-----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, Dzq1Dtqs9LBQqfOQ/CfHwEo5fehv3i/+QBiw/GBmI5ysAqnBogH7MqsllwCp9tGh PKPNbA8ALrPPXLW/cc4UXQ== 0000950123-97-005020.txt : 19970616 0000950123-97-005020.hdr.sgml : 19970616 ACCESSION NUMBER: 0000950123-97-005020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970613 SROS: NONE 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20946 FILM NUMBER: 97623688 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-Q 1 HEALTH MANAGEMENT SYSTEMS, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ___________________ Commission File Number 0-20946 HEALTH MANAGEMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter) New York 13-2770433 State of Incorporation (I.R.S. Employer Identification Number) 401 Park Avenue South, New York, New York 10016 (Address of principal executive offices, zip code) (212) 685-4545 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report.) Indicate by check [root] whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No ________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at May 31, 1997 Common Stock, $.01 Par Value 17,709,793 Shares
2 HEALTH MANAGEMENT SYSTEMS, INC. INDEX TO FORM 10-Q QUARTER ENDED APRIL 30, 1997
PART I FINANCIAL INFORMATION Page No. Item 1 Financial Statements Consolidated Balance Sheets as of April 30, 1997 (unaudited) 1 and October 31, 1996 Consolidated Statements of Operations (unaudited) for the three 2 month and six month periods ended April 30, 1997 and April 30, 1996 Consolidated Statement of Shareholders' Equity (unaudited) for 3 the six month period ended April 30, 1997 Consolidated Statement of Cash Flows (unaudited) for the 4 three month and six month periods ended April 30, 1997 and April 30, 1996 Notes to Interim Consolidated Financial Statements (unaudited) 5 Item 2 Management's Discussion and Analysis of Results of Operations and 7 Financial Condition PART II OTHER INFORMATION 11 SIGNATURES 12 EXHIBIT INDEX 13
3 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ In Thousands, Except Per Share Amounts)
April 30, October 31, 1997 1996 ---- ---- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 18,462 22,340 Short-term investments 17,588 17,181 Accounts receivable, net 41,670 42,730 Other current assets 7,008 4,706 -------- ------- Total current assets 84,728 86,957 Property and equipment, net 7,708 7,823 Intangible assets, net 12,336 5,257 Capitalized software costs, net 3,100 1,472 Investments in affiliates 0 6,824 Other assets 2,077 1,310 -------- ------- Total assets $109,949 109,643 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 14,320 19,676 Amounts payable to affiliates 0 585 Deferred revenue 5,291 4,975 Deferred income taxes 6,807 6,968 -------- ------- Total current liabilities 26,418 32,204 Other liabilities 2,010 2,770 Deferred income taxes 0 57 -------- ------- Total liabilities 28,428 35,031 -------- ------- Shareholders' equity: Preferred stock - $.01 par value; 5,000,000 shares authorized; none issued and outstanding 0 0 Common stock - $.01 par value; 45,000,000 shares authorized; 17,709,783 shares issued and outstanding at April 30, 1997; 17,520,991 shares issued and outstanding at October 31, 1996 177 175 Capital in excess of par value 67,334 62,541 Retained earnings 13,509 11,425 Unrealized appreciation on short-term investments 501 471 -------- ------- Total shareholders' equity 81,521 74,612 -------- ------- Commitments and contingencies Total liabilities and shareholders' equity $109,949 109,643 ======== =======
See accompanying notes to interim consolidated financial statements. 1 4 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ($ In Thousands, Except Per Share Amounts)
Three months ended Six months ended April 3 April 30, 1997 1996 1997 1996 ---- ---- ---- ---- Revenue: Trade $ 19,821 23,491 42,049 46,958 Affiliates 287 2,216 331 4,368 -------- ------ ------ ------ 20,108 25,707 42,380 51,326 Cost of services: Compensation 13,505 11,892 25,164 23,647 Data processing 1,795 2,112 3,588 4,277 Occupancy 2,416 1,775 4,559 3,483 Other 4,603 4,459 7,953 8,751 -------- ------ ------ ------ 22,319 20,238 41,264 40,158 -------- ------ ------ ------ Operating (loss) margin before amortization of intangibles (2,211) 5,469 1,116 11,168 Amortization of intangibles 239 55 285 110 -------- ------ ------ ------ Operating (loss) income (2,450) 5,414 831 11,058 Other income: Net interest income 1,331 228 1,772 479 Merger related costs (37) (489) (537) (489) Equity in (loss) earnings of affiliate (294) 174 (310) 297 -------- ------ ------ ------ 1,000 (87) 925 287 (Loss) income before income taxes (1,450) 5,327 1,756 11,345 Income tax benefit (expense) 1,731 (2,225) 328 (4,633) -------- ------ ------ ------ Net income $ 281 3,102 2,084 6,712 ======== ====== ====== ====== Earnings per share data: Net income per weighted average share of common stock outstanding $ 0.02 0.17 0.12 0.37 ======== ====== ====== ====== Weighted average shares outstanding 17,832 18,477 18,034 18,329 ======== ====== ====== ======
See accompanying notes to interim consolidated financial statements 2 5 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) ($ In Thousands)
Common Stock Capital In ----------------- --------------------- Appreciation Total Par Excess Of Retained on Short-term Shareholders' Shares Value Par Value Earnings Investments Equity ------ ----- --------- -------- ----------- ------ Balance at October 31, 1996, as originally reported 17,348,841 $174 57,583 18,301 471 76,529 Adjustments for Quality Standards in Medicine, Inc. ("QSM") pooling of interests 172,150 1 4,958 (6,876) 0 (1,917) ---------- ---- ------- ------- ------- --------- Balance at October 31, 1996, as restated 17,520,991 175 62,541 11,425 471 74,612 Net income 0 0 0 2,084 0 2,084 Stock option activity 37,913 0 233 0 0 233 Employee Stock Purchase Plan activity 63,029 1 552 0 0 553 Stock issued to retire QSM debt 87,850 1 1,434 0 0 1,435 Disqualifying dispositions 0 0 2,574 0 0 2,574 Appreciation on short-term investments 0 0 0 0 30 30 ---------- ---- ------- ------- ------- --------- Balance at April 30, 1997 17,709,783 $177 67,334 13,509 501 81,521 ========== ==== ======= ======= ======= =========
See accompanying notes to interim consolidated financial statements. 3 6 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($ In Thousands)
Three months ended Six months ended April 30, April 30, 1997 1996 1997 1996 ---- ---- ---- ---- Operating activities: Net income $ 281 3,102 2,084 6,712 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,219 846 1,994 1,630 Software capitalization (477) (272) (782) (551) Provision for doubtful accounts (109) 14 (126) 297 Deferred tax (benefit) expense (932) 133 (371) 488 Equity in loss (earnings) of affiliate 295 (231) 311 (354) Changes in assets and liabilities: Decrease (increase) in accounts receivable 4,888 (8,253) 2,652 (13,693) Decrease (increase) in other current assets 161 406 877 (65) Increase (decrease) in accounts payable and accrued expenses 569 (1,032) (4,740) (3,275) Decrease in amounts payable to affiliates (585) 0 (747) 0 Increase (decrease) in deferred revenue 264 (627) (406) 619 Decrease (increase) in other assets and liabilities, net (906) 326 (554) 1,237 -------- ------ ------ ------- Total adjustments 4,387 (8,690) (1,892) (13,667) -------- ------ ------ ------- Net cash provided by (used in) operating activities 4,668 (5,588) 192 (6,955) -------- ------ ------ ------- Investing activities: Capital asset expenditures (458) (1,039) (821) (1,599) Acquisition of Health Information Services Corporation, net of cash acquired (3,689) 0 (3,689) 0 Proceeds from sale of short-term investments (266) (393) (346) (637) -------- ------ ------ ------- Net cash used in investing activities (4,413) (1,432) (4,856) (2,236) -------- ------ ------ ------- Financing activities: Proceeds from issuance of common stock 122 200 553 1,767 Proceeds from exercise of stock options 77 1,719 233 3,240 Proceeds from issuance of notes payable 0 0 0 148 -------- ------ ------ ------- Net cash provided by financing activities 199 1,919 786 5,155 -------- ------ ------ ------- Net increase (decrease) in cash and cash equivalents 454 (5,101) (3,878) (4,036) Cash and cash equivalents at beginning of period 18,008 11,890 22,340 10,825 -------- ------ ------ ------- Cash and cash equivalents at end of period $ 18,462 6,789 18,462 6,789 ======== ====== ====== =======
See accompanying notes to interim consolidated financial statements. 4 7 HEALTH MANAGEMENT SYSTEMS, INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. UNAUDITED INTERIM FINANCIAL INFORMATION Health Management Systems, Inc. ("HMS" or the "Company") management is responsible for the accompanying unaudited interim consolidated financial statements and the related information included in these notes to the unaudited interim consolidated financial statements. In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operations and cash flows for the periods presented. Results of operations of interim periods are not necessarily indicative of the results to be expected for the entire year. The Company completed an acquisition during the second quarter of fiscal year 1997. The acquisition transaction was accounted for using the purchase method of accounting. For further details see Note 2 to the Interim Consolidated Financial Statements. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company as of and for the year ended October 31, 1996 included in the Company's Annual Report on Form 10-K for such year as filed with the Securities and Exchange Commission (the "Commission"). However, the reader should be aware that the October 31, 1996 financial statements have been retroactively restated for the acquisition of Quality Standards in Medicine, Inc. ("QSM") as noted in the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1997. 2. ACQUISITION OF HEALTH INFORMATION SYSTEMS, INC. ("HISCo") In March 1997, the Company, which owned 43% of HISCo's stock, acquired the remaining 57% of HISCo's stock for $3,689,000, net of cash acquired. HISCo has been renamed HSA Managed Care Systems, Inc. ("HSA"). HSA provides automated business and information solutions, including software and services, to the bearers of risk in the health care industry. The acquisition was accounted for using the purchase method of accounting and accordingly the results of operations of HSA from the date of acquisition through April 30, 1997 are included in the accompanying unaudited interim financial statements. The $2,309,000 excess of the purchase price over fair market value of the net assets acquired was recorded as goodwill and is being amortized over a period not to exceed 20 years. 3. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for income taxes during the quarters ended April 30, 1997 and 1996 was $50,000 and $2,570,000, respectively. Cash paid for income taxes during the six months ended April 30, 1997 and 1996 was $179,000 and $4,444,000, respectively. The Company recorded significant non-cash transactions during the six months ended April 30, 1997 and 1996. The non-cash transactions included the issuance of 87,850 shares of the Company's common stock to settle $1,435,000 of QSM notes payable plus accrued interest in the six months ended April 30, 1997. Additionally, the Company recorded $2,574,000 and $708,000 for the six months ended April 30, 1997 and 1996 as disqualified dispositions related to certain compensatory stock option exercises, which has the effect of reducing the Company's tax liability with an offsetting increase to shareholders' equity. 5 8 4. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earning Per Share". SFAS 128 establishes standards for computing and presenting earnings per share. In accordance with the effective date of SFAS 128, the Company will adopt SFAS 128 as of January 31, 1998. This statement is not expected to have a material impact on the Company's financial statements. 5. RELATED PARTIES Effective April 16, 1997, the Company guaranteed all of the obligations of Robert V. Nagelhout to The Chase Manhattan Bank (the "Bank") arising under a $1,600,000 loan made by the Bank to Mr. Nagelhout. Mr. Nagelhout is a director of the Company and the Chief Executive Officer of the Company's Health Care microsystems, Inc. ("HCm") subsidiary. The loan is payable on a monthly basis as to interest only, at an interest rate equal to the prime rate announced from time to time by the Bank. The loan will mature on April 16, 1999, at which time the entire unpaid principal balance of the Loan, together with accrued and unpaid interest, will become due and payable. Mr. Nagelhout has granted the Company a first security interest in 500,000 shares of HMS Common Stock owned by him to secure the Company's guaranty of his loan obligations to the Bank. 6. SUBSEQUENT EVENTS On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of its Common Stock that have an aggregate purchase price not in excess of $10,000,000. The Company would repurchase these shares from time to time on the open market or in negotiated transactions at prices deemed appropriate by the Company. Repurchased shares will be deposited in the Company's treasury and used for general corporate purposes. On the same date, the Board of Directors also authorized a stock option exchange program for employee participants in the Company's Stock Option and Restricted Stock Purchase Plan. Eligible employees who hold options ("Old Options") with exercise prices in excess of $10.00 per share will be able to exchange them for options ("New Options") exercisable for a lesser number of shares with an exercise price equal to the average price of the Company's Common Stock on the Nasdaq National Market System on June 2, 1997. The exact number of shares of Common Stock underlying each New Option will depend on the exercise price of the Old Option exchanged. Approximately 1,600,000 Old Options are eligible to be exchanged for New Options. If all eligible Old Options are exchanged approximately 900,000 New Options will be issued. Certain executive officers of the Company are either ineligible to participate, or have limitations on their ability to participate, in the option exchange. 6 9 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- THREE MONTH AND SIX MONTH PERIODS ENDED APRIL 30, 1997 AND 1996 OPERATING RESULTS THREE MONTHS ENDED APRIL 30, 1997 Revenue for the quarter ended April 30, 1997 was $20,108,000, a decrease of $5,599,000 or 22% from the comparable period in 1996. The Company's Revenue Enhancement Services, previously referred to as the Company's proprietary services which included Retroactive Claims Reprocessing ("RCR") Services, Third Party Liability Recovery ("TPLR") Services and Comprehensive Account Management Services ("CAMS"), accounted for $10,686,000 or 53% of the Company's consolidated revenue for the second quarter of 1997, compared to $18,988,000 or 74% of consolidated revenue for the comparable period in 1996. Revenue from Revenue Enhancement Services decreased 44% from the comparable period principally due to the non-recurrence in 1997 of one-time projects in 1996 and the expiration of a major contact. This contract is in the process of being renewed at a lower rate and with a smaller scope. Revenue from Managed Care Support ("MCS") services was $6,102,000, an increase of $1,631,000 or 36% over the comparable period in 1996. Revenue from HSA was $1,794,000 for the second quarter of 1997. There is no comparable prior period revenue for HSA because HSA was acquired on March 18, 1997 in a transaction accounted for under the purchase method of accounting. The Company's Electronic Data Interchange ("EDI") services revenue was $1,526,000 for the second quarter of 1997, a decrease of $722,000 or 32% from the comparable period in 1996. Cost of services for the second quarter of 1997 was $22,319,000, an increase of $2,081,000 or 10% from the comparable period in 1996. Compensation expense, the Company's largest expense component, totaled $13,505,000, an increase of $1,613,000 or 14% over the comparable prior period. Salaries increased by 24% due to the acquisition of HSA, which increased compensation expense by $1,102,000, and a 17% growth in the average number of employees in other operations. Increases in the salary component were partially offset by lower bonus and profit sharing expense accruals. Data processing expense for the second quarter of 1997 was $1,795,000, a decrease of $317,000 or 15% from the comparable period in 1996. This decrease was attributable to lower levels of variable cost associated with a reduction in revenue from Revenue Enhancement Services and other general cost savings. Occupancy expense for the second quarter of 1997 was $2,416,000, an increase of $641,000 or 36% over the comparable period in 1996. This increase reflects the additional rent and depreciation expense for expansion at the New York corporate facility and expansion in satellite offices. Other operating expense for the second quarter of 1997 was $4,603,000, an increase of $144,000 or 3% from the comparable period in 1996. This increase was principally attributable to the timing of certain unbilled expenses related to revenue producing projects, and was offset by lower direct project costs and bad debt expense. Operating loss before amortization of intangible assets for the quarter ended April 30, 1997 was $2,211,000, a decrease of $7,680,000 or 140% from the $5,469,000 of operating margin before amortization of intangible assets realized in the comparable period in 1996. 7 10 Net interest income of $1,331,000 in the second quarter of 1997 increased by $1,103,000 from $228,000 in the comparable period in 1996. The increase in interest income was primarily attributable to a reversal of interest expense of $887,000 as a result of a favorable resolution to an Internal Revenue Services audit ("IRS audit resolution"). The Company reported equity in the loss of affiliate of $294,000 during the second quarter of 1997 as compared to earnings of $174,000 for the comparable period in 1996. The Company's income tax benefit for the second quarter of 1997 was $1,731,000, of which $1,093,000 resulted from the IRS audit resolution. This compares to income tax expense of $2,225,000 for the comparable period in 1996. The Company's effective tax rate, exclusive of the effect of the IRS audit resolution, for the second quarter 1997 and 1996 were approximately 44.0% and 41.8%, respectively. Net income for the three month period ended April 30, 1997 was $281,000 a decrease of $2,821,000, or 91% compared to $3,102,000 reported in the comparable prior year period. The Company's earnings per share for the three month period ended April 30, 1997 was $0.02, a decrease of $0.15 or 88% from the $0.17 per share reported in the comparable period in 1996. Excluding all one-time events, the Company experienced a loss per share of $0.07 compared to an earnings per share of $0.19 for the comparable prior period. SIX MONTHS ENDED APRIL 30, 1997 Revenue for the six months ended April 30, 1997 was $42,380,000, a decrease of $8,946,000 or 17% from the comparable period in 1996. Revenue from Revenue Enhancement Services was $25,198,000, a decrease of $13,175,000 or 34%, principally due to the non-recurrence in 1997 of one-time projects in 1996 and the expiration of a major contract. Revenue from MCS services was $12,018,000, an increase of $3,310,000 or 38% over the comparable prior year period. Revenue from HSA was $1,794,000. There are no comparable prior year figures since HSA was acquired on March 18, 1997 in a transaction accounted for under the purchase method of accounting. Revenue from EDI services was $3,370,000, a decrease of $875,000 or 21% from the comparable period in 1996. Cost of services for the six months ended April 30, 1997 was $41,264,000, an increase of $1,106,000 or 3% over the comparable period in 1996. Compensation expense of $25,164,000 increased $1,517,000 or 6% over the comparable period in 1996. This increase is primarily due to the acquisition of HSA which increased salary expense by $1,102,000. Increased average headcount in other operations was partially offset by lower bonus and profit sharing accruals. Data processing expense was $3,588,000, a decrease of $689,000 or 16% from the comparable period in 1996. This decrease was attributable to lower variable costs associated with a reduction in revenue from Revenue Enhancement Services and other general cost savings. Occupancy expense was $4,559,000, an increase of $1,076,000 or 31% over the comparable period in 1996. This increase reflects the additional rent and depreciation expense for the expansion of the New York corporate facility and expansion in satellite offices. Other operating expense was $7,953,000, a decrease of $798,000 or 9% from the comparable period in 1996. This decrease was principally attributable to lower levels of direct project costs and bad debt expense. 8 11 Operating margin before amortization of intangible assets for the six months ended April 30, 1997 was $1,116,000, a decrease of $10,052,000 or 90% from the $11,168,000 amount realized in the comparable period in 1996. The Company's operating margin rate before amortization of intangible assets was 2.6%, compared to 21.8% in 1996. Net interest income of $1,772,000 in the six months ended April 30, 1997 increased by $1,293,000 from $479,000 in the comparable period in 1996, primarily due to a reversal of accrued interest expense resulting from the IRS audit resolution. Merger related costs of $537,000 were incurred in the six months ended April 30, 1997 related to the merger with QSM in November 1996 as compared to $489,000 in the six months ended April 30, 1996 related to the Company's merger with CDR Associates, Inc. ("CDR") in April 1996. The Company's income tax benefit for the six months ended April 30, 1997 was $328,000, resulting primarily from the IRS audit resolution of $1,093,000. The Company's effective tax rate, exclusive of the effect of the IRS audit resolution, for the six months ended April 30, 1997 was approximately 43.6%. This compares to income tax expense of $4,633,000 and an effective tax rate of approximately 40.8% for the comparable period in 1996. The effective tax rate has increased from the comparable prior period due to non-taxable income in the first six months of 1996 resulting from the CDR merger and non-taxable income from the equity in earnings of an affiliate. Net income for the six month period ended April 30, 1997 was $2,084,000, a decrease of $4,628,000 or 69% to from the comparable prior period. The Company's earnings per share for the six month period ended April 30, 1997 was $0.12, a decrease of $0.25 or 68% compared to $0.37 in the comparable prior period. Excluding all one-time events, the Company's earnings per share of $0.06 compared to $0.39 for the comparable prior period. 9 12 LIQUIDITY AND CAPITAL RESOURCES At April 30, 1997, the Company had $58,310,000 in net working capital, an increase of $3,557,000 over the level at October 31, 1996. The Company's principal sources of liquidity at April 30, 1997 consisted of cash, cash equivalents, and short-term investments aggregating $36,050,000, net accounts receivable of $41,670,000, and an available balance of $38,400,000 under a line of credit. Accounts receivable at April 30, 1997 reflected a decrease of $1,060,000 or 2.5% from the October 31, 1996 balance. There has been no significant change in the nature, age, or composition of the Company's accounts receivable portfolio. On May 28, 1997, the Board of Directors authorized the Company to repurchase such number of shares of its Common Stock that have an aggregate purchase price not in excess of $10,000,000. The Company would repurchase these shares from time to time on the open market or in negotiated transactions at prices deemed appropriate by the Company. Repurchased shares will be deposited in the Company's treasury and used for general corporate purposes. * * * * * This document contains forward-looking statements. Such statements by their nature entail various risks, reflecting the dynamic, complex, and rapidly changing nature of the health care industry. Results actually achieved may differ materially from those currently anticipated. The various risks include but are not necessarily limited to: (i) the ability of HMS to contain costs, to grow internally or by acquisition and to integrate acquired businesses into the HMS group of companies, (ii) the uncertainties of litigation, (iii) changing conditions in the health care industry which could simplify the reimbursement process and/or data management requirements associated with the health care transfer payment process and adversely affect HMS's business, (iv) government regulatory and political pressures which could reduce the rate of growth of health care expenditures, (v) competitive actions by other companies, and (vi) other risks, as noted in HMS's registration statements and periodic reports filed with the Commission. 10 13 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES PART II -- OTHER INFORMATION
Item 1 Legal Proceedings -- Four purported class action lawsuits have been filed against the Company and certain of its present and former officers and directors: 1) Baker v. Health Management Systems. Inc., et al., No. 97-CIV-1865; 2) Zola v. Health Management Systems, Inc., et. al., No. 97-CIV-2112; 3) Ronis v. Health Management Systems, Inc., et. al., No. 97-CIV-2535; and 4) Korsinky v. Health Management Systems, Inc., et. al., No. 97-CIV-3637 The Complaints in these lawsuits, which are pending in the United States Court for the Southern District of New York, allege violations of the Securities Exchange Act of 1934 in connection with certain allegedly false and misleading statements and seek damages in an unspecified amount. The Company intends to vigorously defend these lawsuits. Item 2 Changes in Securities -- None Item 3 Defaults Upon Senior Securities -- Not applicable Item 4 Submission of Matters to a Vote of Security Holders -- None Item 5 Other Information -- None Item 6 Exhibits and Reports on Form 8-K -- None
11 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: June 13, 1997 HEALTH MANAGEMENT SYSTEMS, INC. ------------------------------- (Registrant) /s/ Phillip Siegel ------------------------------------------ Phillip Siegel Vice President and Chief Financial Officer 12 15 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT INDEX
EXHIBIT DESCRIPTION OF EXHIBIT NUMBER 2.1 Agreement and Plan of Merger, dated as of March 18, 1997, by and among Health Management Systems, Inc., HISCo Acquisition Corp., Health Information Systems Corporation and HSA Managed Care Systems, Inc. 10.1 Guaranty Agreement, dated as of April 16, 1997, between Health Management Systems, Inc. and The Chase Manhattan Bank. 10.2 Second Amendment to Credit Agreement and Guaranty, dated as of April 16, 1997, among Health Management Systems, Inc., Accelerated Claims Processing, Inc., Quality Medical Adjucation, Incorporated, Health Care microsystems, Inc., CDR Associates, Inc., and The Chase Manhattan Bank. 10.3 Security Agreement, dated as of April 16, 1997, by and between Robert V. Nagelhout and Health Management Systems, Inc. 10.4 Promissory note, dated as of April 16, 1997, by and between Robert V. Nagelhout and The Chase Manhattan Bank. 11 Computations of Earnings Per Share 27 Financial Data Schedule (Submitted for informational purposes only and not deemed to be filed)
13 EX-2.1 2 AGREEMENT AND PLAN OF MERGER 1 Exhibit 2.1 AGREEMENT AND PLAN OF MERGER Among HEALTH MANAGEMENT SYSTEMS, INC., HISCO ACQUISITION CORP. And HEALTH INFORMATION SYSTEMS CORPORATION And HSA MANAGED CARE SYSTEMS, INC. 2
Page TABLE OF CONTENTS RECITALS ............................................................................................................1 ARTICLE 1. DEFINITIONS........................................................................................1 1.1 Certain Definitions.......................................................................1 1.2 Other Definitions.........................................................................3 ARTICLE 2. THE MERGER.........................................................................................3 2.1 Effective Time of the Merger..............................................................3 2.2 Effects of the Merger.....................................................................3 2.3 Effect on HISCo Securities................................................................3 2.4 Conversion of Sub Capital Stock...........................................................5 2.5 Cancellation of HSA Capital Stock. ......................................................5 2.6 Payment of Per Share Purchase Price.......................................................5 ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF HISCo and HSA....................................................6 3.1 Organization and Standing.................................................................6 3.2 Capital Structure.........................................................................6 3.3 Equity Investments........................................................................7 3.4 Authority.................................................................................7 3.5 Governmental Consents.....................................................................8 3.6 Financial Statements......................................................................8 3.7 Absence of Changes........................................................................9 3.8 Properties...............................................................................11 3.9 Taxes....................................................................................12 3.10 Compliance with Law......................................................................12 3.11 Litigation...............................................................................12 3.12 Material Agreements......................................................................12 3.13 Certificate Proprietary Rights...........................................................14 3.14 No Conflict..............................................................................14 3.15 No Default...............................................................................15 3.16 Information Supplied.....................................................................15 3.17 Labor Relations; Employees...............................................................16 3.18 Customers and Suppliers..................................................................16 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HMS AND SUB.....................................................16 4.1 Organization.............................................................................16 4.2 Capital Structure of Sub.................................................................17 4.3 Authority................................................................................17 4.4 Governmental Consents....................................................................17 4.5 No Conflict..............................................................................18 4.6 No Prior Activities......................................................................18
i 3
Page ARTICLE 5. COVENANTS RELATING TO CONDUCT OF BUSINESS.........................................................18 5.1 Ordinary Course..........................................................................18 5.2 Dividends; Changes in Stock..............................................................19 5.3 Issuance of Securities...................................................................19 5.4 Governing Documents......................................................................19 5.5 No Acquisitions..........................................................................19 5.6 No Dispositions..........................................................................19 5.7 Indebtedness.............................................................................20 5.8 Benefit Plans, Etc.......................................................................20 5.9 Accounting Practices.....................................................................20 5.10 Other Agreements.........................................................................20 ARTICLE 6. ADDITIONAL AGREEMENTS.............................................................................20 6.1 Access to Information....................................................................20 6.2 Legal Conditions to the Merger...........................................................21 6.3 HISCo Stockholders' Approval.............................................................21 6.4 Dissenting Shares........................................................................21 6.5 Employee Benefits........................................................................21 6.6 Communications...........................................................................21 6.7 Notification of Certain Matters..........................................................22 6.8 Sub Sole Stockholder's Approval..........................................................22 6.9 Repurchase of HISCo Founders Shares......................................................22 6.10 Cancellation of HISCo Options............................................................22 ARTICLE 7. CONDITIONS PRECEDENT..............................................................................23 7.1 Conditions to Each Party's Obligations to Effect the Merger.....................................................................23 7.2 Conditions to Obligations of HMS and Sub.................................................24 7.3 Conditions to Obligations of HISCo and HSA...............................................25 ARTICLE 8. CLOSING...........................................................................................25 8.1 Closing Date.............................................................................25 8.2 Filing Date..............................................................................26 ARTICLE 9. TERMINATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS............................................................................26 ARTICLE 10. PAYMENT OF EXPENSES...............................................................................26
ii 4
Page ARTICLE 11. TERMINATION, AMENDMENT AND WAIVER.................................................................26 11.1 Termination..............................................................................26 11.2 Effect of Termination....................................................................27 11.3 Amendment................................................................................27 11.4 Extension; Waiver........................................................................28 ARTICLE 12. GENERAL...........................................................................................28 12.1 Notices..................................................................................28 12.2 Headings.................................................................................29 12.3 Counterparts.............................................................................29 12.4 Binding Nature...........................................................................29 12.5 Other Agreements.........................................................................29 12.6 Good Faith...............................................................................29 12.7 Applicable Law...........................................................................29
iii 5 Exhibits Exhibit A - List of Directors and Officers of Surviving Corporation iv 6 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT is made and entered into as of the 18th day of March 1997, by and among HEALTH MANAGEMENT SYSTEMS, INC., a New York corporation ("HMS"), HISCO ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of HMS ("Sub"), HEALTH INFORMATION SYSTEMS CORPORATION ("HISCo"), a Delaware corporation, and HSA MANAGED CARE SYSTEMS, INC. (formerly HEALTH SYSTEMS ARCHITECTS, INC.) ("HSA"), a Delaware corporation and a wholly-owned subsidiary of HISCo. RECITALS A. The parties wish to provide for the merger (the "Merger") of Sub and HSA into HISCo, whereby it is contemplated, among other things, that all shares of common stock, $0.01 par value, of HISCo issued and outstanding ("HISCo Common Stock") immediately prior to the Effective Time of the Merger, as hereinafter defined, other than (1) HISCo Common Stock held by HMS and (2) Dissenting Shares, if any, as defined, will be converted into the right to receive $11.96 per share (the "Per Share Purchase Price") in cash, subject to adjustment as provided for in Section 2.3(e) of this Agreement. B. The parties hereto desire to set forth certain representations, warranties and covenants made by HMS and Sub to HISCo and HSA, and by HISCo and HSA to HMS and Sub, and the conditions precedent to the consummation of the Merger. C. The Boards of Directors of HMS, Sub, HISCo and HSA, respectively, have approved and adopted this Agreement and the Merger; NOW, THEREFORE, in consideration of the premises and of the mutual provisions, agreements and covenants herein contained, HMS, Sub, HISCo and HSA hereby agree as follows: ARTICLE 1. DEFINITIONS 1.1 Certain Definitions. The terms defined in this Section 1.1 shall, for all purposes of this Agreement, have the meanings herein specified, unless the context expressly or by necessary implication otherwise requires: (a) "Dissenting Shares" shall mean shares of HISCo Common Stock which shall be owned by stockholders who shall duly perfect appraisal rights in accordance with Section 262 of the Delaware General Corporation Law (the "GCL"). 7 (b) "Dissenting Stockholders" shall mean those stockholders of HISCo who are holders of Dissenting Shares and are entitled to appraisal rights. (c) "HISCo Founders Shares" shall mean the shares of HISCo Common Stock purchased in connection with the formation of HSA (then known as "Health Information Systems Corporation") for a cash purchase price of $0.01 per share, as set forth on Schedule 3.2 attached hereto. (d) "HISCo Stockholders" shall mean all holders of HISCo Common Stock immediately prior to the Effective Time of the Merger. (e) "HISCo Stockholders' Meeting" shall mean the meeting, and any adjournments thereof, of the holders of HISCo Common Stock called and convened for the purpose of their consideration of and voting upon the transactions contemplated by this Agreement and the Merger (the parties hereto agreeing that approval of this Agreement and the Merger may instead be obtained by means of written consents in accordance with Section 228(a) of the GCL). (f) "Material Adverse Effect" on any entity (or group of entities taken as a whole) shall mean an effect that is materially adverse to the consolidated financial condition, assets, liabilities, business or results of operations of such entity (or, if with respect thereto, of such group of entities taken as a whole). (g) "Material Agreements," as used in relation to HISCo and HSA, shall have the meaning ascribed to such term in Section 3.12. (h) "Subsidiary" means a corporation whose voting securities are owned directly or indirectly by a "parent" corporation in such amounts as are sufficient to elect at least a majority of the Board of Directors of the Subsidiary. (i) "Taxes" shall mean all taxes, charges, fees, levies or other assessments including, without limitation, income, gross receipts, excise, property, sales, withholding, social security, occupation, use, service, license, payroll, franchise, transfer and recording taxes, fees and charges, imposed by the United States, or any state, local or foreign government or subdivision or agency thereof whether computed on a separate, consolidated, unitary, combined or any other basis; and such term shall include any interest, fines, penalties or additional amounts attributable or imposed with respect to any taxes, charges, fees, levies or other assessments. 2 8 1.2 Other Definitions. In addition to the terms defined in Section 1.1, certain other terms are defined elsewhere in this Agreement; whenever such terms are used in this Agreement they shall have their respective defined meanings, unless the context expressly or by necessary implication otherwise requires. ARTICLE 2. THE MERGER 2.1 Effective Time of the Merger. Subject to the provisions of this Agreement, a Certificate of Merger, together with all other required certificates, shall be filed in accordance with the requirements of Section 251 of the GCL as soon as practicable on or after the Closing Date. The Merger shall become effective upon the filing of such certificate with the Secretary of State of the State of Delaware (the "Effective Time of the Merger"). 2.2 Effects of the Merger. At the Effective Time of the Merger: (a) the separate existence of Sub and HSA shall cease and Sub and HSA shall be merged with and into HISCo as the surviving corporation (the "Surviving Corporation"); (b) HISCo's Certificate of Incorporation, as amended by the Certificate of Merger, and By-laws shall be the Certificate of Incorporation and By-laws of the Surviving Corporation; and (c) the persons listed on Exhibit A shall be the directors and officers of the Surviving Corporation, and such officers shall continue to act as such and hold such offices in the Surviving Corporation, until their respective successors are duly elected and qualified. 2.3 Effect on HISCo Securities. As of the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder of any shares of the issued and outstanding shares of HISCo Common Stock: (a) Cancellation of HISCo Common Stock Owned by HISCo. All shares of HISCo Common Stock that are owned directly or indirectly by HISCo or any Subsidiary of HISCo shall be cancelled, and no cash or other consideration shall be delivered in exchange therefor. (b) Conversion of HISCo Common Stock Owned by HMS. All shares of HISCo Common Stock, if any, that are owned directly or indirectly by HMS or any Subsidiary of HMS shall be converted into 3 9 shares of issued and outstanding common stock of the Surviving Corporation on the basis of 1,600 shares of HISCo Common Stock for each share of capital stock of the Surviving Corporation. (c) Conversion of HISCo Common Stock Owned by HISCo Stockholders Other Than HMS. Other than shares of HISCo Common Stock owned directly or indirectly by HMS or any Subsidiary of HMS to be converted pursuant to Section 2.3(a) and Dissenting Shares, each share of HISCo Common Stock issued and outstanding immediately prior to the Effective Time of the Merger shall be converted, without any action on the part of the holders thereof, into the right to receive the Per Share Purchase Price. (d) Adjustments of Price. If, after the date of this Agreement, the outstanding shares of HISCo Common Stock shall have been changed into a different number of shares or a different class by reason of any reclassification, recapitalization, split-up, combination, exchange of shares or readjustment or a stock dividend thereon shall be declared with a record date within said period, then, in addition to all other rights and remedies that HMS and Sub may have by reason of such event, HMS and Sub, in their sole discretion, may elect that the Per Share Purchase Price shall be correspondingly adjusted. (e) Dissenters' Rights of HISCo Stockholders. Any Dissenting Shares shall not be converted into the right to receive the Per Share Purchase Price but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the GCL. HISCo shall give HMS prompt notice of any demand received by HISCo for the right to receive payment of the fair market value for the HISCo Common Stock, and HMS shall have the right to participate in all negotiations and proceedings with respect to such demand. HISCo agrees that, except with the prior written consent of HMS, or as required under the GCL, HISCo will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal. Each Dissenting Stockholder who, pursuant to Section 262 of the GCL, becomes entitled to payment of the value of shares of HISCo Common Stock shall receive payment therefor (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions). In the event of the legal obligation, after the Effective Time of the Merger, to deliver the Per Share Purchase Price to any Dissenting Stockholder who shall have failed to make an effective demand for appraisal or shall have lost his status as a Dissenting Stockholder, HMS shall issue and deliver, upon surrender by such Dissenting Stockholder of his certificate or certificates representing shares of HISCo Common Stock, the aggregate Per Share Purchase Price to which such 4 10 Dissenting Stockholder is then entitled under this Section 2.3, and Section 262 of the GCL. 2.4 Conversion of Sub Capital Stock. Each share of Sub capital stock issued and outstanding immediately prior to the Effective Time of the Merger shall be converted, without any action on the part of the holder thereof, into one share of issued and outstanding capital stock of the Surviving Corporation. 2.5 Cancellation of HSA Capital Stock. Each share of HSA capital stock issued and outstanding immediately prior to the Effective Time of the Merger shall be cancelled, and no cash or other consideration shall be delivered in exchange therefor. 2.6 Payment of Per Share Purchase Price. (a) As soon as practicable after the Effective Time of the Merger, HMS shall mail to each holder (other than HMS or any Subsidiary of HMS) of record of a certificate or certificates representing then outstanding shares of HISCo Common Stock (the "Certificates"), a Letter of Transmittal or similar instrument for use in effecting the surrender of the Certificates in exchange for the Per Share Purchase Price pursuant to Section 2.3 hereunder. Upon surrender to HMS of a Certificate for cancellation after the Effective Time of the Merger, the holder of such Certificate shall be entitled to receive in exchange therefor the aggregate Per Share Purchase Price to which the holder of HISCo Common Stock is entitled pursuant to Section 2.3 of this Agreement and is represented by the Certificate so surrendered. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of HISCo Common Stock which is not registered in the transfer records of HISCo, the aggregate Per Share Purchase Price may be paid to a transferee if the Certificate representing the right to receive such aggregate Per Share Purchase Price is presented to HMS and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.4, each Certificate shall be deemed at any time after the Effective Time of the Merger to represent the right to receive upon such surrender the aggregate Per Share Purchase Price as provided by Section 2.3 and the provisions of the GCL. (b) No Further Ownership Rights in HISCo Common Stock. Payment of the aggregate Per Share Purchase Price upon the surrender for exchange of shares of HISCo Common Stock in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares of 5 11 HISCo Common Stock. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of HISCo Common Stock which were outstanding immediately prior to the Effective Time of the Merger. If, after the Effective Time of the Merger, Certificates, with respect to shares of HISCo Common Stock owned by HISCo Stockholders other than HMS or any Subsidiary of HMS are presented to the Surviving Corporation for any reason, they shall be canceled and the aggregate Per Share Purchase Price or Per Option Purchase Price, as the case may be, shall be paid therefor as provided in this Article 2. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF HISCo and HSA Each of HISCo and HSA represents and warrants to HMS and Sub as of the date hereof and as of the Closing Date as follows: 3.1 Organization and Standing. Each of HISCo and HSA is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation, and has the full power and authority (corporate and otherwise) to carry on its business in the places and as it is now being conducted and to own and lease the properties and assets which it now owns or leases. 3.2 Capital Structure. The authorized capital stock of HISCO consists of 17,000,000 shares of Common Stock, $.01 par value, of which 3,894,396 shares are issued and outstanding, inclusive of 2,500,000 HISCo Founders Shares, 1,500,000 shares of which are to be repurchased by HISCo immediately prior to the Effective Time of the Merger as provided in Section 6.09, and 5,000,000 shares of Preferred Stock, $.01 par value, of which no shares are issued and outstanding. All of the issued and outstanding HISCo Common Stock is owned of record and beneficially by the stockholders as set forth on Schedule 3.2 attached hereto. All of the outstanding shares of HISCo Common Stock were issued in compliance with applicable federal and state securities laws, and no further registration, qualification or other compliance under such securities laws is required. All of the outstanding shares of HISCo Common Stock are validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, HISCo's Certificate of Incorporation or By-laws or any agreement to which HISCo is a party or is bound. There are 312,829 HISCo Options outstanding, which are owned of record and beneficially by the holders thereof as set forth on Schedule 3.2 attached hereto, all of which HISCo Options are to be cancelled immediately prior to the 6 12 Effective Time of the Merger as provided in Section 6.10. The authorized capital stock of HSA consists of 1,000 shares of common stock, $.01 par value, of which 1,000 shares are issued and outstanding, all of which are owned by HISCo. Except for the foregoing, there are no equity securities of any class of HISCo or HSA or any security exchangeable or convertible into or exercisable for such equity securities, issued, reserved for issuance or outstanding. There are no other options, warrants, calls, rights, commitments or agreements of any character to which HISCo or HSA is a party or by which they are bound obligating HISCo or HSA to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of HISCo or HSA or obligating HISCo or HSA to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. There are no voting trusts or other agreements or understandings with respect to the shares of capital stock of HISCo or HSA. 3.3 Equity Investments. Neither HISCo nor HSA owns, directly or indirectly, any equity interest in any corporation, partnership, joint venture, trust or other business entity; provided, however, that HISCo owns all of the outstanding capital stock of HSA. 3.4 Authority. Each of HISCo and HSA has all requisite corporate power and authority to enter into this Agreement and, subject to approval of this Agreement by the stockholders of HISCo and by HISCo in its capacity as the sole stockholder of HSA, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of each of HISCo and HSA, subject to such approval by the stockholders of each of HISCo and HSA. This Agreement has been duly executed and delivered by each of HISCo and HSA and, subject to such approval by the stockholders of each of HISCo and HSA, constitutes a valid and binding obligation of each of HISCo and HSA, enforceable against each of HISCo and HSA in accordance with its terms, except as such terms may be (i) limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including fraudulent transfer laws), and (ii) subject to general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law). Subject to satisfaction of the conditions set forth in Sections 7.1 and 7.3, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or 7 13 acceleration of any obligation or to loss of a material benefit under (i) any provision of the Certificate of Incorporation or Bylaws of HISCo or HSA or (ii) any Material Agreement or permit, license, judgment, order, statute, rule or regulation applicable to either HISCo or HSA or their respective properties or assets, other than any such conflicts, violations, defaults, terminations, cancellations or accelerations which individually or in the aggregate would not have a Material Adverse Effect on HISCo or HSA. 3.5 Governmental Consents. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality (a "Governmental Entity"), is required by or with respect to HISCo or HSA in connection with the execution and delivery of this Agreement by HISCo and HSA or the consummation by HISCo and HSA of the transactions contemplated hereby, except for (i) the filing of a Certificate of Merger with the Secretary of State of the State of Delaware, and appropriate documents with the relevant authorities of other states in which HISCo or HSA is qualified to do business, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state securities laws and the laws of any foreign country and (iii) such other consents, authorizations, filings, approvals and registrations which if not obtained or made would not have a Material Adverse Effect on HISCo or HSA. 3.6 Financial Statements. HISCo has furnished to HMS: (i) the consolidated balance sheet of HISCo as of October 31, 1996 (the "1996 Consolidated Balance Sheet") and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended (together with the 1996 Consolidated Balance Sheet, the "1996 Consolidated Financial Statements"), certified by Ernst & Young LLP, (ii) the unaudited balance sheet of HSA as of October 31, 1996 (the "1996 HSA Balance Sheet") and the related statements of earnings of HSA for the year then ended, certified by Controller of HSA (together with the 1996 HSA Balance Sheet, the "1996 HSA Financial Statements"), and (iii) the unaudited balance sheet of HSA as of January 31, 1997 (the "January Balance Sheet"), and the related statement of earnings of HSA for the three months then ended, certified by the Controller of HSA (together with the January Balance Sheet, the "Interim Financial Statements"). The 1996 Consolidated Financial Statements and 1996 HSA Financial Statements (including any related schedules and/or notes, if any) and the Interim Financial Statements are complete and correct in all material respects and have been prepared in accordance with generally accepted accounting principles, consistently applied ("GAAP") and, in the case of the Interim Financial Statements, subject to normal year-end adjustments. The 1996 Consolidated 8 14 Balance Sheet and 1996 HSA Balance Sheet fairly present the consolidated financial position of HISCo and the financial position of HSA as of their respective dates, and the 1996 Consolidated Financial Statements and the 1996 HSA Financial Statements fairly present the consolidated results of operations of HISCo and the unconsolidated results of operations of HSA, respectively, for the period then ended. Except as described in Schedule 3.6 hereto, the Interim Financial Statements are complete and correct in all material respects, fairly present the financial position and earnings of HSA at the dates and for the periods presented, and have been compiled in accordance with GAAP (except that the Interim Financial Statements are subject to normal year-end adjustments which, both individually and in the aggregate, will not differ materially and adversely from the Interim Financial Statements). Except as described in Schedule 3.6 hereto, there has been no material adverse change in the operations or condition (financial or other) of HISCo since October 31, 1996 or HSA since January 31, 1997. Except as reflected in the 1996 Consolidated Financial Statements or the Interim Financial Statements, neither HISCo nor HSA had any obligations or liabilities, absolute, accrued or contingent, as of October 31, 1996 and January 31, 1997, respectively, that are material to the business or assets of either HISCo or HSA taken as a whole other than performance obligations under contracts or agreements with customers. 3.7 Absence of Changes. Since October 31, 1996 and January 31, 1997, respectively, neither HISCo nor HSA have, except as disclosed on Schedule 3.7 attached hereto: (a) suffered any changes in its condition (financial or otherwise), net worth, assets, properties, obligations or liabilities which, in the aggregate, have a Material Adverse Effect on HISCo or HSA or become aware of any event which may result in any such Material Adverse Effect; (b) issued, or authorized for issuance, or entered into any commitment to issue, any equity security, bond, note or other security of HISCo or HSA, except for those stock options set forth on Schedule 3.7 attached hereto; (c) incurred additional debt for borrowed money, except in the ordinary and usual course of business; (d) paid any obligation or liability, or discharged, settled or satisfied any claim, lien or encumbrance, except for current liabilities in the ordinary and usual course of business; 9 15 (e) declared, promised, or paid any dividend, payment or other distribution on or with respect to any share of HISCo Common Stock; (f) purchased, redeemed or otherwise acquired or committed itself to acquire, directly or indirectly, any share or shares of HISCo Common Stock, except as contemplated in this Agreement; (g) mortgaged, pledged, or otherwise, voluntarily or involuntarily encumbered any of its assets or properties, except for liens for current taxes which are not yet due and payable and purchase-money liens arising out of the purchase or sale of products or services made in the ordinary and usual course of business consistent with past practices; (h) transferred, assigned, licensed, conveyed or liquidated any of its assets or entered into any transaction or incurred any liability or obligation which affected its assets, other than transactions occurring in the ordinary and usual course of business consistent with past practices; (i) suffered any material destruction, damage or loss relating to its assets whether or not covered by insurance; (j) committed, suffered, permitted or incurred any default in any liability or obligation which, in the aggregate, has had or will have any Material Adverse Effect upon HISCo or HSA; (k) made any expenditure or commitment for the purchase, acquisition, construction or improvement of a capital asset, except in the ordinary and usual course of business consistent with past practices; (l) sold, assigned, transferred or conveyed, or committed itself to sell, assign, transfer or convey, any Proprietary Rights (as defined in Section 3.14), except in the ordinary course of business consistent with past practices (including non-exclusive licensing in connection with the sale of equipment); (m) effected or agreed to effect any amendment or supplement to any employee benefit plan or arrangement or paid, agreed to pay or incurred any obligation for any payment for, any contribution or other amount to or with respect to, any employee benefit plan, or paid any bonus to, or granted any increase in the compensation of, its officers, agents or employees, or made any increase in the pension, retirement or other benefits of its directors, officers, agents or other employees; 10 16 (n) paid or committed itself to pay to or for the benefit of any of its directors, officers, employees or stockholders any compensation of any kind other than wages, salaries and benefits at times and rates in effect prior to October 31, 1996 or January 31, 1997, respectively, except for increases and bonuses to employees in the ordinary course of business consistent with past practices; (o) effected or committed itself to effect any amendment or modification in its Certificate of Incorporation or By-laws, except as contemplated in this Agreement, or to any change in the terms of any contract or instrument to which it is a party which may have a Material Adverse Effect on HISCo or HSA; (p) incurred any other material liability or obligation or entered into any transaction other than in the ordinary course of business consistent with past practices; or (q) received any notices, or has reason to believe, that any supplier or customer of HISCo or HSA has taken or contemplates any steps which could disrupt the business relationship of HISCo or HSA with said supplier or customer or could result in the diminution in the value of HISCo or HSA as a going concern. 3.8 Properties. Neither HISCo nor HSA owns any fee interest in real property. The 1996 Consolidated Financial Statements and the Interim Financial Statements reflect all of the personal property used by HISCo or HSA in its business or otherwise held by HISCo or HSA, as of their respective dates, except for (i) property acquired or disposed of in the ordinary and usual course of the business of HISCo or HSA since the dates of the 1996 Consolidated Balance Sheet and the January Balance Sheet, and (ii) property not required under generally accepted accounting principles to be reflected thereon. Each of HISCo and HSA has good and marketable title to all assets and properties listed on the 1996 Consolidated Balance Sheet and the January Balance Sheet and thereafter acquired, free and clear of any imperfections of title, security interests, liens, pledges, claims, charges, escrows, encumbrances, options, rights of first refusal, mortgages, indentures, easements, licenses, security agreements or other agreements, arrangements, contracts, commitments, understandings or obligations (collectively, the "Encumbrances"), except (i) liens for current taxes not yet due and payable or (ii) Encumbrances referred to in the 1996 Consolidated Balance Sheet, the January Balance Sheet or in Schedule 3.8 attached hereto (provided that the foregoing representation does not extend to Proprietary Rights as to which Section 3.13 applies). 11 17 3.9 Taxes. Each of HISCo and HSA has duly filed or caused to be filed with the appropriate United States, state, local and foreign governmental agencies all tax returns and reports required to be filed, and all such reports are true, correct and complete in all material respects. Each of HISCo and HSA has paid all Taxes shown thereon as owing. All Taxes due through the date of the Closing will have been fully paid by that date or provided for by adequate reserves. The 1996 Consolidated Financial Statements and the Interim Financial Statements reflect all Taxes accrued through the period indicated thereon. Neither HISCo nor HSA is a party to any pending action or proceeding, nor is any such action or proceeding threatened by any governmental authority for the assessment or collection of Taxes, and no claim for assessment or collection of Taxes has been asserted against HISCo or HSA. For purposes of this Agreement, an action shall be deemed pending, and a claim shall be deemed to have been asserted, only after service of summons or other notice has been made upon HISCo or HSA. 3.10 Compliance with Law. Except for possible minor exceptions, the curing or non-curing of which would not have a Material Adverse Effect on HISCo or HSA, the business of HISCo and HSA has been conducted in accordance with all applicable laws, regulations, orders and other requirements of governmental authorities. 3.11 Litigation. Except as otherwise set forth on Schedule 3.11 attached hereto, there is no claim, dispute, action, proceeding, suit or appeal, or investigation, at law or in equity, pending against HISCo or HSA or affecting any of its assets or properties (including the Proprietary Rights), before any court, agency, authority, arbitration panel or other tribunal and none has been threatened against HISCo or HSA. There are no facts which, if known to stockholders, customers, governmental authorities or other persons, would be a basis for any such claim, dispute, action, proceeding, suit or appeal or investigation which would have a Material Adverse Effect on HISCo or HSA. Neither HISCo nor HSA is subject to any order, writ, injunction or decree of any court, agency, authority, arbitration panel or other tribunal. 3.12 Material Agreements. Schedule 3.12 attached hereto consists of a true and complete list of all Material Agreements relating to HISCo or HSA, and not listed on another schedule hereto, to which HISCo or HSA is a party and which have been entered into by HISCo or HSA after June 30, 1995. Schedule 3.12 further identifies each of the Material Agreements which contain change of control provisions. Prior to the execution of this Agreement, HISCo and HSA have delivered or made available to HMS a true and complete copy of each such Material Agreement. Except as 12 18 set forth on Schedule 3.12 attached hereto or any other schedule to this Agreement, neither HISCo nor HSA is a party or subject to any other Material Agreements. For purposes of this Agreement, "Material Agreements" means the following written and oral agreements, contracts, or arrangements: (a) each partnership, joint venture or similar agreement of HISCo or HSA with a third person; (b) each contract or agreement under which HISCo or HSA has created, incurred, assumed or guaranteed (or may create, incur, assume or guarantee) indebtedness of more than $25,000 in principal amount or under which HISCo or HSA has imposed (or may impose) a security interest or lien on any of its assets, whether tangible or intangible, securing indebtedness in excess of $25,000; (c) each contract or agreement which involves an aggregate payment or commitment per contract or agreement on the part of HISCo or HSA of more than $25,000; (d) each contract or agreement relating to employment or consulting, and each severance or indemnification agreement or arrangement with any of the directors, officers, consultants or employees of HISCo or HSA, without regard to the value thereof; (e) all leases and subleases from any third person to HISCo or HSA; (f) each contract or agreement to which HISCo, HSA or their affiliates is a party limiting, in any material respect, the right of HISCo or HSA prior to the Effective Date of the Merger, or the Surviving Corporation or any of its subsidiaries or affiliates at or after the Effective Time of the Merger (i) to engage in, or to compete with any person in, any business, including each contract or agreement containing exclusivity provisions restricting the geographical area in which, or the method by which, any business may be conducted by HISCo, HSA or any of their affiliates prior to the Effective Time of the Merger, or the Surviving Corporation or any of its subsidiaries or affiliates after the Effective Date or (iii) to solicit any customer or client; (g) all material licenses, licensing agreements and other agreements pertaining to any Proprietary Rights; (h) all distribution and development agreements; and 13 19 (i) all other contracts or agreements which are material to HISCo or HSA or the conduct of its business, other than those made in the ordinary and usual course of business or those which are terminable by HISCo or HSA upon no greater than sixty (60) days prior notice and without penalty or other adverse consequences. Except for those matters which, individually or in the aggregate, do not and will not have a Material Adverse Effect on HISCo or HSA, no third party has made or raised any claim, dispute or controversy with respect to any of the Material Agreements nor has HISCo or HSA received notice or warning of alleged nonperformance, delay in delivery or other noncompliance by HISCo or HSA with respect to its obligations under any of the Material Agreements, nor are there any facts which exist indicating that any of the Material Agreements may be totally or partially terminated or suspended by the other parties thereto. 3.13 Proprietary Rights. HISCo or HSA owns or possesses adequate licenses or other rights to use all computer software, software programs, patents, patent applications, trademarks, trademark applications, trade secrets, service marks, trade names, copyrights, inventions, drawings, designs, customer lists, proprietary know-how or information, or other rights with respect thereto (collectively referred to as "Proprietary Rights"), used in the business of HISCo or HSA, and the same are sufficient to conduct HISCo's or HSA's business as it has been and is now being conducted or as it may foreseeably be conducted in the future. All of such licenses are in full force and effect and constitute legal, valid and binding obligations of the respective parties thereto; there have not been and there currently are not any material defaults thereunder by any party; and no event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a material default thereunder. The validity, continuation and effectiveness of all of such licenses under the current material terms thereof will in no way be affected by the transactions contemplated in this Agreement or, if any would be affected, HISCo, HSA and HMS shall use all necessary and reasonable means at their disposal to cause an appropriate consent to such transaction to be delivered to HMS prior to the Closing Date at no cost or other adverse consequences to HMS. The operations of HISCo and HSA do not conflict with or infringe, and no one has asserted to HISCo or HSA that such operations conflict with or infringe, any Proprietary Rights owned, possessed or used by any third party. 3.14 No Conflict. The execution and delivery of this Agreement by HISCo and HSA, and the performance of each of their obligations hereunder, (i) are not in violation or breach of, and 14 20 will not conflict with or constitute a default under, any of the terms of the Certificate of Incorporation or By-laws of HISCo or HSA or any Material Agreement; (ii) will not give rise to a right by any party to terminate its obligations under any Material Agreement; (iii) will not result in the creation or imposition of any lien, encumbrance, equity or restriction in favor of any third party upon any of the material assets or properties of HISCo or HSA; and (iv) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over HISCo or HSA or any of its assets or properties. Schedule 3.14 attached hereto contains a full and complete list of all necessary consents, waivers and approvals required in connection with the execution and delivery of this Agreement by HISCo and HSA and the performance of HISCo's and HSA's obligations hereunder. 3.15 No Default. Each of HISCo and HSA has in all material respects performed, or is now performing, the obligations of, and it is not in default (nor would by the lapse of time and/or the giving of notice be in default) in respect of, any Material Agreements. Each of the Material Agreements is a legal, binding and enforceable obligation by or against HISCo or HSA, assuming in the case of any such agreement, that it is a legal, binding and enforceable obligation of the other party(ies) thereto, enforceable in accordance with its terms, except as such terms may be (i) limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including fraudulent transfer laws), and (ii) subject to general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.16 Information Supplied. None of the information provided or to be provided by HISCo and HSA to HMS in writing in connection with the transactions contemplated by this Agreement contains or will contain, at the time such information was or is provided, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. To the extent facts or circumstances occur subsequent to the provision by HISCo or HSA of any written information to HMS which causes such information to become materially misleading, HISCo and HSA will update such information in order to make the statements made, in light of the circumstances under which they were made, not misleading. HISCo's and HSA's obligation to update hereunder shall commence as of the 15 21 date of this Agreement and shall continue thereafter until the Closing Date. 3.17 Labor Relations; Employees. No past or current HISCo or HSA employee has made a claim before any government agency or in any court against HISCo or HSA or threatened to make such a claim. Each of HISCo and HSA will pay in full to the extent possible or, if not, accrue by adequate reserves, all wages, salaries, bonuses, sick pay, vacation pay and other direct and indirect compensation earned by all employees of their respective employees through the Closing Date (whether or not payable by such date). Upon termination of the employment of any HISCo or HSA employee by HMS, HMS will not incur any liability for any severance or termination pay or other similar payment except as expressly provided in employment agreements listed on Schedule 3.12. Each of HISCo and HSA is in compliance with all federal, state, local, and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours. There is no unfair labor practice complaint against HISCo or HSA pending before the National Labor Relations Board or strike, dispute, slowdown or stoppage pending or threatened against or involving HISCo or HSA, and none has occurred since October 31, 1996. No representation question exists respecting the employees of HISCo or HSA and no collective bargaining agreement is currently being negotiated by HISCo or HSA. 3.18 Customers and Suppliers. Schedule 3.18 is a true and complete list of each of HSA's 10 largest customers and suppliers (measured by dollar volume in each case) during fiscal year 1996 and the first quarter of fiscal year 1997 showing, with respect to each, the name and address, dollar volume involved and nature of the relationship (including the principal categories of products or services bought and sold). ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF HMS AND SUB HMS represents and warrants to HISCo and HSA as of the date hereof and as of the Closing Date as follows: 4.1 Organization. Each of HMS and Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the full power and authority (corporate or otherwise) to carry on its business in the places and as it is now being conducted and to own and lease the properties which it now owns and leases. 16 22 4.2 Capital Structure of Sub. The authorized capital stock of Sub consists of 200 shares of Common Stock, $.01 par value ("Sub Common"). Upon the execution of this Agreement, 200 shares of Sub Common were validly issued and outstanding and were and, as of the Effective Time of the Merger will be, held by HMS of record and beneficially. 4.3 Authority. HMS and Sub have all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by the Board of Directors of HMS and Sub. This Agreement has been duly executed and delivered by HMS and Sub and constitutes valid and binding obligations of HMS and Sub, enforceable against them in accordance with its terms, except as such terms may be (i) limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally (including fraudulent transfer laws), and (ii) subject to general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law). Subject to satisfaction of the conditions set forth in Sections 7.1 and 7.2, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under (i) any provision of the Certificate of Incorporation or Bylaws of HMS, (ii) any provision of the Certificate of Incorporation or By-laws of Sub, or (iii) any material agreement, permit, license, judgment, order, statute, rule or regulation applicable to HMS, Sub or any Subsidiary of HMS or their respective properties or assets, other than any such conflicts, violations, defaults, terminations, cancellations or accelerations which individually or in the aggregate would not have a Material Adverse Effect on HMS, Sub and HMS's Subsidiaries. 4.4 Governmental Consents. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to HMS or Sub in connection with the execution and delivery of this Agreement by HMS and Sub or the consummation by HMS and Sub of the transactions contemplated hereby, except for (i) the filing of a Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which HMS or Sub is qualified to do business, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable state 17 23 securities laws and the laws of any foreign country, (iii) the filing of such reports under Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in connection with this Agreement and the transactions contemplated hereby, and (iv) such other consents, authorizations, filings, approvals and registrations which if not obtained or made would not have a Material Adverse Effect on HMS, Sub and Subsidiaries. 4.5 No Conflict. The execution and delivery of this Agreement and the Merger Agreement by HMS, and the performance of its obligations hereunder or thereunder, (i) are not in violation or breach of, and will not conflict with or constitute a default under, any of the terms of the Certificate of Incorporation or Bylaws of HMS or any of its Subsidiaries, or any material contract, agreement or commitment binding upon HMS or any of its Subsidiaries or any of their assets or properties; (ii) will not give rise to a right by any party to terminate its obligations under any HMS material agreement; (iii) will not result in the creation or imposition of any lien, encumbrance, equity or restriction in favor of any third party upon any of the material assets or properties of HMS or any of its Subsidiaries; and (iv) will not conflict with or violate any applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court having jurisdiction over HMS or any of its Subsidiaries or any of their assets or properties. 4.6 No Prior Activities. Sub has not incurred any liabilities or obligations, except those incurred in connection with its incorporation or with the negotiation and consummation of this Agreement and the transactions contemplated hereby. Sub has not engaged in any business or activities of any type or kind whatsoever, or entered into any agreements or arrangements with any person or entity, and is not subject to or bound by any obligation or undertaking which are not contemplated by this Agreement or incurred in connection with its incorporation. ARTICLE 5. COVENANTS RELATING TO CONDUCT OF BUSINESS During the period from the date of this Agreement and continuing until the Effective Time of the Merger, each of HISCo and HSA agrees (except as expressly contemplated by this Agreement or to the extent that HMS shall otherwise consent in writing) that: 5.1 Ordinary Course. It will use all reasonable efforts, consistent with its past practice and policy to: (i) carry on its business in the usual, regular and ordinary course in substantially 18 24 the same manner as heretofore conducted and, to the extent consistent with such business; (ii) to preserve intact its present business organization; (iii) keep available the services of its present officers and key employees and preserve its relationship with customers, suppliers and others having business dealings with it; and (iv) maintain continuously insurance coverage substantially equivalent to the insurance coverage in existence on the date of this Agreement. In addition, neither HISCo nor HSA will engage in any transaction not in the ordinary course consistent with its past practices, nor will HISCo or HSA enter into any new Material Agreement or amend any existing Material Agreement (other than minor modifications) without the prior written consent of HMS. 5.2 Dividends; Changes in Stock. Neither HISCo nor HSA shall: (i) declare, pay or promise to pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of HISCo or HSA or (iii) repurchase or otherwise acquire any shares of its capital stock, except for the repurchase of HISCo Founders Shares as provided in Section 6.09 and the cancellation of the HISCo Options as provided in Section 6.10. 5.3 Issuance of Securities. Neither HISCo nor HSA shall issue, deliver or sell or authorize, promise or propose the issuance, delivery or sale of, or purchase or promise or propose the purchase of, any shares of its capital stock or any class of securities exercisable or convertible into or exchangeable for, or rights, warrants or options to acquire, any such shares or other convertible securities. 5.4 Governing Documents. Neither HISCo nor HSA shall amend its Certificate of Incorporation or By-laws, except as contemplated in this Agreement. 5.5 No Acquisitions. Neither HISCo nor HSA shall acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business of any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets which are material, individually or in the aggregate, to either HISCo or HSA taken as a whole, except with the prior written consent of HMS. 5.6 No Dispositions. Neither HISCo nor HSA shall sell, lease or otherwise dispose of any of its assets, which are material, 19 25 individually or in the aggregate, to either HISCo or HSA, except in the ordinary course of business consistent with prior practice. 5.7 Indebtedness. Neither HISCo nor HSA shall incur any indebtedness for borrowed money, or guarantee any such indebtedness or issue or sell or promise to issue or sell, any debt securities of HISCo or HSA or guarantee any debt securities of others. 5.8 Benefit Plans, Etc. Neither HISCo nor HSA shall adopt or amend in any material respect any agreement with employees, other than as provided in this Agreement. 5.9 Accounting Practices. Neither HISCo nor HSA shall alter the manner of keeping its books, accounts or records, or change in any manner the accounting practices therein reflected. 5.10 Other Agreements. Neither HISCo nor HSA shall agree, in writing or otherwise, to do any of the foregoing. ARTICLE 6. ADDITIONAL AGREEMENTS 6.1 Access to Information. Each of HISCo and HSA shall afford to HMS and to HMS's accountants, counsel and other representatives, reasonable access during normal business hours during the period prior to the Effective Time of the Merger to all of HISCo's and HSA's properties, books, contracts, commitments and records and, during such period, HISCo and HSA shall use all reasonable efforts to furnish promptly to HMS all other information concerning the business, properties and personnel of HISCo and HSA as HMS may reasonably request. HMS will not use such information for purposes other than this Agreement and will otherwise hold such information in confidence (and will cause its consultants and advisors also to hold such information in confidence) until such time as such information otherwise becomes publicly available, and in the event of termination of this Agreement for any reason, HMS shall promptly return, or cause to be returned, to HISCo and HSA all nonpublic documents obtained from HISCo and HSA which it would not otherwise have been entitled to obtain, and any copies made of such documents, extracts and copies thereof, as well as schedules, exhibits or other documents contained in or derived from such information. Notwithstanding the foregoing, HMS shall be permitted to disclose such information in its filings with the Securities and Exchange Commission as and to the extent required under applicable federal securities laws. 20 26 6.2 Legal Conditions to the Merger. Each party will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on such party with respect to the Merger and will promptly cooperate with and furnish information to the other party in connection with any such requirements imposed upon such other party in connection with the Merger. Each party will take all reasonable actions to obtain, and to cooperate with the other party with respect to, any consent, authorization, order or approval of, or any exemption by, any Governmental Entity, or other third party, required to be obtained or made by such party or its Subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement. 6.3 HISCo Stockholders' Approval. HISCo agrees to submit this Agreement and any related matters to its stockholders for approval, as provided by law and its Certificate of Incorporation and By-laws, immediately following the execution of this Agreement. The Board of Directors of HISCo will, subject to its fiduciary duties, unanimously recommend to the HISCo stockholders that such stockholders approve the transactions contemplated by this Agreement. In addition, HISCo shall approve this Agreement and the transactions contemplated hereby in its capacity as the sole stockholder of HSA. HMS agrees to vote its shares in HISCo in favor of the transactions contemplated by this Agreement. 6.4 Dissenting Shares. As promptly as practicable after the date of the HISCo Stockholders' Meeting, or the approval of this Agreement and the Merger by means of written consents in accordance with Section 228(a) of the GCL, HISCo shall furnish HMS with the name, address and number of Dissenting Shares owned by each Dissenting Stockholder. 6.5 Employee Benefits. HMS agrees that, after the Closing Date, HSA employees will be afforded the opportunity to continue to participate in benefits programs that are currently available to them. In addition, they will be afforded the opportunity to participate in equity acquisition programs that are currently available to all HMS employees. For purposes of participating in all such programs, HSA employees will be given length of service credit, to the extent applicable, for the period of their employment by HSA and its predecessors in interest. 6.6 Communications. Between the date hereof and the Effective Time of the Merger, neither HISCo, HSA nor HMS will furnish any communication to its stockholders or to the public generally if the subject matter thereof relates to the other party or to the transactions contemplated by this Agreement without the prior approval of the other parties as to the content hereof, which 21 27 approval shall not be unreasonably withheld; provided, however, that HMS shall be entitled to make any disclosure to the public as it shall reasonably believe to be necessary to comply with the requirements of federal or state securities laws or the Nasdaq National Market System (provided that, in such event, HMS shall make reasonable efforts to advise HISCo and HSA in advance of such disclosure). 6.7 Notification of Certain Matters. HISCo and HSA shall give prompt notice to HMS and HMS shall give prompt notice to HISCo and HSA, of (i) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which would, in the reasonable judgment of their respective management, be likely to cause either (a) any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date of this Agreement to the Effective Time of the Merger or (b) any condition set forth herein to be unsatisfied in any material respect at any time from the date of this Agreement to the Effective Time of the Merger, and (ii) any material failure of HISCo, HSA, HMS or Sub, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, provided that the delivery of any notice pursuant to this Section 6.9 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. 6.8 Sub Sole Stockholder's Approval. HMS agrees, in its capacity as the sole stockholder of Sub, to approve this Agreement and any related matters, as provided by law and Sub's Certificate of Incorporation and By-laws, immediately following the execution of this Agreement. 6.9 Repurchase of HISCo Founders Shares. Prior to the Effective Time of the Merger, HISCo shall repurchase the HISCo Founders Shares owned by HISCo Stockholders other than HMS or any Subsidiary of HMS for $0.01196 in cash per share. 6.10 Cancellation of HISCo Options. Prior to the Effective Time of the Merger, HISCo shall cancel all of the HISCo Options then issued and outstanding upon HSA's payment to the respective HSA employee optionholders and HMS's payment to the remainder of the optionholders an amount in cash in respect of each share issuable under such HISCo Options equal to the difference between (i) the Per Share Purchase Price and (11) the exercise price of such HISCo Options. Holders of HISCo Options cancelled as provided herein shall be afforded the right to exercise dissenters' rights pursuant to Section 262 of the GCL as if they had elected to exercise their respective HISCo Options immediately prior to the 22 28 cancellation thereof. Holders of HISCo Options that exercise dissenters' rights shall be entitled to retain the payments provided in this Section 6.10 in respect of cancelled HISCo Options regardless of whether the appraised value of such HISCo Options turns out to be less than such payments. ARTICLE 7. CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligations to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction, or to the waiver by such party, on or prior to the Closing Date, of each of the following conditions: (a) Stockholder Approval. This Agreement shall have been approved and adopted by the required affirmative vote of (i) the holders of the outstanding shares of HISCo Common Stock, (ii) HISCo in its capacity as the sole stockholder of HSA and (iii) HMS in its capacity as the sole stockholder of Sub. (b) Government Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained, other than filings with and approvals by any Governmental Entity relating to the Merger if failure to make such filings or obtain such approvals would not be materially adverse to HMS or its Subsidiaries taken as a whole, HISCo or HSA. (c) Third-Party Approvals. Any and all consents or approvals required from third parties that if not obtained would have a Material Adverse Effect on HISCo or HSA shall have been obtained. (d) Legal Action. No temporary restraining order, preliminary injunction or permanent injunction or other order preventing the consummation of the Merger shall have been issued by any federal or state court and remain in effect, and no litigation seeking the issuance of such an order or injunction, or seeking the imposition against HISCo, HSA or HMS of substantial damages if the Merger is consummated, shall be pending or threatened which, in the good faith judgment of HISCo's, HSA's or HMS's Board of Directors has a reasonable probability of resulting in such order, injunction or damages. In the event any such order or injunction shall have been issued, each party agrees to use its reasonable efforts to have any such injunction lifted. 23 29 (e) Statutes. No statute, rule or regulation shall have been enacted by the government of the United States or any state or agency thereof which would make the consummation of the Merger illegal. 7.2 Conditions to Obligations of HMS and Sub. The obligations of HMS and Sub to effect the Merger are subject to the satisfaction on or prior to the Closing Date of the following conditions, unless waived by HMS and Sub: (a) Representations and Warranties. The representations and warranties of HISCo and HSA set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, and HMS shall have received a certificate or certificates to such effect signed by the Acting President of HISCo and the Chief Executive Officer and Controller of HSA. (b) Performance of Obligations of HISCo and HSA. HISCo and HSA shall have performed in all material respects all obligations required to be performed by them under this Agreement prior to the Closing Date, and HMS shall have received a certificate signed by the Acting President of HISCo and the Chief Executive Officer of HSA to such effect. (c) No Adverse Change in the Business of HISCo and HSA. HMS shall have received a certificate signed by the Acting President of HISCo and the Chief Executive Officer and Controller of HSA that since the date of the 1996 Consolidated Financial Statements and the Interim Financial Statements, respectively, there has been no Material Adverse Change in the business of HISCo and HSA. (d) Corporate Action. HMS shall have received from HISCo and HSA certified copies of resolutions of HISCo's and HSA's stockholders and Board of Directors approving and adopting this Agreement and the transactions contemplated hereby, and HMS shall have received a certificate signed on behalf of HISCo and HSA by the corporate secretaries or other authorized officers of HISCo and HSA to such effect. (e) Repurchase of HISCo Founders Shares. Immediately prior to the Effective Time of the Merger, HISCo shall have repurchased the HISCo Founders Shares (except for HISCo Founders Shares owned by HMS or any Subsidiary of HMS) for a cash price of $0.01196 per share. 24 30 (f) Cancellation of HISCo Options. Immediately prior to the Effective Time of the Merger, HISCo shall have cancelled the HISCo Options. 7.3 Conditions to Obligations of HISCo and HSA. The obligations of HISCo and HSA to effect the Merger are subject to the satisfaction on or prior to the Closing Date of the following conditions unless waived by HISCo and HSA: (a) Representations and Warranties. The representations and warranties of HMS and Sub set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date, and HISCo and HSA shall have received a certificate signed by the Chief Executive and Chief Financial Officers of HMS to such effect. (b) Performance of Obligations of HMS and Sub. HMS and Sub shall have performed all obligations required to be performed by them under this Agreement prior to the Closing Date, and HISCo and HSA shall have received a certificate signed by the Chief Executive Officer of HMS to such effect. (c) Corporate Action. HISCo and HSA shall have received from HMS certified copies of resolutions of Sub's sole stockholder and of HMS's and Sub's Boards of Directors approving and adopting this Agreement and the transactions contemplated hereby, and HISCo and HSA shall have received a certificate signed on behalf of each of HMS and Sub by the corporate secretary or other authorized officer of each such company to such effect. ARTICLE 8. CLOSING 8.1 Closing Date. The Closing under this Agreement (the "Closing") shall be held not more than five (5) business days following satisfaction of all conditions precedent to the Merger specified in this Agreement, unless duly waived by the party entitled to satisfaction thereof. The parties hereto anticipate that the Closing will occur on or before March 18, 1997. In any event, if the Closing has not occurred on or before April 17, 1997, this Agreement may be terminated as provided in Article 11. Such date on which the Closing is to be held is herein referred to as the "Closing Date." The Closing shall be held at the offices of Coleman & Rhine LLP, 1120 Avenue of the Americas, 19th Floor, New York, New York 10036, at 10:00 a.m. on such date, or at such other time and place as the parties may mutually agree. 25 31 8.2 Filing Date. Subject to the provisions of this Agreement, on the Closing Date, a fully-executed and acknowledged copy of this Agreement, if required, along with required related certificates of HISCo, HSA and Sub meeting the requirements of the GCL, shall be filed with the Secretary of State of the State of Delaware, all in accordance with the provisions of this Agreement. ARTICLE 9. TERMINATION OF REPRESENTATIONS, WARRANTIES AND COVENANTS The representations, warranties and covenants contained in this Agreement shall terminate simultaneously with the Effective Time of the Merger. ARTICLE 10. PAYMENT OF EXPENSES HMS, Sub HISCo and HSA shall each pay their own out-of-pocket expenses incurred incident to the preparation and carrying out of the transactions herein contemplated, whether or not such transactions are consummated; provided, however, that if the Merger is consummated, HISCo's and HSA's out-of pocket expenses (including reasonable attorneys fees) will be paid one-half by HMS and one-half by Welsh, Carson, Anderson & Stowe VI, L.P. ARTICLE 11. TERMINATION, AMENDMENT AND WAIVER 11.1 Termination. This Agreement may be terminated at any time prior to the Effective Time of the Merger, whether before or after approval of matters presented in connection with the Merger by the stockholders of HISCo: (a) by mutual written consent of HISCo and HMS; (b) by HMS or HISCo, as the non-defaulting party, if there has been a material breach of any material representation, warranty, covenant or agreement contained in this Agreement on the part of the other party set forth in this Agreement and, if such breach is curable, such breach has not been cured within a ten (10) day period after written notice of such breach; (c) by either HMS or HISCo if the Merger shall not have been consummated on or before April 17, 1997; provided, however, that if the Merger shall not be consummated on or before April 17, 1997, 26 32 because of a party's failure to satisfy any of the conditions set forth in Sections 7.2 or 7.3, neither HMS nor HISCo may rely upon its own actions or lack thereof to terminate the Agreement. (d) by either HMS or HISCo if (i) there shall be a final nonappealable order of a federal or state court in effect preventing consummation of the Merger or (ii) there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity which would make consummation of the Merger illegal; and (e) by either HMS or HISCo if there shall be any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any Governmental Entity, which would (a) prohibit HMS's, HISCo's or HSA's ownership or operation of all or a material portion of the business or assets of HISCo, HSA or HMS and its Subsidiaries taken as a whole, or compel HMS, HISCo or HSA to dispose of or hold separate all or a material portion of the business or assets of HISCo and its Subsidiaries taken as a whole or HMS and its Subsidiaries taken as a whole, as a result of the Merger or (B) render HMS, HISCo or HSA unable to consummate the Merger, except for any waiting period provisions; Where action is taken to terminate this Agreement pursuant to this Section 11.01, it shall be sufficient for such action to be authorized by the Board of Directors of the party taking such action. 11.2 Effect of Termination. In the event of termination of this Agreement by either HISCo or HMS as provided in Section 11.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of HMS, HISCo or HSA or their respective officers or directors except to the extent that such termination results from the breach by a party hereto of any of its covenants or agreements set forth in this Agreement. 11.3 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Board of Directors, at any time before or after approval of matters presented in connection with the Merger by the stockholders of HISCo, HSA and Sub but, after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 27 33 11.4 Extension; Waiver. At any time prior to the Effective Time of the Merger, any party hereto, by such corporate action as shall be appropriate, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party. ARTICLE 12. GENERAL 12.1 Notices. Any notice, request, instruction or other document to be given hereunder by any party to the other shall be in writing and delivered personally or sent by certified mail, postage prepaid, as follows: If to HMS or Sub: Health Management Systems, Inc. 401 Park Avenue South New York, New York 10016 Attention: President with a copy to Coleman & Rhine LLP 1120 Avenue of the Americas New York, New York 10036 Attention: Bruce S. Coleman, Esq. If to HISCo or HSA: Health Information Systems Corporation 401 Park Avenue South New York, New York 10016 Attention: Acting President with a copy to Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Attention: Robert A. Schwed, Esq. 28 34 for to such other persons as may be designated in writing by the parties, by a notice given as aforesaid. 12.2 Headings. The headings of the several sections of this Agreement are inserted for convenience of reference only and are not intended to affect the meaning or interpretation of this Agreement. 12.3 Counterparts. This Agreement may be executed in counter parts, and when so executed each counterpart shall be deemed to be an original, and said counterparts together shall constitute one and the same instrument. 12.4 Binding Nature. This Agreement shall be binding upon and inure to the benefit of the parties hereto. Neither HMS, Sub, HISCo nor HSA may assign or transfer any rights under this Agreement. 12.5 Other Agreements. This Agreement, together with all of the Exhibits and Schedules hereto, constitute the entire agreement and understanding of the parties with respect to the subject matter hereof. All other written agreements heretofore made between the parties hereto in contemplation of this Agreement are superseded by this Agreement and are hereby terminated in their entirety. 12.6 Good Faith. Each of the parties hereto agrees that it shall act in good faith in an attempt to cause all the conditions precedent to their respective obligations to be satisfied. 12.7 Applicable Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of New York, without regard to principles of conflicts of laws. 29 35 IN WITNESS WHEREOF, HMS, Sub, HISCo and HSA have caused this Agreement to be duly signed all as of the date first written HEALTH MANAGEMENT SYSTEMS, INC. By:_____________________________________ HISCO ACQUISITION CORP. By:_____________________________________ HEALTH INFORMATION SYSTEMS CORPORATION By:_____________________________________ HSA MANAGED CARE SYSTEMS, INC. By:_____________________________________ 36 Agreed And Accepted With Respect To Article 10 Only: WELSH, CARSON, ANDERSON & STOWE By:_____________________________ EX-10.1 3 GUARANTY AGREEMENT 1 Exhibit 10.1 GUARANTY AGREEMENT ("Guaranty") dated as of April 16, 1997, between HEALTH MANAGEMENT SYSTEMS, INC. (the "Guarantor") and THE CHASE MANHATTAN BANK (the "Bank"). PRELIMINARY STATEMENT. The Bank has agreed to provide a One Million Six Hundred Thousand Dollar ($1,600,000) loan (the "Loan") to Robert V. Nagelhout (the "Borrower") pursuant to a Note dated the date hereof between the Bank and the Borrower and any and all documentation executed in connection therewith (as the same may be amended from time to time, the "Note"). It is a condition precedent to the obligation of the Bank to provide the Loan that the Guarantor shall have guaranteed the obligations of the Borrower under the Note to the extent and in the manner herein set forth. NOW, THEREFORE, in consideration of the premises and in order to induce the Bank to provide the Loan to the Borrower as provided in the Note, the Guarantor hereby agrees as follows: SECTION 1. Loan Guaranty. The Guarantor hereby irrevocably, absolutely and unconditionally guarantees to the Bank and its successors, endorsees, transferees and assigns the prompt and complete payment by the Borrower, as and when due and payable (whether on a scheduled payment date, on acceleration or otherwise), of all indebtedness, obligations and liabilities of the Borrower to the Bank now existing or hereafter incurred under or arising out of or in connection with the Loan, whether for principal, interest, fees, expenses or otherwise (all such indebtedness, obligations, and liabilities being herein called the "Loan Obligations"); and agrees to pay any and all expenses (including reasonable counsel fees and expenses) which may be paid or incurred by the Bank by reason of Borrower's default under the Note in collecting any or all of the Loan Obligations and/or enforcing any rights under the Note or under the Loan Obligations (the "Loan Guaranty"). SECTION 2. Guarantor's Obligations Unconditional. The Guarantor hereby guarantees that the Loan Obligations will be paid strictly in accordance with the terms of the Note, regardless of any law, now or hereafter in effect in any jurisdiction affecting any such terms or the rights of the Bank with respect thereto. The obligations and liabilities of the Guarantor under this Guaranty shall be absolute and unconditional irrespective of: (1) any lack of validity or enforceability of any of the Loan Obligations, the Note, or any agreement or instrument relating thereto; (2) any change in the time, manner or place of payment of, or in any other term in respect of, all or any of the Loan Obligations, or any other amendment or waiver of or consent to any departure from the Note; or (3) any other circumstances which might otherwise constitute a defense available to, or a discharge of, a guarantor in respect of the Loan Obligations. 2 This Guaranty is a continuing guaranty and shall remain in full force and effect until: (1) the payment in full of all the Loan Obligations, and (2) the payment of the other expenses to be paid by the Guarantor pursuant hereto. This Guaranty shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment, or any part thereof, of any of the Loan Obligations is rescinded or must otherwise be returned by the Bank upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or otherwise, all as though such payment had not been made. The obligations and liabilities of the Guarantor under this Guaranty shall not be conditioned or contingent upon the pursuit by the Bank or any other person at any time of any right or remedy against the Borrower or any other person which may be become liable in respect of all or any part of the Loan Obligations or against any collateral or security or guarantee therefor or right of setoff with respect thereto. The Guarantor hereby consents that, without the necessity of any reservation of rights against the Guarantor and without notice to or further assent by the Guarantor, any demand for payment of any of the Loan Obligations made by the Bank may be rescinded by the Bank and any of the Loan Obligations continued after such rescission. SECTION 3. Waivers. The Guarantor hereby waives: (a) promptness and diligence; (b) notice of or proof of reliance by the Bank upon this Guaranty or acceptance of this Guaranty; (c) notice of the incurrence of any Loan Obligations by the Borrower or the renewal, extension or accrual of any Loan Obligation; (d) notice of any actions taken by the Bank or the Borrower or any other party under the Note or any other agreement or instrument relating thereto; (e) all other notices, demands and protests, and all other formalities of every kind in connection with the enforcement of the Loan Obligations or of the obligations of the Guarantor hereunder, the omission of or delay in which, but for the provisions of this Section 3, might constitute grounds for relieving the Guarantor of its obligations hereunder; and (f) any requirement that the Bank protect, secure, perfect or insure any lien or security interest, or any property subject thereto or exhaust any right or take any action against the Borrower or any other person or any collateral. SECTION 4. Subrogation. The Guarantor will not exercise any rights which it may acquire by way of subrogation under this Guaranty, whether acquired by any payment made hereunder, by any setoff or application of funds of such Guarantor by the Bank or otherwise, until (a) the payment in full of the Loan Obligations, and (b) the payment of all other expenses to be paid by the Guarantor pursuant hereto. If any amount shall be paid to the Guarantor on account of such subrogation rights at any time when all of the Loan Obligations and all such other 2 3 expenses shall not have been paid in full, such amount shall be held in trust for the benefit of the Bank, shall be segregated from the other funds of the Guarantor and shall forthwith be paid over to the Bank to be credited and applied in whole or in part by the Bank against the Loan Obligations, whether matured or unmatured, and all such other expenses in accordance with the terms of this Guaranty. SECTION 5. Representations and Warranties. The Guarantor represents and warrants as follows as of the date of this Guaranty: (a) The Guarantor is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own its assets and to transact the business in which it is engaged or proposed to be engaged, and is duly qualified as a foreign corporation and in good standing under the laws of each other jurisdiction in which such qualification is required except where failure to qualify would not have a material adverse effect on Guarantor, its assets or properties. (b) The execution, delivery and performance by the Guarantor of the Guaranty has been duly authorized by all corporate action and does not and will not: (i) require any consent or approval of its stockholders; (ii) contravene its charter or by-laws; (iii) violate any provisions of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect applicable to it; (iv) result in a breach of, constitute a default under or otherwise contravene any indenture or loan or credit agreement or any other agreement, lease or instrument to which it is a party or by which it or its properties may be bound or affected; (v) result in, or require, the creations or imposition of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties now owned or hereafter acquired: or (vi) cause it to be in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or other regulatory body is required for the due execution, delivery and performance by the Guarantor of this Guaranty. (d) This Guaranty constitutes a legal valid and binding obligation of the Guarantor enforceable in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditor's rights generally. 3 4 (e) Other than as disclosed on Schedule A attached hereto, there is no action, suit or proceeding pending or to Guarantor's knowledge threatened against or otherwise affecting the Guarantor before any court or other governmental authority or any arbitrator which may, in any one case or in the aggregate, materially adversely affect the financial condition, operations, properties or business of the Guarantor or the ability of the Guarantor to perform its obligations under this Guaranty. SECTION 6. Right of Set-Off. If the Borrower defaults in the payments or performance of any of its Loan Obligations the Bank may, and is hereby authorized, at any time and from time to time, without notice to the Guarantor (any such notice being expressly waived by the Guarantor), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Guarantor against any and all obligations of the Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not the Bank shall have made any demand under this Guaranty and although such obligations may be contingent or unmatured. The Bank agrees promptly to notify the Guarantor after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section 6 are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Bank may have. SECTION 7. Indemnity and Expenses. (a) The Guarantor agrees to indemnify the Bank from and against any and all claims, losses and liabilities growing out of or resulting from this Guaranty to the extent of such claim, loss or liability (including, without limitation, enforcement of this Guaranty against the Guarantor), except claims, losses or liabilities resulting from the Bank's gross negligence or willful misconduct. (b) The Guarantor will upon demand and proof of the expenses being incurred, pay to the Bank the amount of any and all expenses, including the reasonable fees and disbursements of counsel to the Bank and of any experts and agents, which the Bank may incur in connection with the enforcement of this Guaranty. The Guarantor will upon demand and proof of the expenses being incurred, pay to the Bank the amount of any and all expenses, including the reasonable fees and disbursements of counsel to the Bank and of any experts and agents, which the Bank may incur in connection with (i) the exercise or enforcement of any of the rights of the Bank hereunder against the Guarantor, or (ii) the failure by the Guarantor to perform or observe any of the provisions hereof. SECTION 8. Amendments, Etc. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor herefrom 4 5 shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 9. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic and telecopied communication) and, if to the Guarantor, mailed, telegraphed, telecopied or delivered to the Guarantor, addressed to the Guarantor at 401 Park Avenue South, New York, New York 10016, Attention: Phillip Siegel; with a copy to the Guarantor's counsel at Coleman & Rhine, LLP, 1120 Avenue of the Americas, New York, New York 10036, Attention: Kenneth S. Goodwin; if to the Bank, mailed, telegraphed, telecopied or delivered to the Bank, addressed to the Bank at the Manhattan Middle Market Division, 1411 Broadway, Fifth Floor, New York, New York 10018, Attention: Maria Florez; with a copy to Rodger Tighe, Esq., Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019; or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed, telegraphed, telecopied or delivered, respectively, be effective when deposited in the mails, telecopied, delivered to the telegraph company or delivered, respectively, addressed as aforesaid. SECTION 10. Assignment. The Bank may upon notice to Guarantor assign or otherwise transfer the Loan Obligations held by it to any other person, and such other person shall thereupon become vested with all the benefits in respect thereof granted to the Bank herein or otherwise; provided, however, failure of the Bank to deliver notice of assignment in no way limits the obligations of the Guarantor under this Guaranty. SECTION 11. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction, shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 12. Headings. Section headings in this Guaranty are included in this Guaranty for the convenience of reference only and shall not constitute a part of the Guaranty for any other purpose. SECTION 13. Governing Law. This Guaranty shall be governed by and construed in accordance with the laws of the State of New York. THE GUARANTOR WAIVES ANY RIGHT IT MAY HAVE TO A JURY TRIAL. 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Guaranty to be duly executed and delivered by their officer thereunto duly authorized as of the date first above written. HEALTH MANAGEMENT SYSTEMS, INC. By___________________________________ Name: Title: THE CHASE MANHATTAN BANK By___________________________________ Name: Title: 6 EX-10.2 4 2ND AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 10.2 SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY SECOND AMENDMENT TO CREDIT AGREEMENT AND GUARANTY dated as of April 16, 1997 (the "Second Amendment") among HEALTH MANAGEMENT SYSTEMS, INC. (the "Borrower"), ACCELERATED CLAIMS PROCESSING, INC. ("ACP"), QUALITY MEDI- CAL ADJUDICATION, INCORPORATED ("QMA"), HEALTH CARE MICROSYSTEMS, INC. ("HCM"), CDR ASSOCIATES INC. ("CDR"), and THE CHASE MANHATTAN BANK (the "Bank"). PRELIMINARY STATEMENT. The Borrower, ACP, QMA, HCM, CDR and the Bank have entered into a Credit Agreement and Guaranty dated as of July 15, 1996, as amended by First Amendment to Credit Agreement and Guaranty dated as of September 9, 1996 (as it may be further amended, supplemented or modified, the "Credit Agreement"). Any term used herein and not otherwise defined herein shall have the meaning assigned to such term in the Credit Agreement. The Borrower, ACP, QMA, HCM, CDR and the Bank have agreed to amend the Credit Agreement as hereinafter set forth. SECTION 1. Amendment to Credit Agreement. The Credit Agreement is, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, hereby amended as follows: (a) The following definitions shall be added in its proper alphabetical order: "Nagelhout Guaranty" means the Guaranty dated April 16, 1997 pursuant to which the Borrower guarantees a One Million Six Hundred Thousand Dollar ($1,600,000) loan made by the Bank to Mr. Robert V. Nagelhout. "Second Amendment" means the Second Amendment to Credit Agreement and Guaranty dated as of April 16, 1997 among the Borrower, each of the Guarantors and the Bank. (b) The definition of "Revolving Credit Facility" is amended by inserting at the end thereof the following: "less the principal amount of indebtedness outstanding under the promissory note dated April 16, 1997 made by Robert V. Nagelhout in favor of the Bank" 2 (c) Section 8.07 Guaranties, Etc. is amended by inserting after the word "Date" in the last line thereof the following: "and (4) Nagelhout Guaranty" (d) Section 10.01 Events of Default is amended by inserting after paragraph (9) the following: "(10) The Borrower shall fail to pay any obligations owing to the Bank when due and payable under the Nagelhout Guaranty, the Borrower shall fail to observe any term, covenant or agreement contained in such Guaranty on its part to be performed or observed, or such Guaranty shall any time after its execution and delivery and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Borrower, or the Borrower shall deny it has any further liability or obligation under such Guaranty, or the Borrower shall fail to perform any of its obligations under such Guaranty; or any representation or warranty made by the Borrower in such Guaranty shall prove to have been incorrect in any material respect on the date made;" SECTION 2. Condition of Effectiveness. This Second Amendment shall become effective as of the date on which each of the following conditions have been fulfilled: (1) Second Amendment. The Borrower, ACP, QMA, HCM, CDR and the Bank shall each have executed and delivered this Second Amendment; (2) Nagelhout Guaranty. The Borrower shall have executed and delivered the Nagelhout Guaranty; (3) Evidence of All Corporate Action by Borrower. The Bank shall have received a certificate of the Secretary or Assistant Secretary of the Borrower (dated as of the date of this Second Amendment) attesting to all corporate action taken by the Borrower including resolutions of its Board of Directors, authorizing the execution, delivery, and performance of this Second Amendment, the Nagelhout Guaranty and each other document to be delivered pursuant to or in connection with this Second Amendment or the Nagelhout Guaranty. SECTION 3. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. 2 3 (b) Except as specifically amended above, the Credit Agreement and all other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Second Amendment shall not operate as a waiver of any right, power or remedy of the Bank under any of the Loan Documents, nor constitute a waiver of any provision of any of the Loan Documents, and, except as specifically provided herein, the Credit Agreement and each other Loan Document shall remain in full force and effect and are hereby ratified and confirmed. SECTION 4. Costs, Expenses and Taxes. The Borrower agrees to reimburse the Bank on demand for all out-of-pocket costs, expenses and charges (including, without limitation, all fees and charges of legal counsel for the Bank) incurred by the Bank in connection with the preparation, reproduction, execution and delivery of this Second Amendment and any other instruments and documents to be delivered hereunder. In addition, the Borrower shall pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution and delivery, filing or recording of this Second Amendment and the other instruments and documents to be delivered hereunder, and agrees to save the Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes or fees. SECTION 5. Governing Law. This Second Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 6. Headings. Section headings in this Second Amendment are included herein for convenience of reference only and shall not constitute a part of this Second Amendment for any other purpose. SECTION 7. Counterparts. This Second Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any party hereto may execute this Second Amendment by signing any such counterpart. 3 4 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the day and year first above written. HEALTH MANAGEMENT SYSTEMS, INC. By____________________________________ Name: Title: ACCELERATED CLAIMS PROCESSING, INC. By____________________________________ Name: Title: QUALITY MEDI-CAL ADJUDICATION, INCORPORATED By____________________________________ Name: Title: HEALTH CARE MICROSYSTEMS, INC. By____________________________________ Name: Title: CDR ASSOCIATES, INC. By____________________________________ Name: Title: THE CHASE MANHATTAN BANK By____________________________________ Name: Title: 4 EX-10.3 5 SECURITY AGREEMENT 1 Exhibit 10.3 SECURITY AGREEMENT THIS SECURITY AGREEMENT (the "Security Agreement") made as of the 15th day of April, 1997 by and between ROBERT V. NAGELHOUT (the "Debtor") and HEALTH MANAGEMENT SYSTEMS, INC. (the "Secured Party"). WITNESSETH: WHEREAS, The Chase Manhattan Bank (the "Bank") has agreed to provide a loan (the "Loan") to the Debtor in the amount of $1,600,000, which is to be evidenced by a promissory note from Debtor to Bank (the "Note") which the Debtor has agreed to pay with any costs or expenses which arise pursuant to the Note (collectively, the "Loan Obligations"); and WHEREAS, it is a condition precedent to the obligation of the Bank to provide the Loan that the Secured Party shall have guaranteed all of the Debtor's Loan Obligations to the Bank; and WHEREAS, the Secured Party has entered into a Guaranty Agreement of even date herewith (the "Guaranty") with the Bank pursuant to which the Secured Party has guaranteed the prompt and complete payment of all Loan Obligations to the Bank, as and when due and payable; NOW, THEREFORE, to induce the Secured Party to enter into the Guaranty, and in consideration thereof and for other good and valuable consideration, the receipt and sufficiency of which being hereby acknowledged, the parties hereto agree as follows: 1. Security Interest. The Debtor hereby grants, bargains, sells, assigns, transfers and pledges to the Secured Party, its successors and assigns, a first security interest (the "Security Interest") in and to 500,000 shares of the common stock, $.01 par value, of the Secured Party, together with any and all proceeds thereof (the "Collateral"). 2. Obligations. This Security Agreement and the Security Interest shall secure the Loan Obligations which the Secured Party has guaranteed pursuant to the Guaranty. 3. Financing Statements and Other Action. The Debtor will do all lawful acts which the Secured party deems necessary or desirable to protect the Security Interest or otherwise to carry out the provisions of this Security Agreement, including, but not limited to, the execution of Uniform Commercial Code (the "Code") financing, continuation, amendment and termination statements and similar instruments, the execution of such additional documents as may be necessary to effectuate the purposes of this Security 2 Agreement. The Debtor irrevocably appoints the Secured Party as its attorney-in-fact (such power of attorney being coupled with an interest) during the term of this Security Agreement to do all acts which it may be required to do under this Security Agreement. 4. Representations and Warranties. The Debtor hereby represents and warrants to the Secured Party as follows: (a) The debtor is the sole owner of the Collateral. The Security Interest created herein in the Collateral does not require the approval of any other party. (b) Except for the Security Interest created by this Security Agreement, the Collateral is free and clear of all security interests, liens and encumbrances. (c) The debtor has the full power and authority to enter into this Agreement and to pledge the Collateral. Entering into this Agreement does not violate any material provision of any contract, license or agreement to which the Debtor is a party. 5. Encumbrances. The Debtor warrants that it has good and marketable title to the Collateral purportedly owned by it and that there are no sums owed or claims, liens, security interests or other encumbrances against the Collateral. The Debtor will notify the Secured Party of any lien, security interest or other encumbrance adverse to the Secured Party, and will not create, incur, assume, or suffer to exist any lien, security interest or other encumbrances against the Collateral. 6. Default. In the case of the happening of any of the following events (hereinafter called "Events of Default"): (a) if the Debtor shall fail to pay any obligations owing under the Note when due and payable; (b) if the Debtor ceases to be actively involved in the daily operations of the Secured Party or any of its subsidiaries; (c) if the Credit Agreement and Guaranty dated as of July 15, 1996 among the Secured Party, the Guarantors name therein and the Bank ceases to be in full force and effect or the Commitment (as defined therein) has been cancelled thereunder or there has been an acceleration of payments due thereunder; 2 3 (d) if any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common stock of the Secured Party; or, during any period of 12 consecutive calendar months, individuals who were directors of the Secured Party on the first day of such period shall cease to constitute a majority of the board of directors of the Secured Party; (e) if the Debtor shall file a petition in bankruptcy or for an arrangement or for reorganization pursuant to the Federal Bankruptcy Act or any similar law, federal or state, or if, by decree of a court of competent jurisdiction, the Debtor shall be adjudicated a bankrupt, or be declared insolvent, or shall make an assignment for the benefit of creditors, or shall admit in writing its inability to pay its debts generally as they become due, or shall consent to the appointment of a receiver or receivers of all or any part of its property; (f) if any of the Debtor's creditors shall file a petition in bankruptcy against it or for its reorganization pursuant to the Federal Bankruptcy Act or any similar law, federal or state, and if such petition shall not be discharged or dismissed within sixty (60) days after the date on which such petition was filed; (g) if the Debtor shall fail to observe or perform any covenant, condition or agreement in the Note or in any other document that the Debtor shall have executed or delivered in connection with the Loan; (h) if any representation or warranty made by the Secured Party in the Guaranty shall prove to have been incorrect in any material respect on or as of the date made; (i) if the Secured Party shall fail to perform or observe any term, covenant, or agreement contained in the Guaranty on its part to be performed or observed; or (j) if the Guaranty shall at any time and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by the Secured Party, or the Secured Party shall deny it has any further liability or obligation under the Guaranty, or the Secured Party shall fail to perform any of its obligations under the Guaranty. 3 4 thereafter the Secured Party may declare all Loan Obligations secured hereby, any other Obligations of the Debtor to the Secured Party, immediately due and payable and shall have the remedies with respect to the Collateral of a secured party under the Code. The Secured Party will give the Debtor reasonable notice of the time and place of any public sale of the Collateral or of the time after which any private sale or any other intended disposition thereof is to be made. The requirements of reasonable notice shall be met if such notice is delivered in the manner described in Section 9 of this Agreement, to the address of the Debtor shown in such Section at least ten (10) days before the time of the sale or disposition. Expenses of retaking, holding, preparing for sale, selling or the like shall include the Secured Party's attorney's fees and legal expenses. 6. Waivers. To the extent permitted by law, the Secured Party may release, supersede, exchange or modify any Collateral which it may from time to time hold. 7. Termination. This Security Agreement and the Security Interest shall terminate when all Loan Obligations have been paid and discharged in full by the Debtor and the Secured Party, upon such termination, shall deliver to the Debtor appropriate Code termination statements with respect to the Collateral so released from the Security Interest, for filing with each filing office with which Code financing statements have been filed by the Secured Party with respect to the Collateral, and shall release the Collateral to the Debtor. 8. Modification. This Security Agreement may not be modified or amended without the prior written consent of each of the parties hereto. 9. Notices. Except as otherwise provided in this Security Agreement, all notices and other communications hereunder shall be deemed to have been sufficiently given when sent by courier or faxed, return receipt requested, or confirmation of receipt requested in the case of a fax, and the sender shall have received such return receipt or confirmation, such notices or communications to be addressed as follows: 4 5 If to the Secured Party: Health Management Systems, Inc. 401 Park Avenue South New York, New York 10016 Attention: Chief Financial Officer If to the Debtor: Robert V. Nagelhout 1521 Nelson Avenue Manhattan Beach, Ca. 90266 or at such other address or fax number, as the case may be, as the party to whom such notice or demand is directed may have designated in writing to the other party hereto by notice as provided in this Section 9, except that notices of change of address shall be effective when actually received by the addressee. Each of the parties hereto shall have the right to rely on as an original any notice given hereunder by fax as aforesaid. 10. Rights; Merger. No course of dealing between the Debtor and the Secured Party, nor any delay in exercising, on the part of the Secured Party, any right, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law or in equity, including, without limitation, the rights and remedies of a secured party under the Code. It is understood and agreed that all understandings and agreements heretofore had between the parties, if any, with respect to the subject matter hereof are merged into this Security Agreement and this Security Agreement represents the full and complete agreement of the parties with respect to the subject matter hereof. 11. Governing Law, Binding Effect, Etc. This Security Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and governed by the laws of the State of New York. This Security Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 12. Statute Of Limitations. To the full extent permitted by law, the Debtor waives the right to plead any statute of 5 6 limitations as a defense to any indebtedness or obligation secured hereunder. 13. Survival of Provisions. All representations, warranties and covenants of the Debtor contained herein shall survive the execution and delivery of this Security Agreement and shall terminate only upon the termination of this Security Agreement and the Security Interest created hereby in accordance with the provisions of Section 7. 14. Counterparts. This security Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. 15. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the day and year first above written. HEALTH MANAGEMENT SYSTEMS, INC. By:_____________________________ Phillip Siegel Vice President and Chief Financial Officer ________________________________ ROBERT V. NAGELHOUT 6 EX-10.4 6 PROMISSORY NOTE 1 Exhibit 10.4 NOTE Date of Note: April 16, 1997 Amount of Note: $1,600,000 Borrower: Robert V. Nagelhout Interest Rate: the prime commercial lending rate as announced from time to time by The Chase Manhattan Bank at its principal office in New York City (any change in said rate shall effect an adjustment of interest payable hereunder as of the day of such change) to be computed on an actual/360-day basis (i.e., interest for each day during which any of the Principal Amount is outstanding shall be computed at the Interest Rate divided by 360). 1. Borrower's Promise to Pay. In return for a loan (the "Loan") that I have received, I promise to pay, in one lump sum payment on the maturity date (defined below), U.S. $1,600,000 (this amount is called "principal"), plus interest, to the order of the Lender. The "Lender" is THE CHASE MANHATTAN BANK. I understand that the Lender may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the "Note Holder". 2. Interest. Interest will be charged on principal until the full amount of principal has been paid. I will pay interest at a yearly rate as described above. The interest rate required by this Section 2 is the rate I will pay both before and after any default described in Section 6(b) of this Note. 3. Payments. Time and Place of Payments. I will pay interest by making payments every month. I will make my monthly payments of interest only on the last day of each month beginning on April 30,1997. I will make these payments every month until I have paid all of the principal and interest and any other charges described below that I may owe under this Note. My monthly payments will be applied to interest before principal. I will pay all of the unpaid principal of the Loan along with 2 any accrued and unpaid interest related thereto on April 16, 1999 (the "maturity date"). 4. Borrowers Right to Prepay. I have the right to make payments of principal at any time before they are due. A payment of principal only is known as "prepayment". When I make a prepayment, I will tell the Note Holder in writing that I am doing so. I may make a full prepayment or partial prepayments without paying any prepayment charge. The Note Holder will use all of my prepayments to reduce the amount of principal that I owe under this Note. If I make a partial prepayment, there will be no changes in the due date of my monthly payment unless the Note Holder agrees in writing to those changes. Any amounts of the Loan prepaid may not be reborrowed. 5. Loan Charges. If a law, which applies to this loan and which sets maximum loan charges, is finally interpreted so that the interest or other loan charges collected or to be collected in connection with this loan exceed the permitted limits, then: (i) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and (ii) any sums already collected from me which exceeded permitted limits will be refunded to me. The Note Holder may choose to make this refund by reducing the principal I owe under this Note or by making a direct payment to me. If a refund reduces principal, the reduction will be treated as a partial prepayment. 6. Borrower's Failure to Pay as Required. (a) Late Charge for Overdue Payments. Any amount of principal or interest which is not paid when due, whether at stated maturity, by acceleration, or otherwise, shall bear interest from the date when due until said principal or interest amount is paid in full, payable on demand, at the prime commercial lending rate specified above. (b) Default. If I do not pay the full amount of each monthly payment on the date it is due, I will be in default. (c) Notice of Default. If I am in default, the Note Holder may send me a written notice telling me that if I do not pay the overdue amount, the Note Holder may require me to pay immediately the full amount of principal which has not been paid and all the interest that I owe on that amount. That date must be at least fifteen (15) days after the date on which the notice is delivered or mailed to me. 2 3 (d) No Waiver By Note Holder. Even if, at a time when I am in default, the Note Holder does not require me to pay immediately in full as described above, the Note Holder will still have the right to do so if I am in default at a later time. (e) Payment of Note Holder's Costs and Expenses. If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys' fees. 7. Giving of Notices. Unless applicable law requires a different method, any notice that must be given to me under this Note will be given by delivering it or by mailing it by first class mail to me at my address noted below or at a different address if I give the Note Holder a notice of my different address. Any notice that must be given to the Note Holder under this Note will be given by mailing it by first class mail to the Note Holder at: The Chase Manhattan Bank, 1411 Broadway, Fifth Floor, New York, New York 10018 Attention: Randy Berini, or at a different address if I am given a notice of that different address. 8. Waivers. I and any other person who has obligations under this Note waive the rights of presentment and notice of dishonor. "Presentment" means the right to require the Note Holder to demand payment of amounts due. "Notice of dishonor" means the right to require the Note Holder to give notice to other persons that amounts due have not been paid. 9. Uniform Secured Note. This Note is a uniform instrument with limited variations in some jurisdictions. In addition to the protections given to the Note Holder under this Note, the guaranty from Health Management Systems, Inc. ("HMS") to the Lender dated the date hereof (the "Guaranty"), protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note. 10. Events of Default. Notwithstanding anything to the contrary provided herein, the occurrence of any one or more of the following shall be an "Event of Default" hereunder and upon the occurrence of an Event of Default, any and all principal and interest due hereunder shall be immediately due and payable: 3 4 (a) if I shall fail to pay any obligations owing under this Note when due and payable; (b) if I cease to be actively involved in the daily operations of HMS or any of its subsidiaries; (c) if the Credit Agreement and Guaranty dated as of July 15, 1996 among HMS, the Guarantors named therein and Lender ceases to be in full force and effect or the Commitment (as defined therein) has been cancelled thereunder or there has been an acceleration of payments due thereunder; (d) if any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 20% or more of the outstanding shares of common stock of HMS; or, during any period of 12 consecutive calendar months, individuals who were directors of HMS on the first day of such period shall cease to constitute a majority of the board of directors of HMS; (e) if I shall file a petition in bankruptcy or for an arrangement or for reorganization pursuant to the Federal Bankruptcy Act or any similar law, federal or state, or if, by decree of a court of competent jurisdiction, I shall be adjudicated a bankrupt, or be declared insolvent, or shall make an assignment for the benefit of creditors, or shall admit in writing my inability to pay my debts generally as they become due, or shall consent to the appointment of a receiver or receivers of all or any part of my property; (f) if any of my creditors shall file a petition in bankruptcy against me or for my reorganization pursuant to the Federal Bankruptcy Act or any similar law, federal or state, and if such petition shall not be discharged or dismissed within sixty (60) days after the date on which such petition was filed; (g) if I shall fail to observe or perform any covenant, condition or agreement in this Note or in any other document that I shall have executed or delivered in connection with the Loan; (h) if any representation or warranty made by HMS in the Guaranty shall prove to have been incorrect in any material respect on or as of the date made; 4 5 (i) if HMS shall fail to perform or observe any term, covenant, or agreement contained in the Guaranty on its part to be performed or observed; or (j) if the Guaranty shall at any time and for any reason cease to be in full force and effect or shall be declared null and void, or the validity or enforceability thereof shall be contested by HMS, or HMS shall deny it has any further liability or obligation under the Guaranty, or HMS shall fail to perform any of its obligations under the Guaranty. IN WITNESS WHEREOF, I have executed and delivered this Note on the day and year written. ------------------------ ROBERT V. NAGELHOUT Address: _________________________________ _________________________________ _________________________________ Sworn to before me this 16th day of April, 1997 - ----------------------- Notary Public My commission expires: - ----------------------- 5 EX-11 7 COMPUTATIONS OF EARNINGS PER SHARE 1 HEALTH MANAGEMENT SYSTEMS, INC. AND SUBSIDIARIES EXHIBIT 11--COMPUTATIONS OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended Six months ended April 30, April 30, -------------------- ------------------- 1997 1996 1997 1996 ------- ------ ------ ------ Primary Earnings Per Share: Earnings data: Net income $ 281 3,102 2,084 6,712 ======= ====== ====== ====== Weighted average shares outstanding: Average shares of common stock outstanding 17,688 17,076 17,660 16,904 Net effect of dilutive stock options--based on the treasury stock method using average market price 144 1,401 374 1,425 ------- ------ ------ ------ Weighted average shares outstanding 17,832 18,477 18,034 18,329 ======= ====== ====== ====== Earnings per common share: Net income $ 0.02 0.17 0.12 0.37 ======= ====== ====== ======
EX-27 8 FINANCIAL DATA SCHEUDLE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets at April 30, 1997 (unaudited) and 1996 (unaudited) and the Consolidated Statement of Operations for the six months ended April 30, 1997 (unaudited) and 1996 (unaudited) and is qualified in its entirety by reference to such financial statements. 0000861179 HEALTH MANAGEMENT SYSTEMS, INC. 1,000 6-MOS 6-MOS OCT-31-1997 OCT-31-1996 NOV-01-1996 NOV-01-1995 APR-30-1997 APR-30-1996 18,462 6,789 17,588 19,790 41,670 45,468 (1,556) (581) 0 0 84,728 77,366 23,620 16,817 (15,912) (10,560) 109,949 99,330 26,418 23,268 0 0 0 0 0 0 177 172 81,344 70,396 109,949 99,330 42,380 51,326 42,380 51,326 41,264 40,158 0 0 0 0 (114) 356 0 0 1,756 11,345 (328) 4,633 1,756 11,345 0 0 0 0 0 0 2,084 6,712 0.12 0.37 0.12 0.37
-----END PRIVACY-ENHANCED MESSAGE-----