<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HEALTHDYNE INFORMATION ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
GEORGIA 7373 58-2112366
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1850 PARKWAY PLACE, SUITE 1100
MARIETTA, GEORGIA 30067
(770) 423-8450
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
H. DARRELL YOUNG
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEALTHDYNE INFORMATION ENTERPRISES, INC.
1850 PARKWAY PLACE, SUITE 1100
MARIETTA, GEORGIA 30067
(770) 423-8450
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH A COPY TO:
<TABLE>
<S> <C> <C>
JOSEPH G. BLESER DAVID SYLVESTER, ESQ. PATRICIA A. WILSON, ESQ.
CHIEF FINANCIAL OFFICER HALE AND DORR TROUTMAN SANDERS LLP
HEALTHDYNE INFORMATION THE WILLARD BUILDING 600 PEACHTREE STREET, N.E.
ENTERPRISES, INC. 1455 PENNSYLVANIA AVENUE, N.W. SUITE 5200
1850 PARKWAY PLACE, SUITE 1100 SUITE 1000 NATIONSBANK PLAZA
MARIETTA, GEORGIA 30067 WASHINGTON, DC 20004-1008 ATLANTA, GEORGIA 30308-2216
(770) 423-8450 (202) 942-8400 (404) 885-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same Offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share
(together with associated preferred stock
purchase rights)......................... 3,162,500 $4.8125 $15,219,531.25 $5,249
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</TABLE>
(1) Includes 412,500 shares that may be purchased pursuant to the underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of the average of the high and low sales prices of the registrant's
Common Stock on the Nasdaq SmallCap Market on September 20, 1996.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 1996
PROSPECTUS
2,750,000 SHARES
HEALTHDYNE LOGO
COMMON STOCK
---------------------
All of the shares of Common Stock, together with associated preferred stock
purchase rights, offered hereby are being offered by Healthdyne Information
Enterprises, Inc. ("HIE" or the "Company").
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "HDIE." The Company has applied for inclusion of its
Common Stock on the Nasdaq National Market, upon completion of this Offering,
under the same symbol. On September 20, 1996, the last sale price of the Common
Stock as reported on the Nasdaq SmallCap Market was $5.00 per share. See "Price
Range of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
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Total(3).................................. $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $500,000.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 412,500 additional shares of Common Stock on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
certain other conditions, including the right of the Underwriters to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares will be made on or about ,
1996.
MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is , 1996.
<PAGE> 3
THE HIE COMPREHENSIVE COMPUTER-BASED PATIENT RECORD
PROVIDES DECISION SUPPORT TOOLS TO REENGINEER THE
HEALTHCARE DELIVERY PROCESS
Omitted Graphic and Image Material
The following is a narrative description of graphic and image material
contained in the printed version of the prospectus which has been omitted from
the version of the prospectus filed electronically.
A chart consisting of (i) on the left side of the page, a box
containing the heading "Integration Tools," under which are listed the
following: "Cloverleaf Integration Engine," "Cloverleaf Gateway," "Compass
Screen Scraper" and "Express Terminal Emulator;" (ii) on the right side of the
page, a box containing the heading "Clinical Workstation Tools," under which
are listed the following: "Clinical Assessment and Support," "Desktop
Integration," "Clinical Imaging," "Document Imaging," "Workflow" and "Internet
Connection;" (iii) in the center of the page below the aforementioned boxes, a
box containing the heading "Enterprise Management Tools," under which are
listed the following: "Clinical," "Financial," "Operational" and "Patient
Satisfaction;" and (iv) below the box described in (iii) above, a box
containing the heading "Service Solutions," under which are listed the
following: "People," "Tools" and "Products." Between the boxes described in
(i) and (ii) above is a picture of a bridge under which appears the caption
"Community Person Index ("CPI")." To the left of the boxes described in (iii)
and (iv) above appears a picture of a computer terminal under which appears the
caption "Legacy Systems." To the right of the boxes described in (iii) and
(iv) above appears a picture of a computer workstation under which appears the
caption "New Systems." At the bottom of the chart are the following captions
(l. to r.): "PROTECT EXISTING INFORMATION SYSTEM INVESTMENTS," "OFFER
BEST-OF-BREED AND OPEN ARCHITECTURE SOLUTIONS" and "BUILD THE NEXT GENERATION
OF INFORMATION SYSTEMS IN PARTNERSHIP WITH OUR CUSTOMERS."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S SECURITIES ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and Consolidated Financial Statements and related Notes thereto
appearing elsewhere in this Prospectus. Prospective investors should consider
carefully the information discussed under "Risk Factors." Unless otherwise
indicated, all information in this Prospectus assumes no exercise of the
Underwriters' over-allotment option. See "Underwriting." References to "Common
Stock" include associated preferred stock purchase rights (the "Rights")
issuable pursuant to that certain Rights Agreement dated October 23, 1995
providing for the delivery of a Right along with each share of Common Stock
issued by the Company.
The Company is a leading provider of enterprise-wide clinical information
management solutions to emerging integrated healthcare delivery networks
("IDNs"). The Company employs advanced technology to develop the software tools
and applications that enable the creation of the computer-based patient record
("CPR") and enterprise-wide decision support systems while leveraging
investments in existing information systems. The Company's tools, products and
services provide enterprise-wide integration of information systems and indexing
of patient records, clinical information integration and decision support at the
point-of-care, and management decision support systems based upon access to
comprehensive enterprise-wide clinical, financial and other information. The
Company's solutions enable its customers to reduce the cost of delivering
healthcare through increased productivity and to improve the quality of care
through analysis of outcomes and continuous improvement of patient care
processes.
Over the past two decades, healthcare costs have risen dramatically
relative to the overall rate of inflation. With increasing pressure to reduce
costs, managed care organizations and other payers are shifting the economic
risk of the delivery of care to providers through alternative reimbursement
models, including capitation and fixed fees. In response to the changing
reimbursement environment, healthcare organizations such as hospitals,
multi-specialty physician groups, laboratories, pharmacies, home health services
and nursing homes are integrating horizontally and vertically to create IDNs
designed to serve all of the healthcare needs of local or regional populations
while achieving economies of scale. In order for IDNs to lower healthcare
delivery costs while improving the quality of patient care, they need access to
detailed clinical and management information that enables providers within the
IDN to (i) manage the patient care process across multiple delivery sites; (ii)
analyze the appropriateness of diagnoses, treatments and resource utilization;
(iii) compare provider performance and clinical outcomes; (iv) monitor
performance under managed care contracts; (v) monitor practice patterns of
providers; and (vi) support communications among members of the care team. An
integral element of this process is the CPR, an electronic patient record that
resides in a system specifically designed to support users by providing access
to complete and accurate data, alerts, reminders, clinical decision support
systems, links to medical knowledge and other aids. With the development of a
CPR and related management decision tools, providers will have immediate on-line
access to more comprehensive patient care information across multiple delivery
sites to guide them in controlling healthcare costs, improving patient care and
facilitating responsiveness to competitive and regulatory challenges in the
healthcare market.
The Company's tools, products and services directly address the healthcare
industry's need for the creation of the CPR and decision support systems based
on comprehensive, enterprise-wide clinical, financial and other information. The
Company's solutions allow its customers to leverage investments in existing
information systems, while developing the new capabilities required to implement
and manage the emerging IDNs. The Company's use of advanced technology and an
open architecture allows customers to employ best-of-breed technology
strategies. The Company's tools, products and services fall into three broad
areas, each of which represents a critical component of the computer-based
patient record: (i) integration tools, which provide enterprise-wide
communication and connectivity; (ii) clinical workstation tools, which bring
clinical information to the providers at the point-of-care; and (iii) enterprise
management tools, which create decision support systems based on comprehensive
enterprise-wide clinical, financial and other information.
The Company's goal is to become the leading provider of advanced clinical
information solutions, performance tools and related services for the evolving
healthcare market. The Company's primary strategies to achieve this goal are to
(i) capitalize on the emergence of IDNs; (ii) focus on providing its customers
with high-value solutions; (iii) expand its three-tiered distribution system;
(iv) provide technologically advanced solutions premised upon an open
architecture format; and (v) establish new lines of business through
acquisitions or internal development.
3
<PAGE> 5
THE OFFERING
Common Stock offered by the
Company............................. 2,750,000 shares
Common Stock to be outstanding after
this Offering(1).................... 20,033,419 shares
Use of proceeds..................... For satisfaction of a funding
commitment to an affiliate, research
and development, general sales and
marketing, working capital and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol....... HDIE
Proposed Nasdaq National Market
Symbol.............................. HDIE
- ---------------
(1) Excludes 2,843,462 shares of Common Stock issuable upon exercise of
outstanding stock options, of which options to purchase 1,394,678 shares
were exercisable on August 31, 1996, and 1,540,241 shares of Common Stock
issuable upon conversion of the Company's outstanding convertible debenture
due January 2, 1998.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
INCORPORATION
(JUNE 15, SIX MONTHS ENDED
1994) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1994 1995 1995 1996
------------ ------------ ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 153 $ 8,700 $ 3,753 $ 7,267
Gross profit........................................ 88 6,082 2,809 4,732
Operating earnings (loss)........................... (1,270) (8,953) (1,311) 601
Income tax (expense) benefit........................ -- 140 (45) --
Net earnings (loss)................................. (1,265) (9,983) (1,889) 366
Net earnings (loss) per share and common share
equivalent........................................ $ (.08) $ (.64) $ (.12) $ .02
Weighted average number of common shares and common
share equivalents outstanding..................... 15,500 15,653 15,500 18,689
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
DECEMBER 31, ------------------------
1995 ACTUAL AS ADJUSTED(1)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 2,743 $ 2,498 $ 14,923
Total assets............................................... 21,734 22,168 34,593
Long-term debt, excluding current installments............. 5,382 5,306 5,306
Shareholders' equity....................................... 10,929 11,622 24,047
</TABLE>
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(1) Adjusted to give effect to the sale of 2,750,000 shares of Common Stock
offered hereby (at an offering price of $5.00 per share after deducting the
underwriting discounts and commissions and estimated offering expenses
payable by the Company). See "Use of Proceeds" and "Capitalization."
---------------------
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors which could cause or contribute
to such differences include, but are not limited to, those discussed in the
sections entitled "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as those
discussed elsewhere in this Prospectus.
Cloverleaf (TM) and COPPS(TM) are trademarks of Healthcare Communications,
Inc. and Criterion Health Strategies, Inc., respectively. See "The Company."
This Prospectus may contain trademarks and servicemarks of other parties.
4
<PAGE> 6
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following factors in evaluating the
Company and its business before purchasing any shares of the Common Stock
offered hereby.
LIMITED OPERATING HISTORY; LACK OF PROFITABILITY AND ACCUMULATED DEFICIT
The Company commenced operations in June 1994 and has generally sustained
operating losses since that time. The Company incurred a net loss of
approximately $1.3 million for the period from June 15, 1994 (date of
incorporation) through December 31, 1994, a net loss of approximately $10.0
million for the year ended December 31, 1995, a net loss of approximately $1.9
million for the six months ended June 30, 1995, and earned net income of
approximately $366,000 for the six months ended June 30, 1996. As of June 30,
1996 the Company had an accumulated deficit of approximately $10.9 million. No
assurance can be given that the Company will ever generate significant revenue
or sustain or again achieve profitability. Certain of the Company's potential
product applications are in the early stages of market acceptance. To sustain
profitable operations, the Company must successfully market its current and
prospective products and expand sales of its products in the healthcare
industry. No assurance can be given that such efforts will be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON SINGLE PRODUCT
Approximately 56% of the Company's revenue for the six months ended June
30, 1996 was derived from a single product, the Healthcare Communications, Inc.
Cloverleaf integration engine. For at least the near-term, the Company will
continue to be largely dependent on the sales of this product. A downturn in the
market for the Cloverleaf integration engine would likely have a material
adverse effect on the Company's sales and net income. The success of the Company
will continue to depend in part on its ability to diversify its revenue base.
There can be no assurance that the Company will be successful in its
diversification efforts.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
Results of operations have fluctuated and may continue to fluctuate
significantly from quarter to quarter as a result of a number of factors,
including (i) contract terms and the volume and timing of system sales and
customer acceptances; (ii) customer purchasing patterns, order cancellations and
rescheduling of system installations; (iii) the mix of direct and indirect
sales; (iv) the mix of higher-margin software revenue and lower-margin service
revenue; (v) the actions of competitors; and (vi) the timing of acquisitions and
divestitures. Accordingly, the Company's future operating results are likely to
be subject to significant variability from quarter to quarter and could be
adversely affected in any particular quarter. The Company's total revenue and
results of operations may also be affected by seasonal trends including the
possibility of higher revenue in the Company's fourth quarter and lower revenue
in its first three quarters as a result of many customers' annual purchasing and
budgetary practices and the Company's sales commission practices which rely in
part on annual quotas. As a result, the Company believes that period-to-period
comparisons of its revenues and results of operations are not necessarily
meaningful and should not be relied upon as indicators of future performance.
Due to the foregoing factors, it is possible that the Company's operating
results will be below the expectations of public market analysts and investors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's success will depend in large part on the acceptance by
physicians and provider organizations of sophisticated computer-based clinical
information systems that provide access to clinical assessment guides, clinical
outcomes analyses, physician profiles, physician protocols, practice standards
and practice guidelines. In addition, certain physicians may perceive the use of
such computer-based systems as an infringement on their discretion in providing
medical treatment and, accordingly, may be reluctant to accept
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such computer-based systems. There can be no assurance that the Company's tools,
products and services will achieve the market acceptance necessary for
profitable operations.
NEW PRODUCTS; TECHNOLOGICAL CHANGES
The market for the Company's tools, products and services is characterized
by continued and rapid technological advances in software development requiring
ongoing expenditures for research and development and the timely introduction of
new tools, products and services. In addition, compatibility with existing and
emerging industry standards is essential to the Company's marketing strategy and
research and development efforts. The establishment of standards is largely a
function of user acceptance, and standards are therefore subject to change. The
Company's tools and products are dependent upon a number of advanced
technologies, including those relating to computer hardware and software,
storage devices and other peripheral components, all of which are subject to
rapid change. Accordingly, the Company's future success will depend upon its
ability on a timely basis to develop and introduce new tools and products and
enhance its existing tools and products in order to keep pace with competitive
offerings, adapt to technological developments and changing industry standards
and provide additional functionality to address the increasingly sophisticated
needs of its customers. To the extent the Company determines that new
technologies and equipment are required to remain competitive, the acquisition
and implementation of such technologies and equipment are likely to require
investment of significant time and capital. Depending on the complexity of a
given software tool or product, the Company's development and introduction cycle
could last months or years. There can be no assurance that the Company will be
successful in developing, introducing on a timely basis, and marketing such
tools and products or enhancements thereof or that they will be accepted by the
market. Research and development expense totaled $192,000, $1.9 million,
$828,000 and $605,000 for the period from June 15, 1994 (date of incorporation)
through December 31, 1994, for the year ended December 31, 1995 and for the six
months ended June 30, 1995 and 1996, respectively. There can be no assurance
that the necessary capital will be available in the future or that the tools and
products will become or remain commercially viable. There can be no assurance
the Company's future development efforts will be successful or that the
emergence of new technologies, industry standards or customer requirements will
not render the Company's technology, equipment or processes obsolete or
uncompetitive. There can be no assurance that the Company will be able to
acquire or license the needed new technology at a price or on terms acceptable
to the Company. Without the timely development and successful introduction of
market-driven tools and products, there can be no assurance that the Company can
either achieve and sustain profitable operations or continue operations.
PROPRIETARY TECHNOLOGY; DEPENDENCE ON THIRD PARTY TECHNOLOGY
The Company's success is dependent to a significant extent on its ability
to maintain the proprietary and confidential software incorporated in its tools
and products as they are released. The Company relies on a combination of
copyright and trade secret and contractual protections to establish and protect
its proprietary rights. There can, however, be no assurance that the legal
protections and the precautions taken by the Company will be adequate to prevent
misappropriation of the Company's technology or trade secrets. In addition,
these protections and precautions do not prevent independent third-party
development of competitive technology, tools and products, and the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
The Company is dependent upon third-party suppliers to license to it
necessary technology that is incorporated into certain of the Company's
products. The Company has less control over the scheduling and quality of work
of third-party suppliers than its employees. Furthermore, the Company's
agreements to license certain third-party technology will terminate after
specified dates unless renewed. To the extent possible, the Company has
determined that the third-party intellectual property used in its products is
in the public domain or used in accordance with licensed terms, including the
license terms of freeware used in its products. However, while HIE believes
that it has all rights necessary to market and sell its solutions without
infringement of intellectual proprietary rights held by others, the Company
typically uses freeware and shareware as is and has not conducted a formal
infringement search. Accordingly, there can be no assurance that such
conflicting rights do not exist. There can be no assurance that such use is in
compliance with such
6
<PAGE> 8
licenses or that the Company will not become the subject of infringement claims
or legal proceedings by third parties with respect to current or future products
and that such claims or proceedings will not have a material adverse effect on
the Company's business, financial condition or results of operations. An adverse
outcome in litigation or similar adversarial proceedings could subject the
Company to significant liabilities to third parties, require expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the marketing
or use of certain products, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. To the extent the
Company wishes or is required to obtain licenses to patents or proprietary
rights of others, there can be no assurance that any such licenses will be made
available on terms acceptable to the Company, or at all. See
"Business -- Intellectual Property and Proprietary Rights."
RELIANCE ON DISTRIBUTOR; CUSTOMER CONCENTRATION
The Company principally relies upon independent distributors that generate
a substantial portion of the Company's sales. Software license fee revenue
generated by distributors included in the Company's consolidated statements of
operations totaled $0, $2.2 million, $1.2 million and $1.2 million for the
period from June 15, 1994 (date of incorporation) through December 31, 1994, for
the year ended December 31, 1995 and for the six months ended June 30, 1995 and
1996, respectively. Of these total amounts, $0, $1.6 million, $780,000 and
$842,000 of software license fee revenue, or 0%, 18%, 21% and 12% of the
Company's consolidated revenue, in the respective periods was generated by one
distributor. The loss of a significant distributor could have a material adverse
effect on the Company's business, financial condition and results of operations.
No customer accounted for more than 10% of the Company's consolidated revenue
during the period from June 15, 1994 (date of incorporation) through December
31, 1994 or the year ended December 31, 1995. One customer accounted for
approximately 26% of the Company's consolidated revenue for the six months ended
June 30, 1996. The loss of this customer could have a material adverse effect on
the Company's business, financial condition and results of operations.
LIABILITY FOR ERRORS AND OMISSIONS
The Company's tools and products are used to provide information that
relates to healthcare enterprise operations and other critical applications. In
addition, use of the Company's tools and products could also potentially
jeopardize the security and privacy of confidential patient and other
information and data stored in the Company's tools and products and in the
computer systems of the Company's customers. Any failure by the Company's
systems to provide accurate and timely information or to protect the security
and privacy of confidential patient and other information could result in claims
against the Company. The Company maintains errors and omissions insurance to
protect against claims associated with the use of its tools and products, but
there can be no assurance that its insurance coverage would adequately cover any
claims asserted against the Company. A successful claim brought against the
Company could have a material adverse effect on the Company. Even unsuccessful
claims could result in the Company's expenditure of funds in litigation and
management time and resources. There can be no assurance that the Company will
not be subject to claims alleging errors and omissions in product development or
operation, that such claims will not result in liability in excess of its
insurance coverages, that the Company's insurance will cover such claims or that
appropriate or adequate insurance will continue to be available to the Company
in the future at commercially reasonable rates.
COMPETITION
The Company does not believe it has any direct competitors who provide the
overall comprehensive clinical information solutions which the Company offers.
However, because the Company also provides tools, products and services related
to the various elements comprising its solutions -- such as systems and network
integration, object and workflow management, patient indexing, clinical data
measurement and analysis and information network design and management
components of those solutions -- the Company has a large
7
<PAGE> 9
number of competitors in each of these individual areas. The Company competes
with, among others, (i) healthcare information systems vendors, such as HBO &
Company, Shared Medical Systems Corporation and Cerner Corporation; (ii)
integration engine companies, such as Software Technologies Corporation, Century
Analysis Incorporated and HUBLink, Inc.; (iii) image management companies, such
as IMNET Systems, Inc. and LanVision Systems, Inc.; (iv) healthcare database
reference companies, such as HCIA Inc.; (v) consulting firms, such as Ernst &
Young LLP; (vi) original equipment manufacturers, such as International Business
Machines Corporation; (vii) systems integration firms, such as Science
Applications International Corporation; and (viii) internal MIS departments of
providers. A competitor of the Company with respect to one aspect of the
Company's business may serve as a distributor for the Company with respect to
other tools, products or services.
In general, the Company's competitors have greater financial, technical,
research and development and marketing resources and more extensive business
experience than the Company. Although the Company believes that its solutions
have advantages over competing tools, products and services currently being
marketed, there can be no assurance that the Company will be able to continue to
compete effectively in the marketplace if its present and potential competitors
are able to duplicate or improve upon its tools, products, services or marketing
strategy.
UNCERTAIN ABILITY TO MANAGE GROWTH
The Company has experienced a period of rapid growth that has placed, and
could continue to place, a significant strain on the Company's financial,
management and other resources. The Company's future performance will depend in
part on its ability to manage change in its operations, including integration of
any acquired businesses and any internally developed businesses. In addition,
the Company's ability to manage its growth effectively will require it to
continue to improve its operational and financial control systems and
infrastructure, and to attract, train, motivate, manage and retain key
employees. If the Company's management were to become unable to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company intends to pursue acquisitions as part of its growth strategy.
Other than an agreement in principle with respect to a possible increase in its
investment in Criterion Health Strategies, Inc. (see "Recent Developments"), the
Company has no present understandings, commitments or agreements with respect to
any acquisition. The Company anticipates, however, that one or more potential
acquisition opportunities may become available in the future. Acquisitions would
require investment of operational and financial resources and could require
integration of dissimilar operations, assimilation of new employees, diversion
of management resources, increases in administrative costs and additional costs
associated with debt or equity financing. If attractive acquisition
opportunities become available, the Company intends to pursue them actively.
There can be no assurance that the Company will complete any acquisition or that
a future acquisition will not have a material adverse effect on the Company or
will not result in dilution to shareholders purchasing Common Stock in this
Offering. See "Use of Proceeds" and "Business -- Strategy."
CONSOLIDATION AND UNCERTAINTY IN THE HEALTHCARE INDUSTRY
Many healthcare providers are consolidating to create larger healthcare
delivery enterprises with greater regional market power. Such consolidation
could erode the Company's existing customer base and reduce the size of the
Company's target market. In addition, the resulting enterprises could have
greater bargaining power, which may lead to price erosion of the Company's
products and services. The reduction in the size of the Company's target market
or the failure of the Company to maintain adequate price levels could have a
material adverse effect on the Company. The healthcare industry also is subject
to changing political, economic and regulatory influences that may effect the
procurement practices and operation of healthcare industry participants. During
the past several years, the U.S. healthcare industry has been subject to an
increase in governmental regulation and reform proposals. These reforms may
increase governmental involvement in healthcare, lower reimbursement rates and
otherwise change the operating environment for the
8
<PAGE> 10
Company's customers. Healthcare industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's products and services.
The failure of the Company to maintain adequate price levels or sales as a
result of legislative or market-driven reforms could have a material adverse
effect on the Company's business, results of operations and financial condition.
DEPENDENCE ON KEY PERSONNEL
Mr. H. Darrell Young, the Company's President and Chief Executive Officer,
has been primarily responsible for the development and expansion of the
Company's business. The loss of the services of Mr. Young or certain other key
personnel could have a material adverse effect on the Company. In addition, the
Company believes that its future success will be dependent in part on its
continued ability to recruit, motivate and retain qualified personnel. The
Company faces competition for such personnel from other companies and
organizations. The Company's anticipated growth and expansion into areas and
activities requiring additional expertise will require the addition of new
management personnel and the development of additional expertise by existing
management personnel. The failure to attract and retain such personnel or to
develop such expertise could adversely affect the Company's business. See
"Management."
POSSIBLE ADVERSE EFFECTS OF GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA") has issued a
draft guidance document addressing the regulation of certain computer products
as medical devices under the Federal Food, Drug, and Cosmetic Act (the "FDC
Act"). The FDA currently regulates the medical imaging capability that the
Company has developed, continues to develop and markets. Compliance with further
federal regulation could be burdensome, time consuming and expensive. The
Company expects that the FDA is likely to become increasingly active in
regulating computer software intended for use in the healthcare setting.
Furthermore, there can be no assurance that any final FDA policy governing
computer products, once issued, or other future laws and regulations concerning
the manufacture or marketing of medical devices or healthcare information
systems will not increase the cost and time to market new or existing products.
If the FDA chooses to regulate any of the Company's systems as medical devices
not exempt from regulation, it can impose extensive requirements upon the
Company, including the requirement that the Company seek either FDA clearance of
a premarket notification submission demonstrating the device's substantial
equivalence to a legally marketed predicate device or approval of a premarket
approval application establishing the safety and effectiveness of the device.
FDA regulations also govern, among other things, the preclinical and clinical
testing, manufacture, distribution, labeling and promotion of medical devices.
In addition, the Company would be required to comply with the FDC Act's general
controls, including establishment registration, device listing, compliance with
good manufacturing requirements, reporting of certain device malfunctions and
adverse device events. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or service of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or approval of products, withdrawal of clearances
and approvals, and criminal prosecution. See "Business -- Government
Regulation."
The confidentiality of patient records and the circumstances under which
such records may be released are subject to substantial regulation by state and
federal laws and regulations, which govern both the disclosure and use of
confidential patient medical record information. The Company believes that it
complies with the laws and regulations regarding the collection and distribution
of patient data in all jurisdictions in which it operates, but regulations
governing patient confidentiality rights are evolving rapidly and are often
unclear and difficult to apply in the rapidly restructuring healthcare market.
On August 22, 1996, President Clinton signed the Health Insurance Portability
and Accountability Act of 1996. This legislation requires the Secretary of
Health and Human Services to adopt national standards for health information
transactions and the data elements used in such transactions and to adopt
standards to ensure the integrity and confidentiality of health information. The
Secretary is required to issue such standards not later than February 21, 1998.
There can be no assurance that this legislation and the regulations promulgated
thereunder will not materially restrict the ability of the Company to obtain or
disseminate patient information. Additional legislation governing the
9
<PAGE> 11
dissemination of medical record information is continually being proposed at
both the state and federal level. Such proposed legislation could require
patient consent before even coded or anonymous patient information may be shared
with third parties and that holders or users of such information implement
security measures. There can be no assurance that changes to state or federal
laws will not materially restrict the ability of the Company to obtain or
disseminate patient information. Any material restriction on the Company's
ability to obtain or disseminate patient information could adversely affect the
Company's business. See "Business -- Government Regulation."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use the net proceeds of this Offering for
satisfaction of a funding commitment to an affiliate, research and development,
general sales and marketing, working capital to finance the Company's planned
growth, general corporate purposes and potential acquisitions of businesses,
products or technologies. Accordingly, the Company will have broad discretion as
to the application of such proceeds. See "Use of Proceeds" and
"Business -- Strategy."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Prior to becoming an independent stand-alone company in November 1995, the
Company relied upon equity infusions from its then parent company Healthdyne,
Inc. to fund both its operations and its investments in subsidiaries and
affiliated companies. See "The Company." The Company believes that current
available cash, the net proceeds from this Offering and anticipated cash flow
from operating activities will be sufficient to meet the Company's capital
requirements, including the payment of all maturing debt in cash and its
remaining funding commitment to CHS, for at least the next twelve months and for
the foreseeable future. In the future, the Company may require additional
financing to fund its operations. The Company's future capital requirements will
depend on many factors, including the progress of the Company's research and
development, the market acceptance of any of the Company's products, competitive
products and the establishment of third-party licensing arrangements. Any
additional equity financing may result in dilution to the Company's stockholders
and any debt financing is likely to subject the Company to financial and other
covenants. There can be no assurance that funds will be available on favorable
terms, if at all. The absence of such financing would have a material adverse
effect on the Company's business, including a possible reduction or cessation of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in the net tangible book value per share of Common Stock.
See "Dilution." In addition, further dilution will or may occur as a result of
the following: the conversion of the presently outstanding convertible debenture
of the Company due January 2, 1998 secured by a portion of stock of Healthcare
Communications, Inc. (see Notes 3 and 6 of Notes to Consolidated Financial
Statements); the exercise of the Company's option to increase its ownership
interest in Criterion Health Strategies, Inc. (see "Recent Developments"); the
exercise of outstanding stock options (see Note 8 of Notes to Consolidated
Financial Statements); and future equity financings of the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial amount of Common Stock in the public market
following this Offering could adversely affect the market price of the Common
Stock. Upon completion of this Offering (and assuming no exercise of the
Underwriters' over-allotment option), the Company will have an aggregate of
20,033,419 shares of Common Stock outstanding, based on the number of
outstanding shares on August 31, 1996. The Company and each of its directors and
officers, holding in the aggregate 2,569,003 shares of the outstanding Common
Stock, have agreed, subject to certain exceptions, not to sell these shares for
a period of 90 days from the date of this Prospectus without the prior consent
of Morgan Keegan & Company, Inc. After expiration of such lock-up period, these
shares will become eligible for immediate sale, subject in certain cases to
volume
10
<PAGE> 12
and other limitations of Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). Additionally, at August 31, 1996, options to purchase
2,843,462 shares of Common Stock were outstanding, of which options to purchase
1,394,678 shares were then exercisable. The Company has granted limited
registration rights with respect to the shares underlying its convertible
debenture due January 2, 1998 and may grant registration rights in connection
with a potential purchase of the interest of Massey Burch Capital Corp. in
Criterion Health Strategies, Inc. See "Shares Eligible for Future Sale," "Recent
Developments," "Description of Capital Stock -- Registration Rights" and
"Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. In addition, factors such as announcements of
technological innovations or the introduction of new products by the Company or
its competitors, market conditions in the medical industry and related fields,
and general economic conditions may have a significant impact on the market
price of the Common Stock.
CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation and By-Laws,
as well as the Rights Agreement (as hereinafter defined), could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of the Company. Such provisions
could limit the price that certain investors might be willing to pay in the
future for shares of HIE Common Stock. Certain of such provisions will allow the
Company to issue Preferred Stock with rights senior to those of HIE Common Stock
and to impose various procedural and other requirements which could make it more
difficult for shareholders to effect certain corporate actions. See "Description
of Capital Stock."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its capital stock and does
not anticipate paying any cash dividends on its capital stock in the foreseeable
future. See "Dividend Policy."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the factors set forth under the caption "Risk Factors" in this
Prospectus. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
11
<PAGE> 13
THE COMPANY
The Company was incorporated as a Georgia corporation on June 15, 1994 and
was a wholly-owned subsidiary of Healthdyne, Inc. (the "Former Parent") until
November 6, 1995, when the Former Parent distributed to its shareholders all the
outstanding shares of the Company's Common Stock (the "Spin-Off").
HIE works with the following operationally independent, interrelated
entities referred to by the Company as Entrepreneurial Business Units ("EBUs"):
(i) Healthcare Communications, Inc., a Texas corporation ("HCI") which is a
wholly-owned subsidiary of the Company; (ii) Integrated Healthcare Solutions,
Inc., a Georgia corporation ("IHS") which is a wholly-owned subsidiary of the
Company; and (iii) Criterion Health Strategies, Inc., a Tennessee corporation
("CHS") in which the Company currently has a less than 1% equity interest. In
addition, prior to March 31, 1996, DataView Imaging International, Inc., a
Georgia corporation ("DataView") in which the Company had a controlling
interest, was treated as an EBU (see "Recent Developments"). Each EBU
specializes in one or more parts of HIE's comprehensive clinical information
solution. Each EBU provides its tools, products and services either
independently of or collaboratively with the other EBUs depending on a
particular customer's needs. The Consolidated Financial Statements of HIE and
subsidiaries include the results of operations and financial position of the
EBUs as appropriately determined in accordance with generally accepted
accounting principles by the amount and timing of HIE's investment in each EBU.
The principal executive offices of the Company are located at 1850 Parkway
Place, Suite 1100, Marietta, Georgia 30067, and the telephone number is (770)
423-8450. Except as otherwise noted herein, references to the "Company" or "HIE"
shall mean Healthdyne Information Enterprises, Inc. and its wholly-owned
subsidiaries HCI and IHS.
RECENT DEVELOPMENTS
Each of the Company and Massey Burch Capital Corp. ("Massey Burch")
currently holds less than 1% of the CHS common stock and an 8% convertible
debenture which is convertible into 32% of the CHS common stock on a fully
diluted basis. See "Business -- Organizational Structure -- Entrepreneurial
Business Units." On July 30, 1996, the Company and Massey Burch entered into an
agreement in principle which contemplates the purchase by the Company of an
option to acquire Massey Burch's investment in CHS. The option as currently
proposed would be exercisable at any time during the period from December 31,
1996 through June 30, 1997, with the option exercise price to be payable through
the issuance of the greater of 416,666 shares of the Company's Common Stock or
the equivalent number of shares having a fair market value of $2 million at the
time the option is exercised. The agreement in principle contemplates that, as
consideration for the grant of this option, the Company will issue to Massey
Burch a warrant to purchase 50,000 shares of the Company's Common Stock at fair
market value as of the date of grant. The agreement further contemplates that
Massey Burch will be granted registration rights with respect to both the shares
of Common Stock underlying the warrant and the shares issuable upon the
Company's exercise of the proposed option. Massey Burch will continue to be
subject to its commitment to fund CHS up to a maximum of $2 million, of which
Massey Burch has funded $1.4 million as of August 31, 1996. The transactions
contemplated by the agreement in principle are subject to negotiation and
execution of definitive agreements and other customary conditions, as well as
certain rights of first refusal in favor of CHS and other CHS shareholders.
There can be no assurance that definitive agreements will be entered into or,
even if entered into, that the transaction will be consummated as described
above or that the Company would exercise an option to acquire Massey Burch's
interest in CHS. See Note 13 of Notes to Consolidated Financial Statements.
On June 12, 1996, HIE entered into an agreement effective April 1, 1996,
with DataView, a majority-owned subsidiary acquired on July 22, 1994, providing
for a restructuring of the relationship between HIE and DataView due to a change
in HIE's strategic direction with respect to DataView. This agreement provides,
among other things, for a reduction in HIE's equity interest in DataView from
61.5% to 19.5% and perpetual royalty-free rights and licenses for HIE to use
DataView's clinical image management technology in HIE's service business. See
"Business -- Licenses and Distribution Agreements." Accordingly, subsequent to
March 31, 1996, DataView is no longer an EBU and DataView's financial position,
results of operations and
12
<PAGE> 14
cash flows are no longer included in HIE's consolidated financial statements.
See Note 13 of Notes to Consolidated Financial Statements.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,750,000 shares of Common Stock offered hereby (at an assumed offering price of
$5.00 per share) are estimated to be approximately $12,425,000 (approximately
$14,363,750 if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses.
The Company intends to use the net proceeds of this Offering for working
capital and general corporate purposes, including satisfaction of the Company's
remaining funding commitment (not to exceed $700,000) to CHS, research and
development activities, and expansion of general sales and marketing activities.
A portion of the net proceeds may also be used to acquire or invest in
complementary products, technologies or businesses. The Company considers and
engages in discussions relating to such acquisitions and other opportunities on
a continual and ongoing basis. Except as set forth herein (see "Recent
Developments"), at the present time the Company has no understandings,
commitments or agreements, nor is it currently engaged in any negotiations with
respect to, any such transaction. Pending such uses, the Company intends to
invest the net proceeds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
The Company has never paid any cash dividends with respect to its capital
stock and does not anticipate paying cash dividends in the foreseeable future.
The Company currently intends to retain all earnings, if any, for use in the
expansion of the Company's business. The payment of dividends, if any, in the
future with respect to the Company's capital stock is within the discretion of
the Board of Directors and will depend on the Company's earnings, capital
requirements, financial condition and other relevant factors.
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<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 on an actual basis and as adjusted to reflect the sale by the Company
of the 2,750,000 shares of Common Stock offered hereby at an assumed offering
price of $5.00 per share and the application of the net proceeds therefrom
(after deduction of underwriting discounts and commissions and estimated
offering expenses) as described under "Use of Proceeds." This table should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Long-term debt, excluding current installments...................... $ 5,306 $ 5,306
Shareholders' equity:
Preferred Stock, without par value: authorized 20,000 shares;
designated Series A Cumulative Preferred Stock 500 shares;
issued none..................................................... -- --
Common Stock, $.01 par value: authorized 50,000 shares; issued
and outstanding 17,186 shares actual and 19,936 shares as
adjusted(2)..................................................... 172 199
Additional paid-in capital....................................... 22,332 34,730
Accumulated deficit.............................................. (10,882) (10,882)
------- -------
Total shareholders' equity.................................. 11,622 24,047
------- -------
Total capitalization........................................ $16,928 $ 29,353
======= =======
</TABLE>
- ---------------
(1) Adjusted to give effect to the sale of 2,750,000 shares of Common Stock
offered hereby by the Company at an assumed offering price of $5.00 per
share and the application of the net proceeds therefrom. See "Use of
Proceeds."
(2) Excludes 2,923,929 shares of Common Stock issuable upon exercise of
outstanding stock options, of which options to purchase 1,412,725 shares
were exercisable on June 30, 1996.
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<PAGE> 16
DILUTION
The net tangible book value (deficit) of the Company at June 30, 1996 was
approximately $(1,301,000) or $(.08) per share of Common Stock. Net tangible
book value (deficit) per share represents the amount of the Company's net
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
2,750,000 shares offered hereby (and after deducting underwriting discounts and
commissions and estimated offering expenses), the Company's pro forma net
tangible book value at June 30, 1996 would have been $11,124,000 or $.56 per
share of Common Stock. This represents an immediate increase in net tangible
book value of $.64 per share to existing shareholders and an immediate dilution
in net tangible book value of $4.44 per share to new investors purchasing shares
in this Offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Public offering price per share.......................................... $ 5.00
Net tangible book value (deficit) per share before this Offering....... $ (.08)
Increase per share attributable to new investors....................... .64
--------
Pro forma net tangible book value per share after this Offering.......... $ .56
--------
Dilution per share to new investors...................................... $ 4.44
========
</TABLE>
The foregoing table assumes no exercise of outstanding options. As of
August 31, 1996, there were 2,843,462 shares of Common Stock reserved for
issuance upon the exercise of outstanding options, of which options to purchase
1,394,678 shares were then exercisable. See Note 8 of Notes to Consolidated
Financial Statements and "Management -- Stock Option and Other Plans." To the
extent these or additional outstanding options are exercised, there will be
further dilution to new investors. In addition, further dilution could occur
upon the exercise of the Company's outstanding convertible debenture due January
2, 1998 (see Notes 3 and 6 of Notes to Consolidated Financial Statements), the
exercise by the Company of a proposed option to acquire Massey Burch's
investment in CHS (see "Recent Developments"), or future equity financings by
the Company.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock initially traded in the over-the-counter market
on the OTC Bulletin Board under the symbol "HDIE" from November 7, 1995 through
May 22, 1996. Since May 23, 1996 the Common Stock has traded on the Nasdaq
SmallCap Market under the same symbol.
The following table sets forth the high and low sales prices for the Common
Stock on the OTC Bulletin Board or as reported on the Nasdaq SmallCap Market, as
the case may be, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
Fourth Quarter (from November 7, 1995)..................................... $2.50 $1.125
1996
First Quarter.............................................................. $4.312 $1.875
Second Quarter............................................................. $7.75 $3.50
Third Quarter (through September 20, 1996)................................. $5.875 $3.50
</TABLE>
On September 20, 1996, the last sale price of the Common Stock, as reported
on the Nasdaq SmallCap Market, was $5.00 per share. The Company has applied for
inclusion of its Common Stock on the Nasdaq National Market under the symbol
"HDIE" upon completion of this Offering.
As of August 31, 1996, there were 2,279 shareholders of record of the
Company's Common Stock.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31, 1994 and for
the period from June 15, 1994 (date of incorporation) to December 31, 1994
("Partial Year 1994") and as of December 31, 1995 and for the fiscal year ended
December 31, 1995, have been derived from the audited consolidated financial
statements of the Company, which, together with the notes thereto and the
related report of KPMG Peat Marwick LLP, independent certified public
accountants, which is based partially upon the report of other auditors, are
included elsewhere in this Prospectus. The Company's consolidated financial
statements as of June 30, 1995 and 1996 and for the six months ended June 30,
1995 and 1996, respectively, have not been audited; however, in the opinion of
the Company, the selected consolidated financial data as of such dates and for
such periods include all adjustments, including all normal recurring
adjustments, necessary for a fair presentation of the data. The results for the
six months ended June 30, 1996 are not necessarily indicative of results to be
expected for the full fiscal year ending December 31, 1996. The selected
consolidated financial data set forth below should be read in conjunction with
the Consolidated Financial Statements of the Company and the related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
PARTIAL DECEMBER 31, -----------------
YEAR 1994 1995 1995 1996
--------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Software.......................................... $ 153 $ 5,136 $ 2,146 $ 3,152
Services.......................................... -- 3,564 1,607 4,115
--------- ------------ ------- -------
Total revenue............................. 153 8,700 3,753 7,267
--------- ------------ ------- -------
Cost of revenue:
Software.......................................... 65 536 151 312
Services.......................................... -- 2,082 793 2,223
--------- ------------ ------- -------
Total cost of revenue..................... 65 2,618 944 2,535
--------- ------------ ------- -------
Gross profit........................................ 88 6,082 2,809 4,732
Operating expenses:
Sales and marketing............................... 186 3,435 1,478 1,681
Research and development.......................... 192 1,928 828 605
General and administrative........................ 980 4,337 1,814 1,845
Other............................................. -- 5,335(1) -- --
--------- ------------ ------- -------
Operating earnings (loss)........................... (1,270) (8,953) (1,311) 601
Losses of affiliate, net(2)......................... (2) (1,002) (448) --
Interest income (expense), net...................... 7 (168) (85) (235)
--------- ------------ ------- -------
Earnings (loss) before income taxes................. (1,265) (10,123) (1,844) 366
Income tax (expense) benefit........................ -- 140 (45) --
--------- ------------ ------- -------
Net earnings (loss)................................. $(1,265) $ (9,983) $(1,889) $ 366
======= ========== ======= =======
Net earnings (loss) per common share and common
share equivalent.................................. $ (.08) $ (.64) $ (.12) $ .02
======= ========== ======= =======
Weighted average number of common shares and common
share equivalents outstanding..................... 15,500 15,653 15,500 18,689
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)...................................... $ (56) $ 2,743 $ 2,498
Total assets................................................... 9,974 21,734 22,168
Total long-term debt........................................... -- 8,034 7,040
Total liabilities.............................................. 237 10,805 10,546
Shareholders' equity........................................... 9,737 10,929 11,622
</TABLE>
16
<PAGE> 18
- ---------------
(1) Other expenses include (i) purchased in-process research and development
expense of approximately $3,605,000, resulting from HIE increasing its
ownership interest in HCI to 100% effective December 31, 1995; (ii) a
$1,430,000 reduction in goodwill related to DataView, which was impaired as
a result of a change in HIE's strategic direction with respect to DataView;
and (iii) a $300,000 expense to fully reserve the cost of an option
purchased by HIE in 1994 to acquire the remaining ownership interest in
DataView not held by HIE. See "Recent Developments" and Notes 3 and 13 of
Notes to Consolidated Financial Statements.
(2) Losses of affiliate, net includes the operating losses of CHS, which was a
development stage company with no history-to-date revenue and solely
financed by loans from HIE through December 4, 1995. See
"Business -- Organizational Structure -- Entrepreneurial Business Units."
It also includes HIE's 44% equity interest in the after-tax earnings
(losses) of HCI from October 27, 1994 (the date of HIE's initial investment
in HCI) to December 31, 1994 and the minority interest in HCI's after-tax
earnings (losses) during 1995 as a result of HIE increasing its equity
interest in HCI during 1995. See "Business -- Organizational
Structure -- Entrepreneurial Business Units."
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed here. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section, as
well as in the sections entitled "Risk Factors" and "Business."
OVERVIEW
The Company was incorporated in Georgia on June 15, 1994 and was, until the
Spin-Off on November 6, 1995, a wholly-owned subsidiary of the Former Parent. In
conjunction with its subsidiaries HCI and IHS and its affiliate CHS, the Company
is a leading provider of enterprise-wide clinical information management
solutions to emerging IDNs.
The Company generates revenue from licensing clinical information software
tools and products and providing related system design, integration,
implementation, support, training and consulting services as shown below.
HCI. HCI develops and markets software tools and products and provides
related services to the healthcare industry. HCI presently contributes the
majority of HIE's consolidated revenue through the Cloverleaf integration engine
software license fees and related implementation, maintenance and education
fees. Software licenses are granted on a perpetual basis for a one-time, upfront
fee. Implementation fees are based on actual hours of implementation service at
standard hourly rates. Software maintenance agreements are generally one-year
renewable service contracts for a prepaid standard fee. HCI charges a standard
per-student amount for its education classes.
IHS. IHS is a service company dedicated to providing healthcare
information solutions. IHS' revenue contribution to HIE has rapidly increased
since its formation in early 1995. IHS provides clinical and other information
solutions through the use of both proprietary and third-party software tools and
by providing related consulting, system design and integration services.
Software licenses and sublicenses are generally granted on a perpetual basis for
a one-time, upfront fee. Services are generally provided for fixed fees based on
estimated hours of service to be provided at standard hourly rates.
CHS. CHS is a healthcare decision support software and related services
company. CHS provides enterprise management and other decision support products
through the use of both proprietary and third-party software tools. The Company
does not currently consolidate the revenue of CHS. However, on July 30, 1996,
the Company entered into an agreement in principle with Massey Burch which
contemplates that the Company may acquire a majority interest in CHS. See
"Recent Developments."
The Company expects the following external factors to affect the market for
healthcare information systems tools, products and services in future years: (i)
the continued and accelerated emergence of IDNs; (ii) the shift from the
traditional fee-for-service reimbursement system to the capitated payment system
for healthcare services; (iii) the growing importance of comprehensive clinical
information in the managed patient care environment; (iv) the introduction of
cost accounting to the healthcare delivery system; and (v) the growing
world-wide need to control the cost of quality healthcare.
Software revenue is generally recognized upon shipment in accordance with
Statement of Position 91-1, Software Revenue Recognition. Service revenue is
recognized as the work is performed or, in the case of a fixed fee contract, on
the percentage of completion basis, even though some services are prepaid.
The Company's consolidated balance sheets include assets designated as
purchased software and capitalized software development costs. Purchased
software originates from purchases by HIE of proprietary software tools
developed by third parties and prepaid license fees for software tools to be
distributed by HIE on a non-exclusive basis. Certain costs of HIE proprietary
software developed internally are capitalized in accordance with generally
accepted accounting principles. The costs of individual software tools or
products
18
<PAGE> 20
are being amortized ratably based on the projected revenue associated with the
related software or on a straight-line basis over five years, whichever method
results in a higher level of amortization.
The excess of cost over net assets of acquired businesses (goodwill) is
being amortized over a period of fifteen years. At each balance sheet date, the
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. At the end of 1995, the Company
wrote off goodwill related to its investment in DataView in the amount of $1.4
million to reflect the impairment of such goodwill resulting from a change in
the Company's strategic direction with respect to DataView. See Notes 3 and 13
of Notes to Consolidated Financial Statements.
RECENT DEVELOPMENTS
Each of the Company and Massey Burch currently holds less than 1% of the
CHS common stock and an 8% convertible debenture which is convertible into 32%
of the CHS common stock on a fully diluted basis. See
"Business -- Organizational Structure -- Entrepreneurial Business Units." On
July 30, 1996, the Company and Massey Burch entered into an agreement in
principle which contemplates the purchase by the Company of an option to acquire
Massey Burch's investment in CHS. The option as currently proposed would be
exercisable at any time during the period from December 31, 1996 through June
30, 1997, with the option exercise price to be payable through the issuance of
the greater of 416,666 shares of the Company's Common Stock or the equivalent
number of shares having a fair market value of $2 million at the time the option
is exercised. The agreement in principle contemplates that, as consideration for
the grant of this option, the Company will issue to Massey Burch a warrant to
purchase 50,000 shares of the Company's Common Stock at fair market value as of
the date of grant. The agreement further contemplates that Massey Burch will be
granted registration rights with respect to both the shares of Common Stock
underlying the warrant and the shares issuable upon the Company's exercise of
the proposed option. Massey Burch will continue to be subject to its commitment
to fund CHS up to a maximum of $2 million, of which Massey Burch has funded $1.4
million as of August 31, 1996. The transactions contemplated by the agreement in
principle are subject to negotiation and execution of definitive agreements and
other customary conditions, as well as certain rights of first refusal in favor
of CHS and other CHS shareholders. There can be no assurance that definitive
agreements will be entered into or, even if entered into, that the transaction
will be consummated as described above or that the Company would exercise an
option to acquire Massey Burch's interest in CHS. See Note 13 of Notes to
Consolidated Financial Statements.
On June 12, 1996, HIE entered into an agreement effective April 1, 1996,
with DataView, a majority-owned subsidiary acquired on July 22, 1994, providing
for a restructuring of the relationship between HIE and DataView due to a change
in HIE's strategic direction with respect to DataView. This agreement provides,
among other things, for a reduction in HIE's equity interest in DataView from
61.5% to 19.5% and perpetual royalty-free rights and licenses for HIE to use
DataView's clinical image management technology in HIE's service business. See
"Business -- Licenses and Distribution Agreements." Accordingly, subsequent to
March 31, 1996, DataView is no longer an EBU and DataView's financial position,
results of operations and cash flows will no longer be included in HIE's
consolidated financial statements. See Note 13 of Notes to Consolidated
Financial Statements.
19
<PAGE> 21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relative
revenue contributions of the EBUs to the Company as a whole expressed as
percentages of total revenue, unless otherwise indicated:
<TABLE>
<CAPTION>
PERCENT OF TOTAL REVENUE (UNLESS OTHERWISE
INDICATED)
---------------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
PARTIAL YEAR DECEMBER 31, -----------------
1994 1995 1995 1996
------------ ------------ ------ ------
<S> <C> <C> <C> <C>
HCI(1)................................... N/A 75% 84% 56%
IHS(2)................................... 3% 18 7 42
DataView(3).............................. 97 7 9 2
---- ------ ------ ------
Total revenue -- %............. 100% 100% 100% 100%
==== ====== ====== ======
Total revenue -- 000's......... $153 $8,700 $3,753 $7,267
==== ====== ====== ======
</TABLE>
- ---------------
(1) HCI has been in business since 1991. HCI reported revenue of $336,734,
$863,290 and $5.1 million in 1992, 1993 and 1994, respectively, and
operating income (loss) of $(233,065), $(632,340) and $1.8 million for the
corresponding periods, respectively. HIE acquired 100% ownership interest
in HCI through a three-step acquisition of a 44% interest in October 1994,
an additional 13% interest in May 1995 and the remaining 43% interest
effective December 31, 1995. Accordingly, HCI's 1994 operating results were
not consolidated with those of HIE in 1994, but were included in HIE's 1995
consolidated financial statements effective January 1, 1995.
(2) IHS was incorporated on May 30, 1995, but the above table reflects its
operating results for its start-up activities during Partial Year 1994, the
year ended December 31, 1995 and for the six month periods ended June 30,
1995 and 1996.
(3) DataView has been in business since 1990. See the "Recent Developments"
section above for recent developments in the relationship between DataView
and HIE.
20
<PAGE> 22
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Operations expressed as
percentages of total revenue:
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------------------------------
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
PARTIAL YEAR DECEMBER 31, -------------
1994 1995 1995 1996
------------ ------------ ---- ----
<S> <C> <C> <C> <C>
Revenue:
Software............................................. 100% 59% 57 % 43 %
Services............................................. -- 41 43 57
---- ---- --- ---
Total revenue................................ 100 100 100 100
---- ---- --- ---
Cost of revenue:
Software............................................. 42 10 7 10
Services............................................. -- 58 49 54
---- ---- --- ---
Total cost of revenue........................ 42 30 25 35
---- ---- --- ---
Gross profit........................................... 58 70 75 65
Operating expenses:
Sales and marketing.................................. 122 40 40 23
Research and development............................. 125 22 22 9
General and administrative........................... 641 50 48 25
Other................................................ -- 61 -- --
---- ---- --- ---
Operating earnings (loss).................... (830) (103) (35 ) 8
Losses of affiliate.................................... (102) (13) (13 ) --
Minority interest...................................... -- 2 1 --
Interest income (expense).............................. 4 (2) (2 ) (3 )
Equity in earnings of affiliate........................ 101 -- -- --
---- ---- --- ---
Earnings (loss) before income taxes.................. (827) (116) (49 ) 5
Income tax (expense) benefit........................... -- 1 (1 ) --
---- ---- --- ---
Net earnings (loss).......................... (827)% (115)% (50 )% 5 %
==== ==== === ===
</TABLE>
Comparison of Six Months Ended June 30, 1996 and June 30, 1995
Revenue. Consolidated revenue was $7.3 million for the six months ended
June 30, 1996 compared to $3.8 million for the six months ended June 30, 1995,
an increase of 94%, even though DataView's revenue is no longer included in the
Company's consolidated revenue effective April 1, 1996 as discussed above.
During the first half of 1996, 56% of the Company's consolidated revenue was
attributable to software license fees for the Cloverleaf integration engine
software tool and related services as compared to 84% for the first half of
1995. The Company completed development of or acquired and began marketing
additional software tools, acquired distribution rights to other software tools
and expanded the system design and integration services capability of IHS during
1995. While revenue from integration engine license fees and related services
increased, the general availability of these new software tools and the growth
of IHS to meet the demand by IDNs for clinical information solutions were
primarily responsible for the Company's increased revenue for the six months
ended June 30, 1996.
Cost of Revenue. Cost of revenue includes, among other things,
compensation of service personnel, travel and software royalties and
amortization. The cost of revenue was $2.5 million for the six months ended June
30, 1996 compared to $944,000 for the six months ended June 30, 1995, an
increase of 169%. The increase in cost of revenue from 25% of revenue to 35% of
revenue between the first half of 1995 and the first half of 1996 is primarily
attributable to the shift in revenue mix toward services and cost inefficiencies
associated with the rapid growth of IHS' service organization to handle the
increased demand for its system design and integration services.
21
<PAGE> 23
Gross Profit. The Company's gross profit increased to $4.7 million for the
six months ended June 30, 1996 from $2.8 million for the six months ended June
30, 1995, an increase of 68%. Gross profit as a percent of revenue decreased to
65% for the first half of 1996 compared to 75% for the first half of 1995, due
to a shift in revenue mix. The revenue mix shifted from 57% software and 43%
service for the first half of 1995 to 43% software and 57% service for the first
half of 1996. The main reason for the shift was the increase in system design
and integration services provided by IHS. While software revenue, which has
relatively high gross profit margins, increased to $3.2 million for the six
months ended June 30, 1996 from $2.1 million for the six months ended June 30,
1995, a 47% increase, service revenue, which normally has lower gross profit
margins than software, increased to $4.1 million for the six months ended June
30, 1996 from $1.6 million for the six months ended June 30, 1995, or 156%. The
Company expects its consolidated revenue mix to approximate 50% software and 50%
service for the foreseeable future.
Sales and Marketing. Sales and marketing expense includes, among other
things, compensation of sales and marketing personnel, sales commissions, travel
and advertising. Sales and marketing expense was $1.7 million for the six months
ended June 30, 1996 compared to $1.5 million for the six months ended June 30,
1995, an increase of 14%, due primarily to the net effect of increased sales
personnel costs, sales commissions and travel expenses associated with increased
sales staffing and the increase in revenue, offset in part by the exclusion of
DataView from the Company's consolidated operating results for the second
quarter of 1996 as discussed above. Sales and marketing expense as a percent of
revenue decreased from 40% for the first half of 1995 to 23% for the first half
of 1996, reflecting the increased productivity of the Company's internal sales
force and its distributors.
Research and Development. Research and development expense includes, among
other things, compensation of research and development personnel, depreciation
and lease expense of development equipment and travel. Research and development
expense was $605,000 for the six months ended June 30, 1996 compared to $828,000
for the six months ended June 30, 1995, representing a 27% decrease, due
primarily to the capitalization of internally developed software costs totaling
$445,000 and secondarily to the exclusion of DataView from the Company's
consolidated operating results for the second quarter of 1996 as discussed
above. No such costs qualified for capitalization under generally accepted
accounting principles in the first half of 1995.
General and Administrative. General and administrative expense includes,
among other things, compensation of finance, accounting and administrative
personnel, goodwill amortization, office rent and insurance. General and
administrative expense was approximately $1.8 million for both the six months
ended June 30, 1996 and 1995. The slight decrease of $31,000 between the two
periods was due primarily to the net effect of (i) increased goodwill
amortization related primarily to the step acquisition of HCI during 1995; (ii)
identifiable expenses of being a new public company; (iii) increased IHS
administrative staffing costs to support IHS' current and projected growth; (iv)
decreased staffing, outside service expense and other administrative costs at
HCI resulting from cost control measures initiated during the fourth quarter of
1995 and the first quarter of 1996; and (v) the exclusion of DataView from the
Company's consolidated operating results for the second quarter of 1996 as
discussed above.
Losses of Affiliate. Losses of affiliate, which resulted from the
Company's commitment to fund CHS, totaled $468,000 in the first half of 1995.
The December 1995 transaction with Massey Burch provided for a sharing of the
Company's funding commitment to CHS and has had the additional result of
relieving the Company of the requirement to report a loss from CHS in the first
half of 1996.
Minority Interest. The minority interest in net loss of subsidiary
totaling $20,000 in the first half of 1995 related to HCI, and such minority
interest is no longer applicable as a result of HIE's increased ownership
interest in HCI to 100% effective December 31, 1995.
Interest Expense, Net. Net interest expense increased to $235,000 for the
six months ended June 30, 1996 from $85,000 for the six months ended June 30,
1995, representing a 176% increase. This increase relates primarily to the net
effect of (i) increased interest expense associated with financing the increased
HCI ownership interest referred to above; (ii) increased interest expense
related to additional HCI debt incurred to finance a prepaid exclusive
reseller's license for screen scraping technology during the second quarter of
1995;
22
<PAGE> 24
and (iii) reduced HCI interest expense under a financing agreement renegotiated
at a lower interest rate effective January 1, 1996.
Income Taxes. The Company has no provision for income taxes for the six
months ended June 30, 1996 due to the utilization of available net operating
loss carryforward benefits. The income tax expense of $45,000 for the six months
ended June 30, 1995 relates to HCI, which filed a separate income tax return
prior to HIE increasing its ownership interest in HCI to 100% effective December
31, 1995.
Comparison of Year Ended December 31, 1995 to Period from Inception (June 15,
1994) to December 31, 1994
Revenue. HIE's consolidated revenue for the year ended December 31, 1995
increased to $8.7 million due primarily to the acquisition of HCI, which had
revenue of $5.1 million for 1994, and secondarily to the growth of both HCI and
IHS. Consolidated revenue for Partial Year 1994 was $153,000, due primarily to
the July 1994 acquisition of the teleradiology computer system operations of
DataView.
Cost of Revenue. The cost of revenue was $2.6 million in the year ended
December 31, 1995 compared to $65,000 in Partial Year 1994, representing a
decrease in cost of revenue to 30% of revenue in the year ended December 31,
1995 from 42% of revenue in Partial Year 1994. This decrease was attributable to
the net effect of the addition of HCI's relatively low-cost software revenue in
1995, offset somewhat by the addition and growth of both HCI's and IHS' service
businesses in 1995.
Gross Profit. HIE's gross profit was $6.1 million in the year ended
December 31, 1995 compared to $88,000 in Partial Year 1994, representing an
increase in gross profit as a percent of revenue to 70% for the year ended
December 31, 1995 from 58% for Partial Year 1994, due primarily to the higher
margin HCI business being included in the 1995 operating results.
Sales and Marketing. Sales and marketing expense was $3.4 million in the
year ended December 31, 1995 compared to $186,000 in Partial Year 1994,
representing an increase of $3.2 million. The majority of this increase was
attributable to the consolidation of HCI's operating results with HIE effective
January 1, 1995 pursuant to HIE's acquisition of a majority interest in HCI
during 1995. Even though HCI's operating results were not consolidated with HIE
in Partial Year 1994, HCI's sales and marketing expense increased between 1994
and 1995 due to (i) the increased size of the internal sales force to supplement
the efforts of the distributor channel; (ii) increased domestic and
international market research expense; (iii) increased sales and marketing
collateral material expense; and (iv) increased sales-related expenses, such as
sales commissions and travel, associated with HCI's $1.6 million increase in
revenue. IHS increased sales and marketing expense between 1994 and 1995 due to
increased staffing of its direct sales force and increased sales commissions and
sales-related expenses, such as travel, advertising and brochures, related to a
$1.6 million increase in its revenue. The remainder of the increased sales and
marketing expense was due to the timing of the Company's acquisition of DataView
in 1994.
Research and Development. Research and development expense was $1.9
million in the year ended December 31, 1995 compared to $192,000 in Partial Year
1994, representing an increase of $1.7 million. The majority of the increase was
attributable to the consolidation of HCI's operating results with HIE effective
January 1, 1995 pursuant to HIE's acquisition of a majority interest in HCI
during 1995. Even though HCI's operating results were not consolidated with HIE
in Partial Year 1994, the increase in HCI's research and development expense
between 1994 and 1995 was due to increased staffing associated with porting
HCI's Cloverleaf integration engine to several other platforms. IHS increased
research and development expense due to increased staffing for the Clinical
Assessment and Support System ("CASS") software tool development. The remainder
of the increased research and development expense was due to the timing of the
Company's acquisition of DataView in 1994.
General and Administrative. General and administrative expense was $4.3
million in the year ended December 31, 1995 compared to $980,000 in Partial Year
1994, representing an increase of $3.4 million. A majority of the increase was
attributable to the consolidation of HCI's operating results with HIE effective
January 1, 1995 pursuant to HIE's acquisition of a majority interest in HCI
during 1995. Even though HCI's
23
<PAGE> 25
operating results were not consolidated with HIE in 1994, HCI's general and
administrative expense increased between 1994 and 1995 due primarily to
increased general and administrative infrastructure expense to handle
anticipated future growth. HIE's general and administrative expense increased
due to increased goodwill amortization related to the acquisitions of HCI and
DataView and the increased cost of building the HIE corporate infrastructure,
including allocated general and administrative expenses from the Former Parent.
The remainder of the increased general and administrative expense was due to the
cost of building the IHS general and administrative infrastructure to handle
anticipated future growth and the timing of the Company's acquisition of
DataView in 1994.
Purchased In-Process Research and Development. In conjunction with HIE's
43% increase in its ownership interest in HCI to 100% effective December 31,
1995, approximately $3.6 million of the purchase price was allocated to
purchased in-process research and development and expensed during the year ended
December 31, 1995 in accordance with generally accepted accounting principles.
Goodwill Impairment and Investment Option Reserve. At the end of 1995,
goodwill of $1.4 million attributable to DataView was written off to reflect an
impairment of such goodwill resulting from a change in HIE's strategic direction
with respect to DataView. For the same reason, HIE established a $300,000
reserve to fully reserve the cost of HIE's option to increase its ownership
interest in DataView to 100%.
Losses of Affiliate. CHS was a development stage enterprise with no
history-to-date revenue through early 1996. CHS was solely funded by loans from
HIE until early December 1995, at which time Massey Burch began to share HIE's
funding commitment to CHS. Accordingly, all of CHS' operating losses up to HIE's
$1.3 million history-to-date advances to CHS were recorded by HIE as losses of
affiliate. The substantial increase in losses of affiliate during 1995 was due
to the fact that the Company's investment in CHS occurred near the end of 1994.
Interest Expense, Net. Interest expense relates primarily to an HCI vendor
financing agreement for the prior year development of its integration engine
technology. The interest income relates primarily to interest earned on
consolidated cash balances.
Income Taxes. HIE's income tax benefit for the year ended December 31,
1995 represents the income tax benefit that can be realized by HCI through
carry-back claims against HCI's 1994 income taxes paid.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain operating results for each of the
eight quarters ended June 30, 1996. This unaudited quarterly information has
been prepared on the same basis as the audited information set forth in the
consolidated financial statements contained elsewhere herein and includes all
adjustments (consisting only of normal recurring adjustments) necessary, in the
opinion of management, for a fair presentation of the information for the
periods presented.
Results of operations have fluctuated and may continue to fluctuate
significantly from quarter to quarter as a result of a number of factors,
including (i) contract terms and the volume and timing of system sales and
customer acceptances; (ii) customer purchasing patterns, order cancellations and
rescheduling of system installations; (iii) the mix of direct and indirect
sales; (iv) the mix of higher-margin software revenue and lower-margin service
revenue; (v) the actions of competitors; and (vi) the timing of acquisitions and
divestitures. Accordingly, the Company's future operating results are likely to
be subject to significant variability from quarter to quarter and could be
adversely affected in any particular quarter. The Company's total revenue and
results of operations may also be affected by seasonal trends including the
possibility of higher revenue in the Company's fourth quarter and lower revenue
in its first three quarters as a result of many customers' annual purchasing and
budgetary practices and the Company's sales commission practices which rely in
part on annual quotas. As a result, the Company believes that period-to-period
comparisons of its revenues and results of operations are not necessarily
meaningful and should not be relied upon as indicators of
24
<PAGE> 26
future performance. Due to the foregoing factors, it is possible that the
Company's operating results will be below the expectations of public market
analysts and investors.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $ 73 $ 80 $ 1,869 $ 1,884 $ 2,077 $ 2,870 $ 3,530 $ 3,737
Cost of revenue........ 29 36 400 544 828 846 1,243 1,292
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 44 44 1,469 1,340 1,249 2,024 2,287 2,445
Operating expenses:
Sales and
marketing.......... 73 113 577 901 946 1,011 813 868
Research and
development........ 67 125 392 436 545 555 323 282
General and
administrative..... 246 676 932 882 1,100 1,423 928 917
Other................ -- -- -- -- -- 5,335 -- --
------- ------- ------- ------- ------- ------- ------- -------
Operating earnings
(loss)............... (342) (870) (432) (879) (1,342) (6,300) 223 378
Losses of affiliate.... -- (156) (213) (255) (288) (388) -- --
Minority interest...... -- -- (59) 79 143 (21) -- --
Interest income
(expense), net....... 1 6 (33) (52) (51) (32) (113) (122)
Equity in earnings of
affiliate............ -- 154 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Earnings (loss)
before income
taxes.............. (341) (866) (737) (1,107) (1,538) (6,741) 110 256
Income tax (expense)
benefit.............. -- -- (70) 25 327 (142) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net earnings
(loss)...... $ (341) $ (866) $ (807) $ (1,082) $(1,211) $ (6,883) $ 110 $ 256
======= ======= ======= ======= ======= ======= ======= =======
Net earnings (loss) per
weighted average
shares and share
equivalents
outstanding.......... $ (.02) $ (.06) $ (.05) $ (.07) $ (.08) $ (.43) $ .01 $ .01
======= ======= ======= ======= ======= ======= ======= =======
Weighted average shares
and share equivalents
outstanding.......... 15,500 15,500 15,500 15,500 15,500 16,000 18,117 18,903
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
From inception through the Spin-Off, the Company financed both its
operations and its investments in EBUs primarily through equity investments by
the Former Parent, which totaled $22.0 million and $11.0 million at December 31,
1995 and 1994, respectively. Following the Spin-Off, the Former Parent has had
no obligation to make additional advances or equity infusions in the Company.
Since the Spin-Off, the Company has funded its operations and acquisitions and
investments in EBUs through internally generated funds or the issuance of debt
and equity. The Company's plans for future working capital and other capital
requirements are discussed below.
The Company has working capital of $2.5 million at June 30, 1996 compared
to $2.7 million at December 31, 1995. Cash decreased $1.2 million during the
first half of the year ended December 31, 1996 compared to a $1.3 million
increase during the first half of the year ended December 31, 1995 for the
reasons discussed below.
Net cash provided by operating activities totaled $958,000 for the first
half of the year ended December 31, 1996 compared to net cash used in operating
activities of $2.3 million for the first half of the year ended December 31,
1995. The $3.2 million total variance between the two periods reflects increased
cash flow from the net earnings recorded in the first half of the year ended
December 31, 1996 compared to
25
<PAGE> 27
the net loss in the first half of the year ended December 31, 1995 and various
changes in the components of working capital, most notably increases in deferred
service revenue and accounts payable offset somewhat by increased trade accounts
receivable due to increased revenue and higher days revenue in accounts
receivable.
Net cash used in investing activities was $1.3 million for the first half
of the year ended December 31, 1996 compared to $1.7 million for the first half
of 1995. During the first half of the year ended December 31, 1996, the Company
made a higher level of payments for a third-party developed software tool and
prepaid licenses for other software tools. As previously discussed, the Company
capitalized $445,000 of internally developed software costs during the first
half of the year ended December 31, 1996. The decrease in capital expenditures
reflects the Company's current preference for leasing, versus purchasing,
computer equipment. The acquisition of business in the first half of the year
ended December 31, 1995 relates to HCI as previously discussed.
Net cash used in financing activities was $873,000 during the first half of
the year ended December 31, 1996 compared to net cash provided by financing
activities of $5.3 million during the first half of 1995. Prior to the Spin-Off,
the Former Parent funded HIE's operations and investments as reflected in the
$5.3 million capital contribution during the first half of the year ended
December 31, 1995. The long-term debt payments shown in the first half of the
year ended December 31, 1996 primarily relate to the payoff of the $1.1 million
note payable associated with the HCI step-acquisition effective December 31,
1995. The proceeds from the issuance of common stock relate to the exercise of
stock options held by employees of the Former Parent.
The Company has $1.7 million of debt financing maturing over the next
twelve months, of which $1.1 million could be satisfied with HCI's products
and/or services at the lender's option. During May 1996, HCI renewed its $1.0
million line of credit with a bank on similar terms and conditions as the
expiring line of credit with said bank. The Company is currently pursuing, but
has no commitment to receive, at least a $2.0 million line of credit from a bank
or a financial institution for unanticipated working capital needs. Potential
future sources of long-term financing include additional public or private
offerings by the Company or a public or private offering by one or more EBUs,
depending on the Company's or EBU's actual and planned performance and the
conditions in the equity market at the time. However, there can be no assurance
that such financings could be consummated on terms acceptable to the Company, if
at all. The Company believes that current available cash, the net proceeds from
this Offering and anticipated cash flow from operating activities will be
sufficient to meet the Company's capital requirements, including the payment of
all maturing debt in cash and its remaining funding commitment to CHS, for at
least the next twelve months and for the foreseeable future.
In 1995, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 121 ("SFAS 121"), Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of, and
No. 123 ("SFAS 123"), Accounting for Stock-based Compensation, both of which
standards are effective in 1996. The Company does not expect the effect of the
adoption of SFAS 121 to be material. The Company has not yet quantified the
expected effect of the adoption of SFAS 123 disclosure.
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BUSINESS
INTRODUCTION
The Company is a leading provider of enterprise-wide clinical information
management solutions to emerging IDNs. The Company employs advanced technology
to develop the software tools and applications that enable the creation of the
computer-based patient record ("CPR") and related enterprise-wide management
decision support systems, and which leverage investments in existing information
systems. The Company's tools, products and services provide: (i) enterprise-wide
integration of information systems and indexing of patient records; (ii)
clinical information integration and decision support at the point-of-care; and
(iii) management decision support systems based upon access to comprehensive
enterprise-wide clinical, financial and other information. The Company's
solutions enable its customers to reduce the cost of delivering healthcare
through increased productivity and to improve the quality of care through
analysis of outcomes and continuous improvement of patient care processes.
INDUSTRY BACKGROUND
Over the past two decades, healthcare costs have risen dramatically
relative to the overall rate of inflation, exceeding $1 trillion in 1995.
Historically, reimbursement for healthcare services provided by hospitals,
physicians, clinics and other healthcare organizations has been based on a
fee-for-service model of payment. With increasing pressure to reduce costs,
managed care organizations and other payers are shifting the economic risk of
the delivery of care to providers through alternative reimbursement models,
including capitation and fixed fees. In response to the changing reimbursement
environment, healthcare organizations such as hospitals, multi-specialty
physician groups, laboratories, pharmacies, home health services and nursing
homes are integrating horizontally and vertically to create IDNs. IDNs, often
dominated by large hospitals, are designed to serve all of the healthcare needs
of local or regional populations while achieving economies of scale. Large
metropolitan areas are increasingly being served by only a few IDNs where once
many hospitals and physicians competed for patients. In addition, the pressure
to reduce the costs of healthcare delivery has resulted in a trend toward an
increasing percentage of healthcare being delivered on an outpatient as opposed
to an inpatient basis.
In order for IDNs to lower healthcare delivery costs while improving the
quality of patient care, they need access to detailed clinical and management
information that enables providers within the IDN to (i) manage the patient care
process across multiple delivery sites; (ii) analyze the appropriateness of
diagnoses, treatments and resource utilization; (iii) compare provider practices
and clinical outcomes; (iv) monitor performance under managed care contracts;
(v) monitor practice patterns of providers; and (vi) support communications
among members of the care team. An integral element of this process is the CPR,
an electronic patient record that resides in a system specifically designed to
support users by providing access to complete and accurate data, alerts,
reminders, clinical decision support systems, links to medical libraries and
other aids. Creation of the CPR requires three key technologies: integration of
disparate information systems; indexing of patient information across the IDN;
and decision support systems that access information at the point-of-care and on
an enterprise-wide level. With the development of the CPR and related management
decision tools, providers will have immediate on-line access to more
comprehensive patient care information across multiple delivery sites to guide
them in controlling healthcare costs, improving patient outcomes and
facilitating responsiveness to competitive and regulatory challenges in the
healthcare market. The implementation of a multi-entity, multi-site CPR is
extremely complex given the different technologies, information strategies and
legacy systems of the entities comprising an IDN.
HIE'S HEALTHCARE INFORMATION SOLUTIONS
The Company's tools, products and services directly address the healthcare
industry's need for the creation of the CPR and decision support systems based
on comprehensive, enterprise-wide clinical, financial and other information. The
Company's use of advanced technology and an open architecture allows its
customers to leverage investments in existing information systems and employ
best-of-breed technology strategies. The Company believes that it is
well-positioned to meet the information needs of emerging IDNs
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and furthermore that its tools, products and services will serve as a platform
from which the next generation information systems will be created.
The Company offers comprehensive system design, integration, implementation
and other services related to its software tools and products. The Company
believes that each customer's needs will vary according to its existing
technology infrastructure and healthcare delivery requirements. As a result, the
Company's philosophy is to work jointly with each customer to identify the tools
and products needed to best meet its requirements. The Company seeks to
establish long-term relationships with its customers and to obtain recurring
revenue from multiple projects undertaken with each customer.
The Company's tools, products and services fall into three broad areas,
each of which represents a critical component of the CPR: (i) integration and
patient indexing tools, which provide enterprise-wide communication and
connectivity; (ii) clinical workstation tools, which bring clinical information
to the providers at the point-of-care; and (iii) enterprise management tools,
which create decision support systems based on comprehensive enterprise-wide
clinical, financial and other information. The following chart illustrates the
relationships among these areas:
Omitted Graphic and Image Material
The following is a narrative description of graphic and image material
contained in the printed version of the prospectus which has been omitted from
the version of the prospectus filed electronically.
A chart consisting of (i) on the left side of the page, a box
containing the heading "Integration Tools," under which are listed the
following: "Cloverleaf Integration Engine," "Cloverleaf Gateway," "Compass
Screen Scraper" and "Express Terminal Emulator;" (ii) on the right side of the
page, a box containing the heading "Clinical Workstation Tools," under which
are listed the following: "Clinical Assessment and Support," "Desktop
Integration," Clinical Imaging," "Document Imaging," Workflow" and "Internet
Connection;" (iii) in the center of the page below the aforementioned boxes, a
box containing the heading "Enterprise Management Tools," under which are
listed the following: "Clinical," "Financial," "Operational" and "Patient
Satisfaction;" and (iv) below the box described in (iii) above, a box
containing the heading "Service Solutions," under which are listed the
following: "People," "Tools" and "Products." Between the boxes described in
(i) and (ii) above is a picture of a bridge under which appears the caption
"Community Person Index ("CPI")."
Integration Tools. In order to create the comprehensive CPR, it is
necessary to draw together a diverse range of data distributed throughout a
multitude of computer applications within an IDN. The Company's integration
tools and services enable providers to access heterogeneous clinical information
located on multiple disparate systems throughout the IDN and elsewhere on a
cost-effective, real-time basis. The Company's Community Person Index ("CPI"),
working with an integration engine, enables the provider to retrieve
patient-specific clinical information from disparate systems and reduce the
number of redundant patient records.
Clinical Workstation Tools. A second critical element of the CPR is the
capability to provide access to patient clinical data from a workstation at the
point-of-care or elsewhere. The Company has designed its tools, products and
services to allow a physician to access clinical information from a single
workstation that is equipped with a keyboard, mouse, voice or touch screen. The
Company's workflow tools and imaging technologies provide a paperless
environment in which physicians can order, monitor and control medical services
such as lab tests and pharmacy orders. The Company's workflow products operate
over local and wide area networks, intranets and the Internet. A physician with
access to such clinical information would be aware
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of each patient's complete medical history on demand at the point-of-care or
elsewhere. The Company believes that providers can use such information to
reduce unnecessary treatment and duplicate diagnostic testing and related costs,
as well as to improve outcomes.
Enterprise Management Tools. A third critical element of the CPR is
accessible decision support systems. In order to develop enterprise-wide
decision support systems, IDNs need tools to (i) extract and analyze financial,
operational, clinical and other available data; (ii) deploy the results of the
analyses as feedback to physicians to improve protocols, practice standards and
guidelines; and (iii) provide feedback to operations managers and executives to
monitor and improve operational and financial performance. The Company has
designed its enterprise management tools to support financial, operational and
clinical analyses including advanced capabilities for automated management,
scheduling, and distribution of such information and analyses. The Company
believes that these tools can enable provider organizations to both measure and
improve the cost efficiency and quality of care.
STRATEGY
The Company's objective is to become the leading provider of advanced
clinical information solutions, tools and related services for the evolving
healthcare market. The following are key elements of the Company's strategy:
Capitalize on Emergence of IDNs. The Company believes that the
anticipated rapid growth in clinical information systems expenditures will
result from the ongoing formation and growth of IDNs in response to the
changing dynamics of the healthcare industry. The Company further believes
that both the rapid expansion of IDNs and the shift from the inpatient to
the outpatient delivery of healthcare heighten the need for clinical
information systems and network integration tools and services. The Company
will continue to target the physicians, hospitals and medical centers
around which IDNs are forming.
Focus on High-Value Solutions. The decision by a healthcare provider
to replace or substantially upgrade its information systems typically
involves a major commitment of capital and an extended review and approval
process. The Company's sales philosophy is to shorten the sales process
with a "small wins" sales strategy. The Company breaks large healthcare
information systems projects into small projects and helps the customer
prioritize the smaller projects according to value as measured by return on
investment. By demonstrating its capabilities to initially implement
smaller projects, the Company believes that its customers will be more
likely to retain the Company to implement larger healthcare information
systems projects.
Expand Three-Tiered Distribution. The Company relies on three
distribution channels, consisting of direct sales forces at both the HIE
and the EBU level and third-party distributors and OEMs, to sell its tools,
products and services. The HIE sales force, which the Company refers to as
"client partners," are responsible for initiating or expanding customer
relationships with the top executives within an organization by identifying
one or more projects that would enable HIE to demonstrate the capabilities
of its tools, products and services. Secondarily, each EBU has a sales
force primarily focused on its tools, products and services. The EBUs'
direct sales forces are capable of presenting the entire HIE portfolio of
tools, products and services to sales prospects, which can lead to
cross-selling opportunities. Finally, the Company also sells its products
through distributors and OEMs. The Company intends to aggressively pursue
the expansion of its distribution channels by adding additional select
third-party channel partners with complementary tool, product and service
offerings.
Provide Technologically Advanced Open Solutions. The Company is
committed to being a leading provider of advanced technology solutions and
to maintaining its open architecture product strategy. The Company has
employed several advanced technologies including object-oriented
programming, object management, workflow computing and data warehousing and
mining in the development of its CPI, CASS and COPPS tools and products.
The Company's tools and products are designed to work in conjunction with a
customer's existing systems infrastructure. As a result, customers can
readily implement specific, single-product solutions to immediate, or
tactical, information systems needs. HIE
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intends to continue investing in advanced technology solutions that meet
the changing information needs of its customers.
Establish New EBUs through Acquisitions or Internal Development. The
Company believes that it is well-positioned to capitalize on the
significant growth opportunities which exist in the healthcare information
systems industry. In pursuit of such growth opportunities, the Company has
established EBUs both through acquisitions and through internal
development. Each EBU is a stand-alone business focused on the delivery of
specific parts of the Company's overall solutions in a coordinated effort
with the other EBUs. The Company believes that the coordinated autonomy of
the EBU structure (i) enhances market awareness and presence on multiple
fronts; (ii) provides the Company with multiple entry points to sales
opportunities; (iii) promotes the rapid development and deployment of new,
open architecture core technology that is not burdened by the evolution of
legacy system technology; (iv) broadens customer relationships; and (v)
facilitates the recruitment of entrepreneurial executive talent. The
Company will continue to evaluate potential acquisitions and to consider
the development of businesses internally which would enable the Company to
continue to improve its information systems solutions for its customers by
leveraging existing strengths, adding core technological competencies and
expanding its product offerings.
TOOLS, PRODUCTS AND SERVICES
While the general information needs of IDNs are similar, the individual
tools, products and services needed to accomplish specific local community
integration are quite diverse. This diversity is due to, among other things, the
existing information system infrastructure and the number and capability of
technical resources available in the network. Accordingly, HIE offers a modular
solution to meet the specific clinical information needs of a particular IDN.
One network may only require integration services. Another network may only need
clinical imaging. A third network may require HIE's entire clinical information
solution. In all situations, HIE helps customers to evaluate their existing
information systems and to develop solutions that leverage those systems and
technologies in a manner that best fit the customers' needs. These solutions can
then form the foundation for the customer's next generation clinical information
system. The Company's software tools and products are sold on a per seat,
processor and/or site basis and range in unit price from less than $1,000 to
$250,000 with a median price of approximately $100,000. The Company prices its
services on a per hour or fixed fee basis at hourly rates depending upon the
skills of the applicable service personnel and the estimated duration of the
service engagement.
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The following table describes the status, features and benefits of the
tools and products with which HIE solutions can be built:
<TABLE>
<CAPTION>
TOOL OR PRODUCT RELEASE DATE FEATURES/BENEFITS
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTHCARE COMMUNICATIONS, INC.
CLOVERLEAF INTEGRATION January 1995 Connectivity via standard protocols; data
ENGINE (UNIX) recoverability; system monitoring; support for Tcl
scripting language.
CLOVERLEAF GATEWAY (UNIX) October 1995 Limited function Cloverleaf code embedded into
third-party products to provide connectivity
between the third-party products and other
applications within the network.
COMPASS SCREEN SCRAPER June 1995 Non-invasive integration with non-message based
(Windows) systems.
EXPRESS SINGLE LOG-ON August 1996 Terminal emulator which provides enterprise-wide
(UNIX/NT, Windows) single log-on function with robust security
features.
- -----------------------------------------------------------------------------------------------------------------------------
INTEGRATED HEALTHCARE SOLUTIONS, INC.
COMMUNITY PERSON INDEX In Beta (expected to be Integrates master patient indices and demographic
("CPI") (UNIX/Windows) released October 1996)* data across disparate systems.
CLINICAL ASSESSMENT AND May 1996 Access of clinical information from disparate
SUPPORT SYSTEM ("CASS") (NT) systems and decision support tools and
documentation of the patient encounter from the
point-of-care.
DOCUMENT IMAGE MANAGEMENT August 1995 Access to reports, documents and clinical images
(Windows) across the network; management of claims
processing.
WORKFLOW MANAGEMENT August 1995 Improves efficiency of the process of providing
(UNIX/NT) health care; reduces paper work; collects metrics.
INTRANET AND INTERNET February 1996 Provides workflow tools and standard user interface
WORKFLOW MANAGEMENT (NT, for applications across the intranet; Internet
Windows) Cooperative.
DESKTOP INTEGRATION June 1996 Organizes enterprise applications into graphical
(Windows) menus; provides single point of security log-ons
and centralized control of end-user desktops;
allows desktops to be easily customized.
TELERADIOLOGY COMPUTER April 1989 FDA-approved system for point-to-point capture and
SYSTEM (Windows) transmission of radiological images.
CLINICAL IMAGE MANAGEMENT April 1996 Capture, indexing, storage, retrieval, transmission
(Windows) and management of images from radiology,
cardiology, pathology and other telemedicine
multimedia systems throughout the IDN.
- -----------------------------------------------------------------------------------------------------------------------------
CRITERION HEALTH STRATEGIES, INC.
COPPS INFORMATION MANAGEMENT May 1996 Manages the consolidation of a variety of
TOOLS (UNIX, NT) enterprise data, including financial, clinical and
other relevant data, into one point of access.
COPPS CONSOLE (Windows, NT May 1996 Deploys key information analyses throughout the IDN
Deskstation) to complete the feedback loop in improving a
provider's financial and clinical performance.
COPPS SURVEY ENGINE May 1996 A tool to collect opinion-based information from
(Windows, NT Deskstation) patients, physicians and employees; provides an IDN
with patient feedback on the quality of care.
</TABLE>
* The Beta release of the software, which incorporates substantially all of the
features and functionality of the planned general availability release of the
software, is the first or later production release of the software after the
Alpha development version of the software.
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Integration Tools
The Company's integration tools link the information systems of physicians,
practice groups, hospitals, payers and other healthcare constituents within
local and regional IDNs. The Company's integration tools and products include:
Cloverleaf Integration Engine. The Cloverleaf integration engine provides
a tactical solution for replacing individual system-to-system interfaces within
an IDN. The Company believes that as provider networks move beyond a single
hospital or medical facility, the integration engine will evolve to become the
strategic hub for the IDN's next generation information system. Cloverleaf has
the capability of connecting message streams and data structures from disparate
systems both locally and over wide area networks. It facilitates data
interchange by connecting different applications and hardware together via an
open architecture concept involving standard protocols. This interface,
integration and migration tool routes and reformats data, changes communications
protocols and combines and explodes messages to keep network systems
synchronized.
The integration engine improves the accuracy, delivery, availability and
recoverability of clinical information through the following advantages:
information pooling of all system data for better analysis and quality of
patient care; integration and communication of binary, x-ray, digital and other
sources of data; and security defined on a per connection basis with multi-level
audit trails for any or all transactions. Cloverleaf is designed to reduce
ongoing support costs by incorporating a graphical user interface that allows
users to easily design their own integration interfaces.
Cloverleaf Gateway. The Cloverleaf gateway product is a limited function
version of the Cloverleaf integration engine that facilitates communications
between a specific third-party application and other healthcare systems on a
network. While the Cloverleaf integration engine is a more generic interface
that enables multiple systems to communicate among each other, the Cloverleaf
gateway only connects a particular system to multiple systems. As a result,
resellers and distributors may use the gateway as a flexible solution to
accommodate a more specialized interface between a specific healthcare
application and other third-party applications in a situation where the user is
not concerned about the interface between the third-party applications.
Compass Screen Scraper. The Compass screen scraper facilitates data
interchange with legacy healthcare information systems which do not use standard
protocols. It connects systems by reading data streams as they come from the
mainframe and automatically translates the character-based information into a
graphical interface. The features of Compass include easy configuration using
point-and-click methods; support of data storage and retrieval in a variety of
relational data models through storage-independent libraries; and an application
programming interface ("API") for OEM development of new user applications which
interoperate with other applications. The Company's screen scraper technology is
licensed from ICS (Sales) Ltd. See "-- Licenses and Distribution Agreements."
Express Single Log-On. Express Single Log-On is a terminal emulator which
allows a provider to log onto disparate healthcare information systems from a
single dumb terminal or a personal computer running Windows or NT. In addition
to eliminating unnecessary hardware, Express Single Log-On saves a user the time
of logging into multiple security systems of an IDN.
Community Person Index. Each healthcare information system typically has
its own master patient index ("MPI") as a key to information contained in its
database. The CPI integrates MPIs of multiple disparate information systems so
that a physician or other healthcare provider can request from or link to
clinical information on these systems. IDNs use the CPI as a tactical tool to
minimize duplicate patient records, improve data access time and ensure accurate
linkages of disparate clinical information. The Company believes that IDNs can
use the CPI as a strategic tool to lay the foundation for the CPR by
establishing the enterprise-wide shared MPI for a system comprised of multiple
information systems.
The CPI is both vendor and interface engine independent. Its advantages
include a cross-referenced index which can be used as a foundation for an
enterprise-wide data repository or warehouse; duplicate record detection and
resolution functions; remote system indexing and data location information to
link disparate
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systems; management of demographic information; support of customer-defined
event history; and scalable distributed architecture to support a larger IDN.
Clinical Workstation Tools
The Company's clinical workstation tools enable the efficient collection,
indexing, storage and retrieval of clinical and other data from disparate
systems in a multi-user environment. The Company has integrated its CASS tool
with the CPI so that an HIE healthcare information solution can efficiently
direct an integration engine to retrieve clinical information requested by a
provider. The requested information can take a variety of forms called
"objects." Objects may be data, such as patient demographic information from a
hospital information system; clinical images, such as an x-ray from an
orthopedic surgeon's office; document images, such as scanned copy of a
hard-copy lab report; signals, such as an EKG; videos from a telemedicine
encounter; or voices, such as a radiologist's comments on an MRI. HIE's clinical
workstation can capture, index and store the requested objects. In addition, the
Company's object management tools maximize the efficiency of a paperless patient
care process by using third-party licensed workflow software tools which
optimize the flow of objects and eliminate unnecessary human intervention with
such objects.
Clinical Assessment and Support System. CASS is an intuitive, interactive
tool used by the physician at the point-of-care not only to access clinical
information about the patient, but also to document the clinical aspects of the
patient encounter and to assist the physician with patient assessment, diagnosis
and care planning. CASS is designed to be tailored to the user's specifications.
The physician can use his own protocols and care plans, tailor those from other
physicians or use those provided by his affiliated provider organization or
others. Aside from its ease of use and ease of customization, CASS features
include "Heads Up Display" problem lists or alerts for medical history
complications, medications and allergies; question drivers for recording
comprehensive medical history and risk management information about the patient;
results tracking with flags and reminders; voice annotation to elaborate on
findings; pharmacy and formulary tools with allergy and drug-to-drug interaction
warnings; and menu-driven diagnosis and care planning tools to easily document
each patient encounter. CASS also provides a Subjective Objective Assessment
Plan ("SOAP") to assist the provider with documentation and assessment of the
patient's condition through subjective questions and objective findings,
analysis of data, formulation of a diagnosis and development of a longitudinal
care plan.
Document Image Management. The document image management tools enhance the
management of all information within the enterprise. The features of these tools
include on-line processing of reports, documents and clinical images across the
network, reduced paper handling and streamlined business processes. These
features allow the healthcare enterprise to operate in a "paperless" or "near
paperless" environment. As a result, providers using the Company's imaging tools
can improve access to patient medical records and data; reduce lost documents;
decrease storage space costs; remotely access information; and concurrently
access information and images. These tools incorporate document image management
technology from InterTech Imaging Corporation and the OPEN/cold plus software
from Wang Laboratories, Inc. ("Wang").
Workflow Management. The workflow tools allow providers to workflow-enable
key business processes by integrating multiple disparate systems across the
enterprise into a system designed to improve the efficiency of each process and
reduce related paperwork. In addition, the workflow software collects and
analyzes metrics which reveal bottlenecks and identify business rules so that a
provider can intelligently reengineer key business processes. Providers using
the Company's workflow tools can: integrate information from disparate systems;
integrate clinical imaging, voice and video with traditional data and documents;
streamline business processes; improve internal and external communications; and
improve customer satisfaction. These tools incorporate imaging and workflow
technologies from Wang.
Intranet and Internet Workflow Management. The Company has combined
internet technologies with imaging and workflow technologies to deliver timely,
accurate information from disparate systems to the desktop using an industry
standard user interface. These tools provide an "Internet Cooperative" which
allows customers to share applications, thereby reducing each customer's
investment in the development of these applications. The Company also provides
the following intranet applications which leverage investment in
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<PAGE> 35
existing systems by implementing internet technologies within an organization on
the provider's existing network: on-line policy and procedures manual, employee
handbook, patient referrals, physician directory and enterprise-wide calendar of
events and phone book. These intranet tools also eliminate support costs related
to adding new software to client personal computers and reduction of other
support and maintenance costs because application software can be developed and
maintained in a central location. These tools incorporate intranet and internet
workflow management technology from Action Technologies, Inc.
Desktop Integration. The Company's desktop integration tools create a
single point of access for all applications in the enterprise. In addition, they
provide enterprise-wide access to objects other than applications. As a result,
project plans, spreadsheets, word processing documents and other objects may be
shared among groups of users across the enterprise for collaborative computing
and decision making. The desktop integration tools also secure the desktop by
enforcing a single point of system log-on. This log-on is verified at a central
location and, if successful, allows the end-user to access an individually
customized desktop configuration. This configuration is tailored specifically to
the person accessing the system and grants only those privileges necessary for
the user to operate the system.
Teleradiology Computer Systems. The Company believes that the migration by
providers to IDNs is creating a demand for a CPR that incorporates clinical
images, diagnostic impressions and other non-text data from disparate systems
and applications. The Company provides teleradiology tools that allow the
instant capture and transmission of medical images throughout the IDN involving
radiology, cardiology, pathology and other telemedicine data objects. These
FDA-approved tools can be linked to a personal computer in a physician's home
and are designed to provide teleradiology connectivity between rural hospitals
and larger medical centers. See "-- Licenses and Distribution Agreements."
Clinical Image Management. The key features of the clinical image
management tools include: a diagnostic viewing station, an internal networking
system, film printing, a Dicom interface providing a universal file format for
connectivity to other core systems, televideo and teleconferencing and an
archival system for patient records. These tools incorporate clinical image
management technology from DataView. See "-- Licenses and Distribution
Agreements."
Enterprise Management Tools
The Company's enterprise management tools, which it licenses from CHS (see
"-- Licenses and Distribution Agreements"), access data that exist in a variety
of databases across an IDN to provide consolidated mission-critical information
as the basis for more comprehensive analysis. With such enterprise-wide
consolidated information, customers can better analyze and understand key
relationships between the various dimensions of their business, especially
clinical and financial performance. The Company's enterprise management tools
include the following:
COPPS Information Management Tools. With the COPPS Information Management
Tool Set, an organization can access financial, operational, clinical and other
data stored in a variety of databases across the enterprise, and consolidate
identified mission-critical information into a business data model which
reflects the key information requirements of the various business disciplines.
The COPPS tool set manages (i) the complex task of consolidating data from the
source systems; (ii) the mapping and transformation of data into the customer's
business data model; and (iii) the changes to the business data model as the
customer's information needs change. The COPPS Information Management Tool Set
manages the consolidation of a variety of enterprise data, including physician
practice management, financial, clinical, contract management and other data
from disparate systems to one point of access. CHS licenses its information
management technology from Fiserv CIR, Inc. See "-- Licenses and Distribution
Agreements."
COPPS Console. The COPPS Console, a sophisticated workstation tool,
provides customers with the ability to analyze and report on information in the
way that they want it presented. Through advanced scheduling and distribution
capabilities, the COPPS Console can fully automate analysis and report
production and then route the results to key information users to most
effectively deploy information throughout the organization on a timely basis.
These capabilities can satisfy individuals' information needs
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without requiring every individual to be capable of running a workstation. For
example, as organizations broadly implement clinical workstation tools, the
COPPS Console can automatically complete the feedback loop necessary for
improving the delivery of cost-effective quality healthcare by providing the
customer with information necessary to analyze costs and to assess protocols,
standards or guidelines.
COPPS Survey Engine. The COPPS Survey Engine was developed as a data
collection tool to enable providers to collect direct patient feedback about the
patient's perception of the quality of care they are receiving. Other
information can be collected directly from patients using the COPPS Survey
Engine, such as their own assessment of their physical mobility, emotional
well-being and pain management. Additionally, opinion information from other
sources such as physicians and IDN employees can be captured using this tool
set. The data collected automatically populates the business data model with
important data that are not generally being collected at the present time. This
information is valuable feedback to IDNs and an increasingly important factor in
the measurement of quality healthcare.
Services
The Company offers comprehensive systems design, integration,
implementation, support, training and consulting services related to its
software tool and product offerings. The Company believes that each customer's
needs will vary according to its existing technology infrastructure and
healthcare delivery requirements. As of August 31, 1996, the Company employed 50
people in various services positions. Consistent with the Company's philosophy
of helping customers help themselves, HIE will perform the requisite services
listed above for the customer, supervise the customers' staff in conducting
system design, integration and implementation projects and/or train the
customers' staff to implement the Company's tools and products.
SALES AND MARKETING
The Company sells the tools, products and services comprising the Company's
healthcare information solutions through three distribution channels consisting
of direct sales forces at both the HIE and the EBU level and third-party
distributors and OEMs.
As of August 31, 1996, the Company had 18 sales and marketing personnel, of
whom 12 are direct sales personnel. Four of the 12 direct sales personnel are
senior-level "client partners" of HIE. The client partners are individuals who
have extensive executive experience in the healthcare information technology
industry and numerous, long-standing relationships with chief executive,
financial and information officers within the industry. The client partners are
responsible for initiating or expanding customer relationships with the top
executives within an organization by identifying one or more projects that would
enable HIE to demonstrate the capabilities of its tools, products or services.
The remaining eight of the 12 direct sales personnel are employed by various
EBUs and are primarily focused on selling the tools, products and services of
the EBU employing them. The EBUs' direct sales forces are capable of presenting
the entire HIE portfolio of tools, products and services to sales prospects,
which can lead to cross-selling opportunities. All of the direct sales personnel
are paid a base salary plus commissions at escalating rates based on sales
volume and sales timing bonuses.
Third-party distributors of the Company's tools and products include, among
others, system integrators, original equipment manufacturers and software
vendors. For example, HCI's Cloverleaf engine is distributed by, among others,
International Business Machines Corporation, Science Applications International
Corporation, Emtek Healthcare Systems, Inc., IDX Corporation and Triple P
Management B.V. The Company intends to aggressively pursue the expansion of its
distribution channels by adding additional select third-party channel partners
with complementary tool, product and service offerings, including, among others,
original equipment manufacturers, other healthcare information systems vendors,
physician practice management information systems vendors, physician practice
management companies, consulting firms and systems integration companies.
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While the Company has primarily marketed and sold its tools, products and
services in the United States, the Company also intends to pursue international
sales opportunities in select countries that are aggressively trying to control
the cost of providing quality healthcare. For example, the Company has
established a distribution network in German-speaking countries for one or more
of its software tools with several healthcare information system vendors,
including Data-Plan Software GmbH, debis Systemhaus SFI GmbH, Gesellschaft Fuer
Systemforschung und Dienstleistungen im Gesundheitswesen GmbH, and Triple P
Management B.V., in addition to other distributors with worldwide distribution
rights, such as Emtek Healthcare Systems, Inc., International Business Machines
Corporation and Science Applications International Corporation.
RESEARCH AND DEVELOPMENT
HIE's research and development effort is an ongoing process of working with
customers to identify and address the present and future information needs of
the emerging IDNs. The Company anticipates that it will address those identified
information needs through joint development activities with customers, internal
development activities or acquired technology, depending on such factors as
customer resource availability, the number of high priority needs, the number
and type of technical skills required and market timing considerations. As of
August 31, 1996, the Company employed 35 people in research and development. The
Company spent approximately $192,000, $1,928,000, $828,000 and $605,000 on
research and development for the Partial Year 1994, the year ended December 31,
1995 and the six months ended June 30, 1995 and 1996, respectively.
The Company has developed internally the following tools and technologies:
the Cloverleaf Integration Engine, the Express Terminal Emulator, CASS and the
Desktop Engine. CHS has developed the COPPS Console and Survey tools.
The Company believes that an open computing architecture gives healthcare
provider organizations maximum freedom in customizing information systems to
their own specific needs. This freedom fits the Company's product strategy in
several ways. First, the Company's products allow customers to leverage their
existing investment in information technology resources by connecting different
legacy healthcare information systems together via an open architecture concept
involving standard protocols. Second, the ability to link legacy systems with
other applications through the Company's products enables customers to make
gradual system upgrades which avoids major capital commitments and related
internal review and approval complications. This ability also allows customers
to pursue best-of-breed product strategies. Finally, the Company has minimized
the dependence of its products on any one third party vendor by using industry
standard open architecture such as the UNIX operating systems and SQL databases.
The Company intends to continue to develop new tools and products in an open
architecture format that relies on an object-oriented programming approach for
speed of development.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company's success is dependent to a significant extent on its ability
to maintain the proprietary and confidential software incorporated in its tools
and products as they are released. The Company relies on a combination of
copyright and trade secrets and contractual protections to establish and protect
its proprietary rights. There can, however, be no assurance that the legal
protections and the precautions taken by the Company will be adequate to prevent
misappropriation of the Company's technology or trade secrets. In addition,
these protections and precautions do not prevent independent third-party
development of competitive technology, tools and products, and the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
The Company is dependent upon third-party suppliers to license to it
necessary technology that is incorporated into certain of the Company's
products. The Company has less control over the scheduling and quality of work
of third-party suppliers than its employees. Furthermore, the Company's
agreements to license certain third-party technology will terminate after
specified dates unless renewed. To the extent possible, the Company has
determined that the third-party intellectual property used in its products is in
the public domain
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or used in accordance with licensed terms, including the license terms of
freeware used in its products. However, while HIE believes that it has all
rights necessary to market and sell its solutions without infringement of
intellectual proprietary rights held by others, the Company typically uses
freeware and shareware as is and has not conducted a formal infringement search.
Accordingly, there can be no assurance that such conflicting rights do not
exist. There can be no assurance that such use is in compliance with such
licenses or that the Company will not become the subject of infringement claims
or legal proceedings by third parties with respect to current or future products
and that such claims or proceedings will not have a material adverse effect on
the Company's business, financial condition or results of operations. An adverse
outcome in litigation or similar adversarial proceedings could subject the
Company to significant liabilities to third parties, require expenditure of
significant resources to develop non-infringing technology, require disputed
rights to be licensed from others or require the Company to cease the marketing
or use of certain products, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. As the
number of software products in the industry increases and the functionality of
these products further overlaps, the Company believes that software developers
may become increasingly subject to infringement claims. To the extent the
Company wishes or is required to obtain licenses to patents or proprietary
rights of others, there can be no assurance that any such licenses will be made
available on terms acceptable to the Company, or at all.
ORGANIZATIONAL STRUCTURE -- ENTREPRENEURIAL BUSINESS UNITS
HIE works with operationally independent, interrelated entities referred to
by the Company as EBUs. Each EBU is a stand-alone business specializing in one
or more parts of the tools, products and services that collectively create HIE's
clinical information solutions. The Company's organizational structure is both a
function of and a strategy for meeting the challenges of the evolving healthcare
industry, particularly in the context of emerging IDNs. Each EBU focuses upon
developing its particular area of expertise, thereby enabling it to offer the
high level of technological sophistication, customer support and education which
are critical for growing and adapting to changes in its customers' needs. The
Company also believes that the EBU structure facilitates the hiring and
retention by the EBUs of highly qualified personnel, who can be offered
incentives which are tied to that EBU's business and future prospects.
The original investment in each EBU other than IHS was made by the Former
Parent, which was the sole shareholder of the Company until the November 6, 1995
Spin-Off. Because the Former Parent transferred its interest in the EBUs to HIE
prior to the Spin-Off, the following summary of the Company's current investment
in and relationship with the various EBUs refers to HIE rather than the Former
Parent.
Healthcare Communications, Inc.
The Company initially acquired a 44% equity interest in HCI in October 1994
and increased its interest to 57% effective January 1, 1995. The Company further
increased its ownership interest in HCI effective December 31, 1995, by
purchasing the remaining 43% of the outstanding shares of HCI common stock from
certain HCI shareholders. The Company now operates HCI as a wholly-owned
subsidiary.
Integrated Healthcare Solutions, Inc.
IHS is an internally developed, wholly-owned subsidiary of the Company
which has been in existence since May 30, 1995.
Criterion Health Strategies, Inc.
Pursuant to an Incorporation Agreement dated as of October 21, 1994 (as
subsequently amended on December 4, 1995, the "Incorporation Agreement"), by and
among CHS, the Former Parent, Brenton L. Teveit and J. Edward Pearson, Jr.
(Messrs. Teveit and Pearson, collectively, the "CHS Shareholders"), the Company
received 10 shares of the 260,010 shares of CHS common stock outstanding,
representing less than 1% of the outstanding shares, valued at the Company's pro
rata portion of CHS' organization costs, and agreed to make loans to CHS up to a
maximum of $4,000,000. Such loans were evidenced by an 8% convertible debenture
due December 31, 2005 (the "Convertible Debenture"), convertible at the
Company's option at
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any time on or after October 21, 1996 and prior to December 31, 2005 into 64% of
the CHS common stock on a fully diluted basis.
On December 4, 1995, Massey Burch of Nashville, Tennessee, an unrelated
third party venture capital fund that specializes in the healthcare industry,
invested in CHS by acquiring one-half of the CHS common stock held by HIE and
one-half of the rights and obligations of HIE on a pari passu basis under said
agreements referred to above, including a commitment to loan CHS up to a maximum
of $2,000,000. In connection with this transaction, each of the Company and
Massey Burch was issued an 8% convertible debenture (the "New Convertible
Debentures") due June 30, 2004, each convertible into 32% of the CHS common
stock on a fully diluted basis, and the Convertible Debenture was cancelled.
Massey Burch will make loans to CHS until the later of December 31, 1996 or such
time as it has loaned $1,300,000 to CHS, after which time HIE and Massey Burch
will make loans to CHS on an equal basis until such time as HIE and Massey Burch
have each loaned a total of $2,000,000 to CHS.
CHS, the Company, Massey Burch and the CHS Shareholders are parties to a
shareholders agreement (as amended December 4, 1995, the "CHS Shareholders
Agreement"), which contains certain rights of first refusal and preemptive
rights as well as a step-up purchase option. Under the terms of the step-up
option, each of the Company and Massey Burch has the right to acquire an
additional 18% of the shares of the common stock of CHS on a fully diluted basis
at a formula purchase price after December 31, 1999.
The Incorporation Agreement also includes certain covenants of CHS, the
Company and Massey Burch relative to the management of CHS. The parties have
agreed, until the earlier of either the Company's or Massey Burch's conversion
of its New Convertible Debentures, its redemption of the CHS Shareholders'
shares or its exercise of the step-up option, to maintain a five-member Board of
Directors, which shall consist of each of the CHS Shareholders, one nominee of
the Company, one nominee of Massey Burch, and one nominee designated by the CHS
Shareholders and approved by the Company and Massey Burch. Any increases in the
size of the Board must be effected so as to maintain the foregoing relative
representation. In addition, special voting approval provisions are applicable
to certain defined Material Corporate Transactions (defined to include mergers,
consolidations, sales or other dispositions of all or substantially all the
assets of CHS, certain transactions resulting in a change of control, and
liquidation or dissolution).
See "Recent Developments" regarding an agreement in principle whereby the
Company may acquire an option to purchase Massey Burch's investment in CHS.
LICENSES AND DISTRIBUTION AGREEMENTS
On May 25, 1995, HIE entered into a Corporation Reseller Agreement with
InterTech Imaging Corporation ("InterTech"), under which the Company has made a
$500,000 license prepayment. The agreement grants HIE the nonexclusive right to
distribute InterTech's DocuPACT software world-wide in the healthcare market and
a right of first refusal on any proposed InterTech healthcare-related exclusive
joint venture or exclusive healthcare licensing agreement with a third party.
The agreement is automatically renewed each May 25th unless terminated by either
party upon sixty days written notice. The DocuPACT software is incorporated into
the Company's document imaging tools. See "-- Products -- Clinical Workstation
Tools."
On September 12, 1995, HCI entered into a Technology License Agreement with
ICS (Sales) Ltd ("ICS"), under which the Company paid $400,000 upon delivery of
source code and documentation. HCI has an 18-month exclusive, nontransferable
license to market and sell ICS software in the healthcare market in Canada, the
United States and Mexico. HCI also has a five-year non-exclusive,
nontransferable license elsewhere in the world, excluding the healthcare market
in the United Kingdom, to enter into sub-licenses with respect to ICS products.
A version of the ICS TALK software has been modified by HCI to operate in
conjunction with the Cloverleaf integration engine and is marketed and licensed
by HCI as its Compass screen scraper. See "-- Products -- Integration Tools."
On October 13, 1995, CHS entered into a Distribution Agreement with Fiserv
CIR, Inc. ("Fiserv"), which grants perpetual exclusive rights to CHS throughout
the world to market, distribute and license an
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information system application owned by Fiserv currently known as InformEnt to
end users and through distributors in the healthcare industry. The agreement
defines the term "healthcare industry" as entities that provide healthcare
medical services to patients including, but not limited to, hospitals,
physicians, managed care organizations, IDNs, federal, state and local
government health services agencies, associations whose membership is
predominately healthcare professionals, home healthcare companies, insurance
companies and federal, state and local governments. CHS's exclusive rights over
all countries except the U.S. shall be automatically revoked in the event CHS
does not establish a written licensing agreement with at least one international
entity by December 31, 1999. CHS must pay Fiserv the greater of (i) 6% of
revenues from end users for Fiserv's software or (ii) base license fees of
$300,000, $240,000, $400,000 and $560,000 for 1995 through 1998, respectively.
The annual base license fee for each year beginning 1999 shall be $560,000. CHS
may elect to terminate the agreement after December 31, 1999 upon six-months
prior written notice and payment of $280,000 plus any outstanding amounts due
pursuant to the agreement. Said distribution agreement is automatically and
irrevocably assigned to HIE in the event of the failure of CHS to pay the
license fees when due to Fiserv. The Fiserv software is incorporated into CHS's
COPPS Information Management Tool Set. See "-- Products -- Enterprise Management
Tools."
On December 4, 1995, HIE entered into a ten-year Software Licensing and
Distributorship Agreement with CHS which grants HIE a worldwide non-exclusive,
nontransferable license to market, sublicense, install and support the COPPS
Console, COPPS Survey Engine and COPPS Information Management Tool Set. The
products marketed and sublicensed are solely for internal use by third party
customers of HIE whose business is the performance of healthcare services. The
Company has a Most Favored Nations pricing status with respect to CHS products
and tools. See "-- Products -- Enterprise Management Tools."
Effective April 1, 1996, HIE entered into a ten-year agreement with
DataView which grants to the Company a perpetual, royalty-free, non-exclusive,
non-transferable, worldwide license to use DataView's clinical image management
software in the Company's service business to the extent that said use does not
directly compete with one of DataView's products. In addition to its
royalty-free distribution rights status, the Company has a Most Favored Nations
pricing status with respect to the teleradiology and the Mini-PACS product fees.
See "-- Products -- Clinical Workstation Tools."
CUSTOMERS
HIE's customers are generally the constituents of an IDN who have taken a
leadership role in the formation or maintenance of the network or who have a
vested interest in the successful operation of the network. The constituents
include hospitals, physicians, physician groups, independent practice
associations, physician-hospital organizations, health maintenance
organizations, clinics, labs, imaging centers, home healthcare and other
alternate site providers, management service organizations, employers, payers
and others. No customer accounted for more than 10% of the Company's
consolidated revenue during Partial Year 1994 or the year ended December 31,
1995. One customer accounted for approximately 26% of the Company's consolidated
revenue for the six months ended June 30, 1996. One distributor provided
customers to the Company that accounted for approximately 18%, 21% and 12% of
the Company's consolidated revenue for the year ended December 31, 1995 and for
the six months ended June 30, 1995 and 1996, respectively.
HCI has granted approximately 283 licenses for the use of its integration
engine. IHS and CHS have current customer bases of 15 and five, respectively.
The Company's expanding relationships with certain customers who initially
sought project-specific products, tools or services illustrates the
effectiveness of the Company's "small wins" strategy. For example, the Company's
first contract with a nine-hospital, 2,000-bed IDN in Georgia involved a
short-term, one-person advisory services engagement for strategic information
system planning purposes. This engagement has resulted in an ongoing
relationship between the Company and the IDN whereby the Company subsequently
provided or is currently providing software tools, such as an integration
engine, the CPI, document imaging and workflow tools, and related services, such
as implementation, integration, network architecture and development of internet
and intranet applications.
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BACKLOG
The Company had contracts for the delivery of certain tools, products and
services, generally within 12 months of the contract dates, totaling
approximately $1.2 million and $6.3 million as of June 30, 1995 and 1996,
respectively. Of the backlog as of June 30, 1996, approximately $3.4 million was
attributable to the Company's largest customer.
COMPETITION
The Company does not believe it has any direct competitors who provide the
overall comprehensive clinical information solutions which the Company offers.
However, because the Company also provides products, tools and services related
to the various elements comprising its solutions -- such as systems and network
integration, object and workflow management, patient indexing, clinical data
measurement and analysis and information network design and management
components of those solutions -- the Company has a large number of competitors
in each of these individual areas. The Company competes with, among others, (i)
healthcare information systems vendors, such as HBO & Company, Shared Medical
Systems Corporation and Cerner Corporation; (ii) integration engine companies,
such as Software Technologies Corporation, Century Analysis Incorporated and
HUBLink, Inc.; (iii) image management companies, such as IMNET Systems, Inc. and
LanVision Systems, Inc.; (iv) healthcare database reference companies, such as
HCIA Inc.; (v) consulting firms, such as Ernst & Young LLP; (vi) original
equipment manufacturers, such as International Business Machines Corporation;
(vii) systems integration firms, such as Science Applications International
Corporation; and (viii) internal MIS departments of providers. A competitor of
the Company with respect to one aspect of the Company's business may serve as a
distributor for the Company with respect to other products, tools or services.
In general, the Company's competitors have greater financial, technical,
research and development and marketing resources and more extensive business
experience than the Company. Although the Company believes that its solutions
have advantages over competing tools, products and services currently being
marketed, there can be no assurance that the Company will be able to continue to
compete effectively in the marketplace if its present and potential competitors
are able to duplicate or improve upon its tools, products, services or marketing
strategy.
GOVERNMENT REGULATION
The FDA has issued a draft guidance document addressing the regulation of
certain computer products as medical devices under the FDC Act. To the extent
that computer software is a medical device under the policy, the manufacturers
of such products could be required, depending on the product, to: (i) register
and list their products with the FDA; (ii) notify the FDA and demonstrate
substantial equivalence to other products on the market before marketing such
products; or (iii) obtain FDA approval by filing a premarket application that
establishes the safety and effectiveness of the product. The Company expects
that the FDA is likely to become increasingly active in regulating computer
software that is intended for use in healthcare settings. The FDA, if it chooses
to regulate such software, can impose extensive requirements governing pre-and
post-market conditions such as device investigation, approval, labeling and
manufacturing. In addition, such products would be subject to the FDC Act's
general controls, including those relating to good manufacturing practices and
adverse experience reporting. The FDA currently regulates the medical imaging
capability that the Company provides with the DataView technology.
The confidentiality of patient records and the circumstances under which
such records may be released are subject to substantial regulation by state and
federal laws and regulations, which govern both the disclosure and use of
confidential patient medical record information. The Company believes that it
complies with the laws and regulations regarding the collection and distribution
of patient data in all jurisdictions in which it operates, but regulations
governing patient confidentiality rights are evolving rapidly and are often
unclear and difficult to apply in the rapidly restructuring healthcare market.
On August 22, 1996, President Clinton signed the Health Insurance Portability
and Accountability Act of 1996. This legislation requires the Secretary of
Health and Human Services to adopt national standards for health information
transactions and the data
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elements used in such transactions and to adopt standards to ensure the
integrity and confidentiality of health information. The Secretary is required
to issue such standards not later than February 21, 1998. There can be no
assurance that this legislation and the regulations promulgated thereunder will
not materially restrict the ability of the Company to obtain or disseminate
patient information. Additional legislation governing the dissemination of
medical record information is continually being proposed at both the state and
federal level. Such proposed legislation could require patient consent before
even coded or anonymous patient information may be shared with third parties and
that holders or users of such information implement security measures. There can
be no assurance that changes to state or federal laws will not materially
restrict the ability of the Company to obtain or disseminate patient
information. Any material restriction on the Company's ability to obtain or
disseminate patient information could adversely affect the Company's business.
EMPLOYEES
As of August 31, 1996, HIE and its subsidiaries HCI and IHS employed a
total of 106 persons and CHS employed 13 persons. Of these employees, 18 were
engaged in sales and marketing, 35 in research and development, 50 in services
and 16 in general and administrative functions. None of these employees is
represented by a labor union or subject to any collective bargaining agreement,
nor has the Company experienced any work stoppages. The Company believes that
its relations with its employees are good.
FACILITIES
The Company leases approximately 1,250 square feet of office space in
Marietta, Georgia for its principal executive and administrative offices and its
corporate sales and marketing facilities. This lease, which expires in February
1997, currently requires monthly rental payments of $1,710. HCI leases
approximately 8,000 square feet and 2,300 square feet of office space in a
building in Dallas, Texas, for its operations, for monthly rental payments of
$11,635 and $2,000, respectively, under leases expiring in November 2000. IHS'
business is conducted from leased facilities of approximately 8,000 square feet
located in Marietta, Georgia, under a lease which expires in February 1997 and
calls for monthly rental payments of $11,036.
The Company believes that its facilities are adequate through the
above-indicated lease expiration periods. To the extent necessary to support its
operations, the Company may obtain larger office space for its corporate
headquarters.
LEGAL PROCEEDINGS
As of the date hereof, there are no material legal proceedings pending
against the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of August 31, 1996
with respect to the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Parker H. Petit........................ 57 Chairman of the Board of Directors
H. Darrell Young....................... 47 President, Chief Executive Officer and
Director
Joseph G. Bleser....................... 50 Vice President -- Finance, Chief
Financial Officer, Treasurer and
Secretary
J. Terry Dewberry...................... 52 Director
William J. Gresham, Jr................. 53 Director
Charles R. Hatcher, Jr., M.D........... 66 Director
John W. Lawless........................ 53 Director
Carl E. Sanders........................ 71 Director
Donald W. Weber........................ 59 Director
</TABLE>
Parker H. Petit has been Chairman of the Board of the Company since its
inception in June 1994. He is currently Chairman of the Board of Directors of
Matria Healthcare, Inc. ("Matria Healthcare"), a provider of specialized
obstetrical home healthcare services. Mr. Petit was the founder of the Former
Parent and served as its Chairman of the Board of Directors and Chief Executive
Officer from 1970 until the merger in March 1996 of the Former Parent with Tokos
Medical Corporation (Delaware) and Matria Healthcare (the "Merger"). Mr. Petit
is also Chairman of the Board of Directors of Healthdyne Technologies, Inc.
("Healthdyne Technologies"), a designer, manufacturer and marketer of
technologically advanced medical devices, and a former subsidiary of the Former
Parent. He is also a director of Atlantic Southeast Airlines, Inc.
H. Darrell Young has served as a director and the President and Chief
Executive Officer of the Company since June 1994. From June 1993 to June 1994,
Mr. Young developed a formal strategic business plan for the formation of HIE.
From January 1992 to June 1993, Mr. Young was Chairman of and a principal
investor in Transtel Corp., a start-up telecommunications company that
manufactured stationary wireless voice and data products, and from 1977 through
1991 he was employed by HBO & Company, a publicly-traded, international
healthcare information systems and services provider ("HBO"), in various
management positions, including serving as Vice President of Research and
Development from 1984 to 1986, President of the Product Group from 1986 to 1987,
and President and Chief Executive Officer of its subsidiary, HBO & Company of
Georgia, from 1987 to 1991.
Joseph G. Bleser has served as the Chief Financial Officer of the Company
since March 20, 1995 and as Vice President-Finance, Treasurer and Secretary of
the Company since August 10, 1995. Prior to joining the Company, Mr. Bleser
served as Executive Vice President, Chief Financial Officer and Treasurer of
Allegiant Physician Services, Inc., a physician practice management company,
from May 1993 until March 17, 1995. He was previously employed by HBO as Senior
Vice President-Finance, Treasurer, Assistant Secretary and Chief Financial
Officer from 1992 to 1993 and as Vice President, Controller and Chief Accounting
Officer from 1983 to 1992.
J. Terry Dewberry has served as a director of the Company since June 30,
1995 and from June 15, 1994 to January 30, 1995. Mr. Dewberry also served as
Vice President of the Company from June 24, 1994 until January 30, 1995. Prior
to the Merger, he had served as a director of the Former Parent since 1981 and
as Vice Chairman of the Former Parent since March 1992. From September 1987
until that time, Mr. Dewberry was President and Chief Operating Officer of the
Former Parent and was Executive Vice President of the Former Parent from August
1984 to September 1987. Mr. Dewberry is also a director of Healthdyne
Technologies.
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William J. Gresham, Jr. has served as a director of the Company since June
30, 1995. He has been a consultant to The Miller Richmond Company, a real estate
management and brokerage firm, since March 1992 and previously was a consultant
to the Landmark Group, a real estate management and development firm, from June
1990 to February 1992. From September 1987 to June 1990, he served as Chairman
of the Board of City Group, Inc., a real estate development firm, and also
served as President of that company from October 1989 to January 1992. Mr.
Gresham also served as a director of the Former Parent prior to the Merger.
Charles R. Hatcher, Jr., M.D. has served as a director of the Company since
June 30, 1995. He has been a physician since 1962 and has served as Director and
Vice President for Health Affairs at the Robert W. Woodruff Health Sciences
Center of Emory University since 1984, and Professor of Surgery at the Emory
University School of Medicine since 1971. Dr. Hatcher is also a director of Life
of the South Corporation. Prior to the Merger, he also served as a director of
the Former Parent.
John W. Lawless has served as a director of the Company since January 30,
1995. Mr. Lawless was a director of Inforum Inc., a leading provider of hospital
planning and marketing decision support systems ("Inforum"), from March 1989 to
March 1993. He was Chairman of Inforum from June 1991 to March 1993 when that
company was merged with The Medstat Group Inc., a healthcare information
services company (the "Medstat Group"). He served on the board of directors of
the Medstat Group from April 1993 to January 1994. Mr. Lawless was a co-founder
of HBO in 1974 and retired as President and director of that company in 1987.
Since 1988, Mr. Lawless has been a private investor and management consultant.
Carl E. Sanders has served as a director of the Company since June 30, 1995
and as a director of the Former Parent since 1986. Mr. Sanders is Chairman of
Troutman Sanders LLP, an Atlanta-based law firm which the Company retained as
principal outside counsel in 1995. Mr. Sanders is also a director of Matria
Healthcare, Carmike Cinemas, Inc., Metromedia International, Inc., Norrell
Corporation and Roadmaster Industries, Inc. Prior to the Merger, he also served
as a director of the Former Parent.
Donald W. Weber has served as a director of the Company since January 30,
1995. Mr. Weber has been President and Chief Executive Officer of Viewstar
Entertainment Services, Inc., a distributor of satellite entertainment systems,
since August 1993. From April 1991 to August 1993, he was a consultant and
private investor, and from May 1987 to March 1991, he served as President and
Chief Executive Officer of Contel Corporation, a telecommunications supplier,
which was sold in March 1991 to GTE Corp. Mr. Weber is also a director of
Intercel, Inc. and Pegasus Media & Communications, Inc.
KEY EMPLOYEES
Set forth below is certain information as of August 31, 1996 with respect
to key employees of the Company and CHS:
Phillip B. Guy, age 43, has served as the President and Chief Executive
Officer of HCI since February 1996. From 1995 until assuming his present
position with HCI, he served as an independent business consultant. From 1990
through the end of 1994, Mr. Guy served as President and Chief Executive Officer
of BellSouth Systems Integration (formerly Scientific Software, Inc.), a company
specializing in the development and systems integration of communications
software products. Mr. Guy has twenty years of sales, marketing and operational
experience with companies in high technology industries.
James Morrison, age 41, joined IHS in February 1995 and was appointed
President of IHS in May 1995. From 1981 until joining IHS, Mr. Morrison served
in a variety of executive operational and staff capacities at both the regional
and corporate levels at HBO, with his last positions being a Vice President of
Strategic Development and a Vice President of Research and Development. Mr.
Morrison has over twenty years of experience, including over fifteen years in
the healthcare information technology industry, in the customer service and
support and research and development areas.
Brenton L. Teveit, age 41, has served as President and Chief Executive
Officer of CHS since its inception in October 1994. Prior to starting CHS, Mr.
Teveit was part of the founding management of Inforum. Mr. Teveit held the
position of Executive Vice President-Sales and Marketing from January 1988 until
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June 1992 when he assumed the role of President and was added to the Board of
Directors. Prior to his employment at Inforum, Mr. Teveit served eleven years
with HBO. His last position was as Vice President, responsible for the
operations of a business division of HBO.
Marshal E. Field, age 49, has served as Technical Architect of IHS since
June 1994. From February 1978 until May 1994, Mr. Field was employed by HBO in
various positions, including serving as Chief Scientific Advisor. Mr. Field has
28 years of experience in software development, including 22 years of experience
in the healthcare information systems and services industry.
James L. Oakes, Jr., age 49, has served as a client partner since April
1996. Prior to joining HIE, he was Chief Operating Officer for APACHE Medical
Systems, Inc., an outcomes management company, having served in that capacity
since 1994. From 1993 to 1994, Mr. Oakes was President and Chief Operating
Officer of International Health Services, a contract staffing company, and from
1991 to 1993 he was Vice President, Sales and Marketing for InterPractice
Systems, a software development company. From 1984 until 1991, Mr. Oakes was a
Regional Vice President for HBO, responsible for sales, consulting and client
relations for the 14 western states. From 1980 to 1983, he served as Vice
President, Planning and Development for Whittaker Saudi Arabia Ltd., where he
was responsible for operations, logistics and information systems for a five
hospital group. Mr. Oakes has been active in the healthcare information systems
field since 1969.
William C. Ferges, age 53, has been with HIE as a client partner since
February 1995. Previously, Mr. Ferges was General Manager, Western Division of
CIS Technologies, a leading provider of EDI services to the healthcare industry.
From September 1987 until August 1991, Mr. Ferges served as Vice President,
Midwest Region for HBO and from April 1983 until September 1987 he served as
Vice President, Sales Midwest, for Chicago-based Baxter International, a
healthcare products company. Mr. Ferges has been involved in healthcare
information systems sales and management since 1976.
BOARD COMMITTEES
The Company has four standing committees: (i) an Executive Committee; (ii)
a Compensation Committee; (iii) a Stock Option Committee; and (iv) an Audit
Committee. These committees were formed on August 30, 1995 in anticipation of
the Spin-Off and did not meet during the remainder of 1995.
The Executive Committee has the authority to exercise the full powers of
the Board of Directors, except as otherwise provided by law or the Company's
Articles of Incorporation or By-Laws. The present members of the Executive
Committee are Messrs. Petit, Young, Sanders and Weber.
The Compensation Committee is responsible for establishing and
administering the policies which govern the compensation of the Company's
executive officers and key employees. The present members of the Compensation
Committee are Messrs. Petit, Lawless and Weber and Dr. Hatcher.
The Stock Option Committee is responsible for administering the Company's
stock option plans as provided for in said plans. The present members of the
Stock Option Committee are Messrs. Lawless, Gresham, Petit and Sanders.
The Audit Committee has the authority to (i) select and engage independent
auditors to audit the books, records and accounts of the Company; (ii) approve
the scope of such audits set by said auditors; (iii) establish policy in
connection with internal audit programs of the Company; and (iv) perform such
other duties as the Board may from time to time prescribe. The present members
of the Audit Committee are Messrs. Weber and Dewberry and Dr. Hatcher.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On March 8, 1996, the Former Parent merged with Tokos Medical Corporation
(Delaware) and Matria Healthcare, with Matria Healthcare as the surviving
corporation. Mr. Parker H. Petit, the Chairman of the Board of the Company and a
member of both the Compensation Committee and the Stock Option Committee, is
also Chairman of the Board of Matria Healthcare. Mr. Petit was the founder and
acted as Chairman of the Board of Directors and Chief Executive Officer of
Matria Healthcare's predecessor, the
44
<PAGE> 46
Former Parent. See "Certain Relationships and Related Transactions" regarding
the Company's relationships with Matria Healthcare.
Mr. Carl E. Sanders, a member of the Stock Option Committee, is Chairman of
Troutman Sanders LLP, a law firm based in Atlanta, Georgia, which provided legal
services to the Company in fiscal year 1995 and is presently being retained to
provide certain legal services to the Company.
DIRECTORS' COMPENSATION
Directors who are employees of the Company receive no additional
compensation for serving on the Board of Directors. The Company pays all
directors who are not employees of the Company ("Non-Employee Directors") a
quarterly retainer of $2,500, plus $500 for each meeting of the Board which they
attend and $250 for each committee meeting or telephonic meeting. Non-Employee
Directors are also entitled to receive options to purchase Common Stock under
the Non-Employee Director Stock Option Plan and to receive their retainer fee in
shares of Common Stock equivalent in market value to the retainer fee on the
date the retainer fee is payable. See "Stock Options and Other Plans."
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation
The following table sets forth certain information concerning the
compensation of the Company's Chief Executive Officer and the one other
executive officer of the Company whose cash compensation exceeded $100,000
during the year ended December 31, 1995 (the Chief Executive Officer and such
other officer, collectively, the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------ -------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY(1) COMPENSATION UNDERLYING OPTIONS
- -------------------------------------- ---- --------- ------------ -------------------
<S> <C> <C> <C> <C>
H. Darrell Young...................... 1995 $193,015 $8,838(2) 775,000
President and Chief Executive 1994(3) 108,255 5,344(2) 65,000(4)
Officer
Joseph G. Bleser...................... 1995(5) 142,768 154(6) 155,000
Vice President -- Finance, Chief
Financial Officer, Treasurer and
Secretary
</TABLE>
- ---------------
(1) Includes amounts deferred pursuant to flexible benefit plan.
(2) Includes automobile allowances and group life insurance premiums.
(3) From June 15, 1994 (date of incorporation of the Company) through December
31, 1994.
(4) Represents options to purchase shares of the Former Parent Common Stock. In
connection with the Spin-Off in 1995, outstanding Former Parent options
were adjusted and adjustment options to purchase shares of the Company's
Common Stock were issued to option holders pursuant to the Healthdyne
Information Enterprises, Inc. Adjustment Stock Option Plan (the "HIE
Adjustment Plan"). See "Stock Option Grants and Related Information"
regarding options received by Mr. Young pursuant to the HIE Adjustment
Plan.
(5) From March 20, 1995 (date of commencement of employment) through December
31, 1995.
(6) Includes group life insurance premiums.
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<PAGE> 47
Stock Option Grants and Related Information
The following table sets forth information concerning stock option grants
during the year ended December 31, 1995 to the named executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------- REALIZABLE VALUE AT
NUMBER OF % OF ASSUMED ANNUAL
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERM(1)
GRANTED EMPLOYEES PRICE EXPIRATION -------------------
NAME (#) IN 1995 ($/SH) DATE 5% 10%
--------------------------------- --------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
H. Darrell Young................. 775,000(2) 60.5% $ 1.50 03/23/01 $321,177 $709,718
50,000(3) 2.7(4) .23 06/28/99 3,177 7,021
15,000(3) *(4) .33 10/26/99 1,368 3,022
Joseph G. Bleser................. 155,000(2) 12.1% 1.50 03/23/01 64,235 141,944
</TABLE>
- ---------------
* Indicates less than 1%
(1) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock and overall stock
market conditions. The amounts reflected in this table may not necessarily
be achieved.
(2) Represents shares of Common Stock underlying options granted pursuant to the
Company's Stock Option Plans I and II.
(3) Represents shares of Common Stock underlying options granted to Mr. Young
pursuant to the HIE Adjustment Plan ("Adjustment Options"). The Adjustment
Options were issued pursuant to a formula intended to preserve the economic
value of outstanding Former Parent options by remedying the dilution of the
value of such options that would otherwise result from the Spin-Off.
(4) As a percentage of all options granted under the HIE Adjustment Plan.
Neither Mr. Young nor Mr. Bleser exercised any stock options during 1995.
The following table sets forth information concerning the value of unexercised
options held by the named executive officers as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1995(#) DECEMBER 31, 1995($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
H. Darrell Young(2).............................. 409,167 430,833 $ 333,850 $ 377,073
Joseph G. Bleser................................. 0 155,000 0 116,250
</TABLE>
- ---------------
(1) Represents the excess of the fair market value of the Common Stock of $2.25
per share on December 31, 1995, above the exercise price of the options.
(2) Includes options issued under the Adjustment Plan.
STOCK OPTION AND OTHER PLANS
The Company has adopted five stock option plans, one outside directors
stock plan and an employee stock purchase plan. At August 31, 1996, options for
an aggregate of 2,843,462 shares of HIE Common Stock were outstanding under
these plans. The following is a brief description of these plans.
Stock Option Plan I
The Company's Stock Option Plan I ("Plan I"), which was approved by the
Board of Directors of the Company on March 23, 1995, provides for the grant of
options to purchase up to a maximum of 930,000 shares of Common Stock. At August
31, 1996, options to purchase 816,792 shares of Common Stock were outstanding
under Plan I. Plan I is administered by the Stock Option Committee appointed by
the Board of
46
<PAGE> 48
Directors of the Company. The Stock Option Committee may grant either incentive
stock options or non-qualified stock options under Plan I. The Stock Option
Committee determines which employees of the Company and its subsidiaries will be
granted options, the number of shares of Common Stock subject to an option
granted to any employee, whether the option is an incentive stock option or
non-qualified stock option, and the other terms and conditions governing the
option (including the vesting schedule applicable to the option). Key employees,
including officers and directors of the Company and its subsidiaries, are
eligible to receive options, but directors of the Company or its subsidiaries
who are not employees and persons serving on the Stock Option Committee are not
eligible.
Stock Option Plan Two
The Company's Stock Option Plan Two ("Plan Two") was adopted by the Board
of Directors of the Company on March 23, 1995 and provides for the grant of
options to purchase up to a maximum of 930,000 shares of Common Stock. At August
31, 1996, options to purchase 621,375 shares of HIE Common Stock were
outstanding under Plan Two. Plan Two is identical to Plan I except that Plan Two
contains a fixed vesting schedule under which, after the Spin-Off, an option
granted under Plan Two shall become exercisable (i.e., vest) to the extent of
33% of the shares of Common Stock subject to such option on each of the first
three anniversary dates of the option's date of grant.
Non-Employee Director Stock Option Plan
The Company's Non-Employee Director Stock Option Plan (the "Director Stock
Option Plan") was adopted by the Board of Directors of the Company on August 10,
1995. Pursuant to the Director Stock Option Plan, current and subsequently
elected directors each receive an initial option to purchase 20,000 shares of
Common Stock. In addition, each Non-Employee Director will be granted an
additional option to purchase 2,000 shares of Common Stock following such
director's reelection at an annual meeting of shareholders of the Company,
provided that such individual has been a Non-Employee Director for the preceding
six months. The purchase price for all options granted under the Non-Employee
Director Stock Option Plan is equal to the fair market value on the date of said
grants. Under the Director Stock Option Plan, 250,000 shares of Common Stock are
reserved for issuance. At August 31, 1996, options to purchase 154,000 shares of
HIE Common Stock were outstanding under the Director Stock Option Plan.
1996 EBU Tandem Stock Option Plan
The Company's 1996 EBU Tandem Stock Option Plan (the "HIE Tandem Option
Plan"), which provides for the grant of options to purchase up to 957,500 shares
of Common Stock, operates in conjunction with the Healthcare Communications,
Inc. Stock Option Plan and the Integrated Healthcare Solutions, Inc. Stock
Option Plan (together, the "EBU Plans"). The HIE Tandem Option Plan was adopted
by the Board of Directors of the Company on April 23, 1996. The HIE Tandem
Option Plan and the EBU Plans (collectively, the "Tandem Plans") are intended to
advance the interests of the Company and its EBUs by providing a means whereby
officers, key employees, consultants and advisors to the respective EBUs may
acquire a proprietary interest in either or both the employing EBU and HIE.
Options granted under the EBU Plans entitle the holder to receive tandem options
granted under the HIE Tandem Option Plan, and vice versa. The exercise of an
option granted under either EBU Plan results in a simultaneous expiration of the
proportionate amount of the tandem option granted under the HIE Option Plan;
conversely, the exercise of an option granted under the HIE Tandem Option Plan
results in a simultaneous expiration of the proportionate amount of the tandem
option granted under the EBU Plan. In the event of the termination or expiration
of an option granted under any of the Tandem Plans, the corresponding tandem
option automatically terminates. At August 31, 1996, options to purchase 600,534
shares of HIE Common Stock were outstanding under the HIE Tandem Option Plan.
HIE Adjustment Stock Option Plan
Certain directors and employees of the Former Parent and/or its
subsidiaries had been granted stock options to purchase shares of the Former
Parent's Common Stock ("Former Parent Options") under the
47
<PAGE> 49
Non-employee Director Stock Option Plan (the "Director Plan") and the 1981,
1983, 1985, 1991 and 1993 Former Parent Stock Option Plans (together with the
Director Plan, the "Former Parent Option Plans"). The Former Parent Option Plans
and related Stock Option Agreements permitted the Stock Option Committee of the
Former Parent's Board of Directors (the "Committee"), or the Former Parent Board
of Directors itself (in the case of the Director Plan) in the event of a stock
dividend or other relevant change in the capitalization or structure of the
Former Parent, to make such equitable adjustments as it deemed appropriate to
preserve the value of the Former Parent Options by adjusting the number and kind
of underlying shares and the option exercise price. Pursuant to the adjustment
provisions set forth in the Former Parent Option Plans, the Committee and the
Board of Directors determined that each outstanding Former Parent Option held by
any person who is a director of the Former Parent or an employee of the Former
Parent or its subsidiaries on a specified date in advance of the Spin-Off would
be adjusted immediately prior to the Spin-Off so as to represent two separately
exercisable options (the "Adjustment"): one to purchase the Former Parent Common
Stock (the "Former Parent Adjusted Option") and one to purchase HIE Common Stock
(the "HIE Adjustment Option") (collectively, the "Adjusted Options").
The Adjusted Options were issued pursuant to formulas intended to preserve
the economic value of the Former Parent Options by remedying the dilution of the
value of such options that would otherwise result from the Spin-Off. The
Adjustment had the effect of treating holders of the Former Parent Options in a
manner that paralleled the treatment of the Former Parent shareholders in the
Spin-Off. The HIE Adjustment Options are subject to terms and conditions set
forth in the HIE Adjustment Plan which was approved by the Former Parent as the
sole shareholder of HIE. The Board of Directors of the Company approved the HIE
Adjustment Plan on August 10, 1995. The HIE Adjustment Plan was adopted solely
for the purpose of issuing the HIE Adjustment Options, and no further grants
will be made under such plan except in connection with any adjustment or regrant
of any then-outstanding options as permitted under such plan. The terms of the
HIE Adjustment Plan are substantially the same as the terms of the Former Parent
Option Plans. The HIE Adjustment Options consist of both nonqualified options
and incentive stock options. The HIE Adjustment Options are not transferable,
except to the limited extent that the Former Parent Options with respect to
which they will be issued are transferable. The Former Parent Options are not
transferable except by will or the applicable laws of descent and distribution.
At August 31, 1996, options to purchase 650,761 shares of HIE Common Stock were
outstanding under the HIE Adjustment Plan.
Non-Employee Directors Stock Plan
The Company's Non-Employee Directors Stock Plan (the "Stock Plan") was
adopted by the Board of Directors of the Company on October 20, 1995 and
provides a mechanism for Non-Employee Directors of the Company to automatically
increase their ownership of HIE Common Stock and thereby further align their
interests with those of the Company's shareholders. The Stock Plan, which is
administered by the Company's Compensation Committee, allows Non-Employee
Directors to elect to receive all or a portion of their annual retainer fee in
unrestricted shares of HIE Common Stock. The shares will be issued quarterly.
There are presently 250,000 shares of Common Stock reserved for issuance under
the Stock Plan. At August 31, 1996, no shares of HIE Common Stock were
outstanding under the Stock Plan.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") provides
for the purchase of 200,000 shares of the Company's Common Stock by eligible
employees of the Company and its subsidiaries (as defined in Section 424(f) of
the Internal Revenue Code of 1986, as amended). Under the Purchase Plan, the
Company conducts a series of offerings of its authorized but unissued shares of
Common Stock each of which commences on the first business day of each calendar
quarter (starting July 1, 1996) and terminates on the last business day of such
quarter (an "Offering Period"). An eligible employee who elects to become a
participant in the Purchase Plan must sign an authorization form pursuant to
which payroll deductions to purchase Common Stock are made. The authorization
must specify the amount of payroll deduction to be made from the employee's
compensation and such amount (i) may not be less than 2% of the participant's
48
<PAGE> 50
compensation as paid on each payday or $100, whichever is less, and (ii) may not
exceed 10% of the participant's compensation as paid on each payday.
At the beginning of each Offering Period each participant is granted, by
operation of the Purchase Plan, an option to purchase up to 2,000 shares, which
option will expire, to the extent it is unexercised, on the termination date of
that Offering Period. No participant may be granted an option under the Plan if
the option will permit his rights to purchase stock under all employee stock
purchase plans of the Company, any parent of the Company, and any of the
Company's subsidiaries to accrue at a rate that exceeds $25,000 in the fair
market value of such stock for each calendar year or portion of such year in
which the option would be outstanding.
The exercise price for options granted under the Purchase Plan will be the
lower of 85% of the fair market value per share of Common Stock on either the
first business day of the Offering Period or the last business day of the
Offering Period. Fair market value generally is the closing quoted selling price
of the Common Stock in the over-the-counter market as reported in The Wall
Street Journal or any successor, similar publication or as determined by other
equitable means pursuant to the Plan. No shares had been issued under the
Employee Stock Purchase Plan as of August 31, 1996.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's By-Laws provide that the Company will indemnify its directors
and officers and any persons serving at the request of the Company as a director
or officer of another corporation or other entity to the full extent permitted
by law. The Company believes that indemnification under its By-Laws covers at
least negligence and gross negligence by indemnified parties.
The Company's Articles of Incorporation provides that, pursuant to Georgia
law, its directors shall not be liable for monetary damages for breach of the
director's fiduciary duty of care to the Company and its shareholders. This
provision does not eliminate the duty of care, and in appropriate circumstances,
equitable remedies such as injunction or other forms of non-monetary relief will
remain available under Georgia law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for appropriations of business opportunities of the Company, acts or
omissions involving intentional misconduct or knowing violations of law, actions
leading to improper personal benefit to the director, and payment of dividends
or approval of stock repurchases or redemptions that are unlawful under Georgia
law. The provisions do not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
49
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Parker H. Petit, the Chairman of the Board of the Company, is also the
Chairman of the Board of Matria Healthcare. Matria Healthcare provides certain
services to the Company under the terms of an Administrative Services Agreement
(the "Services Agreement") originally entered into between the Company and the
Former Parent. Pursuant to the Services Agreement, Matria Healthcare has agreed
to provide certain administrative and related services to the Company. These
services relate to areas such as accounting, legal, tax, data processing, human
resources and certain other services, as well as certain insurance coverages.
Charges for these services are made on a monthly basis in an amount which is
estimated to equal Matria Healthcare's cost, including overhead, of providing
the services. The Company is under no obligation to purchase such services from
Matria Healthcare. For the year ended December 31, 1995, the Company reimbursed
Matria Healthcare for the cost of the administrative and personnel services
provided by employees of Matria Healthcare in the amount of $325,000. In
addition, the Company paid $57,000 to reimburse Matria Healthcare for the cost
of group health, life, directors and officers and property and casualty
insurance premiums paid by Matria Healthcare on behalf of the Company for the
year ended December 31, 1995. These amounts paid by the Company to Matria
Healthcare for services, however, may not be representative of the amount of
services required by the Company in the future. The respective Audit Committees
of the Company and Matria Healthcare meet on an annual basis to review the
services previously provided and to be provided in the future. The Services
Agreement has an initial term of two years and is automatically renewed each
year thereafter. The Services Agreement may be cancelled for any reason by
either party without penalty on 120 days advance notice.
It is the Company's policy that all transactions between the Company and
Matria Healthcare, or between the Company and any other affiliated party, will
be on an arm's length basis on terms no less favorable to the Company than could
be obtained from unaffiliated third parties. In addition, it is the Company's
policy that any transactions between the Company and any other affiliated party,
including Matria Healthcare or its affiliates, that are material to the Company
must be approved by the vote of a majority of the independent and disinterested
members of the Board of Directors of the Company.
50
<PAGE> 52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the Common Stock
beneficially owned as of August 31, 1996 by each of the Company's directors and
each executive officer named in the Summary Compensation Table set forth under
the caption "Executive Compensation and Other Information" and all directors and
executive officers as a group. Under the rules of the Securities and Exchange
Commission (the "Commission"), a person is deemed to be a beneficial owner of a
security if he or she has or shares the power to vote or to direct the voting of
such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities
which that person has the right to acquire within 60 days, as well as any
securities owned by such person's spouse, children or relatives living in the
same house. Accordingly, more than one person may be deemed to be a beneficial
owner of the same securities. Unless otherwise indicated in a footnote each
person listed below possesses sole voting and investment power with respect to
the shares indicated as beneficially owned by him. Mr. Parker H. Petit, the
Chairman of the Board of the Company, is the only shareholder known to the
Company to beneficially own more than five percent of the outstanding shares of
the Company's Common Stock. Mr. Petit's address is c/o Matria Healthcare, Inc.,
1850 Parkway Place, Suite 1200, Marietta, Georgia 30067.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED(1)
-----------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------- ------------------ --------- ---------
<S> <C> <C> <C>
Parker H. Petit........................................... 1,560,011(2)(3) 9.0% 7.8%
H. Darrell Young.......................................... 646,250(4) 3.6% 3.1%
Joseph G. Bleser.......................................... 63,666(5) * *
J. Terry Dewberry......................................... 108,526 * *
William J. Gresham, Jr.................................... 23,500(6) * *
Charles R. Hatcher, Jr., M.D.............................. 20,000(7) * *
John W. Lawless........................................... 45,800 * *
Carl E. Sanders........................................... 92,500(8) * *
Donald W. Weber........................................... 10,000 * *
All directors and executive officers as a group (9 2,569,003 14.2% 12.3%
individuals)............................................
</TABLE>
- ---------------
* Indicates less than 1%
(1) Percent of Shares Beneficially Owned is with respect to outstanding shares
of the Common Stock on August 31, 1996 (17,283,419 shares).
(2) Does not include 277,130 shares owned by NationsBank of Georgia, N.A.
("NationsBank"), as Trustee of an irrevocable trust for the benefit of Mr.
Petit's children, or 600,000 shares owned by NationsBank as Trustee of an
irrevocable trust for the benefit of Mr. Petit's grandchildren (such trusts
hereinafter referred to collectively as the "Trusts" and individually as a
"Trust"). Mr. Dewberry, a director of the Company, is a member of the
self-perpetuating advisory committee of each Trust. Each advisory committee
has the power to remove the Trustee and to direct the Trustee as to the
voting and disposition of the shares owned by the Trustee except that the
advisory committee has no such power during the lifetime of Mr. Petit if
the shares held by Mr. Petit and the Trust, when aggregated, are
"significant from the viewpoint of voting control" of the Company. Both the
Trustee and the respective advisory committees consider the shares owned by
the Trustee under the Trusts to be significant in terms of voting control.
In the absence of direction by the advisory committees, the Trustee has
sole power to direct the voting and disposition of the securities in the
Trusts.
(3) Includes 1,452,511 shares owned by Mr. Petit, 97,500 shares held by Petit
Investments Limited Partnership, and 10,000 shares held by the Petit
Grantor Trust.
(4) Represents shares that Mr. Young may acquire through the exercise of stock
options exercisable within 60 days. Does not include 1,700 shares owned by
Mr. Young's adult son, as to which shares Mr. Young disclaims beneficial
ownership.
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<PAGE> 53
(5) Includes 51,666 shares that Mr. Bleser may acquire through the exercise of
stock options exercisable within 60 days.
(6) Represents 3,500 shares owned by Mr. Gresham and 20,000 shares that may be
acquired through the exercise of stock options exercisable within 60 days.
(7) Represents shares that Dr. Hatcher may acquire through the exercise of stock
options exercisable within 60 days.
(8) Represents 72,500 shares owned by Mr. Sanders and 20,000 shares that may be
acquired through the exercise of stock options exercisable within 60 days.
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.01 per share, and 20,000,000 shares of Preferred
Stock, no par value. The Preferred Stock may be issued in separate series as
authorized by the Company's Board of Directors.
COMMON STOCK
Each share of Common Stock entitles the holder to one vote on all matters
on which holders are permitted to vote. The holders of Common Stock are entitled
to dividends when, as and if declared by the Board of Directors out of funds
legally available therefor and, upon liquidation, to a pro rata share in any
distribution to shareholders. The Common Stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock in one or
more series and to fix the voting rights, terms of redemption, redemption
prices, liquidation preferences and other rights and the number of shares
constituting any series or the designation of such series, without further vote
or action by the shareholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the shareholders, may discourage bids for the
Company's Common Stock at a premium over the market price therefor and may have
an adverse effect on the market price of the Common Stock and the voting and
other rights of the holders of the Common Stock. The Board of Directors has
authorized one series of the Preferred Stock, the Series A Cumulative Preferred
Stock (the "Series A Preferred Stock"), consisting of 500,000 shares. See
"-- Shareholder Rights Plan."
CERTAIN PROVISIONS OF THE COMPANY'S BY-LAWS
The Company has adopted a bylaw electing coverage under the business
combinations provisions of the Georgia Business Corporations Code. The business
combinations provisions generally prohibit a corporation from engaging in any
"business combination" (a merger, consolidation or other specified corporation
transaction) with an "interested shareholder" (a 10% shareholder or an affiliate
of the corporation which was a 10% shareholder at any time within the preceding
two years) for a period of five years from the date such person becomes an
interested shareholder, unless the interested shareholder (i) prior to becoming
an interested shareholder, obtained the approval of the Board of Directors for
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder, (ii) becomes the owner of at
least 90% of the outstanding voting stock of the corporation in the same
transaction in which the interested shareholder became an interested
shareholder, excluding for purposes of determining the number of shares
outstanding those shares owned by officers, directors, subsidiaries and certain
employee stock plans of the corporation or (iii) subsequent to the acquisition
of 10% or more of the outstanding voting stock of the corporation, acquires
additional shares resulting in ownership of at least 90% of the outstanding
voting stock of the corporation and obtains approval of the business combination
by the holders of a majority of the shares of voting stock of the corporation,
other than those shares held by an interested shareholder, officers, directors,
subsidiaries and certain employee stock plans of the corporation.
REGISTRATION RIGHTS
The Company has granted limited registration rights with respect to the
1,540,241 shares of Common Stock underlying the Company's convertible debenture
due January 2, 1998 issued in connection with the Company's acquisition of the
remaining equity interest in HCI. See Notes 3 and 6 of the Notes to Consolidated
Financial Statements. Upon conversion of the debenture at maturity (or earlier
upon the occurrence of an event of default), holders of such underlying shares
will have the right, during the three months following the conversion, to
require the Company to file a registration statement covering the sale of such
shares. In addition, the Company's agreement in principle with Massey Burch
contemplates that the
53
<PAGE> 55
Company will grant certain registration rights with respect to both the shares
of Common Stock underlying the proposed warrant and the shares of Common Stock
issuable upon the Company's exercise of its option to acquire Massey Burch's
interest in CHS. See "Recent Developments."
SHAREHOLDER RIGHTS PLAN
On October 25, 1995, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of HIE Common
Stock to shareholders of record at the close of business on October 30, 1995 and
authorized and directed the issuance of one Right with respect to each share of
Common Stock that shall become outstanding at any time thereafter but prior to
the occurrence of certain terminating events. Each Right entitles the registered
holder to purchase from the Company a unit consisting of one one-hundredth of a
share (a "Unit") of the Series A Preferred Stock, at a purchase price of $50 per
Unit, subject to adjustment (the "Purchase Price"). The Purchase Price shall be
paid in cash. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the Company and SunTrust Bank, as
Rights Agent.
Upon the occurrence of certain events generally associated with an
unsolicited takeover attempt of the Company or certain self-dealing
transactions, the Rights (except for Rights held by an Acquiring Person, as that
term is defined in the Rights Agreement) will become exercisable and will cease
to automatically trade with the Common Stock. Thereafter, upon the occurrence of
certain further triggering events, each Right (except for Rights held by an
Acquiring Person) will become exercisable for that number of shares of Common
Stock having a value equal to two times the exercise price of the Right; or in
the event that the Company is acquired in a merger or other business combination
and is not the surviving corporation, or over one half of the Company's assets
or earning power is sold or transferred, each Right (except for Rights held by
an Acquiring Person) will become exercisable for that number of shares of common
stock of the acquiring company having a value equal to two times the exercise
price of the Right. The Purchase Price payable, and the number of Units of
Series A Preferred Stock or other securities or property issuable, upon exercise
of the Rights are subject to certain anti-dilution adjustments.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
The Rights Agreement may be amended in certain instances so long as there
are Continuing Directors (as that term is defined in the Rights Agreement) and a
majority of such Continuing Directors votes in favor of the proposed amendment.
Other than those provisions relating to the principal economic terms of the
Rights, any of the provisions of the Rights Agreement may be amended prior to
the Rights Distribution Date (as that term is defined in the Rights Agreement).
After the Rights Distribution Date, the provisions of the Rights Agreement may
be amended in order to cure any ambiguity, to correct or supplement any
provision contained in the Rights Agreement which is defective or inconsistent
with another provision therein, to make changes which do not adversely affect
the interests of holders of Rights (excluding the interests of any Acquiring
Person), or to shorten or lengthen any time period under the Rights Agreement;
provided however, that no amendment to adjust the time period governing
redemption shall be made at such time as the Rights are not redeemable and no
amendment shall be made to lengthen any other time period unless such
lengthening is for the purpose of protecting, enhancing or clarifying the rights
of, and/or the benefits to, the holders of the common equity of the Company,
including the holders of the Rights.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
in a manner which causes the Rights to become exercisable. The Company believes,
however, that the Rights should neither affect any prospective offeror willing
to negotiate with the Board of Directors of the Company nor interfere with any
merger or other business combination approved by the Board of Directors of the
Company because the Board of Directors may, at its option, redeem the Rights.
The Rights will expire on October 23, 2005, unless earlier redeemed by the
Company. This
54
<PAGE> 56
summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the HIE Common Stock is SunTrust Bank.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
20,033,419 shares of Common Stock (20,445,919 shares assuming full exercise of
the Underwriters' over-allotment option). Of these shares, the 2,750,000 shares
sold in this Offering (3,162,500 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable without restrictions or
further registration under the Securities Act, except those held by "affiliates"
(as defined under the Securities Act) of the Company. The remaining outstanding
shares of Common Stock, which were distributed by the Former Parent in the
Spin-Off and were registered under the Securities Act, are also freely
tradeable, except for affiliate shares.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company who have acquired the shares in the public market,
will be entitled to sell within any three-month period a number of shares that
does not exceed the greater of: (i) 1% of the outstanding shares of Common Stock
(approximately 200,334 shares immediately after the closing of this Offering, or
approximately 204,459 shares if the Underwriters' over-allotment option is
exercised in full); or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding such sale. Sales under Rule 144
are also subject to certain requirements relating to the manner and notice of
sale and the availability of current public information about the Company.
Each of the Company's directors and executive officers has entered into
lock-up agreements with the Underwriters pursuant to which such shareholders
have agreed not to sell or otherwise dispose of any shares of Common Stock for a
period of 90 days after the date of this Prospectus without the prior written
consent of Morgan Keegan & Company, Inc. Upon expiration of the lock-up period,
these shares will be eligible for immediate sale, subject in certain cases to
the volume and other limitations under Rule 144.
The Company has filed registration statements on Form S-8 under the
Securities Act to register shares of Common Stock reserved for issuance under
its stock and employee benefit plans. See "Stock Option and Other Plans." Shares
issued under the respective plans will be freely tradeable without restriction
or further registration under the Securities Act, unless acquired by affiliates
of the Company.
No predictions can be made with respect to the effect, if any, that public
sales of shares of Common Stock or the availability of shares for sale in the
public market will have on the market price of the Common Stock after this
Offering. Sales of substantial amounts of Common Stock in the public market
following this Offering, or the perception that such sales may occur, could
adversely affect the market price of the Common Stock or the ability of the
Company to raise capital through sales of its equity securities. See "Risk
Factors -- Shares Eligible for Future Sale" and "Description of Capital
Stock -- Registration Rights."
55
<PAGE> 57
UNDERWRITING
The Underwriters named below, acting through their representative, Morgan
Keegan & Company, Inc., have agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Morgan Keegan & Company, Inc. ............................................
---------
Total........................................................... 2,750,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any of such
shares are purchased.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the offering price set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession of not in excess of $ per share, of which $ may be
reallocated to other dealers. After the Offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representative. No
such reduction shall change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option for thirty days after
the date of this Prospectus to purchase, at the offering price, less the
underwriting discounts and commissions as set forth on the cover page of this
Prospectus, up to 412,500 additional shares of Common Stock at the same price
per share as the Company receives for the 2,750,000 shares of Common Stock
offered hereby, solely to cover over-allotments, if any. If the Underwriters
exercise their over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased by each of
them, as shown in the foregoing table, bears to the 2,750,000 shares of Common
Stock offered hereby.
56
<PAGE> 58
Each of the Company's directors and executive officers has agreed not to
offer, sell or otherwise dispose of Common Stock or securities convertible into
or exchangeable for, or any rights to purchase or acquire Common Stock for a
period of 90 days following the Effective Date, without the prior written
consent of Morgan Keegan & Company, Inc. The Company also has agreed not to
offer, sell, contract to sell or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable for, or any rights to
purchase or acquire, Common Stock for a period of 90 days following the date of
this Prospectus without the prior written consent of Morgan Keegan & Company,
Inc., except for the granting of options or the sale of stock pursuant to the
Company's stock plans described in this Prospectus. Morgan Keegan & Company,
Inc., in its discretion, may waive the foregoing restrictions in whole or in
part, with or without a public announcement of such action.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
In general, the rules of the Commission will prohibit the Underwriters from
making a market in the Common Stock during the "cooling off" period immediately
preceding the commencement of sales in the Offering. The Commission has,
however, adopted exemptions from these rules that permit passive market making
under certain conditions. These rules permit an underwriter to continue to make
a market subject to the conditions, among others, that its bid not exceed the
highest bid by a market maker not connected with the Offering and that its net
purchases on any one trading day not exceed prescribed limits. Pursuant to these
exemptions, certain Underwriters, selling group members (if any) or their
respective affiliates may have engaged in passive market making in the Company's
Common Stock during the cooling off period.
The Company has agreed to indemnify the Underwriters or to contribute to
losses arising out of certain liabilities under the Act.
LEGAL MATTERS
The validity of the HIE Common Stock being distributed hereby and certain
other legal matters in connection with this Offering is being passed upon for
the Company by Troutman Sanders LLP, Atlanta, Georgia. Carl E. Sanders, a
partner at Troutman Sanders LLP, is a director of the Company and of Matria
Healthcare and at August 31, 1996 was the beneficial owner of 92,500 shares of
the Common Stock of the Company. See "Management -- Compensation Committee
Interlocks and Insider Participation."
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Underwriters by Hale and Dorr, Washington, D.C.
EXPERTS
The consolidated balance sheets of Healthdyne Information Enterprises, Inc.
and subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for the period
from June 15, 1994 (the date of incorporation) to December 31, 1994 and for the
year ended December 31, 1995 have been included herein and in the registration
statement in reliance upon the reports of KPMG Peat Marwick LLP and Arthur
Andersen LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firms as experts in accounting and
auditing.
57
<PAGE> 59
The balance sheets of Healthcare Communications, Inc. as of December 31,
1993 and 1994 and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1994 and schedule included in this Prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts giving said report.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement", which term shall include any amendments or
supplements thereto) under the Securities Act with respect to this Offering.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Statements made in this Prospectus as to the contents
of any contract, agreement or other document referred to herein are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
that exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company
with the Commission may be inspected without charge at the principal office of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the Regional Offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of
such information can be obtained by mail from the principal office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the Company can be inspected
and copied at the public reference facilities maintained by the Commission in
Washington, D.C., and at the regional offices of the Commission listed above.
Copies of such material can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The Commission maintains
a web site that contains reports, proxy statements and other information
regarding registrants, including the Company, that file such information
electronically with the Commission. The address of the Commission's web site is
http://www.sec.gov.
58
<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and
June 30, 1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the Period from June 15, 1994 (Date of
Incorporation) to December 31, 1994, the Year ended December 31, 1995 and the Six
Month Periods ended June 30, 1995 and 1996 (unaudited)........................... F-4
Consolidated Statements of Shareholders' Equity for the Period from June 15, 1994
(Date of Incorporation) to December 31, 1994, the Year ended December 31, 1995
and the Six Month Period ended June 30, 1996 (unaudited)......................... F-5
Consolidated Statements of Cash Flows for the Period from June 15, 1994 (Date of
Incorporation) to December 31, 1994, the Year ended December 31, 1995 and the Six
Month Periods ended June 30, 1995 and 1996 (unaudited)........................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
HEALTHCARE COMMUNICATIONS, INC.
Report of Independent Public Accountants............................................ F-18
Balance Sheets as of December 31, 1993 and 1994..................................... F-19
Statements of Operations for the Years Ended December 31, 1992, 1993 and 1994....... F-20
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1992,
1993 and 1994.................................................................... F-21
Statements of Cash Flows for the Years Ended December 31, 1992, 1993 and 1994....... F-22
Notes to Financial Statements....................................................... F-23
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Healthdyne Information Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Healthdyne
Information Enterprises, Inc. and subsidiaries as of December 31, 1994 and 1995,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the period from June 15, 1994 (date of incorporation) to December
31, 1994 and for the year ended December 31, 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the 1994 financial statements
of Healthcare Communications, Inc. (44% owned investee company during 1994). The
Company's investment in Healthcare Communications, Inc. at December 31, 1994 was
$6,904,000 and its equity in earnings was $154,000 for the period ended December
31, 1994. The 1994 financial statements of Healthcare Communications, Inc. were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for this company, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Healthdyne Information Enterprises,
Inc. and subsidiaries at December 31, 1994 and 1995 and the results of their
operations and their cash flows for the period from June 15, 1994 to December
31, 1994 and for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
Atlanta, Georgia KPMG PEAT MARWICK LLP
February 14, 1996
F-2
<PAGE> 62
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 10)................................. $ 41 $ 4,013 $ 2,812
Trade accounts receivable, less allowances of $9, $85 and $68 at
December 31, 1994 and 1995 and June 30, 1996, respectively........ 88 2,966 4,158
Other current assets................................................ 52 1,020 601
------- -------- -----------
Total current assets......................................... 181 7,999 7,571
Notes receivable (note 11)............................................ 590 417 417
Purchased software, net of accumulated amortization of $-0-, $150 and
$378 at December 31, 1994 and 1995 and June 30, 1996,
respectively........................................................ 44 2,494 3,120
Capitalized software development costs, net of accumulated
amortization of $11 at June 30, 1996................................ -- -- 434
Property and equipment, net (note 4).................................. 202 1,136 1,226
Investment in affiliated company (note 3)............................. 6,904 -- --
Excess of cost over net assets of businesses acquired, less
accumulated amortization of $50, $758 and $1,104 at December 31,
1994 and 1995 and June 30, 1996, respectively (note 3).............. 1,749 9,614 9,369
Other assets.......................................................... 304 74 31
------- -------- -----------
$ 9,974 $ 21,734 $ 22,168
======== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations under capital
leases (notes 6, 10 and 11)....................................... $ -- $ 2,652 $ 1,734
Accounts payable, principally trade................................. 186 547 793
Accrued liabilities (note 5)........................................ 28 760 750
Deferred service revenue............................................ 23 1,297 1,796
------- -------- -----------
Total current liabilities.................................... 237 5,256 5,073
Long-term debt and obligations under capital leases, excluding current
installments (notes 6, 10, and 11).................................. -- 5,382 5,306
Other................................................................. -- 167 167
------- -------- -----------
Total liabilities............................................ 237 10,805 10,546
------- -------- -----------
Shareholders' equity (notes 6, 8 and 13):
Preferred stock, without par value: authorized 20,000 shares;
designated Series A Cumulative Preferred Stock 500 shares; issued
none.............................................................. -- -- --
Common stock, $.01 par value: authorized 50,000 shares; issued and
outstanding 15,500, 16,503, and 17,186 shares at December 31, 1994
and 1995 and June 30, 1996, respectively.......................... 155 165 172
Additional paid-in capital.......................................... 10,847 22,012 22,332
Accumulated deficit................................................. (1,265) (11,248) (10,882)
------- -------- -----------
Total shareholders' equity................................... 9,737 10,929 11,622
Commitments (notes 9, 11 and 13)......................................
------- -------- -----------
$ 9,974 $ 21,734 $ 22,168
======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 63
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX
FOR THE PERIOD MONTHS ENDED
FROM JUNE 15, 1994 YEAR ENDED JUNE 30,
(DATE OF INCORPORATION) DECEMBER 31, -----------------
TO DECEMBER 31, 1994 1995 1995 1996
----------------------- ------------ ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenue (note 12):
Software................................... $ 153 $ 5,136 $ 2,146 $ 3,152
Services................................... -- 3,564 1,607 4,115
------- -------- ------- -------
Total revenue...................... 153 8,700 3,753 7,267
------- -------- ------- -------
Cost of revenue (note 2):
Software................................... 65 536 151 312
Services................................... -- 2,082 793 2,223
------- -------- ------- -------
Total cost of revenue.............. 65 2,618 944 2,535
------- -------- ------- -------
Gross profit....................... 88 6,082 2,809 4,732
Operating expenses (note 2):
Sales and marketing........................ 186 3,435 1,478 1,681
Research and development................... 192 1,928 828 605
General and administrative (including
related party expenses of $164, $325,
$153 and $14 for the respective
periods)................................ 980 4,337 1,814 1,845
Purchased in-process research and
development (note 3).................... -- 3,605 -- --
Goodwill impairment and investment option
reserve (note 3)........................ -- 1,730 -- --
------- -------- ------- -------
Operating earnings (loss).......... (1,270) (8,953) (1,311) 601
Losses of affiliate (note 11)................ (156) (1,144) (468) --
Minority interest in net loss of
subsidiary................................. -- 142 20 --
Interest expense............................. -- (303) (85) (315)
Interest income.............................. 7 135 -- 80
Equity in earnings of affiliate (note 3)..... 154 -- -- --
------- -------- ------- -------
Earnings (loss) before income
taxes............................ (1,265) (10,123) (1,844) 366
Income tax (expense) benefit (note 7)........ -- 140 (45) --
------- -------- ------- -------
Net earnings (loss)................ $(1,265) $ (9,983) $(1,889) $ 366
======= ======== ======= =======
Net earnings (loss) per common share and
common share equivalent.................... $ (.08) $ (.64) $ (.12) $ .02
======= ======== ======= =======
Weighted average number of common shares and
common share equivalents outstanding....... 15,500 15,653 15,500 18,689
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 64
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, June 15, 1994.................... -- $ -- $ -- $ -- $ --
Issuance of common stock (note 8)......... 15,500 155 -- -- 155
Capital contribution...................... -- -- 10,847 -- 10,847
Net loss.................................. -- -- -- (1,265) (1,265)
------ ------ ---------- ----------- -------------
Balance, December 31, 1994................ 15,500 155 10,847 (1,265) 9,737
Issuance of common stock.................. 615 6 (6) -- --
Stock options exercised................... 388 4 130 -- 134
Capital contribution...................... -- -- 11,041 -- 11,041
Net loss.................................. -- -- -- (9,983) (9,983)
------ ------ ---------- ----------- -------------
Balance, December 31, 1995................ 16,503 165 22,012 (11,248) 10,929
Stock options exercised (unaudited)....... 683 7 320 -- 327
Net earnings (unaudited).................. -- -- -- 366 366
------ ------ ---------- ----------- -------------
Balance, June 30, 1996 (unaudited)........ 17,186 $172 $ 22,332 $ (10,882) $11,622
====== ====== ======= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 65
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD SIX
FROM JUNE 15, 1994 MONTHS ENDED
(DATE OF YEAR ENDED JUNE 30,
INCORPORATION) DECEMBER 31, -----------------
TO DECEMBER 31, 1994 1995 1995 1996
--------------------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)................................ $(1,265) $ (9,983) $(1,889) $ 366
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Purchased in-process research and development
(note 3)....................................... -- 3,605 -- --
Goodwill impairment (note 3)..................... -- 1,430 -- --
Investment option reserve (note 3)............... -- 300 -- --
Losses of affiliate.............................. 156 1,144 468 --
Depreciation and amortization.................... 80 1,080 432 728
Minority interest in net loss of subsidiary...... -- (142) (20) --
Equity in earnings of affiliate.................. (154) -- -- --
Increase in trade accounts receivable............ (88) (1,411) (735) (1,225)
(Increase) decrease in other assets.............. (28) (477) (300) 222
Increase (decrease) in trade accounts payable.... 53 204 (17) 305
Increase (decrease) in accrued liabilities....... (10) 223 (195) 63
Increase (decrease) in deferred service
revenue........................................ -- 480 (22) 499
------- ------- ------- -------
Net cash provided by (used in) operating
activities................................ (1,256) (3,547) (2,278) 958
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures............................... (148) (672) (406) (159)
Investment in equity of affiliate.................. (6,750) -- -- --
Acquisition of businesses, net of cash acquired.... (1,186) (565) (565) --
Purchase of option to acquire business............. (300) -- -- --
(Increase) decrease in notes receivable............ (746) (820) (225) 172
Purchased software................................. (44) (1,643) (507) (854)
Capitalized software development costs............. -- -- -- (445)
------- ------- ------- -------
Net cash used in investing activities....... (9,174) (3,700) (1,703) (1,286)
------- ------- ------- -------
Cash flows before financing activities............... (10,430) (7,247) (3,981) (328)
------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........... -- 559 -- --
Principal payments on long-term debt............... (531) (410) (44) (1,200)
Proceeds from capital contributions................ 10,847 10,936 5,342 --
Proceeds from issuance of common stock............. 155 134 -- 327
------- ------- ------- -------
Net cash provided by (used in) financing
activities................................ 10,471 11,219 5,298 (873)
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents............................... 41 3,972 1,317 (1,201)
Cash and cash equivalents at beginning of period..... -- 41 41 4,013
------- ------- ------- -------
Cash and cash equivalents at end of period........... $ 41 $ 4,013 $ 1,358 $ 2,812
======= ======= ======= =======
Supplemental disclosures of cash paid for:
Interest........................................... $ -- $ 289 $ 146 $ 16
======= ======= ======= =======
Income taxes....................................... $ -- $ 140 $ 140 $ --
======= ======= ======= =======
Supplemental disclosure of noncash investing and
financing activities:
Equipment acquired under capital lease
obligations...................................... $ -- $ 160 $ -- $ 99
======= ======= ======= =======
Equipment contribution received from Healthdyne,
Inc.............................................. $ -- $ 105 $ -- $ --
======= ======= ======= =======
Deferred service revenue financed by a note
receivable....................................... $ -- $ 417 $ -- $ --
======= ======= ======= =======
Obligations incurred in connection with acquisition
of minority interest of subsidiary (note 3)...... $ -- $ 6,162 $ -- $ --
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 66
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE SIX
MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS
Healthdyne Information Enterprises, Inc. ("HIE" or the "Company") was
incorporated on June 15, 1994 in the State of Georgia and is headquartered in
Marietta, Georgia. HIE was a wholly-owned subsidiary of Healthdyne, Inc.
("Healthdyne") until November 6, 1995 at which time Healthdyne distributed all
of the outstanding shares of HIE to the Healthdyne shareholders (the
"Spin-off"). The Company and its subsidiaries provide clinical information
software tools and products and related services to integrated healthcare
delivery networks and other healthcare providers and payors.
The consolidated financial statements include the financial position,
results of operations and cash flows as of the dates and for the periods
indicated for HIE and the following subsidiaries:
<TABLE>
<CAPTION>
HIE
OWNERSHIP STATE OF
SUBSIDIARY PERCENTAGE NATURE OF BUSINESS INCORPORATION
- -------------------------- -------------------------- -------------------------- -------------
<S> <C> <C> <C>
Healthcare Communications, 44% from October 27, 1994 Systems and network Texas
Inc. (Dallas, Texas) to December 31, 1994; 57% integration tools and
from January 1, 1995 to services
December 31, 1995; 100%
effective December 31,
1995
DataView Imaging 61% from July 22, 1994 to Image management products, Georgia
International, Inc. March 31, 1996; 19% tools and services
(Norcross, Georgia) effective April 1, 1996
(see note 13)
Integrated Healthcare 100% from May 30, 1995 Tools, products, and Georgia
Solutions, Inc. (formerly (the date of services for object and
Clinical Assessment incorporation) work flow management;
Support System, Inc.) patient indexing; clinical
(Marietta, Georgia) assessment, measurement
and analysis; and network
design and management
</TABLE>
HIE also currently owns a less than 1% interest in Criterion Health
Strategies, Inc. ("CHS") of Nashville, Tennessee, a provider of
physician-oriented clinical measurement and analysis software tools, products,
and services. HIE funded the operations of CHS through November 30, 1995;
therefore, HIE recorded 100% of the losses of CHS through that date (see notes
11 and 13).
During 1995, Healthcare Communications, Inc. ("HCI") made certain
convertible loans totaling $301 to Perceptive Systems, Inc. ("PSI"), a software
distributor, thereby making HCI the beneficial owner of PSI. Accordingly, PSI is
consolidated with HCI.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make
F-7
<PAGE> 67
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the consolidated balance sheets and income and
expenses for the periods. Actual results could differ from those estimates.
All significant intercompany balances and transactions have been eliminated
in consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
(D) REVENUE
Revenue is derived from the sale of clinical information software tools and
products, and from providing related implementation, support, training and
consulting services. Revenue from software licensing and support fees is
recognized in accordance with Statement of Position 91-1, Software Revenue
Recognition. Software revenue is recognized upon shipment since (i)
collectibility of the related accounts receivable is typically probable; (ii)
there are generally no obligations remaining under the related software license
agreement after shipment; and (iii) customer acceptance is generally not
contractually required. All service revenue is recognized as the work is
performed or, in the case of a fixed fee contract, on the percentage of
completion basis, even though some services are prepaid.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over an estimated useful
life of five years. Amortization of leasehold improvements is recorded over the
shorter of the lives of the related assets or the lease terms and is included in
depreciation expense.
(F) EXCESS OF COST OVER NET ASSETS OF BUSINESSES ACQUIRED
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized using the straight-line method over 15 years. Amortization
expense related to acquired businesses amounted to $50 for the period from June
15, 1994 to December 31, 1994, $708 for the year ended December 31, 1995 and
$234 and $346 for the six months ended June 30, 1995 and 1996, respectively. At
each balance sheet date, the Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds (see note 3).
(G) PURCHASED SOFTWARE
Purchased software includes both the cost of purchased software tools and
products developed by a third party for the Company to exclusively market and
sell and the cost of software acquired in connection with business combinations.
It also includes the cost of licenses to use, embed, and sell software tools and
products developed by others. These costs are being amortized ratably based on
the projected revenue associated with these purchased or licensed tools and
products or the straight-line method over five years, whichever method results
in a higher level of amortization. Amortization expense related to purchased
software amounted to $-0-for the period from June 15, 1994 to December 31, 1994,
$150 for the year ended December 31, 1995 and $6 and $228 for the six months
ended June 30, 1995 and 1996, respectively.
F-8
<PAGE> 68
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(H) RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Prior to the determination of technological feasibility for software
products and tools, research and development costs are expensed as incurred.
After determination of technological feasibility and before the release of the
software tools and products for general availability, the development costs
related to such tools and products are capitalized. These costs are being
amortized ratably based on the projected revenue associated with these tools and
products or the straight-line method over five years, whichever method results
in a higher level of amortization. There were no software development costs
capitalized for the period from June 15, 1994 to December 31, 1994, for the year
ended December 31, 1995 or for the six months ended June 30, 1995. For the six
months ended June 30, 1996, the Company capitalized $445 of software development
costs. Amortization expense related to capitalized software development costs
was $11 for the six months ended June 30, 1996.
(I) INCOME TAXES
Prior to the Spin-off, the Company's and Integrated Healthcare Solutions,
Inc.'s results of operations were included in the consolidated Federal income
tax returns filed by Healthdyne. Under the tax sharing agreement between the
Company and Healthdyne, income taxes were recorded by the Company as if it filed
separate income tax returns. The Company's subsidiaries DataView Imaging
International, Inc. ("DataView") and HCI (through December 31, 1995) are
required to file separate income tax returns.
The Company accounts for income taxes using an asset and liability approach
in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS
109"). Under SFAS 109, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Additionally, the effect on deferred taxes of a change in tax rates is
recognized in earnings in the period that includes the enactment date. Income
tax benefits are not recognized unless ultimate realization of such benefits is
reasonably certain.
(J) NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Primary earnings (loss) per common share and common share equivalent are
based on the weighted average number of shares outstanding and common share
equivalents derived from dilutive stock options. Fully diluted earnings per
share are not significantly different from primary earnings per share.
(K) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, all adjustments (consisting of normal
recurring accruals) considered necessary for the fair presentation of the
unaudited consolidated financial statements of the Company as of June 30, 1996
and for the six months ended June 30, 1995 and 1996 have been included.
Operating results for the six-month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1996.
2. RELATED PARTY TRANSACTIONS
Healthdyne provides certain legal, tax, data processing, personnel,
insurance, and accounting services to the Company. Amounts charged to the
Company related to such services, which have been reflected as general and
administrative expenses in the accompanying consolidated statements of
operations for the period from June 15, 1994 to December 31, 1994, for the year
ended December 31, 1995 and for the six months ended June 30, 1995 and 1996 were
$164, $325, $153 and $14, respectively. Charges for services provided by
Healthdyne to the Company are generally determined based on estimates of actual
time in providing such services to the Company using actual costs without
markup. To the extent that charges for such services and for costs incurred by
Healthdyne on the Company's behalf are allocations of common expenses, such
allocations are based on one or more criteria such as asset or revenue size,
relative transaction volume,
F-9
<PAGE> 69
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee headcounts, facility size, and other relevant criteria. The Company
believes that such allocation methods result in reasonable approximations of the
common expenses related to the Company.
Healthdyne also pays group health and property and casualty insurance on
the Company's behalf. Amounts allocated to the Company for these premiums and
included in cost of revenue and operating expenses in the accompanying
consolidated statements of operations for the period from June 15, 1994 to
December 31, 1994, for the year ended December 31, 1995 and for the six months
ended June 30, 1995 and 1996 were $9, $57, $19 and $10, respectively.
3. ACQUISITIONS
On October 27, 1994, the Company acquired a 44% interest in HCI of Dallas,
Texas for approximately $6,750 in cash. HCI is a provider of integration engine
software. The investment was accounted for using the equity method of
accounting, and is included in investment in affiliated company in the
accompanying consolidated balance sheet at December 31, 1994. The excess of cost
over the Company's share of net assets of HCI approximated its investment.
Summarized financial information of HCI as of and for the year ended
December 31, 1994 is as follows:
<TABLE>
<S> <C>
Assets:
Current assets........................................................... $4,383
Furniture and equipment, net............................................. 219
Other assets............................................................. 81
------
$4,683
======
Liabilities and stockholders' equity:
Current liabilities...................................................... $1,664
Noncurrent liabilities................................................... 948
Stockholders' equity..................................................... 2,071
------
$4,683
======
Revenue.................................................................... $5,072
Gross profit............................................................... 4,081
Income before income taxes................................................. 1,475
Net income................................................................. $ 951
</TABLE>
On May 9, 1995, the Company purchased an additional 13% interest in HCI for
approximately $3,061 in cash bringing the Company's total ownership interest to
57%. The acquisition was accounted for using the purchase method of accounting
with the results of operations of the business acquired included retroactively
from January 1, 1995. The acquisition resulted in cost over net assets acquired
of approximately $8,834. Effective December 31, 1995, HIE increased its
ownership interest in HCI from 57% to 100% for approximately $6,162 in deferred
payments financed by two promissory notes. The first promissory note for
approximately $1,100 bore interest at 8% per annum, was secured by HCI's
accounts receivable and was paid in full by the Company in April 1996. The
second promissory note is an approximately $5,062 convertible debenture, bearing
interest at 6.4% per annum, secured by a portion of HCI common stock, and is due
January 2, 1998. The principal and accrued interest under this debenture is
convertible at the holders' option into shares of HIE common stock at $3.50 per
share on January 2, 1998. The acquisition was accounted for using the purchase
method of accounting. The acquisition resulted in purchased in-process research
and development of approximately $3,605, which was expensed in 1995, purchased
software of approximately $807, and additional cost over net assets acquired of
approximately $1,169.
On July 22, 1994, the Company acquired a 61% interest in DataView for
approximately $1,250 in cash. DataView produces a system that captures and
transmits radiology and other clinical images. The acquisition was accounted for
using the purchase method of accounting with the results of operations of the
business
F-10
<PAGE> 70
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired included from the effective date of acquisition. The pro forma effect
on earnings for the period prior to acquisition is not significant. The
acquisition resulted in cost over net assets acquired (goodwill) of
approximately $1,799, which was reduced at the end of 1995 by $1,430 to reflect
the impairment of such goodwill resulting from a change in HIE's strategic
direction with respect to DataView. Further, in connection with the acquisition,
the Company purchased an option for $300 to acquire the remaining 39% interest
in DataView. The option price is a multiple equal to a negotiated factor times
the sum of DataView's revenue growth percentage and earnings before interest and
taxes as a percent of revenue during the option year. In conjunction with the
goodwill impairment charge referred to above, HIE also fully reserved the cost
of this option at the end of 1995 (see note 13).
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
---- ------ --------
<S> <C> <C> <C>
Machinery and equipment...................................... $260 $1,088 $1,126
Furniture and fixtures....................................... 17 219 212
Equipment under capital leases............................... -- 160 186
Leasehold improvements....................................... 4 23 19
---- ------ ------
281 1,490 1,543
Less accumulated depreciation and amortization............... 79 354 317
---- ------ ------
Net property and equipment......................... $202 $1,136 $1,226
==== ====== ======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
---- ------ --------
<S> <C> <C> <C>
Benefits and compensation.................................... $ 15 $ 355 $ 430
Other........................................................ 13 405 320
---- ------ ------
$ 28 $ 760 $ 750
==== ====== ======
</TABLE>
F-11
<PAGE> 71
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Convertible debenture, interest at 6.4% payable at maturity;
secured by a portion of HCI stock; convertible at the
holders' option into the Company's common stock at $3.50
per share at maturity on January 2, 1998................... $ -- $5,062 $4,951
Note payable, interest at 8.0%; secured by HCI's accounts
receivable; paid in full during April 1996................. -- 1,100 --
Amount due under financing agreement, as amended, imputed
interest of 25.9% through December 31, 1995 and 12.2%
thereafter; principal due in quarterly installments based
on a percentage of total revenue of HCI payable in cash or
HCI products and services at the lender's option; final
installment due December 31, 1996.......................... -- 1,037 1,099
Amount payable to bank under revolving credit agreement (see
description following)..................................... -- 375 375
Note payable to former shareholder of HCI, principal payable
quarterly in amounts ranging from a minimum $25 to a
maximum of 20% of HCI's gross revenue from its
Europe/Middle East sales territory, until paid in full..... -- 300 250
Obligations under capital leases -- equipment leases;
interest ranging from 12.7% to 15.5% with various monthly
payments and maturing January 1, 1999...................... -- 160 365
------ ------ --------
Total long-term debt............................... -- 8,034 7,040
Less current installments.................................... -- 2,652 1,734
------ ------ --------
Long-term debt, excluding current installments..... $ -- $5,382 $5,306
====== ====== ======
</TABLE>
In May 1995, HCI entered into a revolving credit agreement with a bank
totaling $1,000, which expired in May 1996, but was renewed on similar terms and
conditions through August 1997. Amounts outstanding under this agreement bear
interest at the bank's prime rate plus 1% (9.25% at June 30, 1996) and are
payable on demand.
Approximate aggregate minimum annual payments due on long-term debt and
capital leases for the five years subsequent to December 31, 1995 are as
follows: 1996, $2,652; 1997, $152; 1998, $5,224; 1999, $6; and 2000 and
thereafter, none.
F-12
<PAGE> 72
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
The components of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE PERIOD FROM ENDED JUNE
JUNE 15, 1994 (DATE YEAR ENDED 30,
OF INCORPORATION) TO DECEMBER 31, ------------
DECEMBER 31, 1994 1995 1995 1996
-------------------- ------------ ---- ----
<S> <C> <C> <C> <C>
Current (expense) benefit:
Federal................................. $ -- $163 $(45) $ --
State................................... -- -- -- --
Foreign................................. -- (23) -- --
------- ------ ---- ----
Total income tax (expense)
benefit....................... $ -- $140 $(45) $ --
=============== ========== ==== ====
</TABLE>
A reconciliation of the expected income tax (expense) benefit (based on the
U.S. Federal statutory rate) to the actual income tax (expense) benefit is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
FOR THE PERIOD FROM ENDED JUNE
JUNE 15, 1994 (DATE YEAR ENDED 30,
OF INCORPORATION) TO DECEMBER 31, -------------
DECEMBER 31, 1994 1995 1995 1996
-------------------- ------------ ---- -----
<S> <C> <C> <C> <C>
Computed expected income tax (expense)
benefit................................ $ 443 $ 3,543 $645 $(128)
Goodwill amortization and other
nondeductible expenses................. (18) (2,003) (12) (130)
Losses utilized by Healthdyne............ (248) (700) (394) --
Losses in excess of allowable
carrybacks............................. (182) (372) -- --
Losses of affiliate...................... -- (400) (227) (53)
Use of net operating loss carryovers..... -- -- -- 311
Other.................................... 5 72 (57) --
------- ------------ ---- -----
$ -- $ 140 $(45) $ --
=============== ========== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
---- ------ ---------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 3 $ 30 $ 24
Accruals and reserves not deducted for tax purposes...... 17 78 80
Net operating loss carryforward.......................... 182 935 183
---- ------ ---------
Total gross deferred tax asset................... 202 1,043 287
Less valuation allowance................................... 202 1,043 287
---- ------ ---------
Net deferred tax asset........................... $ -- $ -- $ --
==== ====== =======
</TABLE>
At December 31, 1995, DataView and HIE had approximately $1,200 and $1,400
of estimated net operating loss carryforwards, respectively, available for
Federal income tax reporting purposes to reduce future taxable income, if any.
The DataView carryforward will only reduce the taxable income of DataView and
cannot be utilized by another member of the HIE group. The HIE carryforward will
only reduce the taxable income of HIE and HCI. These carryforwards will begin to
expire in 2009 if not utilized. The alternative minimum tax loss carryforwards
of HIE and DataView approximate the regular tax net operating loss carryforwards
(see note 13).
F-13
<PAGE> 73
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SHAREHOLDERS' EQUITY
The Company was incorporated on June 15, 1994 and its articles of
incorporation authorized 20,000 shares of common stock and 10,000 shares of
preferred stock. The Company was initially capitalized on June 24, 1994, with
the issuance of 8,000 shares of common stock to Healthdyne. On December 12,
1994, the Company declared a 1.9375-for-one stock split effected in the form of
a stock dividend. Shareholders' equity and all share and per share information
in the accompanying consolidated financial statements and related notes have
been restated to reflect this split. On August 10, 1995, the Company's Board of
Directors approved an amendment to the Company's articles of incorporation which
increased the number of authorized shares of common stock from 20,000 to 50,000
and increased the number of authorized shares of preferred stock from 10,000 to
20,000. On November 6, 1995, Healthdyne distributed all of the 16,115
then-outstanding shares of the Company's common stock to the Healthdyne
shareholders.
Stock Option Plans
The Company maintains five stock option plans for the benefit of key
employees, nonemployee directors, and certain directors and employees of
Healthdyne (with such Healthdyne-related plan being established pursuant to the
Spin-off). A total of 4,110 shares and 5,068 shares of the Company's common
stock have been authorized for issuance under these plans as of December 31,
1995 and June 30, 1996, respectively. Terms of options granted under the plans
are determined by the Stock Option Committee of the Company's Board of
Directors, subject to the terms of the respective plans. There was no stock
option activity for the period from June 15, 1994 to December 31, 1994. A
summary of stock option transactions under these plans during 1995 and for the
six months ended June 30, 1996 is shown below:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE
------ --------------
<S> <C> <C>
Options outstanding at December 31, 1994........................ -- --
Granted (at fair market value on the dates of original
grant)..................................................... 3,242 $0.23 - $1.50
Exercised..................................................... (388 ) $0.23 - $0.88
Canceled or expired........................................... -- --
-----
Options outstanding at December 31, 1995........................ 2,854 $0.23 - $1.50
Granted (at fair market value on the dates of original
grant)..................................................... 756 $2.37 - $5.88
Exercised..................................................... (683 ) $0.23 - $1.50
Canceled or expired........................................... (3 ) $0.27 - $4.47
-----
Options outstanding at June 30, 1996............................ 2,924 $0.23 - $5.88
=====
Options exercisable at December 31, 1995........................ 1,000
=====
Options exercisable at June 30, 1996............................ 1,413
=====
</TABLE>
Non-Employee Directors Stock Plan
On October 20, 1995, the Company established a stock plan for nonemployee
directors whereby such directors may elect to receive all or a portion of their
annual retainer fee in unrestricted shares of the Company's common stock. As of
June 30, 1996, none of the 250 shares reserved for this plan have been issued.
Stock Purchase Plan
On July 1, 1996, the Company commenced an employee discount stock purchase
plan for all eligible employees of HIE and designated subsidiaries. Participants
may use up to 10% of their compensation to
F-14
<PAGE> 74
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase the Company's common stock through payroll deductions for 85% of the
lower of the beginning or ending stock price on a quarterly basis. There were
200 shares of HIE common stock reserved for issuance under this plan as of June
30, 1996.
Shareholder Rights Plan
On October 20, 1995, the Company's Board of Directors declared a dividend
distribution of one purchase right for each share of the Company's common stock
outstanding as of October 31, 1995. If a person or group acquires beneficial
ownership of 15% or more of the Company's outstanding common stock or announces
a tender offer or exchange that would result in the acquisition of a beneficial
ownership right of 20% or more of the Company's outstanding common stock, the
rights detach from the common stock and are distributed to shareholders as
separate securities. Each right entitles its holder to purchase one
one-hundredth of a share (a unit) of Series A Cumulative Preferred Stock, at a
purchase price of $50 per unit. The rights, which do not have voting power,
expire on October 23, 2005 unless previously distributed and may be redeemed by
the Company in whole at a price of $.01 per right at any time before and within
10 days after their distribution. If the Company is acquired in a merger or
other business combination transaction, or 50% of its assets or earnings power
are sold at any time after the rights become exercisable, the rights entitle a
holder to buy a number of common shares of the acquiring company having a market
value of twice the exercise price of the right. If a person acquires 20% of the
Company's common stock or if a 15% or larger holder merges with the Company and
the common stock is not changed or exchanged in such merger, or engages in
self-dealing transactions with the Company, each right not owned by such holder
becomes exercisable for the number of common shares of the Company having a
market value of twice the exercise price of the right.
9. EMPLOYEE BENEFIT PLAN
The Company and HCI each maintain a 401(k) defined contribution plan for
the benefit of their employees. The Company's obligation for contributions under
its 401(k) plan is limited to the lesser of (i) one-half of each participant's
contribution but not more than 2.5% of the participant's base salary or (ii) 20%
of the Company's pretax earnings before consideration of this contribution.
Discretionary Company contributions are allowed under this plan. The HCI plan
provides for HCI contributions equal to one-half of each participant's
contribution up to 3% of the participant's base salary. Contributions to the
plans included in the consolidated statements of operations for the period from
June 15, 1994 to December 31, 1994, for the year ended December 31, 1995, and
for the six months ended June 30, 1995 and 1996 were approximately $-0-, $81,
$48 and $47, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosure about Fair
Value of Financial Instruments, requires that the Company disclose estimated
fair values for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments.
(A) CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity
of these instruments.
(B) LONG-TERM DEBT
The Company estimates that the carrying amount of the Company's long-term
debt approximates the fair value based on the current rates offered to the
Company for debt of the same remaining maturities.
F-15
<PAGE> 75
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS
The Company is committed under noncancelable operating lease and capital
lease agreements for facilities and equipment. The future minimum annual lease
payments under these leases are summarized as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------------------------------------------------ --------- -------
<S> <C> <C>
1996.................................................... $ 509 $ 62
1997.................................................... 289 67
1998.................................................... 13 67
1999.................................................... -- 6
Thereafter.............................................. -- --
--------- -------
$ 811 $ 202
=======
Less interest........................................... 42
-------
Present value of future minimum capital lease
payments.............................................. $ 160
=====
</TABLE>
Rental expense for operating leases (except those with lease terms of a
month or less that were not renewed) for the period from June 15, 1994 to
December 31, 1994, for the year ended December 31, 1995, and for the six months
ended June 30, 1995 and 1996 was $37, $362, $136 and $260, respectively.
HIE had committed to make loans up to $4,000 to CHS with such loans being
convertible into a 64% ownership interest in CHS between October 21, 1996 and
December 31, 2005. On December 4, 1995, Massey Burch Capital Corp. ("Massey
Burch") agreed to invest in CHS by acquiring one-half of HIE's rights and
obligations under HIE's commitment. Under this agreement, Massey Burch will make
loans to CHS until the later of December 31, 1996 or such time as Massey Burch
has loaned $1.3 million to CHS. At that point, HIE and Massey Burch will make
loans to CHS on an equal basis until HIE and Massey Burch have each loaned a
total of $2 million to CHS, each loan convertible into a 32% ownership interest
in CHS between October 21, 1996 and June 30, 2004. Loans by HIE to CHS totaled
$495 at December 31, 1994 and $1,300 at December 31, 1995 and June 30, 1996. The
loans bear interest at 8%, payable annually, and are secured by CHS' accounts
receivable, contract rights, equipment, inventory and intellectual property
rights, and a pledge by the CHS shareholders of their shares of CHS common
stock. The losses of CHS are netted against the notes receivable from CHS in the
accompanying consolidated balance sheets and are shown as losses of affiliate in
the accompanying consolidated statements of operations (see note 13).
HIE has also committed to make loans to DataView up to a maximum of $2,450
to be repaid in five equal annual installments commencing on August 1, 2005. The
loan balance, which has been eliminated in consolidation in the accompanying
consolidated financial statements, totaled $1,003 at December 31, 1994, $1,949
at December 31, 1995 and $2,073 at June 30, 1996 (see note 13).
12. MAJOR CUSTOMERS
No single customer accounted for more than 10% of the Company's revenue for
1994 and 1995. One customer accounted for approximately 26% of the Company's
revenue for the six months ended June 30, 1996. In addition, one distributor
provided customers to the Company that accounted for approximately 18%, 21% and
12% of the Company's revenue for the year ended December 31, 1995 and for the
six months ended June 30, 1995 and 1996, respectively.
F-16
<PAGE> 76
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT
AUDITOR
On June 12, 1996, HIE and DataView entered into an agreement (the
"Agreement") providing for a restructuring of the relationship between the
parties effective as of April 1, 1996. The Agreement provides, among other
things, for (i) a modification of the existing funding agreement between the
parties to limit the Company's lending commitment to DataView to a maximum of
$2,042 (the balance due under such funding agreement as of March 31, 1996); (ii)
the repayment by DataView of certain advances totaling at least $93 made by HIE
subsequent to December 31, 1995; (iii) a reduction in HIE's equity interest in
DataView from the current 61.5% to 19.5% through a stock repurchase by DataView
financed by HIE under a $1,061 fully-reserved promissory note; (iv) certain
rights for HIE to use DataView's clinical image management technology in HIE's
service business as well as nonexclusive product distribution rights; and (v) a
reduction in HIE's representation on the DataView Board of Directors and a
termination of HIE's executive management responsibilities with respect to
DataView. Accordingly, subsequent to March 31, 1996, DataView's financial
position, results of operations and cash flows are no longer consolidated with
HIE.
On July 30, 1996, the Company and Massey Burch entered into an agreement in
principle which contemplates the purchase by the Company of an option to acquire
Massey Burch's investment in CHS. Each of the Company and Massey Burch currently
holds less than 1% of the common stock of CHS and an 8% convertible debenture
which is convertible into 32% of the CHS common stock on a fully diluted basis.
The option as currently proposed would be exercisable at any time during the
period from December 31, 1996 through June 30, 1997, with the option exercise
price to be payable through the issuance of the greater of 417 shares of the
Company's Common Stock or the equivalent number of shares having a fair market
value of $2,000 at the time the option is exercised. The agreement in principle
contemplates that, as consideration for the grant of this option, the Company
will issue to Massey Burch a warrant to purchase 50 shares of the Company's
common stock at fair market value as of the date of grant. The agreement further
contemplates that Massey Burch will be granted registration rights with respect
to both the shares of common stock underlying the warrant and the shares
issuable upon the Company's exercise of the proposed option. Massey Burch will
continue to be subject to its commitment to fund CHS up to a maximum of $2,000
of which Massey Burch has funded $1,400 as of August 31, 1996. The transactions
contemplated by the agreement in principle are subject to negotiation and
execution of definitive agreements and other customary conditions, as well as
certain rights of first refusal in favor of CHS and other CHS shareholders.
There can be no assurance that definitive agreements will be entered into or,
even if entered into, that the transaction will be consummated as described
above or that the Company would exercise an option to acquire Massey Burch's
interest in CHS.
F-17
<PAGE> 77
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Healthcare Communications, Inc.:
We have audited the accompanying balance sheets of Healthcare
Communications, Inc., (a Texas corporation) as of December 31, 1993 and 1994,
and the related statements of operations, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Healthcare Communications,
Inc. as of December 31, 1993 and 1994, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
Our audit was made for the purposes of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
April 28, 1995
F-18
<PAGE> 78
HEALTHCARE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 84,772 $2,491,456
Accounts receivable, less allowance for doubtful accounts of
$17,813 and $64,233 at December 31, 1993 and 1994,
respectively................................................... 325,763 1,466,454
Employee receivable............................................... 41,659 66,368
Receivable from related parties................................... -- 305,929
Prepaid expenses.................................................. -- 30,882
Deferred income taxes............................................. 383,319 21,839
--------- ----------
Total current assets......................................... 835,513 4,382,928
--------- ----------
FURNITURE AND EQUIPMENT, net of accumulated depreciation of $19,558
and $51,790 at December 31, 1993 and 1994, respectively........... 24,868 218,730
OTHER ASSETS, net of accumulated amortization of $19,848 and $33,126
at December 31, 1993 and 1994, respectively....................... 24,435 81,010
--------- ----------
Total assets................................................. $ 884,816 $4,682,668
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt................................. $ 171,997 $ 614,727
Accounts payable.................................................. 171,690 157,242
Accrued liabilities............................................... 187,671 161,865
Deferred revenue.................................................. 125,661 567,326
Income taxes payable.............................................. -- 163,184
--------- ----------
Total current liabilities.................................... 657,019 1,664,344
--------- ----------
LONG-TERM DEBT, net of current portion.............................. 870,676 947,926
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 per share par value, 1,000,000 shares
authorized, 118,513 and 148,795 shares issued and outstanding
at December 31, 1993 and 1994, respectively.................... 1,185 1,488
Additional paid-in capital........................................ 144,009 1,906,281
Retained earnings (deficit)....................................... (788,073) 162,629
--------- ----------
Total stockholders' equity (deficit)......................... (642,879) 2,070,398
--------- ----------
Total liabilities and stockholders' equity (deficit)......... $ 884,816 $4,682,668
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 79
HEALTHCARE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1992 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
REVENUE:
Sales of software licenses................................ $ 210,700 $ 535,332 $3,803,494
Support service fees...................................... 116,380 302,147 1,238,426
Other..................................................... 9,654 25,811 30,449
--------- --------- ----------
Total revenue..................................... 336,734 863,290 5,072,369
COST OF REVENUES:
Software licenses......................................... 44,079 132,756 365,394
Support services.......................................... 50,089 201,874 626,312
--------- --------- ----------
Gross profit...................................... 242,566 528,660 4,080,663
OPERATING EXPENSES:
Technical and development................................. 3,846 141,610 456,465
Marketing and sales....................................... 13,743 230,773 744,714
General and administrative................................ 458,042 788,617 1,115,077
--------- --------- ----------
475,631 1,161,000 2,316,256
--------- --------- ----------
INCOME (LOSS) FROM OPERATIONS............................... (233,065) (632,340) 1,764,407
OTHER INCOME (EXPENSE):
Interest income........................................... -- -- 31,179
Interest expense.......................................... (1,000) (154,464) (279,518)
Other, net................................................ (4,479) (4,496) (40,702)
--------- --------- ----------
(5,479) (158,960) (289,041)
--------- --------- ----------
Income (loss) before income taxes................. (238,544) (791,300) 1,475,366
INCOME TAX EXPENSE (BENEFIT)................................ -- (383,319) 524,664
--------- --------- ----------
Net income (loss)................................. $(238,544) $(407,981) $ 950,702
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 80
HEALTHCARE COMMUNICATIONS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
---------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
------- ------ ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1991............... 56,060 $ 561 $ 1,442 $(141,548) $ (139,545)
Sale of common stock................... 37,744 377 49,628 -- 50,005
Net loss............................... -- -- -- (238,544) (238,544)
------- ------ ----------- --------- ------------
BALANCE, December 31, 1992............... 93,804 938 51,070 (380,092) (328,084)
Sale of common stock................... 24,709 247 92,939 -- 93,186
Net loss............................... -- -- -- (407,981) (407,981)
------- ------ ----------- --------- ------------
BALANCE, December 31, 1993............... 118,513 1,185 144,009 (788,073) (642,879)
Issuance of stock to employees......... 8,327 83 24,429 -- 24,512
Purchase of common stock............... (28,725) (287) (2,441,394) -- (2,441,681)
Sale of common stock................... 50,680 507 4,179,237 -- 4,179,744
Net income............................. -- -- -- 950,702 950,702
------- ------ ----------- --------- ------------
BALANCE, December 31, 1994............... 148,795 $1,488 $ 1,906,281 $ 162,629 $ 2,070,398
======= ====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 81
HEALTHCARE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 1994
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................... $(238,544) $(407,981) $ 950,702
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities --
Depreciation and amortization..................... 12,362 22,002 45,511
Common stock issued for services.................. -- -- 24,512
Interest and leasehold expense added to long-term
debt............................................ -- 175,464 312,280
Change in certain assets and liabilities --
Increase in accounts receivable................. -- (325,763) (1,140,691)
Increase in receivables from related parties.... (27,954) (13,705) (330,638)
Increase in prepaid expenses.................... -- -- (30,882)
Decrease (increase) in deferred income taxes.... -- (383,319) 361,480
Decrease (increase) in other assets............. 4,719 (5,337) (69,853)
(Decrease) increase in accounts payable......... 61,361 111,064 (14,448)
(Decrease) increase in accrued liabilities...... 92,337 (14,808) (25,806)
Increase (decrease) in deferred revenue......... -- 125,661 441,665
Increase (decrease) in income taxes payable..... -- -- 163,184
--------- --------- -----------
Net cash flows provided by (used in)
operating activities....................... (95,719) (716,722) 687,016
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment.................. (30,939) (11,388) (226,095)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under financing agreement................. 300,000 500,000 --
Repayments under financing agreement................. -- -- (125,101)
Loans on other borrowings............................ 50,895 -- 43,500
Repayments on other borrowings....................... -- (88,772) (110,699)
Cash paid for purchases of common stock.............. -- -- (2,041,681)
Issuance of common stock............................. 50,005 93,186 4,179,744
--------- --------- -----------
Net cash flows provided by (used in)
financing activities....................... 400,900 504,414 1,945,763
--------- --------- -----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... 274,242 (223,696) 2,406,684
CASH AND CASH EQUIVALENTS, beginning of period......... 34,226 308,468 84,772
--------- --------- -----------
CASH AND CASH EQUIVALENTS, end of period............... $ 308,468 $ 84,772 $ 2,491,456
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period................... $ 1,000 $ 704 $ 89,000
========= ========= ==========
Taxes paid during the period...................... $ -- $ -- $ --
========= ========= ==========
NONCASH FINANCING ACTIVITY:
Note payable issued for purchase of common
stock........................................... $ -- $ -- $ 400,000
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 82
HEALTHCARE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993, AND 1994
1. ORGANIZATION AND NATURE OF BUSINESS:
Healthcare Communications, Inc. (HCI or the "Company") was established as a
Texas corporation in 1991. The Company develops integration software which
enables different computer systems to communicate and transmit information as
one integrated system. To date, the Company has marketed its products primarily
to the healthcare industry. Revenue is earned from sales of software licenses
and fees from related implementation, maintenance, and training.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash And Cash Equivalents
Cash and cash equivalents consist of cash and short-term investments with
original maturities of three months or less.
Short-term investments potentially expose the Company to concentrations of
credit risk, as defined by Statement of Financial Accounting Standards (SFAS)
No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk." The Company's short-term investments are made in creditworthy companies
as defined by management. In management's opinion, these investments do not
generate significant credit risk to the Company.
Other Assets
Other assets consist primarily of purchased software which is amortized
over periods approximating three to five years on the straight-line method.
Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1993 1994
-------- --------
<S> <C> <C>
Accrued payroll and payroll related costs...................... $ 39,662 $ 59,000
Accrued royalties.............................................. 74,314 --
Other accrued liabilities...................................... 73,695 102,865
-------- --------
$187,671 $161,865
======== ========
</TABLE>
Revenue
The Company's basic software product is designed so that it can be
installed without modification and generally HCI is contracted by the customer
to assist with the installation. Therefore, revenue from software license sales
is recognized upon execution of a binding commitment from the purchaser and
shipment of the software. Any special modifications performed by HCI for its
customers are billed separately with related revenue recognized as the work is
performed.
Installation fees are charged to customers to assist in the installation of
software sold. Such fees are recognized as revenue on a progress-to-completion
method.
Annual maintenance fees are charged to customers for ongoing support as
well as generic product modifications and updates. Such fees are recognized
ratably over the term of the maintenance contract. Customers are granted the
first 90 days of support without charge; however, costs associated with this
activity are immaterial.
F-23
<PAGE> 83
HEALTHCARE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Education fees result from training classes for customers using HCI's
software products. Such fees are recognized upon completion of the training,
which typically consists of five-day classes.
The Company also, from time to time, performs services for customers
related to product development or customization of software. Such services are
performed under specific terms of prearranged contracts. The Company recognizes
revenue for these services under contract accounting. The related contracts
typically include "milestones" which determine when the Company will bill for
these services. The Company recognizes revenue upon achievement of these
milestones.
Technical and Development Costs
All technical and development costs are charged to operations as incurred.
Costs of purchased software to be used in development activities are capitalized
and amortized over periods of three to five years since such software is used in
a variety of development projects.
Purchased software is included in other assets in the accompanying balance
sheets.
Depreciation
The Company provides for depreciation of furniture and equipment using the
straight-line method over a five-year period for financial reporting purposes
and accelerated methods for tax purposes.
Deferred Revenue
Revenue from annual maintenance fees and education fees is deferred upon
billing and recognized ratably over the term of the maintenance contract or upon
completion of the related training class. Installation fees are deferred and
recognized ratably on a progress-to-completion method based on labor hours
incurred.
Stock Split
The accompanying financial statements reflect the retroactive effects of a
24.8 to 1 common stock split on October 27, 1994.
Financial Statement Presentation
Certain reclassifications were made to prior year balances to conform with
current year presentations.
3. LONG-TERM DEBT:
Under a financing agreement with International Business Machines
Corporation (IBM) consummated in December 1992, the Company, among other things,
committed to modify its HCI-LINK software product to operate on certain
identified IBM hardware and software systems and to market and support such
modified systems. In exchange, IBM agreed to provide certain computer equipment
and to make advances to the Company totaling $800,000. All equipment and
advances were received by the Company in 1992 and 1993.
The Company agreed to repay IBM a total of $1,600,000 in quarterly
installments based on a percentage of total revenue of the Company. The
percentage amount increases quarterly from 3% of total revenue in the first
calendar quarter of 1994 to 6.5% of total revenue in the last calendar quarter
of 1995. Any amount still outstanding after December 31, 1995, shall be paid in
January 1996.
F-24
<PAGE> 84
HEALTHCARE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has estimated the imputed interest rate on this obligation to
be 25.9%, based on its projected revenue for the periods involved and the
imputed lease value of the equipment. A summary of actual 1992, 1993, 1994, and
projected 1995 interest expense, lease expense, and amounts of debt principal
due is as follows:
<TABLE>
<CAPTION>
DEBT
INTEREST LEASE TOTAL BALANCE
YEAR EXPENSE EXPENSE PAYMENTS OUTSTANDING
------------------------------------- -------- ------- -------- ----------
<S> <C> <C> <C> <C>
1992................................. $ -- $ -- -- $ 300,000
1993................................. 154,464 21,000 -- 975,474
1994................................. 276,280 36,000 125,101 1,162,653
1995................................. 276,246 36,000 514,727 960,172
1996................................. -- -- 960,172 --
</TABLE>
Other long-term debt consists of amounts payable to a former shareholder as
described in Note 4, and notes payable issued to fund organizational and
start-up costs. A summary of long-term debt follows:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Amount due under financing assistance agreement............... $ 975,474 $1,162,653
Due to former shareholder..................................... -- 400,000
Other......................................................... 67,199 --
---------- ----------
1,042,673 1,562,653
Less -- Current portion....................................... 171,997 614,727
---------- ----------
$ 870,676 $ 947,926
========= =========
</TABLE>
4. STOCKHOLDERS' EQUITY:
On June 15, 1994, HCI and a shareholder entered into an agreement under
which HCI was granted a call to purchase all, but not less than all, of the HCI
shares held by the shareholder (approximately 16% of total outstanding shares at
that date) for a total cost of $2,192,000. Of this amount, $1,650,000 was paid
when the call was exercised on October 27, 1994, with additional amounts due and
other provisions of the agreement as follows:
- HCI purchased the call for $35,000.
- The net amount ($156,681) of receivables from the shareholder less a
$50,000 note payable to the shareholder, was canceled.
- HCI committed to pay the shareholder 20% of gross revenue received from
its sales territory identified as Europe/Middle East until a total of
$400,000 has been paid to the shareholder. A minimum of $25,000 is due on
the first day of every third month beginning February 1, 1995. After
$400,000 has been paid to the shareholder, HCI will pay the shareholder 4%
of gross revenue from the Europe/Middle East territory until December 31,
1997.
- Certain software source code licensing rights were granted to HCI by the
shareholder for a royalty paid to the shareholder amounting to 12% of
gross revenue received by HCI from the sale, transfer, or other use of
those rights.
- The shareholder will receive commissions ranging from 3% to 7% of gross
revenue received by HCI from certain identified customers.
F-25
<PAGE> 85
HEALTHCARE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On October 27, 1994, HCI sold 50,680 shares of its common stock to
Healthdyne, Inc. (Healthdyne), an unrelated third-party, for an amount, net of
transaction costs, of $4,179,744. At the same time, Healthdyne purchased
additional stock from existing shareholders to bring its total investment to
65,395 shares, or 43.9% of outstanding common stock at December 31, 1994. On
July 1, 1996, and at any time thereafter, Healthdyne will have the option to
acquire additional shares to bring its ownership interest in common stock to
51%. As of December 31, 1997, and any time thereafter, Healthdyne will have the
option to purchase up to 100% of the outstanding common shares then held by any
shareholder other than Healthdyne. The purchase price for Healthdyne's
additional acquisitions of stock would be based on a formula which considers
HCI's revenue growth rate and operating margin percentage.
The agreement between HCI and Healthdyne includes preemptive and piggyback
provisions and the granting of a distributor license to Healthdyne.
5. OPERATING LEASES:
The Company leases its office space, a vehicle, and equipment under
multiple operating leases that expire at various times through the next few
years. The minimum rental payments under these leases total $143,341 in 1995,
$9,595 in 1996, and $12,050 in 1997.
6. FEDERAL INCOME TAXES:
Statement of Financial .Accounting Standards No. 109, "Accounting for
Income Taxes," issued by the Financial Accounting Standards Board, specifies an
asset and liability approach which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequence of events which
have been recognized in the Company's financial statements. The Company adopted
this statement effective January 1, 1992. Under the Statement, the Company
recorded a deferred federal income tax asset as of December 31, 1993, which was
realized during 1994.
Federal income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1992 1993 1994
---- --------- ---------
<S> <C> <C> <C>
Current.................................................. $ -- $ -- $ 163,184
Deferred................................................. -- (383,319) 361,480
---- --------- ---------
Total.......................................... $ -- $(383,319) $ 524,664
==== ========= =========
</TABLE>
Federal income tax expense differs from the "expected" income tax expense
(computed by applying the US federal income tax rate of 34%, as follows):
<TABLE>
<CAPTION>
1992 1993 1994
-------- --------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)............ $(81,105) $(269,042) $501,624
Recovery of prior year's valuation allowance......... -- (123,000) --
Research and development credit...................... -- -- (20,000)
Nondeductible meals and entertainment................ -- -- 15,000
Officers' life insurance premiums.................... -- -- 8,000
Other................................................ 1,814 8,723 20,040
Net valuation reserve................................ 79,291 -- --
-------- --------- --------
$ -- $(383,319) $524,664
======== ========= ========
</TABLE>
F-26
<PAGE> 86
HEALTHCARE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of deferred tax assets and liabilities and the
change in those assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 CHANGE 1994
------------ --------- ------------
<S> <C> <C> <C>
Net current deferred tax asset:
Net operating loss carryforwards............... $338,959 $(338,959) $ --
Nondeductible interest expense................. 52,518 (52,518) --
Accounts receivable reserve.................... 6,056 15,783 21,839
Other.......................................... (14,214) 14,214 --
------------ --------- ------------
$383,319 $(361,480) $ 21,839
========== ========= ==========
</TABLE>
The net operating loss carryforwards existing at December 31, 1993 were
fully utilized in fiscal year 1994 to reduce the current year tax obligation.
7. RELATED-PARTY TRANSACTIONS:
The Company has made noninterest-bearing advances to a development stage
company related by common ownership. This company was established to develop
software for sale as well as internal use that enables medical providers to
efficiently record and file claims with insurance companies. Such advances
amounted to approximately $306,000 in 1994. In 1995, the direction of the
investee company was modified, personnel changes were made, and certain
shareholders commenced proceedings to obtain title to the software before
commencing revised marketing plans. Alternatively, the shareholders may seek a
buyer of the software. Management of HCI believes that the software is a quality
product which should create enough future revenue to repay in full the advances
made by HCI. Advances in 1995, which have been relatively insignificant, have
been charged to operations.
During 1992, 1993, and 1994, HCI paid expenses to a person employed by its
President, the President is also a member of the board of directors and a
shareholder. The person employed provided necessary medical care for the
President's daughter. The expenses paid by HCI are accumulated in a revolving
note to HCI. The note accrues interest at the lowest acceptable rate under the
Internal Revenue Service Code (5.27% at December 31, 1994). The related
receivable amounted to $41,659 and $66,368 at December 31, 1993 and 1994,
respectively.
During 1993 and 1994, HCI issued 14,672 and 8,327 common shares to certain
employees for no consideration. This resulted in related compensation expense of
approximately $43,000 and $24,500, based upon the average common stock prices
issued to third-party investors during similar time periods.
8. SIGNIFICANT CUSTOMERS:
Certain customers made up a significant portion of revenue for the years
ended 1992, 1993, and 1994. During 1992, the Baptist Medical Centers, Dynapro,
Inc., and Rensimer Associates, LTD accounted for approximately 42%, 15%, and 13%
of net sales, respectively. In 1993, Cook-Ft. Worth Children's Medical Center
and Kaweah Delta District Hospital accounted for approximately 11% and 11% of
net sales. During 1994, Mercy Information Systems accounted for approximately
14% of net sales.
9. CONCENTRATIONS OF CREDIT RISK:
The majority of the Company's sales are to companies in the healthcare
industry. HCI conducts credit evaluations of its customers prior to sale and
maintains an allowance for expected credit losses.
F-27
<PAGE> 87
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE
IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
The Company........................... 12
Recent Developments................... 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Capitalization........................ 14
Dilution.............................. 15
Price Range of Common Stock........... 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 27
Management............................ 42
Certain Relationships and Related
Transactions........................ 50
Security Ownership of Certain
Beneficial Owners and Management.... 51
Description of Capital Stock.......... 53
Shares Eligible for Future Sale....... 55
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 57
Available Information................. 58
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,750,000 SHARES
[LOGO] HIE
HEALTHDYNE INFORMATION ENTERPRISES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
MORGAN KEEGAN & COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable in connection
with the distribution of the securities being registered. All amounts are
estimates except the Securities and Exchange Commission registration fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------------- --------
<S> <C>
SEC registration fee.............................................................. $ 5,249
Blue Sky fees and expenses........................................................ 15,000
Nasdaq listing fee................................................................ 17,500
NASD filing fee................................................................... 2,082
Printing and engraving expenses................................................... 110,000
Legal fees and expenses........................................................... 140,000
Accounting fees and expenses...................................................... 120,000
Transfer agent and registrar fees................................................. 10,000
Miscellaneous..................................................................... 80,169
--------
Total................................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Georgia Business Corporation Code, the Company has broad powers
to indemnify its directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act. The Company's
By-Laws (Exhibit 3.2 hereto) provide that the Company will indemnify its
directors and officers to the fullest extent permitted by law. The Company
believes that indemnification under its Bylaws covers at least negligence and
gross negligence by directors and officers.
In addition, the Company's Articles of Incorporation, as amended (Exhibits
3.1(a), 3.1(b) and 3.1(c) hereto) provide that, pursuant to Georgia law, its
directors shall not be liable for monetary damages for breach of the directors'
fiduciary duty of care to the Company and its shareholders. This provision in
the Articles of Incorporation does not eliminate the duty of care, and in
appropriate circumstances equitable remedies such as injunctive or other forms
of nonmonetary relief will remain available under Georgia law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Company for appropriations of business opportunities of
the Company, acts or omissions involving international misconduct or a knowing
violation of law, actions leading to improper personal benefit to the director,
and payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Georgia law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
At present, there is no pending litigation or proceeding involving a
director or officer of the Company as to which indemnification is being sought
nor is the Company aware of any threatened litigation that may result in claims
for indemnification by any officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On June 24, 1994, the Company issued 8,000,000 shares of HIE Common Stock
to the Former Parent in exchange for $80,000. Such shares were issued pursuant
to the exemption from registration provided by Section 4(2) of the Securities
Act. On December 12, 1994, the Company declared a 1.9375-for-one stock split
effected in the form of a stock dividend, as a result of which an aggregate of
15,500,000 shares of HIE Common Stock are currently outstanding. The shares
issued in the stock split were issued pursuant to the exemption from
registration provided by Section 3(a)(9) of the Securities Act.
II-1
<PAGE> 89
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement.
2.1 -- Distribution Agreement between Healthdyne, Inc. (the "Former Parent") and
Healthdyne Information Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to
Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration
No. 33-96478) (the "Form S-1"), and incorporated herein by reference).
2.2 -- Stock Purchase Agreement, dated as of October 27, 1994, between the Former Parent,
Healthcare Communications, Inc. ("HCI") and Shareholders (as defined therein)
(filed as Exhibit 2.2 to the Form S-1, and incorporated herein by reference).
2.3 -- Shareholders Agreement, dated as of October 27, 1994, between the Former Parent,
HCI and Shareholders (as defined therein) (filed as Exhibit 2.3 to the Form S-1,
and incorporated herein by reference).
2.4 -- Purchase Agreement, dated as of April 28, 1995, between Jerry D. Scott and the
Former Parent (filed as Exhibit 2.4 to the Form S-1, and incorporated herein by
reference).
2.5 -- Shareholders Agreement, dated as of July 22, 1994, between the Former Parent,
DataView Imaging International, Inc. ("DataView") and Shareholders (as defined
therein) (filed as Exhibit 2.5 to the Form S-1, and incorporated herein by
reference).
2.6 -- Option Agreement, dated as of July 22, 1994, between the Former Parent, DataView
and Shareholders (as defined therein) (filed as Exhibit 2.6 to the Form S-1, and
incorporated herein by reference).
2.7 -- Shareholders Agreement, dated as of October 21, 1994, between the Former Parent,
Alpha Development Corporation (now Criterion Health Strategies, Inc. ("CHS")) and
Shareholders (as defined therein) (filed as Exhibit 2.7 to the Form S-1, and
incorporated herein by reference).
2.8(a) -- Incorporation Agreement, dated October 21, 1994, between the Former Parent, Alpha
Development Corporation (now CHS) and Incorporators (as defined therein) (filed as
Exhibit 2.8 to the Form S-1, and incorporated herein by reference).
2.8(b) -- Investment Agreement and First Amendment to Incorporation Agreement, dated as of
December 4, 1995, by and among CHS, the Former Parent, HIE, The Southern Venture
Fund II, L.P. ("SVFII"), Brenton L. Teveit ("Teveit") and J. Edward Pearson, Jr.
("Pearson") (filed as Exhibit 10.13 to the Company's Current Report on Form 8-K
dated December 4, 1995 (the "December 1995 Form 8-K"), and incorporated herein by
reference).
2.9 -- First Amendment to Loan Agreement, dated as of December 4, 1995, by and among the
Former Parent, HIE, SVFII and CHS (filed as Exhibit 10.14 to the December 1995
Form 8-K, and incorporated herein by reference).
2.10 -- First Amendment to Security Agreement, dated as of December 4, 1995, by and among
the Former Parent, HIE, SVFII and CHS (filed as Exhibit 10.15 to the December 1995
Form 8-K, and incorporated herein by reference).
2.11 -- First Amendment to Pledge Agreement, dated as of December 4, 1995, by and among
the Former Parent, HIE, SVFII, Teveit and Pearson (filed as Exhibit 10.16 to the
December 1995 Form 8-K, and incorporated herein by reference).
2.12 -- Waiver and Second Amendment to Shareholders' Agreement dated as of December 4,
1995, by and among CHS, the Former Parent, HIE, SVFII, Teveit and Pearson (filed
as Exhibit 10.17 to the December 1995 Form 8-K, and incorporated herein by
reference).
2.13 -- Intercreditor Agreement, dated as of December 4, 1995, by and between HIE and
SVFII (filed as Exhibit 10.18 to the December 1995 Form 8-K, and incorporated
herein by reference).
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
2.14 -- Settlement Agreement dated December 31, 1995, by and among the Former Parent, HIE,
HCI, Jerry Scott, Walter Carozza, George Schwend, Keith Voigts, Larry Streepy,
Steve Fraser, JMS Charitable Trust, JMS Inheritance Trust, ESS Charitable Trust,
ESS Inheritance Trust, MLS Charitable Trust, MLS Inheritance Trust and CBS
Charitable Trust (filed as Exhibit 2(a) to the Company's Current Report on Form
8-K dated February 12, 1996, and incorporated herein by reference).
2.15 -- Agreement dated as of April 1, 1996, between HIE, DataView, Kurt Farhy, John
Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's Quarterly Report
on Form 10-Q dated June 30, 1996 and incorporated herein by reference).
3.1(a) -- Articles of Incorporation of HIE (the "Articles of Incorporation") (filed as
Exhibit 4(b) to the Company's Registration Statement on Form S-8 with respect to
Stock Option Plan I (the "Form S-8") and incorporated herein by reference).
3.1(b) -- Articles of Amendment dated August 30, 1995 to Articles of Incorporation (filed as
Exhibit 4(c) to the Form S-8 and incorporated herein by reference).
3.1(c) -- Articles of Amendment dated October 31, 1995 to Articles of Incorporation (filed
as Exhibit 4(d) to the Form S-8 and incorporated herein by reference).
3.2 -- By-Laws of HIE, as amended (filed as Exhibit 3.2 to Amendment No. 1 to the Form
S-1, and incorporated herein by reference).
4 -- Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank (filed as
Exhibit 4 to Amendment No. 1 to the Form S-1, and incorporated herein by
reference).
5 -- Opinion of Troutman Sanders LLP.
10.1 -- Corporate Services Agreement between the Former Parent and HIE (filed as Exhibit
10.1 to Amendment No. 1 to the Form S-1, and incorporated herein by reference).
10.2 -- Tax Indemnity Agreement between the Former Parent and HIE (filed as Exhibit 10.2
to Amendment No. 1 to the Form S-1, and incorporated herein by reference).
10.3 -- Tax Disaffiliation Agreement between the Former Parent and HIE (filed as Exhibit
10.3 to Amendment No. 1 to the Form S-1, and incorporated herein by reference).
10.4 -- License Agreement between the Former Parent and HIE (filed as Exhibit 10.4 to
Amendment No. 1 to the Form S-1, and incorporated herein by reference).
10.5 -- HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to the
Form S-1, and incorporated herein by reference).
10.6 -- HIE Stock Option Plan I (filed as Exhibit 10.6 to the Form S-1, and incorporated
herein by reference).
10.7 -- HIE Restated Stock Option Plan Two (filed as Exhibit 10.7 to the Form S-1, and
incorporated herein by reference).
10.8 -- HIE Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the Form
S-1, and incorporated herein by reference).
10.9 -- HIE Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form S-1, and
incorporated herein by reference).
10.10 -- HIE Employee Stock Purchase Plan (filed as Exhibit A to the Company's definitive
Proxy Statement for the 1996 Annual Meeting of Shareholders, and incorporated
herein by reference).
10.11 -- HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the Company's
Quarterly Report on Form 10-Q dated June 30, 1996 and incorporated herein by
reference).
10.12 -- Loan Agreement, dated as of October 21, 1994, between the Former Parent and Alpha
Development Corporation (now CHS) (filed as Exhibit 10.10 to the Form S-1, and
incorporated herein by reference).
10.13 -- Funding Agreement, dated as of July 22, 1994, between the Former Parent, DataView
and Shareholders (as defined therein) (filed as Exhibit 10.11 to the Form S-1, and
incorporated herein by reference).
</TABLE>
II-3
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <C> <S>
10.14 -- Software Licensing and Distributor Agreement, dated as of October 27, 1994,
between HCI and the Former Parent (filed as Exhibit 10.12 to the Form S-1, and
incorporated herein by reference).
10.15 -- Software Licensing and Distributorship Agreement, dated as of December 4, 1995, by
and among HIE and CHS (filed as Exhibit 10.19 to the December 1995 Form 8-K, and
incorporated herein by reference).
11 -- Computation of Per Share Earnings (Loss).
21 -- Subsidiaries of the Company.
23.1 -- Consent of KPMG Peat Marwick LLP with respect to HIE.
23.2 -- Consent of Arthur Andersen LLP with respect to HCI.
23.3 -- Consent of Troutman Sanders LLP (contained in opinion filed in Exhibit 5).
</TABLE>
(b) Financial Statement Schedule:
Independent Auditors' Report
Schedule II -- Valuation and Qualifying Accounts
All other financial statement schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
in the consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on the 24th day of September, 1996.
HEALTHDYNE INFORMATION
ENTERPRISES, INC.
By: /s/ H. DARRELL YOUNG
------------------------------------
H. Darrell Young
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Parker H. Petit, H. Darrell Young
and Joseph G. Bleser, and each of them acting individually, as his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them
acting individually, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them acting individually, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below and as of the date indicated above:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ PARKER H. PETIT Chairman of the Board of Directors
- ---------------------------------------------
Parker H. Petit
/s/ H. DARRELL YOUNG Director, President and Chief Executive
- --------------------------------------------- Officer (Principal Executive Officer)
H. Darrell Young
/s/ JOSEPH G. BLESER Vice President-Finance, Chief Financial
- --------------------------------------------- Officer, Treasurer and Secretary (Principal
Joseph G. Bleser Financial Officer; Principal Accounting
Officer)
/s/ J. TERRY DEWBERRY Director
- ---------------------------------------------
J. Terry Dewberry
/s/ WILLIAM J. GRESHAM, JR. Director
- ---------------------------------------------
William J. Gresham, Jr.
</TABLE>
II-5
<PAGE> 93
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ CHARLES R. HATCHER, JR. Director
- ---------------------------------------------
Charles R. Hatcher, Jr.
/s/ JOHN W. LAWLESS Director
- ---------------------------------------------
John W. Lawless
/s/ CARL E. SANDERS Director
- ---------------------------------------------
Carl E. Sanders
/s/ DONALD W. WEBER Director
- ---------------------------------------------
Donald W. Weber
</TABLE>
II-6
<PAGE> 94
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Healthdyne Information Enterprises, Inc.
Under date of February 14, 1996, we reported on the consolidated balance
sheets of Healthdyne Information Enterprises, Inc. and subsidiaries as of
December 31, 1994 and 1995, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the period from June 15,
1994 (date of incorporation) to December 31, 1994 and for the year ended
December 31, 1995, which are included in the prospectus. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, based on our audits and the report of other auditors, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Atlanta, Georgia KPMG PEAT MARWICK LLP
February 14, 1996
<PAGE> 95
SCHEDULE II
HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM JUNE 15, 1994 (DATE OF INCORPORATION) TO
DECEMBER 31, 1994, FOR THE YEAR ENDED DECEMBER 31, 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
ADDITIONS
------------------
BALANCE (1)
AT CHARGED TO BALANCE
BEGINNING COSTS AND (2) AT END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
- ------------------------------------------------- --------- ---------- ----- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts
Period from June 15, 1994 to December 31,
1994........................................ $-- $ -- $ 9(a) $ -- $ 9
Year ended December 31, 1995................... $ 9 $ 43 $ 64(a) $ 31(b) $85
Six months ended June 30, 1996 (unaudited)..... $85 $ -- $ (17)(c) $ -- $68
</TABLE>
- ---------------
(a) Represents beginning balances in allowance for doubtful accounts for
acquired companies.
(b) Uncollected receivables written off.
(c) Represents the balance in allowance for doubtful accounts of a company no
longer consolidated with the Company's financial statements.
<PAGE> 96
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
1 -- Form of Underwriting Agreement..........................................
2.1 -- Distribution Agreement between Healthdyne, Inc. (the "Former Parent")
and HIE (filed as Exhibit 2.1 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-96478) (the
"Form S-1"), and incorporated herein by reference)......................
2.2 -- Stock Purchase Agreement, dated as of October 27, 1994, between the
Former Parent, Healthcare Communications, Inc. ("HCI") and Shareholders
(as defined therein) (filed as Exhibit 2.2 to the Form S-1, and
incorporated herein by reference).......................................
2.3 -- Shareholders Agreement, dated as of October 27, 1994, between the Former
Parent, HCI and Shareholders (as defined therein) (filed as Exhibit 2.3
to the Form S-1, and incorporated herein by reference)..................
2.4 -- Purchase Agreement, dated as of April 28, 1995, between Jerry D. Scott
and the Former Parent (filed as Exhibit 2.4 to the Form S-1, and
incorporated herein by reference).......................................
2.5 -- Shareholders Agreement, dated as of July 22, 1994, between the Former
Parent, DataView Imaging International, Inc. ("DataView") and
Shareholders (as defined therein) (filed as Exhibit 2.5 to the Form S-1,
and incorporated herein by reference)...................................
2.6 -- Option Agreement, dated as of July 22, 1994, between the Former Parent,
DataView and Shareholders (as defined therein) (filed as Exhibit 2.6 to
the Form S-1, and incorporated herein by reference).....................
2.7 -- Shareholders Agreement, dated as of October 21, 1994, between the Former
Parent, Alpha Development Corporation (now Criterion Health Strategies,
Inc. ("CHS")) and Shareholders (as defined therein) (filed as Exhibit
2.7 to the Form S-1, and incorporated herein by reference)..............
2.8(a) -- Incorporation Agreement, dated October 21, 1994, between the Former
Parent, Alpha Development Corporation (now CHS) and Incorporators (as
defined therein) (filed as Exhibit 2.8 to the Form S-1, and incorporated
herein by reference)....................................................
2.8(b) -- Investment Agreement and First Amendment to Incorporation Agreement,
dated as of December 4, 1995, by and among CHS, the Former Parent, HIE,
The Southern Venture Fund II, L.P. ("SVFII"), Brenton L. Teveit
("Teveit") and J. Edward Pearson, Jr. ("Pearson") (filed as Exhibit
10.13 to the Company's Current Report on Form 8-K dated December 4, 1995
(the "December 1995 Form 8-K"), and incorporated herein by reference)...
2.9 -- First Amendment to Loan Agreement, dated as of December 4, 1995, by and
among the Former Parent, HIE, SVFII and CHS (filed as Exhibit 10.14 to
the December 1995 Form 8-K, and incorporated herein by reference).......
2.10 -- First Amendment to Security Agreement, dated as of December 4, 1995, by
and among the Former Parent, HIE, SVFII and CHS (filed as Exhibit 10.15
to the December 1995 Form 8-K, and incorporated herein by reference)....
2.11 -- First Amendment to Pledge Agreement, dated as of December 4, 1995, by
and among the Former Parent, HIE, SVFII, Teveit and Pearson (filed as
Exhibit 10.16 to the December 1995 Form 8-K, and incorporated herein by
reference)..............................................................
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
2.12 -- Waiver and Second Amendment to Shareholders' Agreement dated as of
December 4, 1995, by and among CHS, the Former Parent, HIE, SVFII,
Teveit and Pearson (filed as Exhibit 10.17 to the December 1995 Form
8-K, and incorporated herein by reference)..............................
2.13 -- Intercreditor Agreement, dated as of December 4, 1995, by and between
HIE and SVFII (filed as Exhibit 10.18 to the December 1995 Form 8-K, and
incorporated herein by reference).......................................
2.14 -- Settlement Agreement dated December 31, 1995, by and among the Former
Parent, HIE, HCI, Jerry Scott, Walter Carozza, George Schwend, Keith
Voigts, Larry Streepy, Steve Fraser, JMS Charitable Trust, JMS
Inheritance Trust, ESS Charitable Trust, ESS Inheritance Trust, MLS
Charitable Trust, MLS Inheritance Trust and CBS Charitable Trust (filed
as Exhibit 2(a) to the Company's Current Report on Form 8-K dated
February 12, 1996, and incorporated herein by reference)................
2.15 -- Agreement dated as of April 1, 1996, between HIE, DataView, Kurt Farhy,
John Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's
Quarterly Report on Form 10-Q dated June 30, 1996 and incorporated
herein
by reference)...........................................................
3.1(a) -- Articles of Incorporation of HIE (the "Articles of Incorporation")
(filed as Exhibit 4(b) to the Company's Registration Statement on Form
S-8 with respect to Stock Option Plan I (the "Form S-8") and
incorporated herein
by reference)...........................................................
3.1(b) -- Articles of Amendment dated August 30, 1995 to Articles of Incorporation
(filed as Exhibit 4(c) to the Form S-8 and incorporated herein by
reference)..............................................................
3.1(c) -- Articles of Amendment dated October 31, 1995 to Articles of
Incorporation (filed as Exhibit 4(d) to the Form S-8 and incorporated
herein by reference)....................................................
3.2 -- By-Laws of HIE, as amended (filed as Exhibit 3.2 to Amendment No. 1 to
the Form S-1, and incorporated herein by reference).....................
4 -- Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank
(filed as Exhibit 4 to Amendment No. 1 to the Form S-1, and incorporated
herein by reference)....................................................
5 -- Opinion of Troutman Sanders LLP.........................................
10.1 -- Corporate Services Agreement between the Former Parent and HIE (filed as
Exhibit 10.1 to Amendment No. 1 to the Form S-1, and incorporated herein
by reference)...........................................................
10.2 -- Tax Indemnity Agreement between the Former Parent and HIE (filed as
Exhibit 10.2 to Amendment No. 1 to the Form S-1, and incorporated herein
by reference)...........................................................
10.3 -- Tax Disaffiliation Agreement between the Former Parent and HIE (filed as
Exhibit 10.3 to Amendment No. 1 to the Form S-1, and incorporated herein
by reference)...........................................................
10.4 -- License Agreement between the Former Parent and HIE (filed as Exhibit
10.4 to Amendment No. 1 to the Form S-1, and incorporated herein by
reference)..............................................................
10.5 -- HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No.
1 to the Form S-1, and incorporated herein by reference)................
10.6 -- HIE Stock Option Plan I (filed as Exhibit 10.6 to the Form S-1, and
incorporated herein by reference).......................................
10.7 -- HIE Restated Stock Option Plan Two (filed as Exhibit 10.7 to the Form
S-1, and incorporated herein by reference)..............................
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------ ------------
<C> <C> <S> <C>
10.8 -- HIE Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to
the Form S-1, and incorporated herein by reference).....................
10.9 -- HIE Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form
S-1, and incorporated herein by reference)..............................
10.10 -- HIE Employee Stock Purchase Plan (filed as Exhibit A to the Company's
definitive Proxy Statement for the 1996 Annual Meeting of Shareholders,
and incorporated herein by reference)...................................
10.11 -- HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q dated June 30, 1996 and
incorporated herein by reference).......................................
10.12 -- Loan Agreement, dated as of October 21, 1994, between the Former Parent
and Alpha Development Corporation (now CHS) (filed as Exhibit 10.10 to
the Form S-1, and incorporated herein by reference).....................
10.13 -- Funding Agreement, dated as of July 22, 1994, between the Former Parent,
DataView and Shareholders (as defined therein) (filed as Exhibit 10.11
to the Form S-1, and incorporated herein by reference)..................
10.14 -- Software Licensing and Distributor Agreement, dated as of October 27,
1994, between HCI and the Former Parent (filed as Exhibit 10.12 to the
Form S-1, and incorporated herein by reference).........................
10.15 -- Software Licensing and Distributorship Agreement, dated as of December
4, 1995, by and among HIE and CHS (filed as Exhibit 10.19 to the
December 1995 Form 8-K, and incorporated herein by reference)...........
11 -- Computation of Per Share Earnings (Loss)................................
21 -- Subsidiaries of the Company.............................................
23.1 -- Consent of KPMG Peat Marwick LLP with respect to HIE....................
23.2 -- Consent of Arthur Andersen LLP with respect to HCI......................
23.3 -- Consent of Troutman Sanders LLP (contained in opinion filed in Exhibit
5)......................................................................
</TABLE>
<PAGE> 1
EXHIBIT 1
FORM OF UNDERWRITING AGREEMENT
[ ] Shares
HEALTHDYNE INFORMATION ENTERPRISES, INC.
Common Stock
UNDERWRITING AGREEMENT
, 1996
-----------------
MORGAN KEEGAN & COMPANY, INC.
As the Representative of the several Underwriters
c/o Morgan Keegan & Company, Inc.
50 North Front Street
Memphis, TN 38103
Dear Sirs and Madams:
Healthdyne Information Enterprises, Inc., a Georgia corporation (the
"Company"), proposes to issue and sell [ ] shares of its
authorized but unissued Common Stock, $0.01 par value per share (together with
associated preferred stock purchase rights, the "Common Stock") (the "Firm
Shares"). The Company proposes to grant to the Underwriters (as defined below)
an option to purchase up to [ ] additional shares of Common Stock
(the "Optional Shares" and, with the Firm Shares, collectively, the "Shares").
The Common Stock is more fully described in the Registration Statement and the
Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term shall
also include any underwriter purchasing Shares pursuant to Section 2(b)
hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
<PAGE> 2
1. Representations and Warranties of the Company. The Company hereby
represents and warrants to the several Underwriters as of the date hereof and
as of each Closing Date (as defined below) that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-_____),
including the related preliminary prospectus, for the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of the Shares.
Copies of such registration statement and of each amendment thereto, if any,
including the related preliminary prospectus (meeting the requirements of Rule
430A of the rules and regulations of the Commission) heretofore filed by the
Company with the Commission have been delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall
also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Shares first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to
such prospectus after the Effective Date, shall also mean (from and after the
filing with the Commission of such supplement or the effectiveness of such
amendment) such prospectus as so supplemented or amended. The term Preliminary
Prospectus as used in this Agreement shall mean each preliminary prospectus
included in such registration statement prior to the time it becomes effective.
The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies
-2-
<PAGE> 3
of each Preliminary Prospectus and has consented to the use of such copies for
the purposes permitted by the Securities Act.
(b) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and as being conducted, and is duly
qualified as a foreign corporation and in good standing in all jurisdictions
in which the character of the property owned or leased or the nature of the
business transacted by it makes qualification necessary (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole).
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21 to the Registration Statement and other than the Company's interest
in Criterion Health Strategies, Inc. as described in the Prospectus. Except as
described in the Prospectus, the Company owns all of the outstanding capital
stock of its subsidiaries free and clear of all claims, liens, charges and
encumbrances. The Company and each of its subsidiaries are in possession of
and operating in compliance with all material authorizations, licenses,
permits, consents, certificates and orders material to the conduct of their
respective businesses as described in the Prospectus, all of which are valid
and in full force and effect.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any materially
adverse change in the business, properties, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement and the Prospectus.
(e) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any
-3-
<PAGE> 4
later date on which Optional Shares are to be purchased, the Prospectus will
comply, in all material respects, with the provisions of the Securities Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date, the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this subparagraph (e) shall apply to
statements in, or omissions from, the Registration Statement or the Prospectus
made in reliance upon and in conformity with information herein or otherwise
furnished in writing to the Company by or on behalf of the Underwriters for use
in the Registration Statement or the Prospectus.
(f) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, are duly authorized for quotation on
the Nasdaq SmallCap Market upon official notice of issuance of the Firm Shares,
have been issued in compliance with all applicable federal and state securities
laws, and were not issued in violation of or subject to any preemptive rights
or other rights to subscribe for or purchase securities. All issued and
outstanding shares of capital stock of each subsidiary of the Company have been
duly authorized and validly issued and are fully paid and nonassessable. Except
as disclosed in or contemplated by the Prospectus and the financial statements
of the Company and the related notes thereto included in the Prospectus,
neither the Company nor any subsidiary has any outstanding options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and
-4-
<PAGE> 5
fairly presents the information required by the Securities Act and the Rules
and Regulations to be shown with respect to such plans, arrangements, options
and rights.
(g) The Shares are duly authorized, will be, when issued and sold to the
Underwriters as provided herein, validly issued, fully paid and nonassessable
and conform to the description thereof in the Prospectus. No further approval
or authority of the shareholders or the Board of Directors of the Company will
be required for the issuance and sale of the Shares to be sold by the Company
as contemplated herein.
(h) The Shares to be sold by the Company will be sold free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
and will conform to the description thereof contained in the Prospectus. No
preemptive right, co-sale right, registration right, right of first refusal or
other similar right to subscribe for or purchase securities of the Company
exists with respect to the issuance and sale of the Shares by the Company
pursuant to this Agreement except as set forth in the Prospectus. No
stockholder of the Company has any right which has not been waived, or complied
with, to require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by
this Agreement.
(i) The Company has full corporate power and authority to enter into
this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium laws
affecting creditors' rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising under federal and
state securities laws. The making and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby (i) will
not violate any provisions of the Articles of Incorporation, Bylaws or other
organizational documents of the Company or any of its subsidiaries, and (ii)
will not conflict with, result in a material breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
material default under (A) any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any of its subsidiaries is a party or by
-5-
<PAGE> 6
which the Company or any of its subsidiaries or any of their respective
properties may be bound or affected, or (B) any statute or any authorization,
judgment, decree, order, rule or regulation of any court or any regulatory
body, administrative agency or other governmental body applicable to the
Company or any of its subsidiaries or any of their respective properties. No
consent, approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body that has not already been
obtained is required for the execution and delivery of this Agreement or the
consummation of the transactions contemplated by this Agreement, except for
compliance with the Securities Act, the Blue Sky laws applicable to the public
offering of the Common Shares by the several Underwriters and the clearance of
such offering with the NASD.
(j) The consolidated financial statements and schedules of the Company
and the related notes thereto included in the Registration Statement and the
Prospectus present fairly on a consolidated basis the financial position of the
Company and its subsidiaries as of the respective dates of such financial
statements and schedules, and the results of operations and cash flows of the
Company and its subsidiaries for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the independent accountants
named in subsection 9(f). No other financial statements or schedules are
required to be included in the Registration Statement. The selected financial
data set forth in the Prospectus under the captions "Capitalization" and
"Selected Consolidated Financial Information" fairly present the information
set forth therein on the basis stated in the Registration Statement.
(k) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and
-6-
<PAGE> 7
warranties given by the Company and its officers to its independent public
accountants for the purpose of supporting the letters referred to in Section
6(c)(vi) are true and correct.
(l) Neither the Company nor any of its subsidiaries is (i) in violation
or default of any provision of its Articles of Incorporation, Bylaws or other
organizational documents, or (ii) in a material breach of or default with
respect to any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound; and
there does not exist any state of facts which, with notice or lapse of time or
both would constitute such a breach or default on the part of the Company and
its subsidiaries, taken as a whole.
(m) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof.
(n) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or threatened to which the
Company or any of its subsidiaries is or is threatened to be made a party or of
which property owned or leased by the Company or any of its subsidiaries is or
is threatened to be made the subject, which actions, suits or proceedings
could, individually or in the aggregate, prevent or adversely affect the
transactions contemplated by this Agreement or result in a material adverse
change in the business, properties, condition (financial or otherwise), or
results of operations of the Company or its subsidiaries; and no labor
disturbance by the employees of the Company or any of its subsidiaries exists
or, to the Company's knowledge, is imminent which could materially adversely
affect the business, properties, condition (financial or otherwise), or results
of operations of the Company or its subsidiaries. Neither the Company nor any
of its subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. Except as disclosed in the
Prospectus, there are no material legal or governmental actions, suits or
proceedings pending or, to the Company's knowledge, threatened against any
executive officers or directors of the Company.
-7-
<PAGE> 8
(o) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject to
no lien, mortgage, pledge, charge or encumbrance of any kind except (i) those,
if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount to the Company or
its subsidiaries, and do not adversely affect the use made and proposed to be
made of such property by the Company or its subsidiaries. The Company or the
applicable subsidiary holds its leased properties under valid and binding
leases. Except as disclosed in the Prospectus, the Company owns or leases all
such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(p) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not (A) incurred any liabilities or obligations, indirect,
direct or contingent, or (B) entered into any oral or written agreement or
other transaction, which in the case of (A) or (B) is not in the ordinary
course of business; (ii) the Company and its subsidiaries have not sustained
any material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company and its subsidiaries have not paid
or declared any dividends or other distributions with respect to their
respective capital stock and the Company and its subsidiaries are not in
default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock of the
Company or its subsidiaries (other than upon the sale of the Shares hereunder
or upon the exercise of any options or warrants disclosed in the Prospectus);
(v) there has not been any material increase in the short- or long-term debt of
the Company and its subsidiaries; and (vi) there has not been any material
adverse change or any development involving or which may reasonably be expected
to involve a prospective material adverse change, in the business, condition
(financial or otherwise), properties, or results of operations of the Company
or its subsidiaries.
(q) The Company is and its subsidiaries are conducting business in
compliance with all applicable laws, rules and regulations of the jurisdictions
in which they are conducting
-8-
<PAGE> 9
business, except where the failure to be so in compliance would not have a
material adverse effect on the business, properties, condition (financial or
otherwise) or results of operations of the Company or its subsidiaries.
(r) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns, and all such tax returns
are complete and correct in all material respects, and the Company and its
subsidiaries have not failed to pay any taxes which were payable pursuant to
said returns or any assessments with respect thereto. The Company has no
knowledge of any tax deficiency which has been or is likely to be threatened or
asserted against the Company or its subsidiaries.
(s) The Company has not distributed, and will not distribute prior to
the later to occur of (i) completion of the distribution of the Shares, or (ii)
the expiration of any time period within which a dealer is required under the
Securities Act to deliver a prospectus relating to the Shares, any offering
material in connection with the offering and sale of the Shares other than the
Prospectus, the Registration Statement and any other materials permitted by the
Securities Act and consented to by the Underwriters.
(t) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for their business,
including, but not limited to, directors' and officers' insurance, insurance
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full
force and effect. Neither the Company nor any of its subsidiaries has been
refused any insurance coverage sought or applied for, and the Company has no
reason to believe that it or they will not be able to renew its or their
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its or
their business at a cost that would not materially adversely affect the
business, properties, condition (financial or otherwise) or results of
operations of the Company or its subsidiaries.
(u) Neither the Company nor any of its subsidiaries nor, to the best of
the Company's knowledge, any of their employees or agents has at any time
during the last five years
-9-
<PAGE> 10
(i) made any unlawful contribution to any candidate for foreign office, or
failed to disclose fully any contribution in violation of law, or (ii) made any
payment to any foreign, federal or state governmental officer or official or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(v) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(w) The Company has caused each of its executive officers and directors
as set forth in the Prospectus to furnish to the Underwriters an agreement in
form and substance satisfactory to Morgan Keegan & Company, Inc. pursuant to
which each such party has agreed that during the period of ninety (90) days
after the date the Registration Statement becomes effective, without the prior
written consent of Morgan Keegan & Company, Inc., such party will not (i)
offer, sell, contract to sell, make any short sale (including without
limitation short against the box), pledge or otherwise dispose of, directly or
indirectly, any shares of the Company's Common Stock, options to acquire Common
Stock or securities convertible into or exchangeable for, or any other rights
to purchase or acquire, the Company's Common Stock (including, without
limitation, Common Stock of the Company which may be deemed to be beneficially
owned in accordance with the rules and regulations of the Commission) other
than the exercise or conversion of outstanding options, warrants or convertible
securities; or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in (i) or (ii) is to be settled
by delivery of Common Stock or such other securities, in cash or otherwise
provided, however, that bona fide gift transactions and transfers which will
not result in any change in beneficial ownership may be permitted if the
transferee enters into a lock-up agreement in substantially the same form
covering the remainder of the lock-up period.
(x) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.
-10-
<PAGE> 11
(y) Except as specifically disclosed in the Prospectus, the Company and
its subsidiaries owns or possesses adequate rights to use sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted; the
expiration of any trademarks, trade names, patent rights, copyrights, licenses,
approvals or governmental authorizations would not have a material adverse
effect on the business, properties, condition (financial or otherwise) or
results of operations of the Company or its subsidiaries; the Company has no
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patent rights, copyrights, licenses, trade secret or other
similar rights of others; and no claims have been made or are threatened
against the Company or its subsidiaries regarding trademark, trade name,
patent, copyright, license, trade secret or other infringement which could have
a material adverse effect on the business, properties, condition (financial or
otherwise) or results of operations or prospects of the Company and its
subsidiaries. The Company has taken reasonable security measures to protect
the secrecy, confidentiality and value of all of its intellectual properties.
Each employee of the Company and its subsidiaries and each consultant of the
Company and its subsidiaries involved in the development of intellectual
property for the Company or its subsidiaries has executed and delivered to the
Company or the applicable subsidiary a non-disclosure and assignment of
inventions agreement.
(a) Except as disclosed in the Prospectus, (i) the Company is and its
subsidiaries are in compliance in all material respects with all rules, laws
and regulation relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to their business, (ii) neither the Company nor any of its
subsidiaries has received any notice from any governmental authority or third
party of an asserted claim under Environmental Laws, (iii) no facts currently
exist that will require the Company or any of its subsidiaries to make future
material capital expenditures to comply with Environmental Laws, and (iv) to
the knowledge of the Company, no property which is or has been owned, leased or
occupied by the Company or any of its subsidiaries has been designated as a
Superfund site pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq.), or otherwise designated as a contaminated site under applicable state or
local law.
-11-
<PAGE> 12
(aa) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
2. Purchase of the Shares by the Underwriters.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
[ ] of the Firm Shares to the several Underwriters, and each of the
Underwriters agrees to purchase from the Company the respective aggregate
number of Firm Shares set forth opposite its name in Schedule I. The price at
which such Firm Shares shall be sold by the Company and purchased by the
several Underwriters shall be $___ per share. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
Firm Shares which represents the same proportion of the total number of Firm
Shares to be sold by the Company pursuant to this Agreement as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto represents of the total number of shares of the Firm Shares to be
purchased by all Underwriters pursuant to this Agreement, as adjusted by you in
such manner as you deem advisable to avoid fractional shares. In making this
Agreement, each Underwriter is contracting severally and not jointly; except as
provided in paragraphs (b) and (c) of this Section 2, the agreement of each
Underwriter is to purchase only the respective number of shares of the Firm
Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements with respect to all such shares and portion, the number
of Shares which each non-defaulting Underwriter is otherwise obligated to
purchase under this Agreement shall be automatically increased on
-12-
<PAGE> 13
a pro rata basis to absorb the remaining shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase; provided, however,
that the non-defaulting Underwriters shall not be obligated to purchase the
portion which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such Shares exceeds 10% of the total number of Shares
which all Underwriters agreed to purchase hereunder. If the total number of
Shares which the defaulting Underwriter or Underwriters agreed to purchase
shall not be purchased or absorbed in accordance with the two preceding
sentences, the Company shall have the right, within 24 hours next succeeding
the 24-hour period above referred to, to make arrangements with other
underwriters or purchasers satisfactory to you for purchase of such Shares and
portion on the terms herein set forth. In any such case, either you or the
Company shall have the right to postpone the Closing Date determined as
provided in Section 4 hereof for not more than seven business days after the
date originally fixed as the Closing Date pursuant to Section 4 in order that
any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all of the Shares which the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the part
of the Company to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to [ ] Optional Shares from the Company at the same
price per share as the Underwriters shall pay for the Firm Shares. Said option
may be exercised only to cover over-allotments in the sale of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time on or
before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
Optional Shares as to which the several Underwriters are exercising the option.
Delivery of certificates for the Optional Shares, and payment therefor, shall
be made as
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provided in Section 4 hereof. The number of Optional Shares to be
purchased by each Underwriter shall be the same percentage of the total number
of Optional Shares to be purchased by the several Underwriters as such
Underwriter is purchasing of the Firm Shares, as adjusted by you in such manner
as you deem advisable to avoid fractional shares.
3. Offering by Underwriters.
(a) The terms of the public offering by the Underwriters of the Shares
to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the public offering and increase or decrease the concessions and
discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and
the Prospectus relating to the Shares constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
4. Delivery of and Payment for the Shares.
(a) Delivery of certificates for the Firm Shares and the Optional Shares
(if the option granted by Section 2(c) hereof shall have been exercised not
later than [9]:00 a.m., [MEMPHIS] time, on the date two business days preceding
the Closing Date), and payment therefor, shall be made at the office of
Troutman Sanders LLP, 600 Peachtree Street, N.E., Suite 5200, NationsBank
Plaza, Atlanta, Georgia, at [9]:00 a.m., [MEMPHIS] time, on the fourth business
day after the date of this Agreement, or at such time on such other day, not
later than seven full business days after such fourth business day, as shall be
agreed upon in writing by the Company, and you. The date and hour of such
delivery and payment (which may be postponed as provided in Section 2(b)
hereof) are herein called the "Closing Date".
(b) If the option granted by Section 2(c) hereof shall be exercised
after [9]:00 a.m., [MEMPHIS] time, on the date two business days preceding the
Closing Date, delivery of
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<PAGE> 15
certificates for the shares of Optional Shares, and
payment therefor, shall be made at the office of Troutman Sanders LLP, 600
Peachtree Street, N.E., Suite 5200, NationsBank Plaza, Atlanta, Georgia, at
[9]:00 a.m., [MEMPHIS] time, on the third business day after the exercise of
such option.
(c) Payment for the shares purchased from the Company shall be made to
the Company or its order, by (i) one or more certified or official bank check
or checks in next day funds (and the Company agrees not to deposit any such
check in the bank on which drawn until the day following the date of its
delivery to the Company) or (ii) federal funds wire transfer. Such payment
shall be made upon delivery of certificates for the shares to you for the
respective accounts of the several Underwriters (including without limitation
by "full-fast" electronic transfer by Depository Trust Company) against receipt
therefor signed by you. Certificates for the shares to be delivered to you
shall be registered in such name or names and shall be in such denominations as
you may request at least one business day before the Closing Date, in the case
of Firm Shares, and at least one business day prior to the purchase thereof, in
the case of the Optional Shares. Such certificates will be made available to
the Underwriters for inspection, checking and packaging at the offices of
Morgan Keegan & Company, Inc.'s clearing agent, [Bear Stearns Securities
Corp.], on the business day prior to the Closing Date or, in the case of the
Optional Shares, by 3:00 p.m., New York time, on the business day preceding the
date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional Shares
are purchased for the account of such Underwriter. Any such payment by you
shall not relieve such Underwriter from any of its obligations hereunder.
5. Covenants of the Company. The Company covenants and agrees as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A
and (ii) not file any amendment to the Registration Statement or supplement to
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<PAGE> 16
the Prospectus of which you shall not previously have been advised and
furnished with a copy or to which you shall have reasonably objected in writing
or which is not in compliance with the Securities Act or the rules and
regulations of the Commission.
(b) The Company will promptly notify you in the event of (i) the
request by the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the shares for sale in any jurisdiction, or (v) the receipt by
it of notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the issuance
of such a stop order and, if such an order shall at any time be issued, to
obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus
as you may reasonably request, and (iii) thereafter from time to time during
the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter
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<PAGE> 17
or dealer any event relating to or affecting the Company, or of which the
Company shall be advised in writing by you, shall occur as a result of which it
is necessary, in the opinion of counsel for the Company or of counsel for the
Underwriters, to supplement or amend the Prospectus in order to make the
Prospectus not misleading in the light of the circumstances existing at the
time it is delivered to a purchaser of the Shares, the Company will forthwith
prepare and file with the Commission a supplement to the Prospectus or an
amended prospectus so that the Prospectus as so supplemented or amended will
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light
of the circumstances existing at the time such Prospectus is delivered to such
purchaser, not misleading. If, after the public offering of the Shares by the
Underwriters and during such period, the Underwriters shall propose to vary the
terms of offering thereof by reason of changes in general market conditions or
otherwise, you will advise the Company in writing of the proposed variation,
and, if in the opinion either of counsel for the Company or of counsel for the
Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus setting
forth such variation. The Company authorizes the Underwriters and all dealers
to whom any of the shares may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Shares in accordance with the applicable provisions of the
Securities Act and the applicable rules and regulations thereunder for such
period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any
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<PAGE> 18
jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to shareholders
of the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its security holders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. ("NASD") of
the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii)
the furnishing to the Underwriters and the persons designated by them of copies
of any Preliminary Prospectus and of the several documents required by
paragraph (c) of this Section 5 to be so furnished, (iii) the printing of this
Agreement and related documents delivered to the Underwriters, (iv) the
preparation, printing and filing of all supplements and amendments to the
Prospectus referred to in paragraph (d) of this Section 5, (v) the furnishing
to you and the Underwriters of the reports and information referred to in
paragraph (g) of this Section 5 and (vi) the printing and issuance of stock
certificates, including the transfer agent's fees.
(j) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including counsel
fees and disbursements and cost of printing memoranda for the Underwriters)
paid by or for the account of the Underwriters or their counsel in qualifying
the Shares under state securities or blue sky laws and in the review of the
offering by the NASD.
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<PAGE> 19
(k) The provisions of paragraphs (i) and (j) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company hereby agrees to pay and shall not affect any agreement which
the Company may make, or may have made, for the sharing of any such expenses
and costs.
(l) The Company hereby agrees that, without the prior written consent
of Morgan Keegan & Company, Inc., the Company, will not, for a period of ninety
(90) days following the date the Registration Statement becomes effective, (i)
offer, sell, contract to sell, make any short sale (including without
limitation short against the box), pledge, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options to acquire shares of
Common Stock or securities convertible into or exchangeable or exercisable for
or any other rights to purchase or acquire Common Stock (including without
limitation, Common Stock of the Company which may be deemed to be beneficially
owned in accordance with the rules and regulations of the Commission) other
than the exercise or conversion of outstanding options, warrants or convertible
securities or (ii) enter into any swap or other agreement that transfers, in
whole or in part, any of the economic consequences or ownership of Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Common Stock or such other securities, in cash or
otherwise; provided, however, that bona fide gift transactions and transfers
which will not result in any change in beneficial ownership may be permitted if
the transferee enters into a lock-up agreement in substantially the same form
covering the remainder of the lock-up period. The foregoing sentence shall not
apply to the shares to be sold to the Underwriters pursuant to this Agreement.
(m) The Company agrees to use its best efforts to cause all directors
and officers to agree that, without the prior written consent of Morgan Keegan
& Company, Inc., such person or entity will not, for a period of ninety (90)
days following the date the Registration Statement becomes effective, (i)
offer, sell, contract to sell, make any short sale (including without
limitation short against the box), pledge, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any options to acquire shares of
Common Stock or securities convertible into or exchangeable or exercisable for
or any other rights to purchase or acquire Common Stock (including without
limitation, Common Stock of the Company which may be deemed to be beneficially
owned in accordance with the rules and regulations of the Commission) other
than the exercise or conversion of
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<PAGE> 20
outstanding options, warrants or convertible securities or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences or ownership of Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise; provided,
however, that bona fide gift transactions and transfers which will not result
in any change in beneficial ownership may be permitted if the transferee enters
into a lock-up agreement in substantially the same form covering the remainder
of the lock-up period.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding
to or commenting on such rumor, publication or event.
(o) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(p) The Company agrees to maintain and to cause its subsidiaries to
maintain directors' and officers' insurance in amounts customary for the size
and nature of the business of the Company and its subsidiaries for a period of
two years from the date of this Agreement.
6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject
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<PAGE> 21
under the Securities Act, the Exchange Act, or the common law or otherwise, and
the Company agrees to reimburse each such Underwriter and controlling person
for any legal or other expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; provided,
however, that (1) the indemnity agreements of the Company contained in this
paragraph (a) shall not apply to any such losses, claims, damages, liabilities
or expenses if such statement or omission was made in reliance upon and in
conformity with information furnished as herein stated or otherwise furnished
in writing to the Company by or on behalf of any Underwriter for use in any
Preliminary Prospectus or the Registration Statement or the Prospectus or any
such amendment thereof or supplement thereto, and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary Prospectus
shall not inure to the benefit of any Underwriter from whom the person
asserting any such losses, claims, damages, liabilities or expenses purchased
the shares which is the subject thereof (or to the benefit of any person
controlling such Underwriter) if at or prior to the written confirmation of the
sale of such stock a copy of the Prospectus (or the Prospectus as amended or
supplemented) was not sent or delivered to such person and the untrue statement
or omission of a material fact contained in such Preliminary Prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented)
unless the failure is the result of noncompliance by the Company with paragraph
(c) of Section 5
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hereof. The indemnity agreements of the Company contained in
this paragraph (a) and the representations and warranties of the Company
contained in Section 1 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each
other Underwriter and each person (including each partner or officer thereof)
who controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, or
the common law or otherwise and to reimburse each of them for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages
or liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented
if the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of such indemnifying Underwriter for use in the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter contained in
this paragraph (b) shall remain operative and in
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<PAGE> 23
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 6 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related and was prejudiced
by the failure to give the Notice, but the omission so to notify such
indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (the "Notice of Defense")
to the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such
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<PAGE> 24
counsel to be necessary to protect the interests of the indemnified party or
parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties
participate in, but not conduct, the defense. If, within a reasonable time
after receipt of the Notice, an indemnifying party gives a Notice of Defense
and the counsel chosen by the indemnifying party or parties is reasonably
satisfactory to the indemnified party or parties, the indemnifying party or
parties will not be liable under paragraphs (a) through (c) of this Section 6
for any legal or other expenses subsequently incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding, except that (A) the indemnifying party or parties shall
bear the legal and other expenses incurred in connection with the conduct of
the defense as referred to in clause (i) of the proviso to the preceding
sentence and (B) the indemnifying party or parties shall bear such other
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 6 is unavailable
or insufficient to hold harmless an indemnified party under paragraph (a) or
(b) of this Section 6, then each indemnifying party, in lieu of indemnifying
such indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages or liabilities
referred to in paragraph (a) or (b) of this Section 6 (i) in such proportion as
is appropriate to reflect the relative benefits received by each indemnifying
party from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of each indemnifying party in connection with
the statements or omissions that resulted in such losses, claims, damages or
liabilities, or actions in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Shares received by the Company and the total
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<PAGE> 25
underwriting discount received by the Underwriters, as set forth in the table
on the cover page of the Prospectus, bear to the aggregate public offering
price of the Shares. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by each indemnifying party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this
paragraph (d). The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities, or actions in respect thereof, referred
to in the first sentence of this paragraph (d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigation, preparing to defend or defending against any
action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 6).
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<PAGE> 26
(e) The Company will not, without your prior written consent, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding.
7. Reimbursement of Certain Expenses. In addition to their other
obligations under Section 6 of this Agreement, the Company hereby agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 6 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 7 and the possibility that such payments
might later be held to be improper; provided, however, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
8. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company in accordance
with Section 9, or if after the date of this Agreement trading in the Common
Stock shall have been suspended, or if there shall have occurred (i) the
engagement in hostilities or an escalation of major hostilities by the United
States or the declaration of war or a national emergency by the United States
on or after the date hereof, (ii) any outbreak of hostilities or other national
or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change in
economic or political conditions in the financial markets of the United States
or the Company's industry sector would, in the Underwriters' reasonable
judgment, make the offering or delivery of the Shares impracticable, (iii)
suspension of trading in securities generally or a material adverse decline in
value of
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<PAGE> 27
securities generally on the New York Stock Exchange, the American Stock
Exchange, or The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree, notice or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States. If this Agreement shall be terminated
pursuant to this Section 8, there shall be no liability of the Company to the
Underwriters and no liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 5 hereof.
9. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the shares shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Optional Shares are to
be purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares hereunder
and the validity and form of the certificates representing the Shares, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved
-27-
<PAGE> 28
at or prior to the Closing Date by Hale and Dorr, counsel for the
Underwriters.
(c) You shall have received from Troutman Sanders LLP, counsel for the
Company, an opinion, addressed to the Underwriters and dated the Closing Date,
covering the matters set forth in Annex A hereto and if Optional Shares are
purchased at any date after the Closing Date, additional opinions from such
counsel, addressed to the Underwriters and dated such later date, confirming
that the statements expressed as of the Closing Date in such opinions remain
valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct, and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such
a supplement or amendment; (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken
as a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) neither the Company nor
any of its subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus; (vi) there are not
any pending or known threatened legal proceedings to which the Company or any
of its subsidiaries is a
-28-
<PAGE> 29
party or of which property of the Company or any of its subsidiaries is the
subject which are material and which are not disclosed in the Registration
Statement and the Prospectus; (vii) there are not any franchises, contracts,
leases or other documents which are required to be filed as exhibits to the
Registration Statement which have not been filed as required; (viii) the
representations and warranties of the Company herein are true and correct in
all material respects as of the Closing Date or any later date on which
Optional Shares are to be purchased, as the case may be; and (ix) there has not
been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable
as to render it impracticable in your reasonable judgment to make a public
offering of the Shares, or a material adverse change in market levels for
securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date on
which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from KPMG Peat Marwick LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning
of the Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter delivered to
you concurrently with the execution of this Agreement (the "Original Letter"),
but carried out to a date not more than three business days prior to the
Closing Date or such later date on which Optional Shares are purchased (i)
confirming, to the extent true, that the statements and conclusions set forth
in the Original Letter are accurate as of the Closing Date or such later date,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any
-29-
<PAGE> 30
changes in the facts described in the Original Letter since the date of the
Original Letter or to reflect the availability of more recent financial
statements, data or information. The letters shall not disclose any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company or any of its subsidiaries which, in your sole
judgment, makes it impractical or inadvisable to proceed with the public
offering of the shares or the purchase of the Optional Shares as contemplated
by the Prospectus.
(g) You shall have received from KPMG Peat Marwick a letter stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's financial statements as at _____________, 1996, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 5 hereof.
(i) Prior to the Closing Date, the Shares to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Hale and Dorr, counsel for the Underwriters, shall be
satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that (i) in the event of such termination, the Company
agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 5 hereof, and (ii) if this Agreement is terminated by you
because of any
-30-
<PAGE> 31
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with
any provision hereof other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
transactions contemplated hereby.
10. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the shares shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company under this
Agreement, including all costs and expenses referred to in paragraphs (i) and
(j) of Section 5 hereof.
11. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 6 hereof, the several parties (in addition to the
Company, and the several Underwriters) indemnified under the provisions of said
Section 6, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give
to any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser,
as such purchaser, of any of the shares from any of the several
Underwriters.
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to Morgan Keegan & Company, Inc., 50
North Front Street, Memphis, Tennessee 38103, Attention: Compliance
-31-
<PAGE> 32
Department, with a copy to David Sylvester, Esq., Hale and Dorr, The Willard
Office Building, Suite 1000, 1455 Pennsylvania Avenue, N.W., Washington, D.C.
20004; and if to the Company, shall be mailed, telegraphed or delivered to it
at its office, Healthdyne Information Enterprises, Inc., 1850 Parkway Place,
Suite 1100, Marietta, Georgia 30007, Attention: President, with a copy to
Patricia A. Wilson, Esq., Troutman Sanders LLP, 600 Peachtree Street, N.W.,
Suite 5200, NationsBank Plaza, Atlanta, Georgia 30308. All notices given by
telegraph shall be promptly confirmed by letter.
13. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of paragraphs
(l), (m) and (n) of Section 5 hereof shall be of no further force or effect.
14. Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
15. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the laws pertaining to conflicts of
laws) of the State of [TENNESSEE].
16. General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect
to the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
-32-
<PAGE> 33
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and you.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company and the several
Underwriters, including you, all in accordance with its terms.
Very truly yours,
HEALTHDYNE INFORMATION ENTERPRISES, INC.
By:
-------------------------------
Title:
-----------------------------
The foregoing Underwriting
Agreement is hereby confirmed
and accepted by us in Memphis,
Tennessee, as of the date
first above written.
MORGAN KEEGAN & COMPANY, INC.
Acting for ourself and as the
Representative of the several
Underwriters named in the
attached Schedule A
By:
------------------------
Partner
-33-
<PAGE> 34
-34-
<PAGE> 35
Schedule I
UNDERWRITERS
<TABLE>
<S> <C>
Underwriters Number of
Shares to
be Purchased
Morgan Keegan & Company, Inc.
Total
------------
</TABLE>
-35-
<PAGE> 36
Annex A
Matters to be Covered in the
Opinion of Troutman Sanders LLP
Counsel for the Company
1. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, is duly qualified as a foreign corporation and
in good standing in each state of the United States of America
in which the nature of its business or its ownership or leasing
of property requires such qualification, and has full corporate
power and authority to own or lease its properties and conduct
its business as described in the Registration Statement; all
the issued and outstanding capital stock of each of the
subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is
owned by the Company free and clear of all liens, encumbrances
and security interests, and to the best of such counsel's
knowledge, no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding;
2. the authorized capital stock of the Company consists of _____________
shares of _____________ Stock, $_____ par value, of which there are outstanding
_____________ shares, and _____________ shares of Common Stock, $____ par
value, of which there are outstanding _____________ shares; all of the
outstanding shares of such capital stock (including the Firm Shares and the
Optional Shares issued, if any) have been duly authorized and validly issued
and are fully paid and nonassessable; any Optional Shares purchased after the
Closing Date have been duly authorized and, when issued and delivered to, and
paid for by, the Underwriters as provided in the Underwriting Agreement, will
be validly issued and fully paid and nonassessable; and no preemptive rights
of, or rights of refusal
-36-
<PAGE> 37
in favor of, shareholders exist with respect to the Shares, or the issue and
sale thereof, pursuant to the Article of Incorporation or Bylaws of the Company
or any other instrument and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the issue and sale of
the Shares by the Company;
3. the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
4. the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, the Exchange Act
and with the rules and regulations of the Commission thereunder;
5. such counsel have no reason to believe that the Registration Statement
(except as to the financial statements and schedules and other financial and
statistical data contained therein, as to which such counsel need not express
any opinion or belief) at the Effective Date contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that the
Prospectus (except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) as of its date or at the Closing Date (or
any later date on which Optional Shares are purchased), contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
6. the information required to be set forth in the Registration Statement
in answer to Items 9, 10 (insofar as it relates to such counsel) and 11(c) of
Form S-1 is to the best of such counsel's knowledge accurately and adequately
set forth therein in all material respects or no response is required with
respect to such Items, and, to the best of such counsel's knowledge, the
description of the Company's stock option plans and the options granted and
which may be granted thereunder and
-37-
<PAGE> 38
the options granted otherwise than under such plans set forth
[add additional stock plans and agreements as necessary] in the Prospectus
accurately and fairly presents the information required to be shown with
respect to said plans and options to the extent required by the Securities Act
and the rules and regulations of the Commission thereunder;
7. such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
8. the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
9. the Company has full corporate power and authority to enter into the
Underwriting Agreement and to sell and deliver the Shares to be sold by it to
the several Underwriters.
10. the issue and sale by the Company of the Shares sold by the Company as
contemplated by the Underwriting Agreement will not conflict with, or result in
a breach of, or constitute a default under the Article of Incorporation or
Bylaws of the Company or any of its subsidiaries or any agreement or instrument
known to such counsel to which the Company or any of its subsidiaries is a
party or by which any of its properties may be bound or any applicable law or
regulation, or so far as is known to such counsel, any order, writ, injunction
or decree, of any jurisdiction, court or governmental instrumentality;
11. all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
12. good and marketable title to the Shares under the Underwriting
Agreement, free and clear of all liens, encumbrances, equities, security
interests and claims, has been transferred to the Underwriters who have
severally purchased such Shares under the Underwriting Agreement, assuming for
the purpose of this opinion that the Underwriters purchased the same in good
faith without notice of any adverse claims;
-38-
<PAGE> 39
13. no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as have
been obtained under the Securities Act and such as may be required under state
securities or blue sky laws in connection with the purchase and distribution of
the Shares by the Underwriters and the clearance of the offering with the NASD;
and
14. the shares issued and sold by the Company will been duly authorized
for listing by the Nasdaq National Market] upon official notice of issuance.
------------------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States or of the State of Georgia, upon
opinions of local counsel satisfactory in form and scope to counsel for the
Underwriters. Copies of any opinions so relied upon shall be delivered to the
Representatives and to counsel for the Underwriters and the foregoing opinion
shall also state that counsel knows of no reason the Underwriters are not
entitled to rely upon the opinions of such local counsel.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such
counsel need not express any opinion or belief) at the Effective Date contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, that the Prospectus (except as to the financial statements and
schedules and other financial and statistical data contained therein, as to
which such counsel need not express any opinion or belief) as of its date or at
the Closing Date (or any later date on which Optional Shares is purchased),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
-39-
<PAGE> 1
EXHIBIT 5
TROUTMAN SANDERS LLP
600 PEACHTREE STREET, N.E.
SUITE 5200, NATIONSBANK PLAZA
ATLANTA, GEORGIA 30308
(404) 885-3000
September 24, 1996
Healthdyne Information Enterprises, Inc.
1850 Parkway Place
Suite 1100
Marietta, Georgia 30067
Gentlemen:
We have examined a copy of the registration statement on Form S-1 being
filed by Healthdyne Information Enterprises, Inc. (the "Company") with the
Securities and Exchange Commission on the date of this letter (such registration
statement being herein referred to as the "Registration Statement"), relating to
the registration pursuant to the Securities Act of 1933, as amended (the "Act"),
of a maximum of 3,162,500 shares (the "Shares") of the Company's Common Stock,
par value $.01 per share (together with associated preferred stock purchase
rights, the "Common Stock"). The Shares are proposed to be sold pursuant to an
underwriting agreement with respect thereto, which, in substantially the form
filed as Exhibit 1 to the Registration Statement, is hereinafter referred to as
the "Underwriting Agreement." In rendering this opinion, we have reviewed such
documents and made such investigations as we deemed appropriate.
Subject to (i) the Underwriting Agreement being entered into by the proper
parties in substantially the form thereof filed as an exhibit to the
Registration Statement, (ii) the Shares being issued and sold for value as
contemplated by the terms of such Underwriting Agreement, (iii) compliance with
the pertinent provisions of the Act and the Securities Exchange Act of 1934, as
amended, and (iv) compliance with such securities or "Blue Sky" laws and any
non-U.S. laws, in each case of any jurisdiction as may be applicable, we are of
the opinion that:
When certificates evidencing the Shares have been duly executed,
countersigned, registered, issued and delivered by the proper officers
of the Company, the Shares will be duly and validly issued and
outstanding, fully paid and non-assessable shares of Common Stock of the
Company.
We are members of the Bar of the State of Georgia. In expressing the
opinions set forth above, we are not passing on the laws of any jurisdiction
other than the laws of the State of Georgia and the Federal law of the United
States.
We hereby consent to the filing of this opinion or copies thereof as an
exhibit to the Registration Statement and to the statements made in regard to
our firm under the caption "Legal Matters" in the related prospectus.
Very truly yours,
TROUTMAN SANDERS LLP
<PAGE> 1
EXHIBIT 11
HEALTHDYNE INFORMATION ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JUNE 15, 1994
(DATE OF
INCORPORATION) SIX MONTHS ENDED
TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------
1994 1995 1995 1996
------------- ------------ ------- -------
<S> <C> <C> <C> <C>
Net earnings (loss)............................. $(1,265) $ (9,983) $(1,889) $ 366
======= ======= ======= =======
Primary shares:
Weighted average number of common shares
outstanding................................ 15,500 15,653 15,500 16,815
Additional shares issuable from assumed
exercise of options........................ --(1) --(1) --(1) 1,874
------- ------- ------- -------
15,500 15,653 15,500 18,689
======= ======= ======= =======
Net earnings (loss) per common share and common
share equivalent.............................. $ (.08) $ (.64) $ (.12) $ .02
======= ======= ======= =======
Fully diluted shares:
Weighted average number of common shares
outstanding per primary computation
above...................................... 15,500 15,653 15,500 18,689
Additional shares issuable from assumed
exercise of options........................ --(1) --(1) --(1) --
------- ------- ------- -------
15,500 15,653 15,500 18,689
======= ======= ======= =======
Net earnings (loss) per common share and common
share equivalent.............................. $ (.08) $ (.64) $ (.12) $ .02
======= ======= ======= =======
</TABLE>
- ---------------
(1) Since stock options are antidilutive to the loss per common share
calculations, stock options are not considered in such loss per share
calculations.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HEALTHDYNE INFORMATION ENTERPRISES, INC.
<TABLE>
<CAPTION>
STATE OF NAME(S) UNDER WHICH
SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
- --------------------------------------------- -------------- -------------------------------------
<S> <C> <C>
Healthcare Communications, Inc............... Texas Healthcare Communications, Inc.
Integrated Healthcare Solutions, Inc......... Georgia Integrated Healthcare Solutions, Inc.
DataView Imaging International, Inc.......... Georgia DataView Imaging International, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Healthdyne Information Enterprises, Inc.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
Atlanta, Georgia KPMG PEAT MARWICK LLP
September 23, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 24, 1996
