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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27056
HEALTHDYNE INFORMATION ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-2112366
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 PARKWAY PLACE, SUITE 1100 30067
MARIETTA, GEORGIA (Zip Code)
(Address of principal executive offices)
(770) 423-8450
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF
THE ACT: Common Stock, $.01 par value per share (together with
associated preferred stock purchase rights)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the registrant's Common Stock (based
upon the mean of the closing high and low sales price reported by NASDAQ) held
by nonaffiliates as of March 14, 1997 was approximately $97,782,745.
As of March 14, 1997, 20,187,197 shares of the registrant's Common
Stock, par value $.01 per share (together with associated preferred stock
purchase rights), were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1997
Annual Meeting of Shareholders are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Healthdyne Information Enterprises, Inc. ("HIE" or 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 computerized patient record ("CPR") and
enterprise-wide 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.
HIE was incorporated in Georgia on June 15, 1994 and 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 Healthdyne's shareholders (the "Spin-Off"). HIE's common stock is publicly
traded on the Nasdaq National Market under the symbol "HDIE." In conjunction
with its subsidiaries Healthcare Communications, Inc. ("HCI") and Integrated
Healthcare Solutions, Inc. ("IHS") and its affiliate Criterion Health
Strategies, Inc. ("CHS"), the Company is a leading provider of enterprise-wide
clinical information solutions for emerging IDNs. Each subsidiary and the
affiliate are referred to by the Company as an Enterpreneurial Business Unit
("EBU").
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 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 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
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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 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, implementation,
integration, 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 develop the solution best suited to its needs. The
Company seeks to establish long-term relationships with its customers,
providing a high level of services and obtaining 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. HIE provides a variety of services,
including consulting, system design, implementation, integration, support and
education, in each of the areas listed above and described below, using
highly-skilled specialists who are experts in using both the Company's
proprietary tools and third-party software tools, to help customers help
themselves create solutions to customer-specific information needs.
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 or wireless device that is equipped with a keyboard, mouse,
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voice or touch screen. The Company's workflow tools and imaging technologies
provide a paper-less 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
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, 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 is
designing 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
the rapid expansion of IDNs heightens 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 win"
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, 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
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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.
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 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 and 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 $500,000,
with the price sometimes varying with the volume of data processed. The median
price is 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. The
following table describes the status, features and benefits of the tools and
products with which HIE solutions can be built:
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<TABLE>
<CAPTION>
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TOOL OR PRODUCT RELEASE DATE FEATURES/BENEFITS
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HEALTHCARE COMMUNICATIONS, INC.
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<S> <C> <C>
CLOVERLEAF INTEGRATION ENGINE Connectivity via standard protocols; data recoverability; system
(UNIX) January 1995 monitoring; support for Tcl scripting language.
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COMPASS SCREEN SCRAPER June 1995 Non-invasive integration with non-message based systems.
(Windows)
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EXPRESS SINGLE LOG-ON June 1996 Terminal emulator which provides enterprise-wide single log-on
(UNIX/NT, Windows) on function with robust security features.
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INTEGRATED HEALTHCARE SOLUTIONS, INC.
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COMMUNITY PERSON INDEX October 1996 Integrates master patient indices and demographic data across
("CPI") disparate systems.
(UNIX/Windows)
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CLINICAL ASSESSMENT AND May 1996 Access of clinical information from disparate systems and
SUPPORT SYSTEM ("CASS") decision support tools and documentation of the patient
(NT) encounter from the point-of-care.
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DOCUMENT IMAGE August 1995 Access to reports, documents and clinical images across the
MANAGEMENT (Windows) network; management of claims processing.
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WORKFLOW MANAGEMENT August 1995 Improves efficiency of the process of providing health care;
(UNIX/NT) reduces paper work; collects metrics.
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INTRANET AND INTERNET February Provides workflow tools and standard user interface for
WORKFLOW MANAGEMENT 1996 applications across the intranet; Internet Cooperative.
(NT, Windows)
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DESKTOP INTEGRATION June 1996 Organizes enterprise applications into graphical menus;
(Windows) provides single point of security log-ons and centralized control
of end-user desktops; allows desktops to be easily customized.
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TELERADIOLOGY COMPUTER FDA-approved system for point-to-point capture and
SYSTEM transmission of April 1989 radiological images.
(Windows)
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CLINICAL IMAGE MANAGEMENT April 1996 Capture, indexing, storage, retrieval, transmission and
(Windows) management of images from radiology, cardiology, pathology
and other telemedicine multimedia systems throughout the IDN.
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CRITERION HEALTH STRATEGIES, INC.
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COPPS INFORMATION May 1996 Manages the consolidation of a variety of enterprise data,
MANAGEMENT including financial, clinical and other relevant data, into one
TOOLS (UNIX, NT) point of access.
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COPPS CONSOLE May 1996 Deploys key information analyses throughout the IDN to
(Windows, NT Deskstation) complete the feedback loop in improving a provider's financial
and clinical performance.
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COPPS SURVEY ENGINE May 1996 A tool to collect opinion based information from patients,
(Windows, NT Deskstation) physicians and employees; provides an IDN with patient
feedback on the quality of care.
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</TABLE>
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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 inside a single medical facility. 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 reduces
ongoing support costs with a graphical user interface that allows users to
easily design their own integration interfaces.
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 for original equipment manufacture
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
physician 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
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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 systems; management of demographic information; support of
customer-defined event history; and scaleable 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 the Cloverleaf 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
paper-less 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 and object 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 "paper-less" or "near paper-less" environment. As a result, providers
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using the Company's imaging and object management 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 and object management technology
from InterTech, Inc. and Network Imaging Corporation and the OPEN IMAGE/OPEN
COLD 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 existing
systems by implementing internet technologies within an organization on the
provider's existing network: 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 reduce 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
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to provide teleradiology connectivity between rural hospitals and larger
medical centers. The features and benefits of these tools include transmission
of images over standard telephone modems, T1-T2 lines and ISDN; TIFF format for
maximum image quality; transmission of black and white as well as color images;
a database to archive images and diagnostic records; and voice recording for
dictation of patient reports. These tools incorporate teleradiology technology
from DataView. 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 Imaging International, Inc. ("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 (including clinical workstations) 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 mission-critical
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 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 health care by providing the customer
with information necessary to assess protocols, standards or guidelines.
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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 health care.
SERVICES
HIE is a solutions company comprised of EBUs that each provide both
software tools and services. HCI is primarily a software tools company that also
provides implementation, support and education services related to its software
tools. IHS and CHS are primarily service companies that also provide consulting,
system design, implementation, integration, support and education services and
typically use proprietary and/or third-party software tools to develop
solutions.
HIE believes that each customer's needs will vary according to its existing
technology infrastructure and healthcare delivery requirements. As of December
31, 1996, the Company employed 59 people in services. Consistent with the
Company's philosophy of helping customers help themselves, HIE will perform the
requisite services for the customer, supervise the customers' resources in
conducting system design, implementation and integration projects and/or educate
the customers' resources 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.
As of December 31, 1996, the Company has 22 sales and marketing
personnel, of whom 14 are direct sales personnel. Three of the 14 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 11 of the 14 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.
11
<PAGE> 12
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 International
Business Machines Corporation, Science Applications International Corporation,
Emtek Healthcare Systems, Inc., Triple P Management B.V. and others. 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.
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., IDX
Corporation, 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 December 31, 1996, the Company employed 32 people in
research and development. The Company spent approximately $1.6 million, $1.9
million and $192,000 on research and development for the years ended December
31, 1996 and 1995 and for the period from June 15, 1994 (date of incorporation)
to December 31, 1994, respectively.
The Company has developed internally the following tools and
technologies: the Cloverleaf Integration Engine, the Express Terminal Emulator,
CPI, 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
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<PAGE> 13
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 currently relies solely on common law copyrights and trade
secrets for proprietary protection of its tools and products. HIE does not
currently have patent protection with respect to any aspect of its tools or
products. In the absence of meaningful intellectual property protection, the
Company may be vulnerable to competitors who could lawfully attempt to copy the
Company's products. Moreover, there can be no assurance that other competitors
may not independently develop the same or similar technology. The Company
routinely applies for trade and service mark protection as appropriate.
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
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 has not
filtered third-party software through a clean room procedure and it has not
conducted a formal infringement search so that 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
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<PAGE> 14
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 Healthdyne,
which was the sole shareholder of the Company until the Spin-Off. Since
Healthdyne 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 Healthdyne. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview" regarding HIE's relationship with DataView, a former EBU.
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, Healthdyne, 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 $4.0 million. Such loans were evidenced by an 8% convertible
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<PAGE> 15
debenture due December 31, 2005 (the "Convertible Debenture"), convertible at
the Company's option at 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 Capital Corp. ("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 $2.0 million. 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,
convertible into 32% of the CHS common stock on a fully diluted basis, and the
Convertible Debenture was canceled. 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, 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 $2.0 million to CHS.
On December 18, 1996, the Company and Massey Burch entered into an
agreement whereby the Company acquired an option to acquire Massey Burch's
investment in CHS. The option is 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
$2.0 million at the time the option is exercised. This option, if exercised,
must be exercised simultaneously with HIE's option to purchase from the CHS
Shareholders their 26% equity ownership interest. In consideration for the grant
of this option, the Company issued 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 granted registration rights to Massey Burch with respect to
both the shares of Common Stock underlying the warrant and the shares issuable
upon the Company's exercise of the option. Massey Burch continued to be subject
to its commitment to fund CHS up to a maximum of $2.0 million. Massey Burch has
loaned $2.0 million to CHS as of December 31, 1996.
On November 13, 1996, HIE and the CHS Shareholders entered into an
agreement in principle which contemplates the granting of an option, at no cost
to HIE: (a) to acquire the 26% equity ownership interest in CHS held by the CHS
Shareholders for 240,000 shares of HIE's Common Stock and (b) to convert the
10% equity ownership interest reserved for CHS stock options to a HIE tandem
stock option program. This proposed option, if exercised, must be exercised
simultaneously with HIE's option to acquire from Massey Burch a promissory note
convertible into 32% ownership interest in CHS. As discussed above, the Massey
Burch option is exercisable between December 31, 1996 and June 30,1997. The
agreement in principle further contemplates that the CHS Shareholders will
periodically vest through June 30, 1999 in an increasing ownership interest
percentage of the HIE shares issuable to them upon the Company's exercise of
the proposed option. Finally, the agreement in principle contemplates that the
CHS Shareholders will be granted certain registration rights with respect to
those shares. The transaction contemplated by the agreement in principle is
subject to negotiation and execution of a definitive agreement and other
customary conditions. There can be no assurance that a definitive agreement
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.
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.
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<PAGE> 16
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 the New Convertible Debentures, the redemption of the CHS
Shareholders' shares or the 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).
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 non-exclusive
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 "-- Tools, Products and Services -- 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 "-- Tools,
Products and Services -- 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 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,
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<PAGE> 17
$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 Software Licensing and
Distributorship Agreement with CHS which grants HIE a worldwide non-exclusive,
nontransferable license to market, sub-license, install and support the COPPS
Console, COPPS Survey Engine and COPPS Information Management Tool Set. The
products marketed and sub-licensed 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 "-- Tools, Products and Services -- Enterprise Management
Tools."
On June 12, 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 "-- Tools, Products and Services -- 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 health care and other
alternate site providers, management service organizations, employers, payers
and others. One customer accounted for approximately 25% of the Company's
revenue in the year ended December 31, 1996. No single customer accounted for
more than 10% of the Company's consolidated revenue for the year ended December
31, 1995 or for the period from June 15, 1994 to December 31, 1994. In
addition, one distributor provided customers to the Company that accounted for
approximately 18% of the Company's revenue in 1995. No single distributor
provided customers to the Company that accounted for more than 10% of the
Company's revenue for the year ended December 31, 1996 or for the period from
June 15, 1994 to December 31, 1994.
HCI has granted approximately 300 licenses for the use of its
integration engine. IHS and CHS have current customer bases of 20 and 5,
respectively.
BACKLOG
The Company has contracts for the delivery of certain tools, products
and services, generally within 12 months of the contract dates, totaling
approximately $7.5 million and $4.0
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<PAGE> 18
million as of December 31, 1996 and 1995, respectively. Of the backlog as of
December 31, 1996, approximately $2.1 million was attributable to the Company's
largest customer.
COMPETITION
The Company does not believe it has any direct competitors who can
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 -- HIE has a large number of
competitors with respect to 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 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"). 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.
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EMPLOYEES
As of December 31, 1996, HIE and its subsidiaries HCI and IHS employed
a total of 114 persons and CHS employed 17 persons. Of these employees, 22 were
engaged in sales and marketing, 32 in research and development, 59 in services
and 18 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.
ITEM 2. PROPERTIES
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 expired 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 and approximately 3,000 square feet located in
Alpharetta, Georgia, under a lease which expired in February 1997 and a lease
which expires in December 1999, respectively, and require monthly rental
payments of $11,036 and $3,570, respectively.
The Company believes that its facilities are adequate through the
above-indicated lease expiration periods. The leases that expired during
February 1997 have been extended on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there are no material legal proceedings pending
against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
H. Darrell Young 48 President, Chief Executive Officer and Director
Joseph G. Bleser 51 Vice President-Finance, Chief Financial Officer,
Treasurer and Secretary
</TABLE>
The executive officers of the Company are elected annually and serve
at the pleasure of the Board of Directors.
H. Darrell Young has served as a director and the President and Chief
Executive Officer of the Company since June 1994. From January 1992 to June
1993, Mr. Young was Chairman 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 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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock has been quoted and traded under the symbol
"HDIE" in the over-the-counter market on the OTC Bulletin Board from November
7, 1995 to May 22, 1996, on the Nasdaq SmallCap Market System from May 23, 1996
to October 29, 1996 and on the Nasdaq National Market System since October 30,
1996. The high and low sales prices of the Common Stock for the period from
November 7, 1995 to December 31, 1995 and for each quarter during 1996 are
shown in the table below. The approximate number of holders of record of the
Company's Common Stock at March 14, 1997 was 2,205.
HIE Stock Price Per Share Information:
<TABLE>
<CAPTION>
PERIOD PRICE PER SHARE
------------------------------------------ --------------------------------
FROM TO LOW HIGH
<S> <C> <C> <C> <C>
1995: November 7 December 31 $1.125 $2.50
1996: January 1 March 31 $1.875 $4.312
April 1 June 30 $3.50 $7.75
July 1 September 30 $3.50 $5.875
October 1 December 31 $3.50 $6.00
</TABLE>
The Company has never paid any cash dividends with respect to its
Common 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 Common 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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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data is presented below for the years ended
December 31, 1996 and 1995 and for the period from June 15, 1994 (date of
incorporation) through December 31, 1994. The data should be read in
conjunction with the Consolidated Financial Statements, related notes and other
financial information contained herein.
<TABLE>
<CAPTION>
FOR THE
FOR THE FOR THE PERIOD FROM
YEAR ENDED YEAR ENDED JUNE 15, 1994 TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
(Amounts in thousands, except for per share data)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue $16,151 $ 8,700 $ 153
Operating Earnings (Loss) $ 1,486 $ (8,953)* $ (1,270)
Net Earnings (Loss) $ 1,183 $ (9,983)* $ (1,265)
Net Earnings (Loss) Per Share $ 0.06 $ (0.64)* $ (0.08)
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding 18,876 15,653 15,500
</TABLE>
*Includes $5,335 pre-tax and after-tax expense or $(0.34) net loss per share
related to purchased in-process research and development expense ($3,605),
goodwill impairment expense ($1,430), and an investment option reserve ($300).
<TABLE>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
(Amounts in thousands, except for per share data)
BALANCE SHEET DATA:
<S> <S> <C>
Total Assets $31,802 $21,734
Long-Term Obligations $ 4,265 $ 5,549
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this report
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, the Company's limited operating history and lack of profitability
in 1995 and for the period from June 15, 1994 to December 31, 1994, limitations
and potential costs inherent in the Entrepreneurial Business Unit ("EBU")
operational structure, market acceptance of new products and services offered
by the Company, limited capital resources, and competitive factors, such as new
technologies and pricing pressures, as well as factors discussed or identified
from time to time in the Company's filings with the Securities and Exchange
Commission.
OVERVIEW
Healthdyne Information Enterprises, Inc. ("HIE" or the "Company") was
incorporated in Georgia on June 15, 1994 and 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 Healthdyne's shareholders
(the "Spin-Off"). HIE's common stock is publicly traded on the Nasdaq National
Market under the symbol "HDIE". In conjunction with its subsidiaries Healthcare
Communications, Inc. ("HCI") and Integrated Healthcare Solutions, Inc. ("IHS")
and its affiliate Criterion Health Strategies, Inc. ("CHS"), the Company is a
leading provider of enterprise-wide clinical information management solutions
for emerging integrated healthcare delivery networks ("IDNs"). Each subsidiary
and the affiliate are referred to by the Company as an EBU.
The Company generates revenue from licensing clinical information
software tools and products and providing related system design, integration,
implementation, support, education and consulting services as discussed below.
HCI. HCI presently contributes the majority of HIE's revenue through
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, up-front 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' 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 system design, integration and consulting services. Software
licenses and sub-licenses are generally granted on a perpetual basis for a
one-time, up-front fee. Services are generally provided for a fixed fee based
on estimated hours of service to be provided at standard hourly rates.
CHS. 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
23
<PAGE> 24
consolidate the operating results of CHS. However, on November 7, 1996 and
December 18, 1996, the Company entered into an agreement in principle and a
separate definitive agreement with the CHS Shareholders and Massey Burch,
respectively, which together would enable the Company to acquire a 100%
ownership interest in CHS. See Note 11 of Notes to Consolidated Financial
Statements included in the accompanying HIE Consolidated Financial Statements.
On June 12, 1996, the Company entered into an agreement effective
April 1, 1996, with DataView, a former majority-owned subsidiary, providing for
a restructuring of the relationship between HIE and DataView as discussed in
Note 3 of Notes to Consolidated Financial Statements included in the
accompanying HIE Consolidated Financial Statements. Subsequent to March 31,
1996, DataView's financial position, results of operations and cash flows are no
longer included in HIE's Consolidated Financial Statements.
The Company expects the following external factors to affect the
market for healthcare information systems tools, products and services in
future years: (1) the continued and accelerated emergence of IDNs; (2) the
shift from the traditional fee-for-service reimbursement system to the
capitated (fixed fee) payment system for healthcare services; (3) the growing
importance of comprehensive clinical information in the managed patient care
environment; (4) the introduction of cost accounting to the healthcare delivery
system; and (5) 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 are being amortized ratably based on the projected revenue associated
with the related software or on a straight-line basis over not more than five
years, whichever method results in a higher level of amortization.
The excess of cost over net assets of businesses acquired (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.
24
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated: (1) the relative
significance of each EBU to the Company as a whole and (2) the percentage of
total revenue for each component included in the Company's Consolidated
Statements of Operations:
PERCENT OF REVENUE (UNLESS OTHERWISE INDICATED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
JUNE 15, 1994 (DATE
YEAR ENDED YEAR ENDED OF INCORPORATION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total HIE revenue (in 000's) $ 16,151 $ 8,700 $ 153
======== ======= =====
HCI (1) 57% 75% 0%
IHS (2) 42% 18% 3%
DataView (3) 1% 7% 97%
-------- ------- -----
Total HIE revenue 100% 100% 100%
======== ======= =====
Revenue:
Software 44% 59% 100%
Services 56% 41% 0%
-------- ------- -----
Total revenue 100% 100% 100%
-------- ------- -----
Cost of revenue
Software 13% 10% 42%
Services 53% 58% 0%
Total cost of revenue 35% 30% 42%
-------- ------- -----
Gross profit 65% 70% 58%
-------- ------- -----
Operating expenses:
Sales and marketing 22% 40% 122%
Research and development 10% 22% 125%
General and administrative 24% 50% 641%
Other (4) 0% 61% 0%
-------- ------- -----
Total operating expenses 56% 173% 888%
-------- ------- -----
Operating earnings (loss) 9% (103%) (830%)
Losses of affiliate 0% (13%) (102)%
Minority interest 0% 2% 0%
Interest income (expense), net (2%) (2%) 4%
Equity in earnings of affiliate (1) 0% 0% 101%
-------- ------- -----
Earnings (loss) before taxes 7% (116%) (827%)
Income tax benefit 0% 1% 0%
-------- ------- -----
Net earnings (loss) 7% (115%) (827%)
======== ======= =====
</TABLE>
25
<PAGE> 26
Notes:
(1) HCI has been in business since 1991. 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 the periods from
June 15, 1994 to December 31, 1994 and from January 1, 1995 to May 29,
1995 with the results for such latter period being included in the
results for the year ended December 31, 1995.
(3) DataView has been in business since 1990. See Note 3 of Notes to
Consolidated Financial Statements included in the accompanying HIE
Consolidated Financial Statements regarding the restructuring of the
relationship between the Company and DataView.
(4) Other operating expenses for the year ended December 31, 1995 include
(a) $3.6 million or 41% of revenue related to purchased in-process
research and development expense and (b) $1.7 million or 20% of revenue
related to goodwill impairment expense and an investment option
reserve. See Note 3 of Notes to Consolidated Financial Statements
included in the accompanying HIE Consolidated Financial Statements.
Comparison of Years Ended December 31, 1996 and 1995
Revenue. Total revenue was $16.2 million in 1996 compared to $8.7
million in 1995, an increase of 86% even though DataView's revenue is no longer
included in the Company's consolidated revenue effective April 1, 1996 as
discussed above. While HCI contributed most of the Company's revenue in both
1996 and 1995, IHS contributed most of the revenue growth between 1995 and
1996. Since most of HCI's revenue was derived from integration engine software
license fees and most of IHS' revenue was derived from system design,
implementation and integration services, the mix of revenue shifted to more
service than software between 1995 and 1996. Even though software revenue
declined as a percent of total revenue in 1996, it still increased 40% between
1995 and 1996 due primarily to the continued growth of integration engine
license fee revenue supplemented by software license fee revenue from the
Clinical Assessment and Support System ("CASS") and the Community Person Index
("CPI") software tools, both of which were released for general availability to
the market by IHS during the second half of 1996. Service revenue grew 152% in
1996 due to the continued growth in HCI's maintenance, implementation and
education services related to the integration engine software tool and, more
significantly, the demand by IDNs for system design, implementation and
integration services of imaging, workflow, internet, CPI and CASS software
tools provided by IHS.
Cost of revenue. The cost of revenue was $5.7 million in 1996 compared
to $2.6 in 1995, an increase of 117%, substantially all of which is related to
the growth in revenue. The increase in cost of revenue from 30% of revenue to
35% between 1995 and 1996 is primarily attributable to the shift in revenue mix
toward service, which typically has a higher cost of revenue than
26
<PAGE> 27
software. The increase in cost of software revenue as a percent of software
revenue is due to the Company sub-licensing more third-party imaging, workflow
and internet software tools than it did during 1995. Third-party software tools
typically have a higher relative cost than the Company's proprietary software
tools, such as the Cloverleaf integration engine, CPI and CASS. The decrease in
cost of services revenue as a percent of services revenue is due to productivity
improvements at IHS as its relatively new service organization matured during
the year.
Gross profit. The Company's gross profit was $10.5 million in 1996
compared to $6.1 million in 1995, an increase of 72%, due primarily to the
revenue growth discussed above. Gross profit as a percent of revenue decreased
from 70% in 1995 to 65% in 1996. The revenue mix shifted from 59% software and
41% services in 1995 to 44% software and 56% services in 1996. The main reason
for the shift was the increase in system design, implementation and integration
services provided by IHS. As discussed above, while software revenue, which has
relatively high gross profit margins, increased 40%, services revenue, which
normally has lower gross profit margins than software, increased 152% between
1995 and 1996.
Sales and marketing. Sales and marketing expense was $3.5 million in
1996 and $3.4 million in 1995. The slight increase is 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 somewhat by the exclusion of DataView from the Company's consolidated
operating results for the last three quarters of 1996 as discussed above and
secondarily to utilization of a more cost-effective international distribution
network in 1996. Sales and marketing expense as a percent of revenue decreased
from 40% in 1995 to 22% in 1996, reflecting the increased productivity of the
Company's internal sales force and its distributors.
Research and development. Research and development expense was $1.6
million in 1996 compared to $1.9 million in 1995, a decrease of 18%, due
primarily to the capitalization of internally developed software costs totaling
$789,000, which represented 33% of research and development expenditures in
1996, and secondarily to the exclusion of DataView from the Company's
consolidated operating results for the last three quarters of 1996 as discussed
above. No such costs qualified for capitalization under generally accepted
accounting principles in 1995.
General and administrative. General and administrative expense was
approximately $3.9 million in 1996 compared to $4.3 million in 1995, a decrease
of 10%. The decrease of $425,000 between the two periods was primarily due to
the net effect of (1) 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 (2) the
exclusion of DataView from the Company's consolidated operating results for the
last three quarters of 1996 as discussed above; both somewhat offset by (3)
increased goodwill amortization related primarily to the step acquisition of
HCI during 1995 (as discussed below); (4) identifiable expenses of being a new
public company; and (5) increased IHS administrative staffing costs to support
current and projected growth of IHS.
Other. Other operating expenses in 1995 were attributable to purchased
in-process research and development expense of $3.6 million related to the HCI
acquisition, goodwill
27
<PAGE> 28
impairment expense of $1.4 million and an option reserve of $300,000, both
related to a change in the Company's strategic direction with respect to
DataView.
Losses of affiliate. Losses of affiliate, which resulted from the
Company's commitment to fund CHS, totaled $1.1 million in 1995. The December
1995 transaction with Massey Burch, which provided for a sharing of the
Company's funding commitment to CHS, had the additional result of relieving the
Company of the requirement to report a loss from CHS in 1996.
Minority interest. The minority interest in net loss of subsidiary
totaling $142,000 in 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 was $303,000 in 1996
compared to $168,000 in 1995, an increase of 80%, due primarily to the net
effect of (1) increased interest associated with financing the increased HCI
ownership interest referred to above; and (2) reduced HCI interest expense
under a financing agreement renegotiated at a lower interest rate effective
January 1, 1996.
Income tax benefit. The Company has no provision for income taxes in
1996 due to the utilization of available net operating loss carryforward
benefits. The income tax benefit of $140,000 in 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 the 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 the period from June 15, 1994 to December 31,
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 for the period from June 15, 1994
to December 31, 1994, representing a decrease in cost of revenue to 30% of
revenue in the year ended December 31, 1995 from 42% of revenue for the period
from June 15, 1994 to December 31, 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 for the period from June 15, 1994 to
December 31, 1994, representing an increase in gross profit as a percent of
revenue to 70% for the year ended December 31, 1995 from 58% for the period
from June 15, 1994 to December 31, 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 for the period from June
15, 1994 to December 31,
28
<PAGE> 29
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 for the period from June 15, 1994 to December 31, 1994, HCI's sales
and marketing expense increased between 1994 and 1995 due to (1) the increased
size of the internal sales force to supplement the efforts of the distributor
channel; (2) increased domestic and international market research expense; (3)
increased sales and marketing collateral material expense; and (4) 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 for the period
from June 15, 1994 to December 31, 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 for the period from June 15,
1994 to December 31, 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
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 for the
period from June 15, 1994 to December 31, 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
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 Healthdyne. 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.
29
<PAGE> 30
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's operating losses up to
HIE's $1.3 million then 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 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 was realized by HCI through
carry-back claims against HCI's 1994 income taxes paid.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically financed both its operations since inception and
its investments in EBUs primarily through equity investments totaling $22.0
million by Healthdyne. Following the Spin-Off, Healthdyne had no obligation or
intention to make additional advances or equity infusions in the Company. During
November 1996, the Company sold 2.75 million shares of its Common Stock in a
public offering and received proceeds of $10.3 million, after deducting all
offering-related expenses. On November 15, 1996, the Company used $800,000 to
prepay a portion of long-term debt at a discount. The Company intends to use the
remainder of the net proceeds of this offering for working capital and general
corporate purposes, including satisfaction of the Company's remaining funding
commitment of $700,000 to CHS. The Company's present financial condition and its
plans for future working capital and other capital requirements are further
discussed below.
The Company has working capital of $12.4 million at December 31, 1996
compared to $2.7 million at December 31, 1995. Cash increased $6.7 million
between 1995 and 1996 for the reasons discussed below.
Net cash provided by operating activities increased $6.2 between 1995 and
1996 due primarily to increased cash flow from the net earnings recorded in 1996
compared to the net loss recorded in 1995 and secondarily to various changes in
the components of working capital, most notably increased cash flow from
deferred revenue, accrued liabilities and accounts payable. This increase was
offset somewhat by increased trade accounts receivable due to increased revenue
and slightly higher days revenue in accounts receivable.
30
<PAGE> 31
Net cash used in investing activities decreased $883,000 between 1995 and
1996 due primarily to the net effect of (1) no cash outflow for CHS funding in
1996, which cash outflow totaled $820,000 in 1995; (2) no cash outflow for
acquisitions in 1996, which cash outflow totaled $565,000 related to HCI in
1995; (3) a reduction of $245,000 in capital expenditures; and (4) an increase
in purchased and capitalized software of $859,000. The slight decrease in
capital expenditures reflects the Company's current preference for leasing
rather than purchasing computer equipment.
Net cash provided by financing activities decreased $4.3 million
between 1995 and 1996 due primarily to the payment of maturing debt and the
prepayment of long-term debt discussed above. The proceeds from equity
transactions include capital contributions by Healthdyne totaling $10.9 million
in 1995, the net proceeds from the Company's secondary public stock offering of
$10.3 million in 1996 and relatively insignificant proceeds from the exercise
of employee stock options.
As of December 31, 1996, the Company has $163,000 of debt financing
maturing over the next twelve months. During May 1996, HCI renewed its $1.0
million line of credit with a bank on essentially the same terms and conditions
as the expiring line of credit with said bank. Subsequent to year end, the
Company received a commitment for a $2 million unsecured line of credit from
another bank that requires the termination of the HCI line of credit referred
to above and the maintenance of certain financial covenants. The Company plans
to maintain a $2 million line of credit for unanticipated needs and financial
flexibility. Based on its current business plan and business model projections,
the Company believes that current available cash 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 were effective in 1996. The adoption of SFAS 121 and 123 did
not have a material effect on the Company's Consolidated Financial Statements,
but the pro forma net earnings (loss) and related per share amounts required to
be disclosed in a note to the financial statements under SFAS 123 reflect
reductions (increases) to the related reported amounts in 1996 and 1995
presented in the Company's Consolidated Financial Statements. See Notes 1 and 8
to the Consolidated Financial Statements included in the accompanying HIE
Consolidated Financial Statements.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company and its
subsidiaries and independent auditors' report thereon are included as pages F-1
through F-22 of this Annual Report on Form 10-K:
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report............................................................... F-1
Consolidated Balance Sheets - December 31, 1996 and 1995................................... F-2
Consolidated Statements of Operations - Years Ended
December 31, 1996 and 1995 and for the period
from June 15, 1994 to December 31, 1994............................................... F-3
Consolidated Statements of Shareholders' Equity -
Years Ended December 31, 1996 and 1995 and for
the period from June 15, 1994 to December 31, 1994.................................... F-4
Consolidated Statements of Cash Flows - Years Ended December 31, 1996 and 1995
and for the period from June 15, 1994 to December 31, 1994............................ F-5
Notes to Consolidated Financial Statements................................................. F-7
</TABLE>
32
<PAGE> 33
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, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1996 and 1995 and for
the period from June 15, 1994 (date of incorporation) to December 31, 1994.
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 equity in earnings in Healthcare Communications,
Inc. 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 for 1994, 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, 1996 and 1995 and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1995 and for the period from June 15, 1994 to December 31, 1994 in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 28, 1997
F-1
<PAGE> 34
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------
Assets 1996 1995
------ ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 10) $ 10,743 $ 4,013
Trade accounts receivable, less allowances of $165 and $85
at December 31, 1996 and 1995, respectively 5,260 2,966
Other current assets 963 1,020
--------- ---------
Total current assets 16,966 7,999
Notes receivable (note 11) 333 417
Purchased software, net of accumulated amortization of $770
and $150 at December 31, 1996 and 1995, respectively 3,587 2,494
Capitalized software development costs, net of accumulated
amortization of $39 at December 31, 1996 750 --
Property and equipment, net (note 4) 1,221 1,136
Excess of cost over net assets of businesses acquired, less accumulated
amortization of $1,267 and $758 at December 31,
1996 and 1995, respectively (note 3) 8,836 9,614
Other assets 109 74
--------- ---------
$ 31,802 $ 21,734
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current installments of long-term debt and obligations
under capital leases (notes 6, 10, and 11) $ 163 $ 2,652
Accounts payable, principally trade 1,019 547
Accrued liabilities (note 5) 981 760
Deferred service revenue 2,418 1,297
--------- ---------
Total current liabilities 4,581 5,256
Long-term debt and obligations under capital leases, excluding
current installments (notes 6, 10, and 11) 4,265 5,382
Other liabilities -- 167
--------- ---------
Total liabilities 8,846 10,805
--------- ---------
Shareholders' equity (notes 6, 8, and 11):
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 20,172 and 16,503 shares at
December 31, 1996 and 1995, respectively 202 165
Additional paid-in capital 32,819 22,012
Accumulated deficit (10,065) (11,248)
--------- ---------
Total shareholders' equity 22,956 10,929
Commitments (notes 9 and 11)
$ 31,802 $ 21,734
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 35
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Period from
Years ended June 15, 1994 (date
December 31, of incorporation) to
1996 1995 December 31, 1994
---- ---- -----------------
<S> <C> <C> <C>
Revenue (note 12):
Software $ 7,169 $ 5,136 $ 153
Services 8,982 3,564 --
--------- --------- ---------
Total revenue 16,151 8,700 153
--------- --------- ---------
Cost of revenue (note 2):
Software 907 536 65
Services 4,765 2,082 --
--------- --------- ---------
Total cost of revenue 5,672 2,618 65
--------- --------- ---------
Gross profit 10,479 6,082 88
Operating expenses (note 2):
Sales and marketing 3,505 3,435 186
Research and development 1,576 1,928 192
General and administrative (including related
party expenses of $51, $325, and $164
for the respective periods) 3,912 4,337 980
Purchased in-process research and development
(note 3) -- 3,605 --
Goodwill impairment and investment option
reserve (note 3) -- 1,730 --
--------- --------- ---------
Operating earnings (loss) 1,486 (8,953) (1,270)
Losses of affiliate (note 11) -- (1,144) (156)
Minority interest in net loss of subsidiary -- 142 --
Interest expense (552) (303) --
Interest income 249 135 7
Equity in earnings of affiliate (note 3) -- -- 154
--------- --------- ---------
Earnings (loss) before income taxes 1,183 (10,123) (1,265)
Income tax benefit (note 7) -- 140 --
--------- --------- ---------
Net earnings (loss) $ 1,183 $ (9,983) $ (1,265)
========= ========= ==========
Net earnings (loss) per common share and
common share equivalent $ .06 $ (.64) $ (.08)
========= ========= ==========
Weighted average number of common shares
and common share equivalents outstanding 18,876 15,653 15,500
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
------------ paid-in Accumulated shareholders'
Shares Amount capital deficit equity
------ ------ ------- ------- ------
<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
Issuance of common stock
in public offering, net of
offering expenses of $634 2,750 28 10,297 -- 10,325
Stock options exercised 905 9 452 -- 461
Employee stock plan purchases 14 -- 58 -- 58
Net earnings -- -- -- 1,183 1,183
--------- --------- --------- --------- ---------
Balance, December 31, 1996 20,172 $ 202 $ 32,819 $ (10,065) $ 22,956
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the Period from
Years ended June 15, 1994 (date
December 31, of incorporation) to
1996 1995 December 31, 1994
---- ---- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 1,183 $ (9,983) $ (1,265)
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 -- 1,144 156
Provision for doubtful accounts 92 43 --
Depreciation and amortization 1,623 1,080 80
Minority interest in net loss of subsidiary -- (142) --
Equity in earnings of affiliate -- -- (154)
Increase in trade accounts receivable (2,419) (1,454) (88)
Increase in other assets (212) (477) (28)
Increase in trade accounts payable 531 204 53
Increase (decrease) in accrued liabilities 687 223 (10)
Increase in deferred service revenue 1,121 480 --
--------- --------- ---------
Net cash provided by (used in)
operating activities 2,606 (3,547) (1,256)
--------- --------- ---------
Cash flows from investing activities:
Purchased software (1,713) (1,643) (44)
Capitalized software development costs (789) -- --
Capital expenditures (427) (672) (148)
Investment in equity of affiliate -- -- (6,750)
Acquisition of businesses, net of cash acquired -- (565) (1,186)
Purchase of option to acquire business -- -- (300)
Decrease (increase) in notes receivable 112 (820) (746)
--------- --------- ---------
Net cash used in investing activities (2,817) (3,700) (9,174)
--------- --------- ---------
Cash flows before financing activities (211) (7,247) (10,430)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 67 559 --
Principal payments on long-term debt (3,970) (410) (531)
Proceeds from capital contributions -- 10,936 10,847
Proceeds from issuances of common stock 10,844 134 155
--------- --------- ---------
Net cash provided by financing activities 6,941 11,219 10,471
--------- --------- ---------
Net increase in cash and cash
equivalents 6,730 3,972 41
Cash and cash equivalents at beginning of period 4,013 41 --
--------- --------- ---------
Cash and cash equivalents at end of period $ 10,743 $ 4,013 $ 41
========= ========= =========
(Continued)
</TABLE>
F-5
<PAGE> 38
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the Period from
Years ended June 15, 1994 (date
December 31, of incorporation) to
1996 1995 December 31, 1994
---- ---- -------------------
<S> <C> <C> <C>
Supplemental disclosures of cash paid for:
Interest $ 199 $ 289 $ --
========= ========= =========
Income taxes $ -- $ 140 $ --
========= ========= =========
Supplemental disclosure of noncash investing
and financing activities:
Equipment acquired under capital lease
obligations $ 67 $ 160 $ --
========= ========= =========
Equipment contribution received from
Healthdyne $ -- $ 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> 39
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(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, 44% from October 27, Systems and network Texas
Communications, 1994 to December 31, integration tools and
Inc. (Dallas, Texas) 1994; 57% from January 1, services
1995 to December 31,
1995; 100% effective
December 31, 1995
DataView Imaging 61% from July 22, 1994 Image management products, Georgia
International, Inc. to March 31, 1996; 19% tools and services
(Norcross, Georgia) effective April 1,
1996 (see note 3)
Integrated Healthcare 100% from May 30, 1995 Tools, products and services Georgia
Solutions, Inc. (the date of incorporation) for object, and work flow
(formerly Clinical management; patient
Assessment Support indexing; clinical assessment,
System, Inc.) measurement and analysis;
(Marietta, Georgia) and network design and
management
</TABLE>
F-7
<PAGE> 40
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
HIE owns less than a 1% equity ownership interest in Criterion
Health Strategies, Inc. ("CHS") of Nashville, Tennessee, a provider
of healthcare enterprise management software tools and services.
However, HIE holds a promissory note convertible into a 32% equity
ownership interest in CHS; holds an option to acquire from Massey
Burch Capital Corp. another promissory note convertible into an
additional 32% equity ownership interest in CHS; and has entered
into an agreement in principle for an option to acquire the
remaining 36% equity ownership interest in CHS. HIE funded the
operations of CHS through November 30, 1995; therefore, HIE recorded
100% of the losses of CHS through that date (see note 11).
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 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.
F-8
<PAGE> 41
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 $682
and $708 for 1996 and 1995, respectively, and $50 for the period
from June 15, 1994 to December 31, 1994. 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 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 $620 and $150 for
1996 and 1995, respectively, and $-0- for the period from June 15,
1994 to December 31, 1994.
(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. The Company
capitalized $789 of software development costs during 1996. There
were no capitalized software costs during any prior period.
Amortization expense related to capitalized software development
costs was $39 in 1996.
F-9
<PAGE> 42
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 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) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, on January 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations,
or liquidity.
(k) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense to be recognized over the related vesting period would
generally be determined on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date
of grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
earnings (loss) and pro forma earnings (loss) per share disclosures
for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure requirements of
SFAS 123 (see note 8).
F-10
<PAGE> 43
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(l) 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.
(2) Related Party Transactions
Matria Healthcare, Inc. ("Matria"), which was formed in a merger
involving Healthdyne in March 1996, provides certain legal, tax, data
processing, personnel 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 years ended December 31,
1996 and 1995 and for the period from June 15, 1994 to December 31, 1994
were $51, $325, and $164, respectively. Charges for services provided by
Matria 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 Matria 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, 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.
Prior to March 8, 1996, Matria also paid 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 years ended December 31, 1996 and 1995 and for the period from June
15, 1994 to December 31, 1994 were $10, $57, and $9, 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 $154, representing HIE's share of HCI's
net earnings, is included in equity in earnings of affiliate in the
accompanying consolidated statement of operations for the period from
June 15, 1994 to December 31, 1994.
F-11
<PAGE> 44
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. Principal and accrued interest
totaling $1,007 under this debenture were prepaid at a discount on
November 15, 1996. The remaining 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 (see note 6). 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 acquired included from the effective date of
acquisition. The pro forma effect on earnings for the period prior to the
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. In conjunction with the goodwill impairment charge referred to
above, HIE also fully reserved the cost of this option at the end of
1995. 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. Subsequent to March 31, 1996, DataView's financial position,
results of operations, and cash flows are no longer consolidated with
HIE due to the immateriality of DataView's current financial position
and results of operations.
F-12
<PAGE> 45
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $ 1,198 $ 1,088
Furniture and fixtures 214 219
Equipment under capital leases 227 160
Leasehold improvements 38 23
--------- ---------
1,677 1,490
Less accumulated depreciation and amortization 456 354
--------- ---------
Net property and equipment $ 1,221 $ 1,136
========= =========
</TABLE>
(5) Accrued Liabilities
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Benefits and compensation $ 807 $ 355
Other 174 405
--------- ---------
$ 981 $ 760
========= =========
</TABLE>
F-13
<PAGE> 46
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <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 (see note 3) $ 4,051 $ 5,062
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; paid in full during November 1996 -- 1,037
Amount payable to bank under revolving credit agreement
(see description following) -- 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 200 300
Obligations under capital leases - equipment leases; interest
ranging from 11.3% to 16.3% with various monthly
payments and maturing at various dates through
May 1, 2001 177 160
-------- --------
Total long-term debt 4,428 8,034
Less current installments 163 2,652
-------- --------
Long-term debt, excluding current installments $ 4,265 $ 5,382
======== ========
</TABLE>
In May 1995, HCI entered into an unsecured 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 December 31, 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, 1996 are as
follows: 1997, $163; 1998, $4,222; 1999, $18; 2000, $16; and 2001, $9.
F-14
<PAGE> 47
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Income Taxes
The components of income tax (expense) benefit are as follows:
<TABLE>
<CAPTION>
For the period from
Years ended June 15, 1994 (date
December 31, of incorporation) to
1996 1995 December 31, 1994
---- ---- -------------------
<S> <C> <C> <C>
Current:
Federal $ -- $ 163 $ --
State -- -- --
Foreign -- (23) --
----- ----- -----
Total income tax benefit $ -- $ 140 $ --
===== ===== =====
</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>
For the period from
Years ended June 15, 1994 (date
December 31, of incorporation) to
1996 1995 December 31, 1994
---- ---- -----------------
<S> <C> <C> <C>
Computed expected income tax
(expense) benefit $(414) $ 3,543 $ 443
Goodwill amortization and other
nondeductible expenses (213) (2,003) (18)
Losses utilized by Healthdyne -- (700) (248)
Losses in excess of allowable carrybacks (53) (372) (182)
Utilization of prior year financial statement
losses 680 -- --
Losses of affiliate -- (400) --
Other -- 72 5
----- ------- -----
$ -- $ 140 $ --
===== ======= =====
</TABLE>
F-15
<PAGE> 48
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 58 $ 30
Accruals and reserves not deducted for tax purposes 9 78
Net operating loss carryforwards 1,869 935
Tax credit carryforwards 157 107
-------- --------
Total gross deferred tax asset 2,093 1,150
Less valuation allowance 2,093 1,150
-------- --------
Net deferred tax asset $ -- $ --
======== ========
</TABLE>
At December 31, 1996, the Company had the following estimated credits
and net operating loss carryforwards available for Federal income tax
reporting purposes to be applied against future taxable income and tax
liabilities:
<TABLE>
<CAPTION>
Net
Foreign R&D operating
Year of expiration tax credit credit loss
------------------ ---------- ------ ----
<S> <C> <C> <C>
1999 $ 4 $ -- $ --
2000 23 -- --
2009 -- 38 694
2010 -- 42 719
2011 -- 50 3,927
--------- --------- ---------
$ 27 $ 130 $ 5,340
========= ========= =========
</TABLE>
The net operating loss carryforward of $5,340 includes deductions of
approximately $3,447 related to the exercise of stock options which will
be credited to additional paid-in capital when recognized. The
alternative minimum tax net operating loss carryforward approximates the
regular net operating loss carryforward.
F-16
<PAGE> 49
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Shareholders' Equity
Capitalization
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.
Public Offering
On November 4, 1996, the Company sold 2,750 shares of its common
stock and received approximately $10,325, net of offering expenses of
$634.
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 5,268 shares of the Company's common stock
have been authorized for issuance under these plans. Most of the stock
options granted under these plans are exercisable in equal amounts over
three years and expire in six years. Other 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.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $1.97 and $0.61, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected volatility 41% 46%
Expected dividend yield none none
Risk-free interest rate 6.25% 6.0%
Expected life of stock options 5 years 5 years
</TABLE>
F-17
<PAGE> 50
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant date
for its stock options under SFAS 123, the Company's net earnings (loss)
and related per share amounts would have been reduced (increased) to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net earnings (loss):
As reported $ 1,183 $ (9,983)
Pro forma 385 (10,265)
Net earnings (loss) per share:
As reported $ .06 $ (.64)
Pro forma .02 (.66)
</TABLE>
Pro forma net earnings (loss) reflects only options granted in 1996 and
1995. Therefore, the full effect of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net
earnings (loss) and related per share amounts presented above because
compensation cost is reflected over the vesting period of the options
and compensation cost for options granted prior to January 1, 1995 is
not considered.
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 1996 is shown below:
<TABLE>
<CAPTION>
Option price per share
----------------------
Number Weighted
of shares Range average
--------- ----- -------
<S> <C> <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 $0.90
Exercised (388) $0.23 - $0.88 $0.35
Canceled or expired --
------
Options outstanding at December 31, 1995 2,854 $0.23 - $1.50 $0.98
Granted (at fair market value on the dates
of original grant) 1,048 $2.37 - $5.88 $4.34
Exercised (905) $0.23 - $1.50 $0.50
Canceled or expired (169) $0.23 - $4.81 $3.77
------
Options outstanding at December 31, 1996 2,828 $0.23 - $5.88 $2.21
=====
Options exercisable at December 31, 1995 1,820 $0.23 - $1.50 $0.68
=====
Options exercisable at December 31, 1996 1,300 $0.23 - $1.50 $1.06
=====
</TABLE>
F-18
<PAGE> 51
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- -------------------
Weighted
average Weighted Weighted
Number remaining average Number average
outstanding contractual exercise exercisable exercise
Classification at 12/31/96 life price at 12/31/96 price
-------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
Healthdyne-related 529 44 $0.41 529 $0.41
Directors 154 45 $1.90 35 $1.50
Others 2,145 58 $2.68 736 $1.50
----- ------
2,828 54 $2.21 1,300 $1.06
===== =====
</TABLE>
Non-Employee Directors Stock Plan
On October 20, 1995, the Company established a stock plan for
non-employee 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 December 31, 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 stock purchase plan
for all eligible employees of HIE and designated subsidiaries.
Participants may use up to 10% of their compensation to 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. Of the 200
shares of the Company's common stock reserved for issuance under this
plan, 14 were issued during 1996. Compensation cost related to this plan
determined under SFAS 123 had an insignificant effect on the pro forma
net earnings and pro forma net earnings per share for 1996 disclosed
above.
F-19
<PAGE> 52
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 30, 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 Plans
The Company and HCI each maintain a 401(k) defined contribution plan for
the benefit of their employees. Prior to June 1, 1996, 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. Subsequent to
June 1, 1996, Company contributions are discretionary. The HCI plan
provides for HCI contributions equal to one-half of each participant's
contributions up to 3% of the participant's base salary. Contributions
to the plans included in the consolidated statements of operations for
the years ended December 31, 1996 and 1995 and for the period from June
15, 1994 to December 31, 1994 were approximately $79, $81, and $-0-,
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.
F-20
<PAGE> 53
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(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>
1997 $ 465 $ 82
1998 396 81
1999 288 21
2000 191 18
Thereafter 9 10
-------- --------
$ 1,349 212
========
Less interest 35
--------
Present value of future minimum
capital lease payments $ 177
========
</TABLE>
Rental expense for operating leases (except those with lease terms of a
month or less that were not renewed) for the years ended December 31,
1996 and 1995 and for the period from June 15, 1994 to December 31, 1994
was $600, $362, and $37, 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 committed to make loans to CHS until the
later of December 31, 1996 or such time as Massey Burch had loaned
$1,300 to CHS. At that point, HIE and Massey Burch will make loans to
CHS until HIE and Massey Burch have each loaned a total of $2,000 to
CHS, each loan convertible into a 32% ownership interest in CHS between
October 21, 1996 and June 30, 2004. As of December 31, 1996 and 1995,
loans by HIE to CHS totaled $1,300. 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.
F-21
<PAGE> 54
HEALTHDYNE INFORMATION ENTERPRISES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On December 18, 1996, the Company and Massey Burch entered into an
agreement whereby the Company acquired an option to acquire Massey
Burch's investment in CHS. Prior to this agreement, the Company and
Massey Burch each held 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 is 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. As consideration for the grant of this option, the Company
issued 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
granted registration rights to Massey Burch with respect to both the
shares of common stock underlying the warrant and the shares issuable
upon the Company's exercise of the option. Massey Burch continued to be
subject to its commitment to fund CHS up to a maximum of $2,000. Massey
Burch has loaned $2,000 to CHS as of December 31, 1996.
On November 13, 1996, HIE and the two CHS executive officers entered
into an agreement in principle which contemplates the granting of an
option, at no cost to HIE: (a) to acquire the 26% equity ownership
interest in CHS held by the two CHS executive officers for 240,000
shares of HIE's common stock and (b) to convert the 10% equity ownership
interest reserved for CHS stock options to a HIE tandem stock option
program. This proposed option, if exercised, must be exercised
simultaneously with HIE's option to acquire from Massey Burch Capital
Corp. ("Massey Burch") a promissory note convertible into 32% equity
ownership interest in CHS. The Massey Burch option is exercisable
between December 31, 1996 and June 30, 1997. The agreement in principle
further contemplates that the two CHS executive officers will
periodically vest through June 30, 1999 in an increasing ownership
interest percentage of the HIE shares issuable to them upon the
Company's exercise of the proposed option. Finally, the agreement in
principle contemplates that the two CHS executive officers will be
granted certain registration rights with respect to those HIE shares.
The transaction contemplated by the agreement in principle is subject to
negotiation and execution of a definitive agreement and other customary
conditions. There can be no assurance that a definitive agreement 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.
During July 1994, HIE committed to make loans to DataView up to a
maximum of $2,450. As described in note 3, on June 12, 1996, HIE and
DataView entered into an agreement which limited 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).
(12) Major Customers
One customer accounted for approximately 25% of the Company's revenue in
1996. No single customer accounted for more than 10% of the Company's
revenue for the year ended December 31, 1995 or for the period from June
15, 1994 to December 31, 1994. In addition, one distributor provided
customers to the Company that accounted for approximately 18% of the
Company's revenue in 1995. No single distributor provided customers to
the Company that accounted for more than 10% of the Company's revenue
for the year ended December 31, 1996 or for the period from June 15,
1994 to December 31, 1994.
F-22
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
33
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section of the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement") captioned "Certain
Nominees for Board of Directors" under "Proposal 1. Election of Directors"
identifies members of the Board of Directors of the Company and nominees, and
is incorporated in this Item 10 by reference.
See also "Executive Officers of the Company" appearing in Part I
hereof.
ITEM 11. EXECUTIVE COMPENSATION
The information in the section of the 1997 Proxy Statement captioned
"Executive Compensation and Other Information" under "Proposal 1. Election of
Directors" is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information in the sections of the 1997 Proxy Statement captioned
"Security Ownership of Certain Beneficial Owners and Management" under "Proposal
1. Election of Directors" is incorporated in this Item 12 by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section captioned "Committee Interlocks and
Insider Participation" under "Proposal 1. Election of Directors" of the 1997
Proxy Statement is incorporated in this Item 13 by reference.
34
<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company
and its subsidiaries and report of independent auditors thereon are included as
Pages F-1 through F-22 of this Annual Report on Form 10-K:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Operations - Years Ended December 31, 1996
and 1995 and for the period from June 15, 1994 to December 31, 1994
Consolidated Statements of Shareholders' Equity Years Ended December
31, 1996 and 1995 and for the period from June 15, 1994 to December
31, 1994
Consolidated Statements of Cash Flows - Years Ended December 31, 1996
and 1995 and for the period from June 15, 1994 to December 31, 1994
Notes to Consolidated Financial Statements
(a)(2) The following supporting financial statement schedule and
report of independent auditors thereon are included as part
of this Annual Report on Form 10-K:
Independent Auditors' Report
Schedule II - Valuation and Qualifying Accounts
All other Schedules are omitted because the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements or related notes.
35
<PAGE> 58
(a)(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Distribution Agreement between Healthdyne 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
Healthdyne, 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
Healthdyne, HCI and Shareholders (as 2.3 defined therein) (filed as
Exhibit 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 Healthdyne (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 Healthdyne,
DataView and Shareholders (as 2.5 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 Healthdyne,
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
Healthdyne, Alpha Development Corporation (now 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 Healthdyne,
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, Healthdyne, 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 Healthdyne, 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 Healthdyne, HIE, SVFII and CHS (filed as Exhibit 10.15 to
the December 1995 Form 8-K, and incorporated herein by reference).
36
<PAGE> 59
2.11 First Amendment to Pledge Agreement, dated as of December 4, 1995, by
and among Healthdyne, 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, Healthdyne, 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 Healthdyne,
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).
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 the 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 the 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).
10.1 Corporate Services Agreement between Healthdyne 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 Healthdyne 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 Healthdyne 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 Healthdyne 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 Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the
Form S-1, and incorporated herein by reference).
10.9 Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form
S-1, and incorporated herein by reference).
37
<PAGE> 60
10.10 Loan Agreement, dated as of October 21, 1994, between Healthdyne and
Alpha Development Corporation 10.10 (now CHS) (filed as Exhibit to the
Form S-1, and incorporated herein by reference).
10.11 Funding Agreement, dated as of July 22, 1994, between Healthdyne,
DataView and Shareholders (as 10.11 defined therein) (filed as Exhibit
10.11 to the Form S-1, and incorporated herein by reference).
10.12 Software Licensing and Distributor Agreement, dated as of October 27,
1994, between HCI and Healthdyne (filed as Exhibit 10.12 to the Form
S-1, and incorporated herein by reference).
10.13 Software Licensing and Distributorship Agreement, dated as of December
4, 1995, by and among HIE and 10.13 CHS (filed as Exhibit 10.19 to the
December 1995 Form 8-K, and incorporated herein by reference).
10.13 Agreement dated as of April 1, 1996 among HIE, DataView, Kurt Farhy,
John Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the
"June 1996 Form 10-Q"), and incorporated herein by reference).
10.14 HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the June
1996 Form 10-Q, and incorporated herein by reference).
10.15 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).
10.16 Option Agreement dated December 18, 1996 between HIE and SVFII.
10.17 Stock Purchase Warrant dated December 18, 1996 by HIE to SVFII.
11 Statement of Computation of per Share Earnings (Loss).
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedules (for SEC purposes only).
(b) Reports on Form 8-K:
During the quarter ended December 31, 1996, the Company filed the
following report on Form 8-K:
(i) a Form 8-K dated November 18, 1996, reporting under Item 5 that on
November 13, 1996, the Company entered into an agreement in principle for an
option to acquire an additional 36% equity ownership interest in Criterion
Health Strategies, Inc. ("CHS"), a Nashville-based affiliate that provides
healthcare enterprise management software tools and services. As of the date of
this agreement in principle, the Company held a promissory note convertible
into a 32% equity ownership interest in CHS, and had previously entered into an
agreement in principle to acquire an option for the remaining 32% equity
ownership interest held by another shareholder.
38
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
By: /s/ H. Darrell Young
--------------------------------------
H. Darrell Young
President and Chief Executive Officer
(Principal Executive Officer)
March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Parker H. Petit Chairman of the Board of March 24, 1997
- -------------------------------------------- Directors
Parker H. Petit
/s/ H. Darrell Young Director, President and Chief
- -------------------------------------------- Executive Officer (Principal
H. Darrell Young Executive Officer) March 24, 1997
/s/ Joseph G. Bleser Vice President-Finance, Chief March 24, 1997
- -------------------------------------------- Financial Officer, Treasurer and
Joseph G. Bleser Secretary(Principal Financial
Officer; Principal Accounting
Officer)
/s/ J. Terry Dewberry Director March 24, 1997
- --------------------------------------------
J. Terry Dewberry
/s/ William J. Gresham, Jr. Director March 24, 1997
- --------------------------------------------
William J. Gresham, Jr.
/s/ Charles R. Hatcher, Jr. Director March 24, 1997
- --------------------------------------------
Charles R. Hatcher, Jr.
</TABLE>
39
<PAGE> 62
<TABLE>
<S> <C> <C>
/s/ John W. Lawless Director March 24, 1997
- --------------------------------------------
John W. Lawless
/s/ Carl E. Sanders Director March 24, 1997
- --------------------------------------------
Carl E. Sanders
/s/ Donald W. Weber March 24, 1997
- --------------------------------------------
Donald W. Weber Director
</TABLE>
40
<PAGE> 63
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Healthdyne Information Enterprises, Inc.
Under date of January 28, 1997, we reported on the consolidated balance sheets
of Healthdyne Information Enterprises, Inc. and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the years ended December 31, 1996 and
1995 and for the period from June 15, 1994 (date of incorporation) to December
31, 1994, as contained in the annual report on Form 10-K for the year 1996. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. 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 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.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 28, 1997
<PAGE> 64
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 AND FOR THE
YEARS ENDED DECEMBER 31, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED
BALANCE AT TO COSTS BALANCE AT
BEGINNING AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ADDITIONS DEDUCTIONS OF PERIOD
----------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Period from June 15, 1994
to December 31, 1994 $ -- $ -- $ 9* $ -- $ 9
Year ended December 31, 1995 $ 9 $ 43 $ 64* $ (31)** $ 85
Year ended December 31, 1996 $ 85 $ 92 $ -- $ (12)*** $ 165
</TABLE>
* Represents beginning balances in allowance for doubtful accounts of
acquired companies.
** Uncollected receivables written off.
*** Represents the balance in allowance for doubtful accounts of a company
no longer consolidated with the Company's financial statements.
<PAGE> 65
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Distribution Agreement between Healthdyne 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
Healthdyne, 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
Healthdyne, HCI and Shareholders (as 2.3 defined therein) (filed as
Exhibit 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 Healthdyne (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 Healthdyne,
DataView and Shareholders (as 2.5 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 Healthdyne,
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
Healthdyne, Alpha Development Corporation (now 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 Healthdyne,
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, Healthdyne, 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 Healthdyne, 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 Healthdyne, HIE, SVFII and CHS (filed as Exhibit 10.15 to
the December 1995 Form 8-K, and incorporated herein by reference).
i
<PAGE> 66
2.11 First Amendment to Pledge Agreement, dated as of December 4, 1995, by
and among Healthdyne, 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, Healthdyne, 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 Healthdyne,
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).
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 the 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 the 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).
10.1 Corporate Services Agreement between Healthdyne 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 Healthdyne 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 Healthdyne 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 Healthdyne 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 Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the
Form S-1, and incorporated herein by reference).
10.9 Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Form
S-1, and incorporated herein by reference).
ii
<PAGE> 67
10.10 Loan Agreement, dated as of October 21, 1994, between Healthdyne and
Alpha Development Corporation 10.10 (now CHS) (filed as Exhibit to the
Form S-1, and incorporated herein by reference).
10.11 Funding Agreement, dated as of July 22, 1994, between Healthdyne,
DataView and Shareholders (as 10.11 defined therein) (filed as Exhibit
10.11 to the Form S-1, and incorporated herein by reference).
10.12 Software Licensing and Distributor Agreement, dated as of October 27,
1994, between HCI and Healthdyne (filed as Exhibit 10.12 to the Form
S-1, and incorporated herein by reference).
10.13 Software Licensing and Distributorship Agreement, dated as of December
4, 1995, by and among HIE and 10.13 CHS (filed as Exhibit 10.19 to the
December 1995 Form 8-K, and incorporated herein by reference).
10.13 Agreement dated as of April 1, 1996 among HIE, DataView, Kurt Farhy,
John Ernissee and Richard Bigelow (filed as Exhibit 2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 (the
"June 1996 Form 10-Q"), and incorporated herein by reference).
10.14 HIE 1996 EBU Tandem Stock Option Plan (filed as Exhibit 10 to the June
1996 Form 10-Q, and incorporated herein by reference).
10.15 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).
10.16 Option Agreement dated December 18, 1996 between HIE and SVFII.
10.17 Stock Purchase Warrant dated December 18, 1996 by HIE to SVFII.
11 Statement of Computation of per Share Earnings (Loss).
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedules (for SEC purposes only).
iii
<PAGE> 1
EXHIBIT 10.16
OPTION AGREEMENT
This OPTION AGREEMENT dated as of December 18th, 1996 (the
"Agreement"), by and between Healthdyne Information Enterprises, Inc., a
Georgia corporation ("HIE"), and the Southern Venture Fund II, L.P., a Delaware
limited partnership ("SVFII").
WITNESSETH:
WHEREAS, each of HIE and SVFII are investors in Criterion Health
Strategies, Inc. (f/k/a Alpha Development Corp.), a Tennessee corporation (the
"Company"), with each of HIE and SVFII owning five (5) shares of common stock,
no par value, of the Company ("Criterion Common Stock"), and a Convertible
Debenture of the Company due June 30, 2004, dated October 21, 1994, in the
principal amount of $2,000,000 (individually, a "Criterion Debenture" and
collectively, the "Criterion Debentures"), pursuant to the terms of that
certain Investment Agreement and First Amendment to Incorporation Agreement,
dated as of December 4, 1995 (the "Investment Agreement") among the Company,
Healthdyne, Inc., a Georgia corporation ("Healthdyne"), HIE, SVFII, and Brenton
L. Teveit and J. Edward Pearson, Jr. (individually, a "Shareholder" and
collectively, the "Shareholders");
WHEREAS, Healthdyne, HIE, SVFII and the Company are parties to that
certain First Amendment to Loan Agreement, dated as of December 4, 1995 (the
"Amended Loan Agreement"), and that certain First Amendment to Security
Agreement, dated as of December 4, 1995 (the "Amended Security Agreement"), and
Healthdyne, HIE, SVFII and each of the Shareholders are parties to that certain
First Amendment to Pledge Agreement, dated as of December 4, 1995 (the "Amended
Pledge Agreement");
WHEREAS, the Company, Healthdyne, HIE, SVFII and each of the
Shareholders are parties to that certain Waiver and Second Amendment to
Shareholders' Agreement, dated as of December 4, 1995 (the "Amended
Shareholders' Agreement");
WHEREAS, HIE, SVFII and the Company are parties to that certain letter
agreement dated December 4, 1995 (the "Letter Agreement");
WHEREAS, HIE and SVFII are parties to that certain Intercreditor
Agreement, dated December 4, 1995 (the "Intercreditor Agreement');
WHEREAS, HIE is desirous of increasing its investment in the Company,
and subject to the terms and conditions of this Agreement, SVFII is willing to
grant to HIE an option to purchase SVFII's entire investment in the Company;
and
WHEREAS, simultaneously with the execution hereof, HIE, SVFII, the
Company and the Shareholders have executed a Consent (the "Consent"), pursuant
to which the Shareholders
<PAGE> 2
and the Company, subject to the conditions therein specified, have consented to
the execution of this Agreement and consummation of the transactions
contemplated hereby;
NOW, THEREFORE, HIE and SVFII agree as follows:
1. Grant of Option. In consideration for the issuance and delivery by
HIE to SVFII of a warrant to purchase 50,000 shares of the common stock, $.01
par value per share, of HIE ("HIE Common Stock"), in the form of Exhibit A
attached hereto and made a part hereof (the "HIE Warrant"), SVFII hereby grants
to HIE the option (the "Option") to purchase from SVFII at any time during the
period beginning December 31, 1996, and terminating at 5:00 p.m., Nashville
time on June 30, 1997 (the "Termination Date"), the five (5) shares of
Criterion Common Stock owned by SVFII (the "SVFII Criterion Stock") and the
Criterion Debenture owned by SVFII (the "SVFII Criterion Debenture") for an
Option purchase price of 416,666 shares of HIE Common Stock, or such greater
number of shares of HIE Common Stock as is provided in Section 3 below (the
"HIE Shares"). HIE may exercise the Option by giving to SVFII written notice
of exercise (the "Notice of Exercise"), which shall specify the closing date
(the "Option Closing Date"). The Option Closing Date shall be no more than
five (5) business days after the date of the Notice of Exercise.
Notwithstanding the foregoing, provided the Notice of Exercise is delivered to
SVFII in the manner provided in Section 6(d) below by the Termination Date, the
Option Closing Date may be after June 30, 1997. The closing with respect to
the exercise of the Option shall take place at the offices of Troutman Sanders
LLP, 5200 NationsBank Plaza, 600 Peachtree Street, N.E., Atlanta, Georgia
30308-2216 at 9:00 a.m., local time, on the Option Closing Date, or at such
other place and time as HIE and SVFII shall agree.
2. Closing Deliveries. At the Option closing, the following deliveries
shall take place:
2.1 Deliveries by SVFII.
(a) SVFII shall deliver to HIE:
(i) a stock certificate representing the SVFII
Criterion Stock, accompanied by a duly executed stock
power or duly endorsed for transfer to HIE; and
(ii) the SVFII Criterion Debenture, duly endorsed
for transfer to HIE.
(b) In the event SVFII has not advanced loan proceeds to
the Company in the amount of $2,000,000 pursuant to the provisions of
the Investment Agreement, the Amended Loan Agreement, the Letter
Agreement and the SVFII Criterion Debenture, SVFII shall deliver to
the Company by certified or official bank check or by federal funds
wire transfer an amount equal to the unfunded balance of its
"Commitment" (as defined in the Amended Loan Agreement).
2
<PAGE> 3
2.2 Deliveries by HIE.
(a) HIE shall deliver to SVFII one or more stock
certificates evidencing the HIE Shares, registered in the name of
SVFII or its nominees.
(b) SVFII shall have received the opinion of counsel to
HIE, dated the Option Closing Date, substantially in the form attached
hereto as Exhibit B.
2.3 Mutual Deliveries. HIE, SVFII, the Company and the
Shareholders mutually agree, subject to the satisfaction of the
conditions set forth in the Consent, to execute and deliver such other
instruments as shall be reasonably necessary to consummate the
transactions contemplated hereby, including:
(a) the termination of the Intercreditor Agreement;
(b) the termination of the participation of SVFII as a
party to the Investment Agreement, the Amended Loan Agreement,
the Amended Pledge Agreement, the Amended Shareholders'
Agreement, the Amended Security Agreement and the Letter
Agreement; and
(c) the assignment by SVFII to HIE of the security
interests granted to SVFII under the Amended Security
Agreement and the Amended Pledge Agreement.
2.4 HIE Management Shareholders Arrangements. HIE acknowledges
and agrees that it has entered into an agreement in principle dated
November 6, 1996 (the "AIP"), with the Shareholders which contemplates
that each of the Shareholders will grant to HIE an option to purchase
their respective entire investment in the Company, that holders of
options for the Criterion Common Stock will convert their options to
options for stock of HIE under a stock option plan, that HIE will fund
certain obligations to the Company, and that certain other agreements
between the Company, HIE and the Shareholders will be modified or
canceled, and HIE further agrees with SVFII, that, in order to fulfill
the conditions to the Consent, it will negotiate in good faith with
the Shareholders to execute the definitive agreements contemplated by
the AIP, which agreements shall include a provision that the closing
of the transactions contemplated thereunder will occur simultaneously
with the Option closing.
3. The HIE Shares.
(a) Number of HIE Shares. The number of HIE Shares to be
delivered to SVFII upon exercise of the Option shall be 416,666 shares of HIE
Common Stock, provided, however, that if at the date of the Notice of Exercise,
the "Current Market Value" of the HIE Common Stock is less than $4.80 per
share, the number of HIE Shares to be delivered hereunder shall be increased to
that number of shares which, when multiplied by the Current
3
<PAGE> 4
Market Value of the HIE Common Stock, equals $2,000,000. For purposes of this
Agreement, "Current Market Value" per share of HIE Common Stock shall mean (i)
if a public market for HIE Common Stock exists at the time of such exercise,
the average of the closing bid and asked prices of HIE Common Stock quoted in
the Over-The-Counter Market Summary or the last reported sale price of the HIE
Common Stock or the closing price quoted on the Nasdaq National Market or on
any exchange on which the HIE Common Stock is listed, whichever is applicable,
as published in The Wall Street Journal for the five (5) trading days prior to
the date of determination of Current Market Value; or (ii) if there is no
public market for HIE Common Stock, determined by HIE's Board of Directors in
good faith. The number of HIE Shares subject to the Option shall be adjusted
by HIE proportionately to reflect changes in the capitalization of HIE between
the date hereof and the Option Closing Date as a result of any
recapitalization, reclassification, stock dividend, stock split, combination of
shares, exchange of shares or any other change in HIE's capital structure which
affects holders of HIE Common Stock generally.
(b) Status of HIE Shares. SVFII acknowledges and agrees
as follows:
(i) The HIE Shares to be received by SVFII upon
HIE's exercise of the Option will not have been
registered under the Securities Act of 1933, as
amended (the "Securities Act"), or any applicable
state securities laws.
(ii) SVFII will not sell or otherwise transfer the
HIE Shares except pursuant to a registered offering
as contemplated by Section 3(c) of this Agreement or
in one or more private transactions if, in the
opinion of counsel to SVFII reasonably satisfactory
to HIE, such transaction or transactions are not
required to be registered under the Securities Act or
any applicable state securities laws.
(iii) Each certificate representing the HIE Shares
to be issued upon exercise of the Option shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT
BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM, OR IN THE
ABSENCE OF RECEIPT BY THE COMPANY OF AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT
THE SECURITIES MAY BE SOLD OR TRANSFERRED WITHOUT
SUCH REGISTRATION.
4
<PAGE> 5
(c) Registration of HIE Shares by HIE.
(i) Shelf Registration. HIE agrees with SVFII
that, within ninety (90) days of the Option Closing
Date, HIE shall file with the Securities and Exchange
Commission (the "Commission") a registration
statement under the Securities Act with respect to
resales by SVFII of the HIE Shares issued upon
exercise of the Option. Such registration statement
shall provide for sales to be made on a continuous
basis pursuant to Rule 415 (or any similar rule that
may be adopted by the Commission) in accordance with
the intended method or methods of disposition
designated by SVFII, provided, however, that not more
than one underwritten offering shall be made pursuant
to such registration statement. Such registration
statement shall be filed on Form S- 3 or such other
form as HIE determines in its sole discretion to be
available and appropriate for the registration of
resales of the HIE Shares by SVFII.
HIE shall prepare and file with the Commission such
amendments (including post-effective amendments) and
supplements to the registration statement and the
related prospectus as may be necessary to keep such
registration current and continuously effective for a
period to expire upon the earlier of (a) two years
following the Option Closing Date (or such earlier
time, if any, as to which Rule 144 or any successor
rule or regulation under the Securities Act shall be
available for immediate resales of all of the HIE
Shares by SVFII); or (b) the date that all of the HIE
Shares are sold.
(ii) Piggyback Registration.
(A) If HIE shall propose the
registration under the Securities Act of an
offering of any of its capital stock to be
sold for cash, whether or not for its own
account, pursuant to a firm commitment
underwritten offering (other than a
registration relating to either (1) a
dividend reinvestment, employee stock option,
stock purchase or similar plan, (2) a
transaction pursuant to Rule 145 under the
Securities Act, or (3) a merger,
consolidation or reorganization), HIE, on
each such occasion, shall as promptly as
practicable but in no event later than ten
(10) days prior to the proposed filing date
of the registration statement give written
notice (the "Notice") to SVFII of its
intention to effect such registration, and
SVFII shall be entitled, on each such
occasion, to request to have all or a portion
of the HIE Shares included in such
registration statement. Upon the written
request of SVFII that HIE include any HIE
Shares in such registration statement (which
request shall state the number of HIE Shares
for which registration is sought), given
within ten (10) days after the
5
<PAGE> 6
giving of HIE's Notice, HIE shall use its
reasonable efforts to cause such HIE Shares
to be so included in the offering covered by
such registration statement, subject to the
limitations hereinafter set forth.
(B) The registration of some or all of
such HIE Shares pursuant to this Section
3(c)(ii) may be conditioned or restricted if,
in the case of a registration statement which
also includes shares to be sold for the
account of HIE in an underwritten offering,
in the good faith exercise of the reasonable
business judgment of the managing underwriter
of such proposed offering, inclusion thereof
in such registration statement will have an
adverse impact on the marketing of the
securities to be offered by HIE (provided
that such conditions or restrictions apply on
a proportional basis not only to the HIE
Shares but also to all other securities to be
included other than those to be offered for
HIE's own account). If such managing
underwriter shall require that the number of
HIE Shares to be offered by SVFII be reduced
or eliminated, SVFII shall have the right to
withdraw its request for registration
pursuant to this Section 3(c)(ii).
(C) HIE shall not be obligated to honor
any request by SVFII under this Section
3(c)(ii) if (i) in the opinion of counsel for
HIE in form and substance reasonably
satisfactory to SVFII, SVFII could then sell
under Rule 144 promulgated under the
Securities Act the number of HIE Shares it
proposes to have registered under Section
3(c)(ii) or (ii) the request is made more
than two years following the Option Closing
Date.
(iii) Registration Procedures. If and whenever HIE
is obligated by the provisions of this Section 3(c)
to effect the registration of any Warrant Shares
under the Securities Act, HIE shall:
(A) Prepare and file with the Commission
a registration statement with respect to such
securities on such form as HIE deems
appropriate and is permitted or qualified to
use and shall use all reasonable efforts to
cause such registration statement to become
and remain effective as provided herein;
provided, that in the case of any
registration pursuant to Section 3(c)(ii),
such preparation and filing may be delayed in
the sole discretion of HIE, without prejudice
to the rights of SVFII pursuant to Section
3(c)(i).
(B) Furnish to SVFII at a reasonable
time prior to the filing thereof with the
Commission a copy of the registration
statement
6
<PAGE> 7
in the form in which HIE proposes to file the
same; not later than one day prior to the
filing thereof, a copy of any amendment
(including any post-effective amendment) to
such registration statement; and promptly
following the effectiveness thereof, a
conformed copy of the registration statement
as declared effective by the Commission and
of each post-effective amendment thereto,
including financial statements and all
exhibits and reports incorporated therein by
reference.
(C) Furnish to SVFII such number of
copies of such registration statement, each
amendment thereto, the prospectus included in
such registration statement (including each
preliminary prospectus), each supplement
thereto and such other documents as they may
reasonably request in order to facilitate the
disposition of the HIE Shares owned by them.
(D) Use all reasonable efforts to
register and qualify the HIE Shares covered
by the registration statement under such
other securities laws of such jurisdictions
as shall be reasonably requested by SVFII and
do any and all other acts and things which
may be reasonably necessary or advisable to
enable SVFII to consummate the disposition of
the HIE Shares owned by SVFII in such
jurisdictions; provided, however, that HIE
shall not be required in connection therewith
or as a condition thereto to qualify to
transact business or to file a general
consent to service of process in any such
states or jurisdictions, or to maintain the
effectiveness of any such registration or
qualification for any period during which it
is not required to maintain the effectiveness
of the related registration statement under
the Securities Act as set forth in Section
3(c)(ii).
(E) Promptly notify SVFII of the
happening of any event as a result of which
the prospectus included in such registration
statement contains an untrue statement of a
material fact or omits any fact necessary to
make the statements therein not misleading
and, at the request of SVFII, and subject to
the further provisions of Section 3(c)(v)(B),
HIE will prepare a supplement or amendment to
such prospectus so that, as thereafter
delivered to the purchasers of such HIE
Shares, such prospectus will not contain an
untrue statement of a material fact or omit
to state any fact necessary to make the
statements therein not misleading.
(F) Enter into such customary agreements
in form and substance satisfactory to HIE and
take such other customary
7
<PAGE> 8
actions as may be reasonably requested in
order to expedite or facilitate the
disposition of such HIE Shares.
(G) Make reasonably available for
inspection by SVFII pursuant to such
registration statement and any attorney or
accountant retained by SVFII, all financial
and other records, pertinent corporate
documents and properties of HIE, and use all
reasonable efforts to cause the officers,
directors, employees and independent
accountants of HIE to supply all information
reasonably requested by SVFII, its attorney
or its accountant in connection with such
registration statement, in each case as and
to the extent necessary to permit SVFII to
conduct a reasonable investigation within the
meaning of the Securities Act. To minimize
disruption and expense to HIE during the
course of the registration process, SVFII and
any transferee(s) of SVFII hereunder shall,
to the extent practicable, coordinate
investigation and due diligence efforts
hereunder and, to the extent practicable,
will act through a single set of counsel and
a single set of accountants and will enter
into confidentiality agreements with HIE in
form and substance reasonably satisfactory to
HIE and SVFII prior to receiving any
confidential or proprietary information of
HIE.
(H) Promptly notify SVFII of the
following events and (if requested by SVFII)
confirm such notification in writing: (w)
the filing of the prospectus or any
prospectus supplement and the registration
statement and any amendment or post-
effective amendment thereto and, with respect
to the registration statement or any
post-effective amendment thereto, the
declaration of the effectiveness of such
documents, (x) any requests by the Commission
for amendments or supplements to the
registration statement or the prospectus or
for additional information, (y) the issuance
or threat of issuance by the Commission of
any stop order suspending the effectiveness
of the registration statement or the
initiation of any proceedings for that
purpose, and (z) the receipt by HIE of any
notification with respect to the suspension
of the qualification of the HIE Shares for
sale in any jurisdiction or the initiation or
threat of initiation of any proceeding for
such purpose.
(I) Cooperate with SVFII to facilitate
the timely preparation and delivery of
certificates representing the HIE Shares to
be sold and not bearing any restrictive
legends, and enable such HIE Shares to be in
such lots and registered in such names as
SVFII
8
<PAGE> 9
may request at least two (2) business days
prior to any delivery of the HIE Shares to
the purchaser.
(J) Prior to the effectiveness of the
registration statement and any post-
effective amendment thereto, (w) make such
representations and warranties to SVFII and
the underwriters, if any, with respect to the
HIE Shares and the registration statement as
are customarily made by issuers in similar
underwritten offerings; (x) use its best
efforts to obtain "cold comfort" letters and
updates thereof from HIE's independent
certified public accountants addressed to
SVFII and the underwriters, if any, such
letters to be in customary form and covering
matters of the type customarily covered in
"cold comfort" letters by underwriters in
connection with similar underwritten
offerings; (y) deliver such documents and
certificates as may be reasonably requested
(1) by SVFII, and (2) by the underwriters, if
any, to evidence compliance with clause (w)
above and with any customary conditions
contained in the underwriting agreement or
other agreement entered into by HIE; and (z)
obtain opinions of counsel to HIE (which
counsel and which opinions shall be
reasonably satisfactory to the underwriters,
if any), covering the matters customarily
covered in opinions requested in underwritten
offerings. Such counsel shall also state
that no facts have come to the attention of
such counsel which cause them to believe that
such registration statement, the prospectus
contained therein, or any amendment or
supplement thereto, as of their respective
effective or issue dates, contains any untrue
statement of any material fact or omits to
state any material fact necessary to make the
statements therein not misleading (except
that no statement need be made with respect
to any financial statements, notes thereto or
other financial data or other expertized
material contained therein or as to any
information furnished by or on behalf of
SVFII or underwriters, if any, for inclusion
in such registration statement).
(K) Otherwise use its best efforts to
comply with all applicable rules and
regulations of the Commission, and make
generally available to its security holders
an earnings statement satisfying the
provisions of Section 11(a) of the Securities
Act, no later than forty-five (45) days after
the end of any twelve-month period (or ninety
(90) days, if such period is a fiscal year)
beginning with the first month of the fiscal
quarter of HIE commencing after the effective
date of the registration statement, which
statements shall cover such twelve-month
periods.
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<PAGE> 10
(iv) HIE's obligations with respect to and
compliance with this Section 3 shall be expressly
conditioned upon SVFII's compliance with the
following:
(A) SVFII shall cooperate with HIE in
connection with the preparation of the
registration statement, and for so long as
HIE is obligated to keep the registration
statement effective, shall provide to HIE, in
writing, for use in the registration
statement, all such information regarding
SVFII and its plan of distribution of the HIE
Shares as may be necessary to enable HIE to
prepare the registration statement and
prospectus covering the HIE Shares, to
maintain the currency and effectiveness
thereof and otherwise to comply with all
applicable requirements of law in connection
therewith.
(B) During such time as SVFII may be
engaged in a distribution of the HIE Shares,
SVFII shall comply with Rules 10b-6 and 10b-7
promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and
pursuant thereto, shall, among other things:
(w) not engage in any stabilization activity
in connection with the securities of HIE in
contravention of such Rules; (x) distribute
the HIE Shares solely in the manner described
in the registration statement; (y) cause to
be furnished to each broker through whom the
HIE Shares may be offered, or to the offeree
if an offer is not made through a broker,
such copies of the prospectus and any
amendment or supplement thereto and documents
incorporated by reference therein as may be
required by law; and (z) not bid for or
purchase any securities of HIE or attempt to
induce any person to purchase any securities
of HIE other than as permitted under the
Exchange Act.
(v) Holdback Agreements.
(A) Notwithstanding any provision
of this Agreement to the contrary, in the
event HIE notifies SVFII, in writing and no
later than ten (10) days prior to the
proposed filing date that HIE intends to file
a registration statement in connection with
an underwritten offering of any of its
capital stock, SVFII shall refrain from
selling or otherwise distributing, except in
accordance with the provisions of Section
3(c)(ii) hereunder, any HIE Shares within the
period beginning up to seven days prior to
the effective date of such registration
statement (or on such later date that HIE
notifies SVFII, in writing, that such period
has begun) and ending up to 90 days after
such effective date (or on
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<PAGE> 11
such earlier date that HIE notifies
SVFII that such period has ended) (the
"Offering Restricted Period"). In the event
the Holder's Shares are not included in such
a registered underwritten offering pursuant
to Section 3(c)(ii) hereof, HIE's obligation
under Section 3 to keep the registration
statement filed pursuant to Section 3(c)(i)
current and effective shall be extended for a
number of days equal to the Offering
Restricted Period, or, if earlier, until the
date on which all of the HIE Shares have been
disposed of.
(B) Notwithstanding anything set forth
herein to the contrary, SVFII agrees that it
will give HIE prior oral notice, directed to
its Chief Executive Officer or its Chief
Financial Officer, confirmed immediately in
writing by facsimile transmission, of its
intention to sell any HIE Shares under the
shelf registration statement, which notice
shall be given not less than two (2) days in
advance of any such proposed sale. In the
event that HIE thereafter informs SVFII,
within one (1) day of its receipt of such
notice from SVFII, that in the good faith
exercise of its reasonable business judgment,
there exist bona fide financing, acquisition
or other plans of HIE or other matters which
would require disclosure by HIE of
information, the premature disclosure of any
of which would adversely affect or otherwise
be detrimental to HIE, SVFII shall refrain
from selling HIE Shares until the earlier to
occur of the date (x) HIE notifies SVFII that
it has filed with the Commission an amendment
or supplement to the prospectus included in
the shelf registration statement, (y) HIE
notifies SVFII that the potentially
disclosable event no longer exists and that
the prospectus included in the shelf
registration statement does not contain an
untrue statement of material fact or omit to
state any fact necessary to make the
statements therein not misleading, or (z)
which is 90 days after the date that SVFII
orally notified HIE of its intention to sell
any HIE Shares (each of which is a
"Disclosure Restricted Period"). HIE's
obligation under Section 3 to keep the
registration statement filed pursuant to
Section 3 current and effective shall be
extended for a number of days equal to the
Disclosure Restricted Period, or, if earlier,
until the date on which all of the HIE Shares
have been disposed of.
(vi) HIE shall bear the expenses of registration
pursuant to this Section 3; provided, however, that
SVFII shall be responsible for (x) the fees and
expenses of its own counsel, its own accountants and
other experts retained by it with respect to such
registration and resales and (y)
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<PAGE> 12
all underwriting discounts or brokerage fees or
commissions relating to the sale of the HIE Shares.
(vii) Indemnification.
(A) HIE shall indemnify and hold
harmless SVFII, its general partner, each
underwriter (as defined in the Securities
Act), each other selling agent who may be
deemed to be an underwriter, and each
controlling person of SVFII, any underwriter
or other selling agent, if any (within the
meaning of the Securities Act), against any
losses, claims, damages or liabilities, joint
or several (or actions in respect thereof)
("Losses"), to which such indemnified party
may be subject under the Securities Act,
under any other statute or at common law, but
only to the extent such Losses arise out of
or are based upon (i) any untrue statement
(or alleged untrue statement) of any material
fact contained in (x) the registration
statement under which the HIE Shares held by
SVFII were registered under the Securities
Act or offered for sale, (y) any preliminary
prospectus (if used prior to the effective
date of such registration statement), or (z)
any final prospectus or any post-effective
amendment or supplement thereto (if used
during the period HIE is required to keep the
registration statement effective), in each
case, on the effective date of such
registration statement or post-effective
amendment, or the date of such prospectus,
including any preliminary prospectus, or
supplement (the "Disclosure Documents"), (ii)
any omission (or alleged omission) to state
therein a material fact required to be stated
therein or necessary to make the statements
made therein not misleading or (iii) any
violation by HIE of the Securities Act or any
applicable state securities laws ("Blue Sky
Laws"), or any rule or regulation promulgated
under the Securities Act or any Blue Sky Law,
or any other law applicable to HIE in
connection with the sale, registration or
qualification of the HIE Shares held by
SVFII; and HIE shall reimburse each such
indemnified party for any legal or other
expenses reasonably incurred by such party in
connection with investigating or defending
any such loss, claim, damage, liability or
action, whether or not resulting in any
liability, or in connection with any
investigation or proceeding by any
governmental agency or instrumentality
relating to any such claims with respect to
any offering of securities pursuant to this
Section 3, but excluding any amounts paid in
settlement of any action, suit, arbitration,
proceeding, litigation, or investigation
(collectively "Litigation"), commenced or
threatened, if such settlement is effected
without the prior written consent of HIE,
which consent shall not be unreasonably
withheld; provided, however, that HIE shall
not be
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<PAGE> 13
liable to SVFII, its general partner, any
underwriter, other selling agent or
controlling person in any such case to the
extent that any such Losses arise out of or
are based upon (i) an untrue statement or
omission or alleged omission (y) made in any
such Disclosure Documents in reliance upon
and in conformity with written information
furnished to HIE by or on behalf of such
indemnified party expressly for use in the
preparation thereof and so designated by such
indemnified party, or (z) made in any
preliminary prospectus if a copy of the final
prospectus was not delivered to the person
alleging any loss, claim, damage or liability
for which Losses arise at or prior to the
written confirmation of the sale of such HIE
Shares to such person and the untrue
statement or omission concerned had been
corrected in such final prospectus and copies
thereof had timely been delivered by HIE to
such indemnified party; or (ii) the use of
any prospectus after such time as HIE has
advised such indemnified party that the
filing of a post-effective amendment or
supplement thereto is required, except the
prospectus as so amended or supplemented, or
the use of any prospectus after such time as
the obligation of HIE to keep the same
current and effective has expired.
(B) In connection with the registration
or sale of HIE Shares pursuant to this
Section 3, SVFII shall, and shall cause any
underwriter retained by it who participates
in the offering to, indemnify and hold
harmless HIE, each of its directors, each of
its officers who have signed such
registration statement and each controlling
person of HIE (within the meaning of the
Securities Act), against any Losses, joint or
several, to which such indemnified party may
become subject under the Securities Act,
under any other statute or at common law, but
only to the extent such Losses arise out of
or are based upon (i) any untrue statement
(or alleged untrue statement) of any material
fact contained in any of the Disclosure
Documents or any omission or alleged omission
to state therein a material fact required to
be stated therein or necessary to make the
statements therein not misleading, if the
statement or omission was made in reliance
upon and in conformity with written
information furnished to HIE by or on behalf
of such indemnifying party expressly for use
in the preparation thereof and so designated
by such indemnifying party; (ii) the use by
such indemnifying party of any prospectus
after such time as HIE has advised such
indemnifying party that the filing of a
post-effective amendment or supplement
thereto is required, except the prospectus as
so amended or supplemented, or after such
time as the obligation of HIE to keep the
registration statement effective and current
has expired, or (iii) any information given
or
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<PAGE> 14
representation made by such indemnifying
party in connection with the sale of HIE
Shares which is not contained in and not in
conformity with the prospectus (as amended or
supplemented at the time of the giving of
such information or making of such
representation); and such indemnifying party
shall reimburse each such indemnified party
for any legal and other expenses reasonably
incurred by such party in investigating or
defending any such loss, claim, damage,
liability or action, whether or not resulting
in any liability, or in connection with any
investigation or proceeding by any
governmental agency or instrumentality
relating to any such claims with respect to
any offering of securities pursuant to this
Section 3, but excluding any amounts paid in
settlement of any Litigation, commenced or
threatened, if such settlement is effected
without the prior written consent of such
indemnifying party, which consent shall not
be unreasonably withheld.
(d) Permitted Transfers. The rights of SVFII under this
Section 3 may be transferred or assigned by SVFII to any partner in SVFII,
provided that HIE is given written notice at the time of or within a reasonable
time after said transfer or assignment, of the name and address of the
transferee or assignee and identifying the securities with respect to which
such rights are to be transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes the obligations of SVFII under
this Section 3. In any event, such rights may be transferred only in
connection with a transfer of the HIE Shares subject to such rights. HIE
agrees that it shall be obligated to each partner in SVFII hereunder to the
same extent that HIE is obligated to SVFII provided that each such partner
assumes all obligations of SVFII hereunder to HIE.
4. Representations, Warranties and Agreements of HIE. HIE hereby
represents and warrants to, and agrees with, SVFII that:
(a) HIE is a corporation duly organized, validly existing and in
good standing under the laws of the State of Georgia, and has the corporate
power to own and operate its properties, to carry on its business as now
conducted and to enter into and to perform its obligations under this
Agreement.
(b) HIE has full legal right, power and authority to enter into
this Agreement and the HIE Warrant and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the performance by HIE of its obligations hereunder and under each
instrument and under the transactions contemplated hereby are within the
corporate powers of HIE and have been duly authorized by all necessary
corporate action properly taken, and do not and will not contravene or conflict
with the articles of incorporation or by-laws of HIE or any material agreement
binding upon HIE or its properties or, to the knowledge of HIE, any material
provision of law or any applicable material judgment, ordinance, regulation or
order of any court or governmental agency.
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<PAGE> 15
(c) This Agreement and the HIE Warrant are the legal, valid and
binding obligations of HIE, enforceable against it in accordance with their
respective terms except as such enforceability may be limited by bankruptcy or
similar laws affecting the rights of creditors generally and by the
availability of equitable remedies.
(d) The shares of HIE Common Stock to be issued upon exercise of
the HIE Warrant will, upon issuance and payment therefor, be legally and
validly issued and outstanding, fully paid and nonassessable. HIE shall at all
times reserve and keep available for issuance upon the exercise of the HIE
Warrant such number of authorized shares of HIE Common Stock as will be
sufficient to permit the exercise in full of the HIE Warrant. HIE covenants
and agrees that all shares of HIE Common Stock which may be issued to SVFII
upon exercise of the Option will, upon issuance and delivery against transfer
of the consideration therefor, be legally and validly issued and outstanding,
fully paid and nonassessable.
(e) No consent, waiver, approval or other authorization and filing
or registration with any private or public authority is required for the
execution, delivery and performance by HIE of this Agreement or the
consummation by HIE of the transactions contemplated hereby, except such as may
be required under the Securities Act or any applicable Blue Sky Laws, and, with
respect to the consummation of the Option exercise, such as have been obtained
under the Consent, subject to the satisfaction of the conditions set forth
therein.
(f) HIE has been subject to the reporting requirements of Section
12 or 15(d) of the Exchange Act since October 31, 1995, has filed with the
Commission all the material required to be filed pursuant to Section 13, 14 or
15(d) of the Exchange Act since January 1, 1996, and has filed in a timely
manner with the Commission all reports required to be filed since January 1,
1996. HIE has furnished SVFII with true and complete copies of (i) HIE's
annual report on Form 10-K (including exhibits) filed with the Commission for
the fiscal year ended December 31, 1995, (ii) each of HIE's quarterly reports
on Form 10-Q (including exhibits) filed with the Commission for each of the
fiscal quarters since January 1, 1996, and (iii) HIE's proxy statement dated
April 29, 1996 in connection with the annual meeting of stockholders held on
May 21, 1996 (the reports referred to in clauses (i) and (ii) being the "HIE
Reports"). HIE is a registrant eligible to use Form S-3 under the Securities
Act for transactions involving secondary offerings. All of the financial
statements of HIE included within the HIE Reports were prepared in accordance
with generally accepted accounting principles ("GAAP") and fairly present the
consolidated financial position of HIE and the consolidated results of
operations and changes in financial position or cash flows for HIE at the dates
and for the periods referred to therein in conformity with GAAP applied on a
consistent basis throughout the periods involved. As of their respective
dates, the HIE Reports referred to herein complied as to form in all material
respects with all rules and regulations promulgated by the Commission.
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<PAGE> 16
5. Representations, Warranties and Agreements of SVFII. SVFII hereby
represents and warrants to, and agrees with, HIE that:
(a) SVFII is a limited partnership duly organized and validly
existing and in good standing under the laws of its jurisdiction of
organization.
(b) SVFII has full power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby, and has taken
all action necessary for the due execution and delivery of this Agreement and
has duly executed and delivered this Agreement. This Agreement constitutes
SVFII's legal, valid and binding obligation enforceable against SVFII in
accordance with its terms, except as such enforceability may be limited by
bankruptcy or similar laws affecting the rights of creditors generally and by
the availability of equitable remedies and will not contravene or conflict with
the partnership agreement or certificate of partnership of SVFII or any
material agreement binding upon SVFII or its properties or, to the knowledge of
SVFII, any material provision of law or any applicable material judgment,
ordinance, regulation or order of any court or governmental agency.
(c) SVFII has good, valid and marketable title, beneficially and
of record, to the SVFII Criterion Stock and the SVFII Criterion Debenture, free
and clear of any and all restrictions, claims, pledges, liens, charges,
security interests and other encumbrances (collectively "Liens"), and, at the
Option Closing, will transfer to HIE good, valid and marketable title thereto
free and clear of all Liens. The SVFII Criterion Common Stock and the SVFII
Criterion Debenture represent, and on the Option Closing Date will represent,
all of SVFII's interest in the Company.
(d) No consent, waiver, approval or other authorization and filing
or registration with any private or public authority is required for the
execution, delivery and performance by SVFII of this Agreement or the
consummation by SVFII of the transactions contemplated hereby, except such as
have been obtained under the Consent, subject to the satisfaction of the
conditions set forth therein.
(e) With respect to the Warrant:
(i) SVFII is an "accredited investor" as that term is
defined in Regulation D promulgated under the Securities Act
and is acquiring the Warrant and will acquire any HIE Common
Stock issuable upon exercise of the Warrant for its own
account for investment and not with a view to the resale or
distribution of all or any part thereof, except in accordance
with applicable federal and state securities laws. Upon
exercise of the Warrant, this representation shall be deemed
to have been given with respect to the HIE Common Stock
received. SVFII recognizes that it must bear the economic
risk of the investment for an indefinite period.
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<PAGE> 17
(ii) SVFII has been given the opportunity to ask HIE and
its officers and directors questions relating to HIE and has
had access to such financial and other information concerning
HIE as it has considered necessary to make a decision to
invest in the Warrant and the HIE Common Stock for which the
Warrant is exercisable and has availed itself of that
opportunity to the full extent desired.
(iii) SVFII understands that the Warrant and the shares of
HIE Common Stock issuable upon exercise of the Warrant have
not been registered under the Securities Act or any state
securities laws and are being offered pursuant to certain
exemptions under the Securities Act for transactions by an
issuer not involving any public offering and similar
exemptions under applicable state securities laws, and, except
as provided in Section 6 of the Warrant, HIE has no obligation
to register any of such securities for resale by SVFII.
(iv) SVFII agrees that it will not sell, transfer or
otherwise distribute the Warrant or the HIE Common Stock
issuable upon exercise of the Warrant, except pursuant to a
registered offering or in one or more private transactions if,
in the opinion of counsel to SVFII reasonably satisfactory to
HIE, such transaction or transactions are not required to be
registered under the Securities Act or any applicable state
securities laws.
6. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia. Whenever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining
provisions of this Agreement.
(b) Successor and Assigns. This Agreement shall inure to the
benefit and shall be binding upon the parties, their legal representatives and
permitted assigns, subject to the limitations otherwise set forth in this
Agreement.
(c) Counterparts. For the convenience of the parties, any number
of counterparts of this Agreement may be executed and all such counterparts or
facsimile copy thereof shall be deemed to be an original instrument.
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<PAGE> 18
(d) Notices. Any notice or other communication by any party
hereto to the other parties shall be in writing and shall be given, and be
deemed to have been given, if either delivered personally, by overnight
delivery service or mail, postage prepaid, registered or certified mail, return
receipt requested, addressed as follows:
(i) to HIE: Healthdyne Information
Enterprises, Inc.
1850 Parkway Place, 11th Floor
Marietta, Georgia 30067
Telephone: (770) 423-8450
Facsimile: (770) 423-8440
Attention: President and CEO
(ii) to SVFII: The Southern Venture Fund II, L.P.
310 25th Avenue North, Suite 103
Nashville, Tennessee 37203
Telephone: (615) 329-9448
Facsimile: (615) 329-9237
Attention: General Partner
(iii) to the Company: Criterion Health Strategies, Inc.
215 Second Avenue North, Suite 200
Nashville, Tennessee 37201
Telephone: (615) 259-3363
Facsimile: (615) 259-2877
Attention: President and CEO
Any party may change the address for notice by notifying the other parties in
writing of the new address.
(e) Specific Performance. The parties hereto acknowledge and
agree that the benefits to them under this Agreement are unique, that they are
willing to enter into this Agreement only upon performance by each other of all
of their obligations hereunder and that they will not have an adequate remedy
at law if the other fails to perform any of its obligations hereunder.
Accordingly, the parties hereby agree that each shall have the right, in
addition to any other rights or remedies it may have at law or in equity, to
specific performance or equitable relief by way of injunction if the other
party fails to perform any of its obligations hereunder.
(f) Modification or Waiver. No change, modification or waiver of
any term of this Agreement shall be valid or binding upon the parties hereto
unless such change, modification or waiver shall be in writing signed by all
parties hereto.
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<PAGE> 19
(g) Headings. The headings and captions used in this Agreement
are used for convenience of reference only and shall not be considered in
construing or interpreting this Agreement. All references in this Agreement to
sections, paragraphs and exhibits shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits attached hereto, all of which are
incorporated herein by this reference.
(h) Entire Agreement. This Agreement and the other instruments
specified herein constitute the entire understanding and agreement of the
parties hereto with respect to the subject matter hereof and supersede all
prior discussions, understandings and agreements with respect thereto.
[SIGNATURES ON NEXT PAGE]
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IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement on the date first above written.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
By: /s/ Joseph G. Bleser
--------------------
Name: Joseph G. Bleser
Title: Vice President and Chief
Financial Officer
THE SOUTHERN VENTURE FUND II, L.P.
By: Its General Partner
SV Partners II, L.P.
By: /s/ Benjamin H. Gray
-----------------------------
Name: Benjamin H. Gray
A General Partner
Each of Criterion Health Strategies, Inc., Brenton L. Teveit and J. Edward
Pearson, Jr. executes this Agreement solely for the purpose of (a)
acknowledging that HIE and SVFII have advised each of them of this Agreement,
and (b) the closing deliveries contemplated to be made by each of them under
Section 2 hereof.
Criterion Health Strategies, Inc.
By: /s/ J. Edward Pearson, Jr.
---------------------------
Name: J. Edward Pearson, Jr.
Title: Executive Vice President and
Chief Financial Officer
/s/ Brenton L. Teveit
---------------------------
Brenton L. Teveit
/s/ J. Edward Pearson, Jr.
---------------------------
J. Edward Pearson, Jr.
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<PAGE> 21
EXHIBIT A
Warrant No. S-1
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED, SOLD, OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT (the "Warrant") is issued this 18th day of
December, 1996, by HEALTHDYNE INFORMATION ENTERPRISES, INC., a Georgia
corporation (the "Company"), to THE SOUTHERN VENTURE FUND II, L.P., a Delaware
limited partnership ("SVFII," which, together with any assignee or transferee
hereinafter referred to collectively as "Holder" or "Holders").
1. Issuance of Warrant. For and in consideration of the grant by SVFII to
the Company of an option to purchase all of the securities of Criterion Health
Strategies, Inc., a Tennessee corporation, held by SVFII pursuant to the terms
and conditions of that certain Option Agreement between SVFII and the Company
dated the date hereof, the Company hereby grants to Holder the right to
purchase 50,000 shares of the Company's common stock, $.01 par value per share
(the "Common Stock"), at the purchase price per share (the "Exercise Price")
set forth herein. The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Warrant Shares." The number of
Warrant Shares and the Exercise Price are subject to adjustment as provided in
Section 9 below.
2. Term. Subject to the terms and conditions set forth herein, this
Warrant shall be exercisable in whole or in part at any time and from time to
time from the date hereof until 5:00 p.m. Atlanta, Georgia time on December 13,
2003 (the "Expiration Date") and shall be void thereafter.
3. Price. The Exercise Price per share for which the Warrant Shares may
be purchased pursuant to the terms of this Warrant shall be $_____ per share,
as adjusted from time to time pursuant to Section 9 hereof.
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<PAGE> 22
4. Exercise.
(a) This Warrant may be exercised by the Holder hereof (but only on
the conditions hereinafter set forth) as to part or all of the Warrant
Shares by surrender of this Warrant and the Notice of Exercise attached hereto
as Exhibit A, duly completed and executed on behalf of the Holder, at the
office of the Company, 1850 Parkway Place, 11th Floor, Marietta, Georgia 30067,
or at such other address as the Company shall designate in a written notice to
the Holder hereof, together with a check acceptable and payable to the Company
in the amount of the Exercise Price times the number of Warrant Shares being
purchased.
(b) In lieu of exercising the Warrant by payment of the Exercise
Price in cash pursuant to Section 4(a) above, the Holder shall have the
right to require the Company to convert the Warrant, in whole or in part and at
any time or times (the "Conversion Right"), into Warrant Shares, by surrender
to the Company of this Warrant and the Notice of Exercise attached hereto, duly
completed and executed by the Holder to evidence the exercise of the Conversion
Right. Upon exercise of the Conversion Right, the Company shall deliver to the
Holder a certificate(s) representing that number of Warrant Shares which is
equal to the quotient obtained by dividing (x) the value of the number of
Warrants being converted at the date the Conversion Right is exercised
(determined by subtracting (A) the aggregate Exercise Price for all such
Warrants immediately prior to the exercise of the Conversion Right from (B) the
aggregate Fair Market Value (determined on the basis of the Fair Market Value
per share of Common Stock multiplied by that number of Warrant Shares
purchasable upon exercise of such Warrants immediately prior to the exercise of
the Conversion Right)), by (y) the Fair Market Value per share of Common Stock
on the date of exercise of the Conversion Right. For purposes of this
calculation, the Fair Market Value per share of Common Stock shall be (i) if a
public market for the Company's Common Stock exists at the time of such
exercise, the average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary or the last reported sales price
of the Common Stock or the closing price quoted on the Nasdaq National Market
or on any exchange on which the Common Stock is listed, whichever is
applicable, as published in The Wall Street Journal for the five (5) trading
days prior to the date of determination of Fair Market Value; or (ii) if there
is no public market for the Company's Common Stock, determined by the Company's
Board of Directors in good faith. Any references in this Warrant to the
"exercise" of any Warrants, and the use of the term "exercise" herein, shall be
deemed to include (without limitation) any exercise of the Conversion Right.
(c) Upon exercise of this Warrant as aforesaid, the person entitled
to receive the Warrant Shares issuable upon such exercise shall be
treated for all purposes as the holder of record of such shares as of the close
of business on the date of exercise. As promptly as practicable on or after
such date, and in any event within ten (10) days thereafter, the Company shall
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Warrant Shares for which this Warrant is being
exercised (net of any Warrant Shares applied upon exercise of the Conversion
Right), in such names and denominations as are requested by such Holder. If
this Warrant shall be exercised with respect to less than all of the
Warrant Shares, the Company, at its expense, will issue to the Holder a new
Warrant covering
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<PAGE> 23
the number of Warrant Shares with respect to which this Warrant shall
not have been exercised, which new Warrant shall be identical to this Warrant
except for the number of shares remaining subject to the Warrant. If, upon
exercise of this Warrant, the Holder would be entitled to acquire a fractional
share of the Company's Common Stock, such fractional share shall be disregarded
and the number of shares subject to this Warrant shall be rounded down to the
next lower number of shares and the Holder shall be entitled to receive from
the Company a cash payment equal to the product of the per share Exercise Price
multiplied by such fraction rounded to the nearest penny.
(d) The Company will pay all documentary stamp taxes attributable
to the initial issuance of Warrant Shares upon the exercise of this
Warrant, provided that such certificates for such Warrant Shares are issued in
the name of SVFII or in the name of any partner of SVFII. The Company shall
not be required to pay any tax or taxes which may be payable in respect of any
other transfer involved in the issue of any certificates for Warrant Shares and
the Company shall not be required to issue or deliver such certificates for
Warrant Shares unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
5. Covenants and Conditions. The above provisions are subject to the
following:
(a) The Holder of this Warrant and any transferee hereof or of the
Warrant Shares issuable upon exercise of this Warrant, by their
acceptance hereof or thereof, hereby (i) acknowledge that this Warrant has
been, and any Warrant Shares issuable upon exercise hereof will be, acquired
for investment purposes and not with a view to distribution or resale and (ii)
understand and agree that this Warrant and the Warrant Shares issuable upon the
exercise hereof, have not been registered under the Securities Act or any
applicable state securities laws ("Blue Sky Laws"), and may not be sold,
pledged, hypothecated or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel reasonably satisfactory
to the Company that registration is not required under the Securities Act or
under any applicable Blue Sky Laws. Transfer of the Warrant Shares issued upon
the exercise of this Warrant shall be restricted in the same manner and to the
same extent as the Warrant. Each Warrant and each certificate representing
such Warrant Shares shall bear substantially the following legend (with such
changes therein as may be appropriate to reflect whether such legend refers to
a Warrant or Warrant Shares):
THE WARRANT AND SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
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<PAGE> 24
REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
(b) The Holder and the Company agree to execute such documents and
instruments as counsel for the Company reasonably deems necessary to effect the
compliance of the issuance of the Warrant and any Warrant Shares with
applicable federal and state securities laws, including compliance with
applicable exemptions from the registration requirements of such laws.
(c) The Company covenants and agrees that all Warrant Shares which
may be issued upon exercise of this Warrant will, upon issuance and
payment therefor, be legally and validly issued and outstanding, fully paid and
nonassessable. The Company shall at all times reserve and keep available for
issuance upon the exercise of this Warrant such number of authorized shares of
Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
6. Registration Rights.
(a) Demand Rights.
(i) The Company agrees that if it receives from the Holder a
written request that the Company effect any registration with respect
to Warrant Shares on a shelf registration pursuant to Rule 415 of the
Securities and Exchange Commission (the "Commission"), the Company will as soon
as practicable use its best efforts to effect such registration (including,
without limitation, filing post-effective amendments, appropriate
qualifications under applicable Blue Sky Laws, and appropriate compliance with
the Securities Act) as would permit or facilitate the sale and distribution of
all or such portion of such Warrant Shares as are specified in such request.
Such shelf registration shall not be deemed to provide for an underwritten
offering of the Warrant Shares pursuant to such registration statement.
(ii) The Company shall only be required to effect one (1)
registration of Warrant Shares pursuant to this Section 6(a), and the
provisions of Section 6(c) below shall apply.
(iii) The Company, upon receipt of such request for
registration pursuant to Section 6(a)(i), will as promptly as
practicable prepare and file with the Commission a registration statement on
Form S-3 or on such other form as the Company determines in its sole discretion
to be available and appropriate for the registration under the Securities Act
of a secondary public offering. The Company shall use reasonable efforts to
keep such registration statement current and continuously effective until the
earlier of (A) the date when all Warrant Shares covered by the registration
statement have been sold or (B) one year from the effective date of the
registration statement with respect to a shelf registration or (C) such time as
to which all of the Warrant Shares may be sold immediately by the Holder under
Rule 144 or any successor rule or regulation under the Securities Act.
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<PAGE> 25
(iv) Upon written notice to the Holder stating the reasons
therefor, the Company shall be entitled to postpone, for a reasonable
period of time not to exceed ninety (90) days, the filing of a registration
statement pursuant to this Section 6(a) if (A) such filing would occur prior to
ninety (90) days following the effective date of a registration statement
relating to an underwritten public offering of securities of the Company for
its own account, or (B) the Company would be required to undergo a special
interim audit in order to comply with such request, unless the Holder agrees to
bear the costs of such special interim audit, or (C) the Company determines, in
the good faith exercise of its reasonable business judgment, that such
registration and offering would materially interfere with bona fide financing,
acquisition or other plans of the Company or would require disclosure of
information, the premature disclosure of which would materially adversely
affect or otherwise be materially detrimental to the Company. If the Company
postpones the filing of the registration statement, it shall promptly notify
the Holder in writing when the events or circumstances permitting such
postponement have ended.
(b) Piggyback Registration.
(i) If the Company shall propose the registration under the
Securities Act of an offering of any of its capital stock to be sold
for cash, whether or not for its own account, pursuant to a firm commitment
underwritten offering (other than a registration relating to either (A) a
dividend reinvestment, employee stock option, stock purchase or similar plan,
(B) a transaction pursuant to Rule 145 under the Securities Act, or (C) a
merger, consolidation or reorganization), the Company, on each such occasion,
shall as promptly as practicable but in no event later than ten (10) days prior
to the proposed filing date of the registration statement give written notice
(the "Notice") to the Holder of its intention to effect such registration, and
the Holder shall be entitled, on each such occasion, to request to have all or
a portion of the Warrant Shares included in such registration statement. Upon
the written request of the Holder that the Company include any Warrant Shares
in such registration statement (which request shall state the number of Warrant
Shares for which registration is sought), given within ten (10) days after the
giving of the Company's Notice, the Company shall use its reasonable efforts to
cause such Warrant Shares to be so included in the offering covered by such
registration statement, subject to the limitations hereinafter set forth.
(ii) The registration of some or all of such Warrant Shares
pursuant to this Section 6(b)(i) may be conditioned or restricted if,
in the case of a registration statement which also includes shares to be sold
for the account of the Company in an underwritten offering, in the good faith
exercise of the reasonable business judgment of the managing underwriter of
such proposed offering, inclusion thereof in such registration statement will
have an adverse impact on the marketing of the securities to be offered by the
Company (provided that such conditions or restrictions apply on a proportional
basis not only to the Warrant Shares but also to all other securities to be
included other than those to be offered for the Company's own account). If
such managing underwriter shall require that the number of Warrant Shares to be
offered by the Holder be reduced or eliminated, the Holder shall have the right
to withdraw its request for registration pursuant to this Section 6(b)(i).
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<PAGE> 26
(iii) The Company may, for any reason and without the consent
of the Holder determine at any time not to proceed with the
registration which is the subject of the Company's Notice and abandon the
proposed offering, whereupon the Company shall be relieved of any further
obligations hereunder to proceed with such registration or offering.
(c) Limitation of Registration Rights. The Company shall not be
obligated to honor any request by a Holder under Section 6(a) or 6(b)
if, in the opinion of counsel for the Company in form and substance reasonably
satisfactory to such Holder, such Holder could then sell under Rule 144
promulgated under the Securities Act, the number of Warrant Shares it proposes
to have registered in compliance with this Agreement.
(d) Registration Procedures. If and whenever the Company is
obligated by the provisions of this Section 6 to effect the
registration of any Warrant Shares under the Securities Act, the Company shall:
(i) Prepare and file with the Commission a registration
statement with respect to such securities on such form as the Company
deems appropriate and is permitted or qualified to use and shall use all
reasonable efforts to cause such registration statement to become and remain
effective as provided herein; provided, that in the case of any registration
pursuant to Section 6(b), such preparation and filing may be delayed in the
sole discretion of the Company, without prejudice to the rights of the Holder
pursuant to Section 6(a).
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to any such registration statement filed pursuant to
Section 6(a) as may be necessary to keep such registration statement effective
during the period referred to in Section 6(a)(iii) and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement, and cause the prospectus to
be supplemented by any required prospectus supplement, and as so supplemented
to be filed with the Commission pursuant to Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder at a reasonable time prior
to the filing thereof with the Commission a copy of the registration
statement in the form in which the Company proposes to file the same; not later
than one day prior to the filing thereof, a copy of any amendment (including
any post-effective amendment) to such registration statement; and promptly
following the effectiveness thereof, a conformed copy of the registration
statement as declared effective by the Commission and of each post-effective
amendment thereto, including financial statements and all exhibits and reports
incorporated therein by reference.
(iv) Furnish to the selling Holder of Warrant Shares such
number of copies of such registration statement, each amendment
thereto, the prospectus included in such registration statement (including each
preliminary prospectus), each supplement thereto and such other documents as
they may reasonably request in order to facilitate the disposition of the
Warrant Shares owned by them.
A-6
<PAGE> 27
(v) Use all reasonable efforts to register and qualify the
Warrant Shares covered by the registration statement under such other
securities laws of such jurisdictions as shall be reasonably requested by the
selling Holder of Warrant Shares and do any and all other acts and things which
may be reasonably necessary or advisable to enable the selling Holder to
consummate the disposition of the Warrant Shares owned by such Holder in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to transact business
or to file a general consent to service of process in any such states or
jurisdictions, or to maintain the effectiveness of any such registration or
qualification for any period during which it is not required to maintain the
effectiveness of the related registration statement under the Securities Act as
set forth in Section 6(a)(iii).
(vi) Promptly notify each selling Holder of Warrant Shares of
the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading and,
at the request of any such Holder, and subject to the further provisions of
Section 6(f)(ii), the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Warrant
Shares, such prospectus will not contain an untrue statement of a material fact
or omit to state any fact necessary to make the statements therein not
misleading.
(vii) Enter into such customary agreements in form and
substance reasonably satisfactory to the Company and take such other
customary actions as may be reasonably requested in order to expedite or
facilitate the disposition of such Warrant Shares.
(viii) Make reasonably available for inspection by any selling
Holder of Warrant Shares pursuant to such registration statement and
any attorney or accountant retained by such selling Holder, all financial and
other records, pertinent corporate documents and properties of the Company, and
use all reasonable efforts to cause the officers, directors, employees and
independent accountants of the Company to supply all information reasonably
requested by any such seller, attorney or accountant in connection with such
registration statement, in each case as and to the extent necessary to permit
the selling Holder to conduct a reasonable investigation within the meaning of
the Securities Act. To minimize disruption and expense to the Company during
the course of the registration process, all prospective selling Holders shall,
to the extent practicable, coordinate their investigation and due diligence
efforts hereunder and, to the extent practicable, will act through a single set
of counsel and a single set of accountants and will enter into confidentiality
agreements with the Company in form and substance reasonably satisfactory to
the Company and such Holders prior to receiving any confidential or proprietary
information of the Company.
(ix) Promptly notify the selling Holder of Warrant Shares of
the following events and (if requested by any such person) confirm such
notification in writing: (A) the filing of the prospectus or any prospectus
supplement and the registration statement and any amendment or post-effective
amendment thereto and, with respect to the registration statement or any
post-effective amendment thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments or supplements to
the
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<PAGE> 28
registration statement or the prospectus or for additional information,
(C) the issuance or threat of issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or the initiation of
any proceedings for that purpose, and (D) the receipt by the Company of any
notification with respect to the suspension of the qualification of the Warrant
Shares for sale in any jurisdiction or the initiation or threat of initiation
of any proceeding for such purpose.
(x) Cooperate with the selling Holder of Warrant Shares to
facilitate the timely preparation and delivery of certificates
representing the Warrant Shares to be sold and not bearing any restrictive
legends, and enable such Warrant Shares to be in such lots and registered in
such names as the selling Holder may request at least two (2) business days
prior to any delivery of the Warrant Shares to the purchaser.
(xi) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering pursuant to Section 6(b) hereof, (A) make such
representations and warranties to the selling Holder of Warrant Shares and the
underwriters, if any, with respect to the Warrant Shares and the registration
statement as are customarily made by issuers in similar underwritten offerings;
(B) use its best efforts to obtain "cold comfort" letters and updates thereof
from the Company's independent certified public accountants addressed to the
selling Holder of Warrant Shares and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with similar underwritten
offerings; (C) deliver such documents and certificates as may be reasonably
requested (1) by the Holders of a majority of the Warrant Shares being sold,
and (2) by the underwriters, if any, to evidence compliance with clause (A)
above and with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company; and (D) obtain opinions of
counsel to the Company (which counsel and which opinions shall be reasonably
satisfactory to the underwriters, if any), covering the matters customarily
covered in opinions requested in underwritten offerings. Such counsel shall
also state that no facts have come to the attention of such counsel which cause
them to believe that such registration statement, the prospectus contained
therein, or any amendment or supplement thereto, as of their respective
effective or issue dates, contains any untrue statement of any material fact or
omits to state any material fact necessary to make the statements therein not
misleading (except that no statement need be made with respect to any financial
statements, notes thereto or other financial data or other expertized material
contained therein or as to any information furnished by or on behalf of the
selling Holder or underwriters, if any, for inclusion in such registration
statement).
(xii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act, no later than forty-five
(45) days after the end of any twelve-month period (or ninety (90) days, if
such period is a fiscal year) beginning with the first month of the fiscal
quarter of the Company commencing after the effective date of the registration
statement, which statements shall cover such twelve-month periods.
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<PAGE> 29
(e) The Company's obligations with this Section 6 shall be expressly
conditioned upon Holder's compliance with the following:
(i) The selling Holder shall cooperate with the Company in
connection with the preparation of a registration statement with
respect to or including any Warrant Shares, and for so long as the Company is
obligated to keep the registration statement effective, shall provide to the
Company, in writing, for use in the registration statement, all such
information regarding the Holder and its plan of distribution of the Warrant
Shares as may be necessary to enable the Company to prepare the registration
statement and prospectus covering the Warrant Shares, to maintain the currency
and effectiveness thereof and otherwise to comply with all applicable
requirements of law in connection therewith.
(ii) During such time as the selling Holder may be engaged in a
distribution of the Warrant Shares, the Holder shall comply with Rules 10b-6
and 10b-7 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and pursuant thereto, shall, among other things: (w) not
engage in any stabilization activity in connection with the securities of the
Company in contravention of such Rules; (x) distribute the Warrant Shares
solely in the manner described in the registration statement; (y) cause to be
furnished to each broker through whom the Warrant Shares may be offered, or to
the offeree if an offer is not made through a broker, such copies of the
prospectus and any amendment or supplement thereto and documents incorporated
by reference therein as may be required by law; and (z) not bid for or purchase
any securities of the Company or attempt to induce any person to purchase any
securities of the Company other than as permitted under the Exchange Act.
(f) Holdback Agreements.
(i) Notwithstanding any provision of this Agreement to the
contrary, in the event the Company notifies the Holder, in writing and
no later than 10 days prior to the proposed filing date, that the Company
intends to file a registration statement in connection with an underwritten
offering of any of its capital stock, the Holder shall refrain from selling or
otherwise distributing, except in accordance with the provisions of Section
6(b) hereof, any Warrant Shares within the period beginning up to seven days
prior to the effective date of such registration statement (or on such later
date that the Company notifies the Holder, in writing, that such period has
begun) and ending up to 90 days after such effective date (or on such earlier
date that the Company notifies the Holder that such period has ended) (the
"Offering Restricted Period"). In the event the Holder's Warrant Shares are
not included in such a registered underwritten offering pursuant to Section
6(b) hereof, the Company's obligation under Section 6(a)(iii) to keep the
registration statement filed pursuant to Section 6(a) current and effective
shall be extended for a number of days equal to the Offering Restricted Period,
or, if earlier, until the date on which all of the Warrant Shares have been
disposed of.
(ii) Notwithstanding anything set forth herein to the contrary,
the Holder agrees that it will give the Company prior oral notice,
directed to its Chief Executive Officer or its Chief Financial Officer,
confirmed immediately in writing by facsimile
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<PAGE> 30
transmission, of its intention to sell any Warrant Shares under the
shelf registration statement, which notice shall be given not less than two (2)
days in advance of any such proposed sale. In the event that the Company
thereafter informs the Holder, within one (1) day of its receipt of such
notice, that, in the good faith exercise of its reasonable business judgment,
there exist bona fide financing, acquisition or other plans of the Company or
other matters which could require disclosure by the Company of information, the
premature disclosure of any of which would materially adversely affect or
otherwise be materially detrimental to the Company, the Holder shall refrain
from selling the Warrant Shares until the earlier to occur of the date (x) the
Company notifies the Holder that it has filed with the Commission an amendment
or supplement to the prospectus included in the shelf registration statement,
(y) the Company notifies the Holder that the potentially disclosable event no
longer exists and that the prospectus included in the shelf registration
statement does not contain an untrue statement of material fact or omit to
state any fact necessary to make the statements therein not misleading, or (z)
which is 90 days after the date that the Holder orally notified the Company of
its intention to sell any Warrant Shares (each of which is a "Disclosure
Restricted Period"). The Company's obligation under Section 6(a)(iii) to keep
the registration statement filed pursuant to Section 6(a) current and effective
shall be extended for a number of days equal to the Disclosure Restricted
period, or, if earlier, until the date on which all of the Warrant Shares have
been disposed of.
(g) Expenses. The Company shall bear the expenses of registration
pursuant to this Section 6; provided, however, that the selling Holder
shall be responsible for (x) the fees and expenses of its own counsel, its own
accountants and other experts retained by it with respect to such registration
and resales and (y) all underwriting discounts or brokerage fees or commissions
relating to the sale of the Warrant Shares pursuant to Section 6(b).
(h) Indemnification.
(i) The Company shall indemnify and hold harmless the selling
Holder, its general partner, each underwriter (as defined in the
Securities Act), each other selling agent who may be deemed to be an
underwriter, and each controlling person of the selling Holder, any underwriter
or other selling agent, if any (within the meaning of the Securities Act),
against any losses, claims, damages or liabilities, joint or several (or
actions in respect thereof) ("Losses"), to which such indemnified party may be
subject under the Securities Act, under any other statute or at common law, but
only to the extent such Losses arise out of or are based upon (i) any untrue
statement (or alleged untrue statement) of any material fact contained in (x)
the registration statement under which the Warrant Shares held by the Holder
were registered under the Securities Act or offered for sale, (y) any
preliminary prospectus (if used prior to the effective date of such
registration statement), or (z) any final prospectus or any post-effective
amendment or supplement thereto (if used during the period the Company is
required to keep the registration statement effective), in each case, on the
effective date of such registration statement or post-effective amendment, or
the date of such prospectus, including any preliminary prospectus, or
supplement (the "Disclosure Documents"), (ii) any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading or (iii) any
violation by the Company of the Securities Act or any Blue Sky Law, or any rule
or regulation promulgated under the Securities Act or any Blue Sky Law, or any
other
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<PAGE> 31
law, applicable to the Company in connection with the sale,
registration or qualification of the Warrant Shares held by the Holder; and the
Company shall reimburse each such indemnified party for any legal or other
expenses reasonably incurred by such party in connection with investigating or
defending any such loss, claim, damage, liability or action, whether or not
resulting in any liability, or in connection with any investigation or
proceeding by any governmental agency or instrumentality relating to any such
claims with respect to any offering of securities pursuant to this Section 6,
but excluding any amounts paid in settlement of any action, suit, arbitration,
proceeding, litigation, or investigation (collectively "Litigation"), commenced
or threatened, if such settlement is effected without the prior written consent
of the Company, which consent shall not be unreasonably withheld; provided,
however, that the Company shall not be liable to the Holder, its general
partner, any underwriter, other selling agent or controlling person in any such
case to the extent that any such Losses arise out of or are based upon (i) an
untrue statement or omission or alleged omission (y) made in any such
Disclosure Documents in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such indemnified party
expressly for use in the preparation thereof and so designated by such
indemnified party, or (z) made in any preliminary prospectus if a copy of the
final prospectus was not delivered to the person alleging any loss, claim,
damage or liability for which Losses arise at or prior to the written
confirmation of the sale of such Warrant Shares to such person and the untrue
statement or omission concerned had been corrected in such final prospectus and
copies thereof had timely been delivered by the Company to such indemnified
party; or (ii) the use of any prospectus after such time as the Company has
advised such indemnified party that the filing of a post-effective amendment or
supplement thereto is required, except the prospectus as so amended or
supplemented, or the use of any prospectus after such time as the obligation of
the Company to keep the same current and effective has expired.
(ii) In connection with the registration or sale of Warrant
Shares pursuant to this Section 6, the Holder shall indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed such registration statement and each controlling person of the Company
(within the meaning of the Securities Act), against any Losses, joint or
several, to which such indemnified party may become subject under the
Securities Act, under any other statute or at common law, but only to the
extent such Losses arise out of or are based upon (i) any untrue statement (or
alleged untrue statement) of any material fact contained in any of the
Disclosure Documents or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such indemnifying party expressly for use in the preparation thereof
and so designated by such indemnifying party; (ii) the use by such indemnifying
party of any prospectus after such time as the Company has advised such
indemnifying party that the filing of a post-effective amendment or supplement
thereto is required, except the prospectus as so amended or supplemented, or
after such time as the obligation of the Company to keep the registration
statement effective and current has expired, or (iii) any information given or
representation made by such indemnifying party in connection with the sale of
Warrant Shares which is not contained in and not in conformity with the
prospectus (as amended or supplemented at the time of the giving of such
information or making of such
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<PAGE> 32
representation); and such indemnifying party shall reimburse each such
indemnified party for any legal and other expenses reasonably incurred by such
party in investigating or defending any such loss, claim, damage, liability or
action, whether or not resulting in any liability, or in connection with any
investigation or proceeding by any governmental agency or instrumentality
relating to any such claims with respect to any offering of securities pursuant
to this Section 6, but excluding any amounts paid in settlement of any
Litigation, commenced or threatened, if such settlement is effected without the
prior written consent of such indemnifying party, which consent shall not be
unreasonably withheld.
7. Transfer of Warrants. Subject to the provisions of Section 5,
this Warrant may be transferred, in whole or in part, to any partner in
SVFII, by presentation of the Warrant to the Company with written instructions
for such transfer and by the execution by such transferee of an investment
letter in a form reasonably satisfactory to the Company. Upon such
presentations for transfer and receipt of such investment letter, the Company
shall promptly execute and deliver a new Warrant or Warrants in the form hereof
in the name of the assignee or assignees and in the denominations specified in
such instructions. The Company shall pay all expenses in connection with the
preparation, issuance and delivery of Warrants under this Section 7.
8. Warrant Holder Not Shareholder. This Warrant does not confer
upon the Holder, as such, any right whatsoever as a shareholder of the
Company.
9. Adjustment Upon Changes in Company Common Stock. The number of
shares of Common Stock subject to this Warrant and the Exercise Price
per share of such shares shall be adjusted by the Company proportionately to
reflect changes in the capitalization of the Company as a result of any
recapitalization, reclassification, stock dividend, stock split, combination of
shares, exchange of shares or any other change in the Company's capital
structure which affects holders of Common Stock generally. All adjustments
described herein shall be reflected on the Company's stock warrant ledger and
the Holder shall receive written notice thereof.
10. Merger, Sale of Assets, etc. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired, there
shall be (a) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for in Section 9 hereof),
(b) a merger or consolidation of the Company with or into another corporation
in which the Company is not the surviving entity, or a reverse triangular
merger in which the Company is the surviving entity but the shares of the
Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (c) a sale or transfer of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or
transfer, lawful provision shall be made so that the holder of this Warrant
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Exercise Price then in
effect, the number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
exercise of this Warrant would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Warrant had
been exercised
A-12
<PAGE> 33
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment for other future events as provided
in Section 9. The foregoing provision of this Section 10 shall similarly apply
to successive reorganizations, consolidations, mergers, sales and transfers and
to the stock or securities of any other corporation that are at the time
receivable upon the exercise of this Warrant. If the per share consideration
payable to the holder hereof for shares in connection with any such transaction
is in a form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors. In all events, appropriate adjustments (as determined in good faith
by the Company's Board of Directors) shall be made in the application of the
provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applied after that event, as nearly as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
11. Notice of Certain Events. In case:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive any dividend
or other distribution, or any right to subscribe for or purchase any shares of
capital stock of any class, or to receive any other rights; or
(b) of any capital reorganization, any reclassification of
shares of capital stock of the Company (other than a subdivision or
combination of outstanding shares of Common Stock to which Section 9 applies),
or any consolidation or merger of the Company or the sale or transfer of all or
substantially all of the assets of the Company; or
(c) of any voluntary dissolution, liquidation, or winding up
of the Company;
then the Company shall mail (at least ten (10) days prior to the applicable
date referred to in subclause (x) or in subclause (y) below, as the case may
be), to the Holder at the address set forth in the Company's stock records, a
notice stating that (x) the date on which a record is to be taken for the
purpose of such dividend, distribution or rights or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined, or (y)
the date on which such reclassification, capital reorganization, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and, if applicable, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, capital reorganization, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
A-13
<PAGE> 34
IN WITNESS WHEREOF, Healthdyne Information Enterprises, Inc. has caused
this Warrant to be executed by its duly authorized officer on the date first
above written.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
By:
-------------------------------------
Name: Joseph G. Bleser
Title: Vice President and Chief
Financial Officer
Accepted:
THE SOUTHERN VENTURE FUND II, L.P.
By: Its General Partner
SV Partners II, L.P.
By:
----------------------------
Name: Benjamin H. Gray
A General Partner
A-14
<PAGE> 35
EXHIBIT A
NOTICE OF EXERCISE
To: HEALTHDYNE INFORMATION ENTERPRISES, INC.
The undersigned, the holder of the foregoing Warrant No. S-1, and pursuant
to the terms hereof, hereby elects to exercise rights represented by said
Warrant for, and to purchase thereunder, _________ shares of the Company's
Common Stock covered by said Warrant, and tenders herewith payment of the
purchase price in full for such shares of $__________ by:
_____ (a) cash, through the delivery of a certified or official bank
check; or
_____ (b) exercising the Conversion Right provided under Section 4(b) of
the Warrant by the surrender of said Warrant.
The undersigned hereby requests that certificates for such shares (or any
other securities or other property issuable upon such exercise) be issued in
the name of and delivered to the undersigned at the address set forth below.
-------------------------------
Name
Date: -------------------------------
---------- Signature
Address:
-------------------------------
-------------------------------
-------------------------------
<PAGE> 36
EXHIBIT B
FORM OF OPINION OF COUNSEL TO
HEALTHDYNE INFORMATION ENTERPRISES, INC. ("HIE")
1. HIE was incorporated and is validity existing as a corporation in good
standing under the laws of the State of Georgia.
2. The [416,666] shares of common stock, $.01 par value per share, of HIE
(the "HIE Shares"), [to be delivered to SFVII] have been duly authorized for
issuance and sale pursuant to the Option Agreement and, when issued and
delivered against payment of the consideration therefor as provided in the
Option Agreement, will be validly issued, fully paid and nonassessable.
<PAGE> 1
EXHIBIT 10.17
Warrant No. S-1
THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE
OFFERED, SOLD, OR TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT (the "Warrant") is issued this 18th day of
December, 1996, by HEALTHDYNE INFORMATION ENTERPRISES, INC., a Georgia
corporation (the "Company"), to THE SOUTHERN VENTURE FUND II, L.P., a Delaware
limited partnership ("SVFII," which, together with any assignee or transferee
hereinafter referred to collectively as "Holder" or "Holders").
1. Issuance of Warrant. For and in consideration of the grant by SVFII to
the Company of an option to purchase all of the securities of Criterion Health
Strategies, Inc., a Tennessee corporation, held by SVFII pursuant to the terms
and conditions of that certain Option Agreement between SVFII and the Company
dated the date hereof, the Company hereby grants to Holder the right to
purchase 50,000 shares of the Company's common stock, $.01 par value per share
(the "Common Stock"), at the purchase price per share (the "Exercise Price")
set forth herein. The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Warrant Shares." The number of
Warrant Shares and the Exercise Price are subject to adjustment as provided in
Section 9 below.
2. Term. Subject to the terms and conditions set forth herein, this
Warrant shall be exercisable in whole or in part at any time and from time to
time from the date hereof until 5:00 p.m. Atlanta, Georgia time on December 13,
2003 (the "Expiration Date") and shall be void thereafter.
3. Price. The Exercise Price per share for which the Warrant Shares may
be purchased pursuant to the terms of this Warrant shall be $_____ per share,
as adjusted from time to time pursuant to Section 9 hereof.
<PAGE> 2
4. Exercise.
(a) This Warrant may be exercised by the Holder hereof (but only on
the conditions hereinafter set forth) as to part or all of the Warrant
Shares by surrender of this Warrant and the Notice of Exercise attached hereto
as Exhibit A, duly completed and executed on behalf of the Holder, at the
office of the Company, 1850 Parkway Place, 11th Floor, Marietta, Georgia 30067,
or at such other address as the Company shall designate in a written notice to
the Holder hereof, together with a check acceptable and payable to the Company
in the amount of the Exercise Price times the number of Warrant Shares being
purchased.
(b) In lieu of exercising the Warrant by payment of the Exercise
Price in cash pursuant to Section 4(a) above, the Holder shall have the
right to require the Company to convert the Warrant, in whole or in part and at
any time or times (the "Conversion Right"), into Warrant Shares, by surrender
to the Company of this Warrant and the Notice of Exercise attached hereto, duly
completed and executed by the Holder to evidence the exercise of the Conversion
Right. Upon exercise of the Conversion Right, the Company shall deliver to the
Holder a certificate(s) representing that number of Warrant Shares which is
equal to the quotient obtained by dividing (x) the value of the number of
Warrants being converted at the date the Conversion Right is exercised
(determined by subtracting (A) the aggregate Exercise Price for all such
Warrants immediately prior to the exercise of the Conversion Right from (B) the
aggregate Fair Market Value (determined on the basis of the Fair Market Value
per share of Common Stock multiplied by that number of Warrant Shares
purchasable upon exercise of such Warrants immediately prior to the exercise of
the Conversion Right)), by (y) the Fair Market Value per share of Common Stock
on the date of exercise of the Conversion Right. For purposes of this
calculation, the Fair Market Value per share of Common Stock shall be (i) if a
public market for the Company's Common Stock exists at the time of such
exercise, the average of the closing bid and asked prices of the Common Stock
quoted in the Over-The-Counter Market Summary or the last reported sales price
of the Common Stock or the closing price quoted on the Nasdaq National Market
or on any exchange on which the Common Stock is listed, whichever is
applicable, as published in The Wall Street Journal for the five (5) trading
days prior to the date of determination of Fair Market Value; or (ii) if there
is no public market for the Company's Common Stock, determined by the Company's
Board of Directors in good faith. Any references in this Warrant to the
"exercise" of any Warrants, and the use of the term "exercise" herein, shall be
deemed to include (without limitation) any exercise of the Conversion Right.
(c) Upon exercise of this Warrant as aforesaid, the person entitled
to receive the Warrant Shares issuable upon such exercise shall be
treated for all purposes as the holder of record of such shares as of the close
of business on the date of exercise. As promptly as practicable on or after
such date, and in any event within ten (10) days thereafter, the Company shall
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Warrant Shares for which this Warrant is being
exercised (net of any Warrant Shares applied upon exercise of the Conversion
Right), in such names and denominations as are requested by such Holder. If
this Warrant shall be exercised with respect to less than all of the
Warrant Shares, the Company, at its expense, will issue to the Holder a new
Warrant covering
2
<PAGE> 3
the number of Warrant Shares with respect to which this Warrant shall
not have been exercised, which new Warrant shall be identical to this Warrant
except for the number of shares remaining subject to the Warrant. If, upon
exercise of this Warrant, the Holder would be entitled to acquire a fractional
share of the Company's Common Stock, such fractional share shall be disregarded
and the number of shares subject to this Warrant shall be rounded down to the
next lower number of shares and the Holder shall be entitled to receive from
the Company a cash payment equal to the product of the per share Exercise Price
multiplied by such fraction rounded to the nearest penny.
(d) The Company will pay all documentary stamp taxes attributable
to the initial issuance of Warrant Shares upon the exercise of this
Warrant, provided that such certificates for such Warrant Shares are issued in
the name of SVFII or in the name of any partner of SVFII. The Company shall
not be required to pay any tax or taxes which may be payable in respect of any
other transfer involved in the issue of any certificates for Warrant Shares and
the Company shall not be required to issue or deliver such certificates for
Warrant Shares unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
5. Covenants and Conditions. The above provisions are subject to the
following:
(a) The Holder of this Warrant and any transferee hereof or of the
Warrant Shares issuable upon exercise of this Warrant, by their
acceptance hereof or thereof, hereby (i) acknowledge that this Warrant has
been, and any Warrant Shares issuable upon exercise hereof will be, acquired
for investment purposes and not with a view to distribution or resale and (ii)
understand and agree that this Warrant and the Warrant Shares issuable upon the
exercise hereof, have not been registered under the Securities Act or any
applicable state securities laws ("Blue Sky Laws"), and may not be sold,
pledged, hypothecated or otherwise transferred without (i) an effective
registration statement for such Warrant under the Securities Act and such
applicable Blue Sky Laws, or (ii) an opinion of counsel reasonably satisfactory
to the Company that registration is not required under the Securities Act or
under any applicable Blue Sky Laws. Transfer of the Warrant Shares issued upon
the exercise of this Warrant shall be restricted in the same manner and to the
same extent as the Warrant. Each Warrant and each certificate representing
such Warrant Shares shall bear substantially the following legend (with such
changes therein as may be appropriate to reflect whether such legend refers to
a Warrant or Warrant Shares):
THE WARRANT AND SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY APPLICABLE STATE
SECURITIES LAW AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
3
<PAGE> 4
REGISTRATION UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
TRANSFER.
(b) The Holder and the Company agree to execute such documents and
instruments as counsel for the Company reasonably deems necessary to effect the
compliance of the issuance of the Warrant and any Warrant Shares with
applicable federal and state securities laws, including compliance with
applicable exemptions from the registration requirements of such laws.
(c) The Company covenants and agrees that all Warrant Shares which
may be issued upon exercise of this Warrant will, upon issuance and
payment therefor, be legally and validly issued and outstanding, fully paid and
nonassessable. The Company shall at all times reserve and keep available for
issuance upon the exercise of this Warrant such number of authorized shares of
Common Stock as will be sufficient to permit the exercise in full of this
Warrant.
6. Registration Rights.
(a) Demand Rights.
(i) The Company agrees that if it receives from the Holder a
written request that the Company effect any registration with respect
to Warrant Shares on a shelf registration pursuant to Rule 415 of the
Securities and Exchange Commission (the "Commission"), the Company will as soon
as practicable use its best efforts to effect such registration (including,
without limitation, filing post-effective amendments, appropriate
qualifications under applicable Blue Sky Laws, and appropriate compliance with
the Securities Act) as would permit or facilitate the sale and distribution of
all or such portion of such Warrant Shares as are specified in such request.
Such shelf registration shall not be deemed to provide for an underwritten
offering of the Warrant Shares pursuant to such registration statement.
(ii) The Company shall only be required to effect one (1)
registration of Warrant Shares pursuant to this Section 6(a), and the
provisions of Section 6(c) below shall apply.
(iii) The Company, upon receipt of such request for
registration pursuant to Section 6(a)(i), will as promptly as
practicable prepare and file with the Commission a registration statement on
Form S-3 or on such other form as the Company determines in its sole discretion
to be available and appropriate for the registration under the Securities Act
of a secondary public offering. The Company shall use reasonable efforts to
keep such registration statement current and continuously effective until the
earlier of (A) the date when all Warrant Shares covered by the registration
statement have been sold or (B) one year from the effective date of the
registration statement with respect to a shelf registration or (C) such time as
to which all of the Warrant Shares may be sold immediately by the Holder under
Rule 144 or any successor rule or regulation under the Securities Act.
4
<PAGE> 5
(iv) Upon written notice to the Holder stating the reasons
therefor, the Company shall be entitled to postpone, for a reasonable
period of time not to exceed ninety (90) days, the filing of a registration
statement pursuant to this Section 6(a) if (A) such filing would occur prior to
ninety (90) days following the effective date of a registration statement
relating to an underwritten public offering of securities of the Company for
its own account, or (B) the Company would be required to undergo a special
interim audit in order to comply with such request, unless the Holder agrees to
bear the costs of such special interim audit, or (C) the Company determines, in
the good faith exercise of its reasonable business judgment, that such
registration and offering would materially interfere with bona fide financing,
acquisition or other plans of the Company or would require disclosure of
information, the premature disclosure of which would materially adversely
affect or otherwise be materially detrimental to the Company. If the Company
postpones the filing of the registration statement, it shall promptly notify
the Holder in writing when the events or circumstances permitting such
postponement have ended.
(b) Piggyback Registration.
(i) If the Company shall propose the registration under the
Securities Act of an offering of any of its capital stock to be sold
for cash, whether or not for its own account, pursuant to a firm commitment
underwritten offering (other than a registration relating to either (A) a
dividend reinvestment, employee stock option, stock purchase or similar plan,
(B) a transaction pursuant to Rule 145 under the Securities Act, or (C) a
merger, consolidation or reorganization), the Company, on each such occasion,
shall as promptly as practicable but in no event later than ten (10) days prior
to the proposed filing date of the registration statement give written notice
(the "Notice") to the Holder of its intention to effect such registration, and
the Holder shall be entitled, on each such occasion, to request to have all or
a portion of the Warrant Shares included in such registration statement. Upon
the written request of the Holder that the Company include any Warrant Shares
in such registration statement (which request shall state the number of Warrant
Shares for which registration is sought), given within ten (10) days after the
giving of the Company's Notice, the Company shall use its reasonable efforts to
cause such Warrant Shares to be so included in the offering covered by such
registration statement, subject to the limitations hereinafter set forth.
(ii) The registration of some or all of such Warrant Shares
pursuant to this Section 6(b)(i) may be conditioned or restricted if,
in the case of a registration statement which also includes shares to be sold
for the account of the Company in an underwritten offering, in the good faith
exercise of the reasonable business judgment of the managing underwriter of
such proposed offering, inclusion thereof in such registration statement will
have an adverse impact on the marketing of the securities to be offered by the
Company (provided that such conditions or restrictions apply on a proportional
basis not only to the Warrant Shares but also to all other securities to be
included other than those to be offered for the Company's own account). If
such managing underwriter shall require that the number of Warrant Shares to be
offered by the Holder be reduced or eliminated, the Holder shall have the right
to withdraw its request for registration pursuant to this Section 6(b)(i).
5
<PAGE> 6
(iii) The Company may, for any reason and without the consent
of the Holder determine at any time not to proceed with the
registration which is the subject of the Company's Notice and abandon the
proposed offering, whereupon the Company shall be relieved of any further
obligations hereunder to proceed with such registration or offering.
(c) Limitation of Registration Rights. The Company shall not be
obligated to honor any request by a Holder under Section 6(a) or 6(b)
if, in the opinion of counsel for the Company in form and substance reasonably
satisfactory to such Holder, such Holder could then sell under Rule 144
promulgated under the Securities Act, the number of Warrant Shares it proposes
to have registered in compliance with this Agreement.
(d) Registration Procedures. If and whenever the Company is
obligated by the provisions of this Section 6 to effect the
registration of any Warrant Shares under the Securities Act, the Company shall:
(i) Prepare and file with the Commission a registration
statement with respect to such securities on such form as the Company
deems appropriate and is permitted or qualified to use and shall use all
reasonable efforts to cause such registration statement to become and remain
effective as provided herein; provided, that in the case of any registration
pursuant to Section 6(b), such preparation and filing may be delayed in the
sole discretion of the Company, without prejudice to the rights of the Holder
pursuant to Section 6(a).
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to any such registration statement filed pursuant to
Section 6(a) as may be necessary to keep such registration statement effective
during the period referred to in Section 6(a)(iii) and to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement, and cause the prospectus to
be supplemented by any required prospectus supplement, and as so supplemented
to be filed with the Commission pursuant to Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder at a reasonable time prior
to the filing thereof with the Commission a copy of the registration
statement in the form in which the Company proposes to file the same; not later
than one day prior to the filing thereof, a copy of any amendment (including
any post-effective amendment) to such registration statement; and promptly
following the effectiveness thereof, a conformed copy of the registration
statement as declared effective by the Commission and of each post-effective
amendment thereto, including financial statements and all exhibits and reports
incorporated therein by reference.
(iv) Furnish to the selling Holder of Warrant Shares such
number of copies of such registration statement, each amendment
thereto, the prospectus included in such registration statement (including each
preliminary prospectus), each supplement thereto and such other documents as
they may reasonably request in order to facilitate the disposition of the
Warrant Shares owned by them.
6
<PAGE> 7
(v) Use all reasonable efforts to register and qualify the
Warrant Shares covered by the registration statement under such other
securities laws of such jurisdictions as shall be reasonably requested by the
selling Holder of Warrant Shares and do any and all other acts and things which
may be reasonably necessary or advisable to enable the selling Holder to
consummate the disposition of the Warrant Shares owned by such Holder in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to transact business
or to file a general consent to service of process in any such states or
jurisdictions, or to maintain the effectiveness of any such registration or
qualification for any period during which it is not required to maintain the
effectiveness of the related registration statement under the Securities Act as
set forth in Section 6(a)(iii).
(vi) Promptly notify each selling Holder of Warrant Shares of
the happening of any event as a result of which the prospectus included
in such registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading and,
at the request of any such Holder, and subject to the further provisions of
Section 6(f)(ii), the Company will prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such Warrant
Shares, such prospectus will not contain an untrue statement of a material fact
or omit to state any fact necessary to make the statements therein not
misleading.
(vii) Enter into such customary agreements in form and
substance reasonably satisfactory to the Company and take such other
customary actions as may be reasonably requested in order to expedite or
facilitate the disposition of such Warrant Shares.
(viii) Make reasonably available for inspection by any selling
Holder of Warrant Shares pursuant to such registration statement and
any attorney or accountant retained by such selling Holder, all financial and
other records, pertinent corporate documents and properties of the Company, and
use all reasonable efforts to cause the officers, directors, employees and
independent accountants of the Company to supply all information reasonably
requested by any such seller, attorney or accountant in connection with such
registration statement, in each case as and to the extent necessary to permit
the selling Holder to conduct a reasonable investigation within the meaning of
the Securities Act. To minimize disruption and expense to the Company during
the course of the registration process, all prospective selling Holders shall,
to the extent practicable, coordinate their investigation and due diligence
efforts hereunder and, to the extent practicable, will act through a single set
of counsel and a single set of accountants and will enter into confidentiality
agreements with the Company in form and substance reasonably satisfactory to
the Company and such Holders prior to receiving any confidential or proprietary
information of the Company.
(ix) Promptly notify the selling Holder of Warrant Shares of
the following events and (if requested by any such person) confirm such
notification in writing: (A) the filing of the prospectus or any prospectus
supplement and the registration statement and any amendment or post-effective
amendment thereto and, with respect to the registration statement or any
post-effective amendment thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments or supplements to
the
7
<PAGE> 8
registration statement or the prospectus or for additional information,
(C) the issuance or threat of issuance by the Commission of any stop order
suspending the effectiveness of the registration statement or the initiation of
any proceedings for that purpose, and (D) the receipt by the Company of any
notification with respect to the suspension of the qualification of the Warrant
Shares for sale in any jurisdiction or the initiation or threat of initiation
of any proceeding for such purpose.
(x) Cooperate with the selling Holder of Warrant Shares to
facilitate the timely preparation and delivery of certificates
representing the Warrant Shares to be sold and not bearing any restrictive
legends, and enable such Warrant Shares to be in such lots and registered in
such names as the selling Holder may request at least two (2) business days
prior to any delivery of the Warrant Shares to the purchaser.
(xi) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering pursuant to Section 6(b) hereof, (A) make such
representations and warranties to the selling Holder of Warrant Shares and the
underwriters, if any, with respect to the Warrant Shares and the registration
statement as are customarily made by issuers in similar underwritten offerings;
(B) use its best efforts to obtain "cold comfort" letters and updates thereof
from the Company's independent certified public accountants addressed to the
selling Holder of Warrant Shares and the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters by underwriters in connection with similar underwritten
offerings; (C) deliver such documents and certificates as may be reasonably
requested (1) by the Holders of a majority of the Warrant Shares being sold,
and (2) by the underwriters, if any, to evidence compliance with clause (A)
above and with any customary conditions contained in the underwriting agreement
or other agreement entered into by the Company; and (D) obtain opinions of
counsel to the Company (which counsel and which opinions shall be reasonably
satisfactory to the underwriters, if any), covering the matters customarily
covered in opinions requested in underwritten offerings. Such counsel shall
also state that no facts have come to the attention of such counsel which cause
them to believe that such registration statement, the prospectus contained
therein, or any amendment or supplement thereto, as of their respective
effective or issue dates, contains any untrue statement of any material fact or
omits to state any material fact necessary to make the statements therein not
misleading (except that no statement need be made with respect to any financial
statements, notes thereto or other financial data or other expertized material
contained therein or as to any information furnished by or on behalf of the
selling Holder or underwriters, if any, for inclusion in such registration
statement).
(xii) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders an earnings statement satisfying the
provisions of Section 11(a) of the Securities Act, no later than forty-five
(45) days after the end of any twelve-month period (or ninety (90) days, if
such period is a fiscal year) beginning with the first month of the fiscal
quarter of the Company commencing after the effective date of the registration
statement, which statements shall cover such twelve-month periods.
8
<PAGE> 9
(e) The Company's obligations with this Section 6 shall be expressly
conditioned upon Holder's compliance with the following:
(i) The selling Holder shall cooperate with the Company in
connection with the preparation of a registration statement with
respect to or including any Warrant Shares, and for so long as the Company is
obligated to keep the registration statement effective, shall provide to the
Company, in writing, for use in the registration statement, all such
information regarding the Holder and its plan of distribution of the Warrant
Shares as may be necessary to enable the Company to prepare the registration
statement and prospectus covering the Warrant Shares, to maintain the currency
and effectiveness thereof and otherwise to comply with all applicable
requirements of law in connection therewith.
(ii) During such time as the selling Holder may be engaged in a
distribution of the Warrant Shares, the Holder shall comply with Rules 10b-6
and 10b-7 promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and pursuant thereto, shall, among other things: (w) not
engage in any stabilization activity in connection with the securities of the
Company in contravention of such Rules; (x) distribute the Warrant Shares
solely in the manner described in the registration statement; (y) cause to be
furnished to each broker through whom the Warrant Shares may be offered, or to
the offeree if an offer is not made through a broker, such copies of the
prospectus and any amendment or supplement thereto and documents incorporated
by reference therein as may be required by law; and (z) not bid for or purchase
any securities of the Company or attempt to induce any person to purchase any
securities of the Company other than as permitted under the Exchange Act.
(f) Holdback Agreements.
(i) Notwithstanding any provision of this Agreement to the
contrary, in the event the Company notifies the Holder, in writing and
no later than 10 days prior to the proposed filing date, that the Company
intends to file a registration statement in connection with an underwritten
offering of any of its capital stock, the Holder shall refrain from selling or
otherwise distributing, except in accordance with the provisions of Section
6(b) hereof, any Warrant Shares within the period beginning up to seven days
prior to the effective date of such registration statement (or on such later
date that the Company notifies the Holder, in writing, that such period has
begun) and ending up to 90 days after such effective date (or on such earlier
date that the Company notifies the Holder that such period has ended) (the
"Offering Restricted Period"). In the event the Holder's Warrant Shares are
not included in such a registered underwritten offering pursuant to Section
6(b) hereof, the Company's obligation under Section 6(a)(iii) to keep the
registration statement filed pursuant to Section 6(a) current and effective
shall be extended for a number of days equal to the Offering Restricted Period,
or, if earlier, until the date on which all of the Warrant Shares have been
disposed of.
(ii) Notwithstanding anything set forth herein to the contrary,
the Holder agrees that it will give the Company prior oral notice,
directed to its Chief Executive Officer or its Chief Financial Officer,
confirmed immediately in writing by facsimile
9
<PAGE> 10
transmission, of its intention to sell any Warrant Shares under the
shelf registration statement, which notice shall be given not less than two (2)
days in advance of any such proposed sale. In the event that the Company
thereafter informs the Holder, within one (1) day of its receipt of such
notice, that, in the good faith exercise of its reasonable business judgment,
there exist bona fide financing, acquisition or other plans of the Company or
other matters which could require disclosure by the Company of information, the
premature disclosure of any of which would materially adversely affect or
otherwise be materially detrimental to the Company, the Holder shall refrain
from selling the Warrant Shares until the earlier to occur of the date (x) the
Company notifies the Holder that it has filed with the Commission an amendment
or supplement to the prospectus included in the shelf registration statement,
(y) the Company notifies the Holder that the potentially disclosable event no
longer exists and that the prospectus included in the shelf registration
statement does not contain an untrue statement of material fact or omit to
state any fact necessary to make the statements therein not misleading, or (z)
which is 90 days after the date that the Holder orally notified the Company of
its intention to sell any Warrant Shares (each of which is a "Disclosure
Restricted Period"). The Company's obligation under Section 6(a)(iii) to keep
the registration statement filed pursuant to Section 6(a) current and effective
shall be extended for a number of days equal to the Disclosure Restricted
period, or, if earlier, until the date on which all of the Warrant Shares have
been disposed of.
(g) Expenses. The Company shall bear the expenses of registration
pursuant to this Section 6; provided, however, that the selling Holder
shall be responsible for (x) the fees and expenses of its own counsel, its own
accountants and other experts retained by it with respect to such registration
and resales and (y) all underwriting discounts or brokerage fees or commissions
relating to the sale of the Warrant Shares pursuant to Section 6(b).
(h) Indemnification.
(i) The Company shall indemnify and hold harmless the selling
Holder, its general partner, each underwriter (as defined in the
Securities Act), each other selling agent who may be deemed to be an
underwriter, and each controlling person of the selling Holder, any underwriter
or other selling agent, if any (within the meaning of the Securities Act),
against any losses, claims, damages or liabilities, joint or several (or
actions in respect thereof) ("Losses"), to which such indemnified party may be
subject under the Securities Act, under any other statute or at common law, but
only to the extent such Losses arise out of or are based upon (i) any untrue
statement (or alleged untrue statement) of any material fact contained in (x)
the registration statement under which the Warrant Shares held by the Holder
were registered under the Securities Act or offered for sale, (y) any
preliminary prospectus (if used prior to the effective date of such
registration statement), or (z) any final prospectus or any post-effective
amendment or supplement thereto (if used during the period the Company is
required to keep the registration statement effective), in each case, on the
effective date of such registration statement or post-effective amendment, or
the date of such prospectus, including any preliminary prospectus, or
supplement (the "Disclosure Documents"), (ii) any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading or (iii) any
violation by the Company of the Securities Act or any Blue Sky Law, or any rule
or regulation promulgated under the Securities Act or any Blue Sky Law, or any
other
10
<PAGE> 11
law, applicable to the Company in connection with the sale,
registration or qualification of the Warrant Shares held by the Holder; and the
Company shall reimburse each such indemnified party for any legal or other
expenses reasonably incurred by such party in connection with investigating or
defending any such loss, claim, damage, liability or action, whether or not
resulting in any liability, or in connection with any investigation or
proceeding by any governmental agency or instrumentality relating to any such
claims with respect to any offering of securities pursuant to this Section 6,
but excluding any amounts paid in settlement of any action, suit, arbitration,
proceeding, litigation, or investigation (collectively "Litigation"), commenced
or threatened, if such settlement is effected without the prior written consent
of the Company, which consent shall not be unreasonably withheld; provided,
however, that the Company shall not be liable to the Holder, its general
partner, any underwriter, other selling agent or controlling person in any such
case to the extent that any such Losses arise out of or are based upon (i) an
untrue statement or omission or alleged omission (y) made in any such
Disclosure Documents in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such indemnified party
expressly for use in the preparation thereof and so designated by such
indemnified party, or (z) made in any preliminary prospectus if a copy of the
final prospectus was not delivered to the person alleging any loss, claim,
damage or liability for which Losses arise at or prior to the written
confirmation of the sale of such Warrant Shares to such person and the untrue
statement or omission concerned had been corrected in such final prospectus and
copies thereof had timely been delivered by the Company to such indemnified
party; or (ii) the use of any prospectus after such time as the Company has
advised such indemnified party that the filing of a post-effective amendment or
supplement thereto is required, except the prospectus as so amended or
supplemented, or the use of any prospectus after such time as the obligation of
the Company to keep the same current and effective has expired.
(ii) In connection with the registration or sale of Warrant
Shares pursuant to this Section 6, the Holder shall indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed such registration statement and each controlling person of the Company
(within the meaning of the Securities Act), against any Losses, joint or
several, to which such indemnified party may become subject under the
Securities Act, under any other statute or at common law, but only to the
extent such Losses arise out of or are based upon (i) any untrue statement (or
alleged untrue statement) of any material fact contained in any of the
Disclosure Documents or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, if the statement or omission was made in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such indemnifying party expressly for use in the preparation thereof
and so designated by such indemnifying party; (ii) the use by such indemnifying
party of any prospectus after such time as the Company has advised such
indemnifying party that the filing of a post-effective amendment or supplement
thereto is required, except the prospectus as so amended or supplemented, or
after such time as the obligation of the Company to keep the registration
statement effective and current has expired, or (iii) any information given or
representation made by such indemnifying party in connection with the sale of
Warrant Shares which is not contained in and not in conformity with the
prospectus (as amended or supplemented at the time of the giving of such
information or making of such
11
<PAGE> 12
representation); and such indemnifying party shall reimburse each such
indemnified party for any legal and other expenses reasonably incurred by such
party in investigating or defending any such loss, claim, damage, liability or
action, whether or not resulting in any liability, or in connection with any
investigation or proceeding by any governmental agency or instrumentality
relating to any such claims with respect to any offering of securities pursuant
to this Section 6, but excluding any amounts paid in settlement of any
Litigation, commenced or threatened, if such settlement is effected without the
prior written consent of such indemnifying party, which consent shall not be
unreasonably withheld.
7. Transfer of Warrants. Subject to the provisions of Section 5,
this Warrant may be transferred, in whole or in part, to any partner in
SVFII, by presentation of the Warrant to the Company with written instructions
for such transfer and by the execution by such transferee of an investment
letter in a form reasonably satisfactory to the Company. Upon such
presentations for transfer and receipt of such investment letter, the Company
shall promptly execute and deliver a new Warrant or Warrants in the form hereof
in the name of the assignee or assignees and in the denominations specified in
such instructions. The Company shall pay all expenses in connection with the
preparation, issuance and delivery of Warrants under this Section 7.
8. Warrant Holder Not Shareholder. This Warrant does not confer
upon the Holder, as such, any right whatsoever as a shareholder of the
Company.
9. Adjustment Upon Changes in Company Common Stock. The number of
shares of Common Stock subject to this Warrant and the Exercise Price
per share of such shares shall be adjusted by the Company proportionately to
reflect changes in the capitalization of the Company as a result of any
recapitalization, reclassification, stock dividend, stock split, combination of
shares, exchange of shares or any other change in the Company's capital
structure which affects holders of Common Stock generally. All adjustments
described herein shall be reflected on the Company's stock warrant ledger and
the Holder shall receive written notice thereof.
10. Merger, Sale of Assets, etc. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired, there
shall be (a) a reorganization (other than a combination, reclassification,
exchange or subdivision of shares otherwise provided for in Section 9 hereof),
(b) a merger or consolidation of the Company with or into another corporation
in which the Company is not the surviving entity, or a reverse triangular
merger in which the Company is the surviving entity but the shares of the
Company's capital stock outstanding immediately prior to the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, or (c) a sale or transfer of the Company's
properties and assets as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or
transfer, lawful provision shall be made so that the holder of this Warrant
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Exercise Price then in
effect, the number of shares of stock or other securities or property of the
successor corporation resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
exercise of this Warrant would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Warrant had
been exercised
12
<PAGE> 13
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment for other future events as provided
in Section 9. The foregoing provision of this Section 10 shall similarly apply
to successive reorganizations, consolidations, mergers, sales and transfers and
to the stock or securities of any other corporation that are at the time
receivable upon the exercise of this Warrant. If the per share consideration
payable to the holder hereof for shares in connection with any such transaction
is in a form other than cash or marketable securities, then the value of such
consideration shall be determined in good faith by the Company's Board of
Directors. In all events, appropriate adjustments (as determined in good faith
by the Company's Board of Directors) shall be made in the application of the
provisions of this Warrant with respect to the rights and interests of the
Holder after the transaction, to the end that the provisions of this Warrant
shall be applied after that event, as nearly as reasonably may be, in relation
to any shares or other property deliverable after that event upon exercise of
this Warrant.
11. Notice of Certain Events. In case:
(a) the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive any dividend
or other distribution, or any right to subscribe for or purchase any shares of
capital stock of any class, or to receive any other rights; or
(b) of any capital reorganization, any reclassification of
shares of capital stock of the Company (other than a subdivision or
combination of outstanding shares of Common Stock to which Section 9 applies),
or any consolidation or merger of the Company or the sale or transfer of all or
substantially all of the assets of the Company; or
(c) of any voluntary dissolution, liquidation, or winding up
of the Company;
then the Company shall mail (at least ten (10) days prior to the applicable
date referred to in subclause (x) or in subclause (y) below, as the case may
be), to the Holder at the address set forth in the Company's stock records, a
notice stating that (x) the date on which a record is to be taken for the
purpose of such dividend, distribution or rights or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution or rights are to be determined, or (y)
the date on which such reclassification, capital reorganization, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up is expected to
become effective, and, if applicable, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such
reclassification, capital reorganization, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
13
<PAGE> 14
IN WITNESS WHEREOF, Healthdyne Information Enterprises, Inc. has caused
this Warrant to be executed by its duly authorized officer on the date first
above written.
HEALTHDYNE INFORMATION ENTERPRISES, INC.
By:
-------------------------------------
Name: Joseph G. Bleser
Title: Vice President and Chief
Financial Officer
Accepted:
THE SOUTHERN VENTURE FUND II, L.P.
By: Its General Partner
SV Partners II, L.P.
By:
----------------------------
Name: Benjamin H. Gray
A General Partner
14
<PAGE> 15
EXHIBIT A
NOTICE OF EXERCISE
To: HEALTHDYNE INFORMATION ENTERPRISES, INC.
The undersigned, the holder of the foregoing Warrant No. S-1, and pursuant
to the terms hereof, hereby elects to exercise rights represented by said
Warrant for, and to purchase thereunder, _________ shares of the Company's
Common Stock covered by said Warrant, and tenders herewith payment of the
purchase price in full for such shares of $__________ by:
_____ (a) cash, through the delivery of a certified or official bank
check; or
_____ (b) exercising the Conversion Right provided under Section 4(b) of
the Warrant by the surrender of said Warrant.
The undersigned hereby requests that certificates for such shares (or any
other securities or other property issuable upon such exercise) be issued in
the name of and delivered to the undersigned at the address set forth below.
-------------------------------
Name
Date: -------------------------------
---------- Signature
Address:
-------------------------------
-------------------------------
-------------------------------
<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
YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net earnings (loss) $ 1,183 $ (9,983) $ (1,265)
========= ========= =========
Primary shares:
Weighted average number of
common shares outstanding 17,481 15,653 15,500
Additional shares issuable from
assumed exercise of options 1,395 --* --*
--------- --------- ---------
18,876 15,653 15,500
========= ========= =========
Net earnings (loss) per common share
and common share equivalent $ .06 $ (.64) $ (.08)
========= ========= =========
Fully diluted shares:
Weighted average number of
common shares outstanding
per primary computation above 17,481 15,653 15,500
Additional shares issuable from
assumed exercise of options 1,698 --* --*
--------- --------- ---------
19,179 15,653 15,500
========= ========= =========
Net earnings (loss) per common share
and common share equivalent $ .06 $ (.64) $ (.08)
========= ========= =========
</TABLE>
- -------------
* 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
HEALTHDYNE INFORMATION ENTERPRISES, INC.
SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
JURISDICTION OF
NAME INCORPORATION
---- -------------
<S> <C>
Criterion Health Strategies, Inc. Tennessee
DataView Imaging International, Inc. Georgia
Healthcare Communications, Inc. Texas
Integrated Healthcare Solutions, Inc. (formerly, Clinical
Assessment Support System, Inc.) Georgia
</TABLE>
Note: The above subsidiaries (except for Criterion Health Strategies, Inc.
in which the Company owns less than 1% equity ownership interest and
DataView Imaging International, Inc. in which the Company owns 19.5%
equity ownership interest) are wholly-owned subsidiaries of the
Company.
<PAGE> 1
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
Healthdyne Information Enterprises, Inc.
We consent to incorporation by reference in the registration statements (Nos.
33-99034, 333-08271, 333-08279, 333-08283, 333-08287, 333-08293 and 333-08295)
on Form S-8 of Healthdyne Information Enterprises, Inc. of our reports dated
January 28, 1997, relating to the consolidated balance sheets of Healthdyne
Information Enterprises, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, shareholders'
equity and cash flows and related schedule for the years ended December 31,
1996 and 1995 and for the period from June 15, 1994 (date of incorporation) to
December 31, 1994, which reports appear in the December 31, 1996, annual report
on Form 10-K of Healthdyne Information Enterprises, Inc.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
HEALTHDYNE INFORMATION ENTERPRISES, INC. CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE HEALTHDYNE INFORMATION ENTERPRISES,
INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,743
<SECURITIES> 0
<RECEIVABLES> 5,425
<ALLOWANCES> 165
<INVENTORY> 0
<CURRENT-ASSETS> 16,966
<PP&E> 1,677
<DEPRECIATION> 456
<TOTAL-ASSETS> 31,802
<CURRENT-LIABILITIES> 4,581
<BONDS> 4,265
0
0
<COMMON> 202
<OTHER-SE> 22,754
<TOTAL-LIABILITY-AND-EQUITY> 31,802
<SALES> 0
<TOTAL-REVENUES> 16,151
<CGS> 0
<TOTAL-COSTS> 5,672
<OTHER-EXPENSES> 8,993
<LOSS-PROVISION> 92
<INTEREST-EXPENSE> 303
<INCOME-PRETAX> 1,183
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,183
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,183
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
