreement for the 9 10 purpose only of the particular legal proceedings in question and all other covenants and provisions of this Agreement shall in every other respect continue in full force and effect and no covenant or provision shall be deemed dependent upon any other covenant or provision. 14. Waiver. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant or condition, nor shall any waiver or relinquishment of any right or power hereunder at any one or more times be deemed a waiver or relinquishment of such right or power at any other time or times. 15. Arbitration. With the exception of any dispute regarding the Employee's compliance with the provisions of Sections 6 and 9 above, any dispute relating to or arising out of the provisions of this Agreement shall be decided by arbitration in New York, New York, in accordance with the Expedited Arbitration Rules of the American Arbitration Association then obtaining, unless the parties mutually agree otherwise in a writing signed by both parties. This undertaking to arbitrate shall be specifically enforceable. The decision rendered by the arbitrator will be final and judgment may be entered upon it in accordance with appropriate laws in any court having jurisdiction thereof. Each of the parties shall pay his or its own legal fees associated with such arbitration. 16. Entire Agreement; Modifications. This Agreement constitutes the entire and final expression of the agreement of the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto with respect to the subject matter hereof. This Agreement may be modified or amended only by an instrument in writing signed by both parties hereto. 17. 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. 10 11 IN WITNESS WHEREOF, the Company and the Employee have duly executed and delivered this Agreement as of the day and year first above written. HEALTH MANAGEMENT SYSTEMS, INC. By --------------------------------- Name: Title: ---------------------------------------- William F. Miller III 11 EX-10.17.II 7 y45381ex10-17_ii.txt RESTRICTED STOCK PURCHASE AGREEMENT 1 Exhibit 10.17(ii) HEALTH MANAGEMENT SYSTEMS, INC. January 10, 2001 Mr. William F. Miller III 3618 Harvard Dallas, Texas 75203 Restricted Stock Purchase Agreement Dear Mr. Miller: This letter sets forth our entire agreement with respect to the 550,000 shares of Common Stock, $.01 par value, of Health Management Systems, Inc., a New York corporation (the "Company"), being purchased by you as of the date hereof from the Company. As used herein, such shares of Common Stock are hereinafter collectively referred to as the "Shares". The total amount to be paid by you to the Company to purchase the Shares is $721,875 or $1.3125 per Share. As payment in full for the Shares, you are hereby delivering to the Company such sum which has been loaned to you by the Company's subsidiary, Accelerated Claims Processing, Inc. ("ACP"). To evidence such loan, you have delivered to ACP your promissory note in the form of Exhibit A hereto (the "Note") in the aggregate principal amount of $721,875 payable to the order of ACP. 1. Right and Option of Company to Repurchase Shares. (a) In the event that you cease to perform services for the Company as a result of (i) your disability (as defined in your employment agreement with the Company dated as of October 2, 2000) or (ii) the termination (as a result of your resignation or termination by the Company with our without cause or otherwise) of your position as President and Chief Executive Officer of the Company, the Company shall thereupon have the right and option, but not the obligation, to purchase from you all, or any part, of the Purchase Option Shares (as hereinafter defined) held by you as of the date of such disability or termination. The purchase price to be paid by the Company to purchase such Purchase Option Shares under this Section 1(a) shall be an amount equal to the amount paid by you pursuant to this Agreement to purchase such Purchase Option Shares. (b) The Company may exercise the right and option set forth in Section 1(a) above by giving you (or, in the case of your death, your legal representative) a written notice of 2 election to purchase at any time within 90 days after the termination of your employment with the Company. The closing for the purchase by the Company of any such Shares pursuant to the provisions of this Section 1 will take place at the offices of the Company on the date specified in such written notice, which date shall be a business day not later than 30 days after the date such notice is given. At such closing, you will deliver such Shares, duly endorsed for transfer, against payment of the purchase price therefor. Such purchase price shall be payable to you by check payable to your order. To the extent the Company chooses not to exercise such right and option under this Section 1 to repurchase any Purchase Option Shares, such Purchase Option Shares shall thereafter cease to be subject to the provisions of this Section 1. 2. Purchase Option Shares. (a) As of the date hereof, fifty percent (50%) of the Shares (or 275,000 Shares) shall be subject to the Company's purchase option pursuant to Section 1(a) (the "Purchase Option Shares") and fifty percent (50%) of the Shares (or 275,000 Shares) shall not be so subject ("Unencumbered Shares"). The Purchase Option Shares shall cease to be subject to the Company's purchase option (and, thus, become Unencumbered Shares) on the first anniversary of the date hereof as long as you shall be performing services for the Company as its President and Chief Executive Officer on such anniversary. (b) The Board of Directors of the Company, in its sole discretion, may at any time accelerate the time set forth in Section 2(a) above at which the Shares shall cease to subject to the Company's purchase option. (c) In the event that (i) you die or (ii) a Change of Control Transaction (as defined in your employment agreement with the Company dated as of October 2, 2000) occurs, in either case during the period during which you are providing services to the Company as described in this Agreement, then 100% of the Shares shall cease to be subject to the Company's purchase option on and as of the date of your death or the date of the Change of Control Transaction. 3. Rights as a Stockholder. Subject to the provisions of Sections 1, 2, 4 and 5 hereof, you will have all rights of a stockholder with respect to all Shares being purchased by you today, including the right to vote such Shares and to receive any dividends paid thereon. 2 3 4. Transfer Restrictions on Shares. Notwithstanding anything contained in this Agreement to the contrary, you hereby agree with the Company that you will not sell, assign, transfer, pledge, convey or otherwise dispose of any Shares, or subject the same to any lien, encumbrance, mortgage or other security interest of any kind whatsoever, (i) so long as the Note shall be outstanding or (ii) prior to the date on which such Shares (or a portion thereof) are no longer subject to repurchase by the Company pursuant to Section 2. 5. Recording of Assignments. The Company shall not record any assignment, transfer or other disposition of any Shares on its transfer books unless the provisions of this Agreement shall have been fully complied with and the Company shall have received satisfactory evidence thereof. 6. Certain Tax Matters. You hereby acknowledge that you understand the Federal, state and local income tax consequences of your purchase of the Shares, the repurchase provisions relating to the Shares, and any subsequent sale of the Shares, including, if applicable, the consequences of making (or not making) a timely election under Section 83(b) of the Internal Revenue Code of 1986 with respect to the Shares. In addition, you fully understand that, at the time that you realize any compensation income in respect of the Shares, the Company will be required to withhold Federal, state and local taxes on the full amount of the compensation income realized by you. Accordingly, at or prior to the time that you realize any compensation income in respect of the Shares, you hereby agree to provide the Company with cash funds equal to the total Federal, state and local taxes required to be withheld by the Company in respect of such compensation income, or make other arrangements satisfactory to the Company regarding such payment. It is understood that all matters with respect to the total amount of taxes to be withheld in respect of such compensation income shall be determined by the Company in its sole discretion. 7. Escrow Agent. In order to facilitate any repurchase of the Shares by the Company under this Agreement, the stock certificates representing any part of the Shares shall, for so long as such Shares are subject to repurchase under any of the provisions of this Agreement (including any period during which the Company has an option to repurchase and any period after the Company gives notice of its election to repurchase but before the closing of such repurchase has occurred), remain in the custody of the Company acting as escrow agent and as custodian for your account. You agree to provide the Company, acting in such custodial capacity, with a stock power or other instrument of transfer, appropriately endorsed in blank, in respect of the Shares. 8. Investment Representations. You hereby represent and warrant to the Company that you are acquiring the Shares for your own account for investment and not with a view to, or for sale in connection with, any distribution thereof and that you understand that (i) the Shares are not being registered with the Securities and Exchange Commission by reason 3 4 of their being issued in a transaction exempt from the registration requirements of the Securities Act of 1933, and (ii) the Shares must be held indefinitely by you unless a subsequent disposition thereof is registered under that Act or is exempt from such registration. 9. Legend on Stock Certificates. Each stock certificate representing the Shares shall be conspicuously endorsed with the following legend written on the face thereof: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THE RIGHTS OF THE HOLDER OF THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AND LIMITED BY THE TERMS AND CONDITIONS OF A CERTAIN AGREEMENT DATED JANUARY 10, 2001 BETWEEN THE COMPANY AND THE ORIGINAL HOLDER OF SUCH SHARES. A COPY OF SAID AGREEMENT, TO WHICH REFERENCE IS HEREBY MADE, IS ON FILE AND MAY BE EXAMINED AT THE OFFICES OF HEALTH MANAGEMENT SYSTEMS, INC." 10. General Provisions. (a) The terms and provisions of this Agreement shall apply to any shares of capital stock that may subsequently be issued to you in exchange for or in addition to the Shares as a result of any recapitalization, stock dividend, stock split, reclassification, merger, consolidation or similar corporate transaction. All Share numbers herein shall be appropriately adjusted to account for any of the foregoing. (b) Except as herein expressly provided, the respective rights and obligations of you and the Company under this Agreement shall not be assignable by either party without the prior written consent of the other party. Nothing herein expressed or implied is intended to confer upon any person, other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement. (c) Nothing contained in this Agreement shall confer upon you any right to continue to provide services to the Company nor limit in any respect the right of the Company to terminate your services to the Company at any time. (d) All notices and other communications to be given to any party hereunder shall be in writing and shall be deemed given if delivered personally, mailed by certified or registered mail, return receipt requested and postage prepaid, sent via a nationally recognized 4 5 overnight courier or sent via facsimile confirmed in writing, to such party at the following address (or at such other address for a party as shall be specified by like notice): (i) if to the Company: Health Management Systems, Inc. 401 Park Avenue South New York, New York 0016 Attention: Chief Financial Officer (ii) if to you, at your address specified at the head of this Agreement, or in either case to such other address or addresses as such other party shall have designated to the other from time to time. (e) This Agreement contains the entire agreement between the Company and you, and supersedes all prior agreements and understandings, relating to the subject matter hereof. (f) The transfer restrictions set forth in Section 4 hereof are in addition to any and all restrictions on transfer of securities imposed pursuant to any applicable Federal or state law or regulation or established by the Company's board of directors with respect to sales by corporate insiders. (g) This Agreement may not be amended, changed or waived other than by an instrument in writing signed by the party against which the enforcement of the change, waiver or discharge is sought. (h) In the event any provision of this Agreement shall be held void or unenforceable, the unaffected provisions hereof shall remain in full force and effect. (i) This Agreement shall be governed by and construed in accordance with the laws of the State of New York and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. If the foregoing is in accordance with our agreement, please sign both copies of the Agreement in the space provided below and return one copy to the Company, whereupon this letter shall become a binding agreement between us. HEALTH MANAGEMENT SYSTEMS, INC. By ----------------------------------- Agreed and Accepted as of the date first above written: - ----------------------------------- William F. Miller III 5 EX-10.17.III 8 y45381ex10-17_iii.txt PLEDGE AGREEMENT 1 Exhibit 10.17(iii) PLEDGE AGREEMENT PLEDGE AGREEMENT, dated as of January 10, 2001 made by WILLIAM F. MILLER III ("Pledgor"), in favor of ACCELERATED CLAIMS PROCESSING, INC., a Delaware corporation ("ACP"). WHEREAS Pledgor is acquiring an aggregate 550,000 shares and options to acquire 750,000 shares (the "Pledged Shares") of Common Stock, $.01 par value, of Health Management Systems, Inc., a New York corporation and the corporate parent of ACP (the "Company"), in accordance with the terms and provisions of the Restricted Stock Purchase Agreement dated January 10, 2001 (the "Purchase Agreement") and an option agreement dated January 10, 2001 (the "Option Agreement, and collectively with the Purchase Agreement, the "Agreements") between the Company and Pledgor; and WHEREAS in connection with the purchase by Pledgor of shares pursuant to the Purchase Agreement, Pledgor has executed and delivered to ACP a promissory note of Pledgor in the principal amount of $721,875 (the "Note"), in order to pay the purchase price of such shares; and WHEREAS, it is a condition precedent to the obligation of the Company to enter into the Agreements and to consummate the transactions contemplated thereby that Pledgor shall have executed and delivered this Agreement to ACP to secure the obligations of Pledgor under the Note; NOW, THEREFORE, Pledgor, in consideration of the premises and in order to induce ACP to make the loan evidenced by the Note, intending to be bound hereby, does hereby agree with ACP as follows: 1. Pledge. Pledgor hereby pledges to ACP and grants to ACP a security interest in the following (collectively, the "Pledged Collateral"): (a) the Pledged Shares and the certificates representing the Pledged Shares, including the shares issued upon exercise of the options granted pursuant to the Option Agreement, and all dividends, cash, instruments and other property from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of the Pledged Shares; and (b) any and all proceeds and substitutions of the foregoing. 2 2. Security for Obligations. This Agreement secures the full and prompt payment and performance of all obligations and liabilities of Pledgor to ACP now or hereafter existing under the Note, whether for principal, interest, fees, expenses or otherwise, and all obligations of Pledgor now or hereafter existing under this Agreement, in each case, direct or indirect, absolute or contingent and whether or not evidenced by any note or written instrument (all such obligations of Pledgor being hereinafter called collectively the "Obligations"). The Pledged Collateral shall serve as collateral for, and additional security to ACP securing the repayment of, the Obligations, but shall not in any way limit Pledgor's liability for repayment of the Obligations. 3. Delivery of Pledged Collateral. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of ACP pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to ACP. 4. Voting Rights; Dividends; Etc. (a) So long as no Event of Default (as such term is defined in the Note) or event which, with the giving of notice or the lapse of time, or both, would become an Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement; provided, however, that Pledgor shall not exercise or refrain from exercising any such right if, in judgment of ACP reasonably exercised, such action would have a material adverse effect on the value of the Pledged Collateral or any part thereof. (ii) Pledgor shall be entitled to receive and retain any and all dividends paid in respect of the Pledged Collateral; provided, however, that any and all: (A) dividends paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed or distributable in respect of, or in exchange for, any Pledged Collateral; (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus; and 2 3 (C) cash paid, payable or otherwise distributed or distributable in respect of redemption of, or in exchange for, any Pledged Collateral; shall be, and shall forthwith be delivered to ACP to hold as, Pledged Collateral, and shall, if received by Pledgor, be received in trust for the benefit of ACP, be segregated from the other property or funds of Pledgor, and be forthwith delivered to ACP as Pledged Collateral in the same form as so received (with any necessary endorsement). (iii) ACP shall execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies and other instruments as Pledgor may reasonably request for the purpose of enabling Pledgor to exercise the voting and other rights which Pledgor is to exercise pursuant to paragraph (i) above and to receive the dividend payments which Pledgor is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuance of an Event of Default or an event which, with the giving of notice or the lapse of time, or both, would become an Event of Default under the Note: (i) all rights of Pledgor to receive the dividend and other payments which Pledgor would otherwise be authorized to receive and retain pursuant to Section 4(a)(ii) of this Agreement shall cease, and all such rights shall thereupon become vested in ACP which shall thereupon have the sole right to receive and hold as Pledged Collateral such dividend and other payments; (ii) all dividend and other payments which are received by Pledgor contrary to the provisions of Section 4(b)(i) of this Agreement shall be received in trust for the benefit of ACP, shall be segregated from other funds of Pledgor and shall be forthwith paid over to ACP as Pledged Collateral in the same form as so received (with any necessary endorsement); and (iii) the rights of Pledgor to exercise the voting and other consensual rights which Pledgor would otherwise be entitled to exercise pursuant to Section 4(a)(i) of this Agreement shall cease immediately upon receipt by Pledgor of notice of the termination of such rights, given by ACP in accordance with Section 10, and all such rights shall thereupon become vested in ACP which shall thereupon have the sole right to exercise such voting and other consensual rights. 5. Transfers and Other Liens. Pledgor agrees that he will not (i) sell or otherwise dispose of, or grant any option or proxy (other than to ACP or the Company) with respect to, any of the Pledged Collateral or (ii) create or permit to exist any lien, security interest, or 3 4 other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for the security interests under this Agreement. 6. ACP Appointed Attorney-in-Fact. Pledgor hereby irrevocably appoints ACP as his attorney-in-fact, with full authority in his place and stead and in his name or otherwise, from time to time in the discretion of ACP reasonably exercised, to take, upon the occurrence and during the continuation of any Event of Default, any action and to execute any instrument which ACP may deem reasonably necessary or advisable to accomplish the purposes of this Agreement, including, without limitation, to receive, endorse and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same, when and to the extent permitted by this Agreement. 7. Remedies upon Default. If any Event of Default shall have occurred and be continuing: (a) ACP shall exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the State of New York at that time (in compliance with all applicable securities laws), and ACP may also, without notice except as specified below, sell (in compliance with all applicable securities laws) the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or elsewhere, for cash, on credit or for future delivery, and at such price or prices and upon such other terms as ACP may deem commercially reasonable. (b) Any cash held by ACP as Pledged Collateral and all cash proceeds received by ACP in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral may, in the discretion of ACP, be held by ACP as collateral for, and/or then or at any time thereafter applied in whole or in part by ACP against all or any part of the Obligations. Any surplus of such cash or cash proceeds held by ACP and remaining after payment in full of all the Obligations shall be paid over to Pledgor or to whomsoever may be lawfully entitled to receive such surplus. 8. Security Interests Absolute. All rights of ACP and the security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Note or any other agreement or instrument relating thereto; 4 5 (b) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from this Agreement, the Note or any other agreement or instrument relating thereto; (c) any exchange, release or non-perfection of any other collateral, or any release or amendment or waiver of or consent to or departure from any guaranty, for all or any of the Obligations; or (d) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Pledgor in respect of the Obligations or the Note. 9. Amendments. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by ACP, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 10. Addresses for Notices. Any notice or other communication to be given or made to ACP hereunder shall be sent or otherwise communicated to ACP at its address at 401 Park Avenue South, New York, New York 10016, with copies to Reboul, MacMurray, Hewitt, Maynard & Kristol, 45 Rockefeller Plaza, New York, New York 10111, Attention: Robert A. Schwed, or such other address and/or such other attention as may be notified to Pledgor in accordance with this Section. Any notice or other communication to be given to Pledgor hereunder shall be sent or otherwise communicated to Pledgor at 3618 Harvard, Dallas, Texas 75203. Any notice or other communication to be given or made pursuant to this Agreement may be given or made by personal delivery, by certified or registered mail, return receipt requested and postage prepaid, by a nationally known overnight courier service or sent via facsimile confined in writing to the recipient. 11. Continuing Security Interests; Assignments. This Agreement shall create continuing security interests in the Pledged Collateral and shall (i) be binding upon Pledgor, his heirs, executors, representatives, administrators and assigns, (ii) inure, together with the rights and remedies hereunder, to the benefit of ACP, its successors, transferees and assigns and (iii) remain in full force and effect until Pledgor shall be entitled to the return and release from the pledge hereunder of the Pledged Collateral pursuant to the next sentence of this Section 11. When no Obligations are outstanding Pledgor shall be entitled to the return and release from the pledge hereunder, upon his request, of such of the Pledged Collateral as shall not have been sold or otherwise disposed of by ACP pursuant to the terms of this Agreement. 12. Governing Law; Terms. This Agreement shall be governed by and construed in accordance with the substantive, internal laws of the State of New York. All judicial proceedings brought against Pledgor with respect to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of New York and, by Pledgor's 5 6 execution and delivery of this Agreement, Pledgor accepts, for himself and in connection with his properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be bound by any final judgment rendered thereby in connection with this Agreement from which no appeal has been taken or is available. Pledgor irrevocably consents to the service of process of any of the aforementioned courts in any such action or proceedings by the mailing of copies thereof by registered or certified mail, postage prepaid, to Pledgor's notice address specified in Section 10 hereof, such service to become effective five (5) business days after such mailing. Pledgor irrevocably waives (a) trial by jury in any action or proceeding with respect to this Agreement and (b) any objection (including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens) which Pledgor may now or hereafter have the bringing of any such action or proceeding with respect to this Agreement in any jurisdiction set forth above. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of ACP to bring proceedings against Pledgor in the courts of any other jurisdiction. 13. Severability. In the event that any provision of this Agreement shall be determined to be superseded, invalid or otherwise unenforceable pursuant to applicable law, such determination shall not affect the validity of the balance of this Agreement, and the remaining provisions of this Agreement shall be enforced as if the invalid provision were deleted. 14. Termination; Counterparts. This Agreement shall continue in full force and effect until all of the Obligations shall have been paid and satisfied. Section headings used herein are for convenience only and shall not affect the meaning or construction of any of the provisions hereof. This Agreement may be executed in any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. 6 7 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be duly executed and delivered as of the date first above written. ____________________________ William F. Miller III ACCEPTED AND AGREED: ACCELERATED CLAIMS PROCESSING, INC. By_____________________________________ 7 EX-10.17.IV 9 y45381ex10-17_iv.txt PROMISSORY NOTE 1 Exhibit 10.17(iv) EXHIBIT A PROMISSORY NOTE DUE JANUARY 9, 2003 $721,875 New York, New York January 10, 2001 FOR VALUE RECEIVED, the undersigned, William F. Miller III (herein called the "Borrower"), hereby promises to pay to ACCELERATED CLAIMS PROCESSING, INC., a Delaware corporation (the "Company"), the principal sum of Seven Hundred Twenty-One Thousand Eight Hundred Seventy-Five Dollars ($721,875) in two equal annual installments, commencing January 9, 2002 with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount hereof at a per-annum rate equal to 6.5% (representing the Company's current borrowing rate of the one year LIBOR rate plus 1 1/8%), from the date hereof, payable annually, commencing January 9, 2002, until the principal amount hereof shall have become due and payable, whether by acceleration, prepayment or otherwise. All payments of principal and interest on this Note shall be made at the offices of the Company at 401 Park Avenue South, New York, New York, in such coin or currency of the United States of America as at the time of payment shall be legal tender for payment of public and private debts. Regardless of any provision contained in this Note, the holder of this Note shall not be entitled to receive, collect or apply, as interest, or on principal if the Note is not paid when due, any amount which in the aggregate would exceed the maximum rate of interest permitted to be charged by applicable law. 1. Events of Default. In case of the happening of any of the following events (herein sometimes called "Events of Default"): (a) if default shall be made in the due and punctual payment of any installment of principal or interest on this Note when and as such interest installment shall become due and payable, and such default shall have continued unremedied for a period of five business days; (b) if Borrower shall (i) apply for or consent to the appointment of, or the taking or possession by, a receiver, custodian, trustee or liquidator of himself or of all or a substantial part of his property, (ii) admit in writing his inability, or be generally unable, to pay his debts as such debts become due, (iii) make a general assignment for the benefit of his creditors, (iv) commence a voluntary case under the United States Bankruptcy Code or any other Federal or state bankruptcy, insolvency or similar law (as now or hereafter in effect), (v) file a petition seeking to take advantage of any other law relating 2 to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, or (vi) fail to controvert in a timely or appropriate manner, or acquiesce in writing to, any petition filed against him in an involuntary case under the United States Bankruptcy Code or any other Federal or state bankruptcy, insolvency or similar law; or (c) if a proceeding or case shall be commenced in any court of competent jurisdiction, seeking (i) the composition or readjustment of debts of Borrower, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of Borrower under any law relating to bankruptcy, insolvency, or composition or adjustment of debts, without the consent of Borrower, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 30 days, or an order for relief against Borrower shall be entered in an involuntary case under the United States Code or any other Federal or state bankruptcy, insolvency or similar law (as now or hereafter in effect); then, and in every such event and at any time thereafter during the continuance of such event, the holder of this Note may by written notice to Borrower, declare this Note to be forthwith due and payable, whereupon this Note shall become, forthwith due and payable, both as to principal and interest, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. 2. Consent to Jurisdiction; Waiver of Trial by Jury. As part of the consideration for the financial accommodation extended to Borrower by the Company, Borrower consents to the jurisdiction of any local, state or Federal court located within the State of New York, and waives personal service of any and all process upon Borrower, and consents that all such service of process be made by registered mail directed to the undersigned at the address stated herein and service so made shall be deemed to be completed three (3) days after the same shall have been posted as aforesaid. Borrower waives trial by jury and waives any objection to venue of any action instituted hereunder and consents to the granting of such legal or equitable relief as is deemed appropriate by the court. 3. Waiver of Presentment, etc. Borrower hereby waives presentment, demand for payment, protest and notice of protest, notice of dishonor and all other notices in connection with the delivery, acceptance, performance or enforcement of this Note, assents to any extension or postponement of the time of payment or any other indulgence, and/or to the addition or release of any other party or person primarily or secondarily liable. 4. Security; Full Recourse. This Note is secured by a pledge of certain Pledged Collateral as said term is defined in that certain Pledge Agreement, dated the date hereof, between Borrower and the Company. Borrower acknowledges that the Company shall 2 3 have full recourse against Borrower and all of his properties and assets (in addition to the Pledged Collateral) for satisfaction of any and all obligations of Borrower hereunder. 5. Amendments; Governing Law. This Note may not be modified or amended in any respect except in writing. This Note shall be governed by, and construed in accordance, with the laws of the State of New York, without regard to its conflicts of law rules. IN WITNESS WHEREOF, has caused this Note to be signed in his name as of the day and year first above written. __________________________________ William F. Miller III ACCEPTED AND AGREED: ACCELERATED CLAIMS PROCESSING, INC. By_______________________________________ 3 EX-11 10 y45381ex11.txt COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years ended October 31, --------------------------------------------- 2000 1999 1998 ---------- ------- ------- Numerator: Net income (loss) $ (25,426) $ 7,483 $ 6,088 ========== ======= ======= Denominator: Weighted average common shares outstanding 17,467 17,357 17,366 Net effect of dilutive stock options - based on the Treasury stock method using average market price - (a) 62 467 ---------- ------- ------- Weighted average common shares and common share equivalents 17,467 17,419 17,833 ========== ======= ======= Basic earnings (loss) per share: $ (1.46) $ 0.43 $ 0.35 ========== ======= ======= Diluted earnings (loss) per share: $ (1.46) $ 0.43 $ 0.34 ========== ======= =======
(a) Stock options would be anti-dilutive for fiscal year 2000 and are therefore excluded from the denominator. EX-21 11 y45381ex21.txt LIST OF SUBSIDIARIES 1 Exhibit 21
STATE OF SUBSIDIARY INCORPORATION ---------- ------------- Accelerated Claims Processing, Inc. Delaware 401 Park Avenue South New York, NY 10016 Quality Medi-Cal Adjudication, Incorporated California 10381 Old Placerville Road Sacramento, CA 95827 Health Care Microsystems, Inc. California 200 North Sepulveda Boulevard, Suite 600 El Segundo, CA 90245 CDR Associates, Inc. Maryland 9642 Deereco Road Timonium, MD 21093 Health Receivables Management, Inc. Delaware 820 West Jackson Boulevard, Suite 725 Chicago, IL 60607 HSA Managed Care Systems, Inc. Delaware 234 Spring Lake Drive Itasca, IL 60143 - 3203
EX-23 12 y45381ex23.txt CONSENT OF KPMG LLP 1 Exhibit 23 INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors Health Management Systems, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-3 (File No. 33-91518) and Form S-8 (File Nos. 33-65560, 33-76638, 33-76770, 33-95326, 333-33706 and 333-77121) of Health Management Systems, Inc. of our report dated January 5, 2001, relating to the consolidated balance sheets of Health Management Systems, Inc. and subsidiaries as of October 31, 2000 and 1999, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity, and cash flows for each of the years in the three-year period ended October 31, 2000 and the related schedule, which report appears in the October 31, 2000, Annual Report on Form 10-K of Health Management Systems, Inc. /s/ KPMG LLP New York, New York February 9, 2001 -----END PRIVACY-ENHANCED MESSAGE-----