Business Combinations

April 17, 2017,

the Company completed the acquisition of

100%

of the outstanding capital stock of Eliza Holding Corp. (“Eliza”), for a preliminary purchase price of

$171.6

million funded with available liquidity of approximately

75%

cash on hand and

25%

from the Company’s existing credit line. Eliza is a cloud based technology platform which provides comprehensive and personalized health engagement solutions designed to improve clinical outcomes and reduce costs. Eliza reaches and engages members through a proprietary, scalable technology solution that leverages a multi-channel communications platform incorporating consumer and proprietary data sources, analytics, and behavior-driven program design to help clients achieve desired outcomes.

The purchase price was subject to certain post-closing purchase price adjustments and the initial purchase price allocation as of the date of acquisition was based on a preliminary valuation. Estimates and assumptions for which the Company is still obtaining or evaluating information are subject to change up to

one

year from the acquisition date as that additional information becomes available and adjustments

may

require a change in the amounts allocated to goodwill during the periods in which the adjustments are determined. The intangible assets are valued using various methods which requires several judgments, including growth rates, discount rates, customer attrition rates, and expected levels of revenues, earnings, cash flows and tax rates. The intangible assets are amortized over their estimated useful lives on a straight-line basis and are

not

expected to be deductible for taxable purposes. As such, the Company recorded a net deferred tax liability which is comprised of deferred tax liabilities recognized in connection with the acquired intangible assets partially offset by deferred tax assets associated with acquired net operating loss carryforwards and credits. The goodwill recognized from the acquisition was a result of synergies to be realized from future revenue growth, is

not

deductible for tax purposes, has an indefinite useful life and will be included in the Company’s annual impairment testing or between annual tests if an indicator of impairment exists.

During the

third

quarter of fiscal

2017,

the Company made adjustments to the preliminary purchase price allocation which resulted in an increase of

$8.9

million to the fair value of acquired intangible assets, an increase of

$3.4

million to the deferred tax liability associated with the acquired intangible assets and a decrease of

$5.5

million to goodwill. The Company also changed the estimated useful life of the acquired customer relationships intangible asset from

years to

years. The purchase price allocation is still preliminary and subject to change throughout the remainder of the measurement period based on the finalization of the detailed valuations. The updated preliminary allocation of the purchase price to the fair value of the assets acquired and the liabilities assumed as of

April

17,

2017,

the effective date of the acquisition, is as follows

(in thousands)

Cash and cash equivalents	$	435
Accounts receivable		10,748
Prepaid expenses		1,427
Property and equipment		1,146
Intangible assets		76,240
Goodwill		105,677
Other assets		63
Accounts payable		(2,620	)
Deferred tax liability		(19,450	)
Other liabilities		(2,057	)
Total purchase price	$	171,609

The purchase price allocated to the intangibles acquired was as follows

(in thousands)

			Useful Life (years)
Customer relationships	$	56,200		15
Intellectual property		19,600		6
Trade name		310		1.5
Restrictive covenants		130		1
Fair value of intangibles acquired	$	76,240

Acquisition costs recorded to selling, general and administrative expenses were as follows

(in thousands)

Other operating expenses - consulting fees	$	3,515
Other operating expenses - legal fees		832
Other operating expenses - transaction costs		185
Acquisition-related costs	$	4,532

Goodwill was determined based on the difference between the purchase price and the fair values of the tangible and intangible assets acquired.

The financial results of Eliza have been included in the Company’s consolidated financial statements since the date of acquisition. Eliza contributed approximately

$17.5

million in revenue to HMS results of operations from the date of acquisition through

September 30, 2017.