| Item 1.01 | Entry into a Material Definitive Agreement. |
On May 12, 2021, Computer Programs and Systems, Inc., a Delaware corporation (“CPSI”), entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with TruCode LLC, a Virginia limited liability company (“TruCode”), the members of TruCode set forth on the signature pages to the Purchase Agreement (each a “Seller” and, collectively, the “Sellers”), and Michael E. Mulligan, in his capacity as a representative of the Sellers (the “Sellers’ Representative”). The Purchase Agreement provides, among other things, that, upon the terms and subject to the conditions set forth therein, (i) CPSI will purchase from the Sellers all of the issued and outstanding membership interests of TruCode, and (ii) CPSI will pay the purchase price as provided in the Purchase Agreement and as described below (collectively, the “Transaction”).
The parties to the Purchase Agreement closed the Transaction on May 12, 2021. Effective upon the consummation of the Transaction (the “Closing”), TruCode became a wholly-owned subsidiary of CPSI.
The Purchase Agreement provides for a total purchase price (the “Purchase Price”) of $61 million (the “Base Cash Price”), subject to various adjustments, including for working capital and indebtedness, plus a potential earnout payment of up to $15 million (the “Earnout Payment”). Pursuant to the Purchase Agreement, various amounts were withheld from the Base Cash Price and placed in escrow with an escrow agent at Closing. Based upon the adjustments and the various escrow holdbacks, at Closing CPSI paid a net amount to the Sellers of approximately $58.0 million, and a total of approximately $4.5 million was deposited by CPSI in escrow accounts. As an inducement to CPSI entering into the Purchase Agreement, TruCode has entered into employment agreements with certain of its employees, which employment agreements became effective as of the Closing and which provide for a minimum term of one year.
The Earnout Payment represents potential additional consideration, up to a maximum amount of $15 million, to be paid by CPSI to the Sellers within thirty days of the final determination of TruCode’s EBITDA (as hereinafter defined) for the twelve-month period from and after the date of Closing (the “Measurement Period”). “EBITDA” is defined in Annex B to the Purchase Agreement as the total of the following for TruCode for the Measurement Period: (i) net income of TruCode (excluding (A) those items of revenue that do not occur in the ordinary course, (B) any payments received by CPSI in connection with the purchase price adjustment provision of the Purchase Agreement, (C) any indemnification payments received by CPSI under the Purchase Agreement, (D) any payments received by CPSI under the R&W Insurance Policy (as hereinafter defined), and (E) any revenue derived from any acquired business or consolidating business, all as determined under the Purchase Agreement), plus (ii) interest expense, income taxes, depreciation and amortization, minus (iii) any software development costs to the extent capitalized during such period, in each case calculated in accordance with generally accepted accounting principles, except as set forth in the Purchase Agreement and prior to any consolidation adjustments or intercompany eliminations, and further subject to certain pro forma revenue and expense adjustments set forth in Annex B to the Purchase Agreement. Under the terms of the Purchase Agreement, (i) no Earnout Payment will be made if TruCode’s EBITDA for the Measurement Period is less than or equal to $6,120,000, (ii) between $1 and $5,000,000 will be paid if EBITDA is greater than $6,120,000 and less than or equal to $7,000,000, (iii) between $5,000,000 and $10,000,000 will be paid if EBITDA is greater than $7,000,000 and less than or equal to $8,000,000, (iv) between $10,000,000 and $15,000,000 will be paid if EBITDA is greater than $8,000,000 and less than or equal to $9,000,000, and (v) the amount of the Earnout Payment will be straight-line interpolated between each of the foregoing thresholds.
The Purchase Agreement also contains customary representations, warranties and covenants. CPSI has obtained a buy-side representations and warranties insurance policy (“R&W Insurance Policy”) to cover certain potential claims from breaches of certain of the representations and warranties made by the Sellers in the Purchase Agreement. CPSI, on the one hand, and the Sellers, on the other hand, each paid 50% of the premium for the R&W Insurance Policy. The Purchase Agreement contains a five-year noncompetition covenant that applies to certain members of TruCode, and a five-year non-solicitation covenant that prohibits such members from soliciting CPSI employees, both subject to limited exceptions.
Subject to certain exceptions, the Sellers have agreed to indemnify CPSI on a joint and several basis for certain breaches of representations, warranties and covenants, certain pre-closing taxes and certain other enumerated items, up to a prescribed amount in an indemnity escrow fund. Certain of the Sellers are severally but not jointly liable for indemnifiable amounts in excess of the indemnity escrow fund. Subject to certain exceptions, CPSI has agreed to indemnify the Sellers for certain breaches of representations, warranties and covenants, with such indemnification limited to the amount of the total Purchase Price.
