SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JULY 19, 1996
HCIA INC.
(Exact name of registrant as specified in its charter)
Maryland 0-25378 52-1407998
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
300 East Lombard Street, Baltimore, Maryland 21202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 895-7470
Not applicable
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events.
LBA Health Care Acquisition. On August 9, 1996, the Company
consummated the acquisition of LBA Health Care Management, Inc. ("LBA"),
through the purchase of all of the capital stock of HealthVISION, Inc., LBA's
parent company. The acquisition price was approximately $130 million, $100
million of which was paid in cash and $30 million of which was paid by
delivery of Company Common Stock (492,961 shares). Prior to the consummation
of the LBA acquisition, all of the assets and liabilities of HealthVISION not
associated with LBA were distributed to the former stockholders of
HealthVISION. Eighty-six million dollars of the cash portion of the purchase
price was provided by a $100 million loan facility which the Company
obtained from a bank. The Company intends to repay the bank financing with a
portion of the net proceeds of a public offering of its Common Stock.
Second Quarter Results. On July 22, 1996 the Company announced results
for the second quarter of 1996. See the press release attached hereto as Exhibit
99.
Incorporation of Certain Information by Reference. Pursuant to Rule 411
of Regulation C under the Securities Act of 1933, as amended (the "Act"), the
Registrant intends to incorporate by reference the financial statements included
in Item 7 hereof in one or more registration statement(s) filed under Act.
2
<PAGE>
Item 7. Financial Statements and Exhibits.
(a) Financial Statements
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements of Datis Corporation:
Independent Auditors' Report................................................................ F-1
Report of Independent Accountants........................................................... F-2
Balance Sheet (May 31, 1994, May 31, 1993 and March 31, 1993)............................... F-3
Statement of Operations (Year ended May 31, 1994, Two Months ended
May 31, 1993 and Year ended March 31, 1993)............................................ F-4
Statement of Cash Flows (Year ended May 31, 1994, Two Months ended
May 31, 1993 and Year ended March 31, 1993)............................................. F-5
Statement of Shareholders' Deficit (Year ended May 31, 1994, Two Months
ended May 31, 1993 and Year ended March 31, 1993)....................................... F-6
Notes to Financial Statements............................................................... F-7
Unaudited Financial Statements of Datis Corporation:
Balance Sheet (March 31, 1995).............................................................. F-17
Statement of Operations (Ten Months ended March 31, 1994 and
March 31, 1995)......................................................................... F-18
Statement of Shareholders' Deficit (Ten Months ended March 31, 1995)........................ F-19
Statement of Cash Flows (Ten Months ended March 31, 1994 and March 31, 1995)................ F-20
Notes to Unaudited Financial Statements..................................................... F-21
Financial Statements of William M. Mercer, Incorporated National Health Analysis
Unit (CHAMP):
Independent Auditors' Report................................................................ F-22
Balance Sheets (December 31, 1994 and September 30, 1995)................................... F-23
Statements of Operations (Years ended December 31, 1993 and 1994 and the
Nine Months ended September 30, 1995)................................................... F-24
Statements of Cash Flows (Years ended December 31, 1993 and 1994 and the
Nine Months ended September 30, 1995)................................................... F-25
Notes to Financial Statements (December 31, 1993 and 1994 and
September 30, 1995)..................................................................... F-26
Financial Statements of HealthVISION, Inc.:
Report of Independent Auditors.............................................................. F-30
Consolidated Balance Sheets (December 31, 1994 and 1995).................................... F-31
Consolidated Statements of Operations (Period from February 2, 1994 (Inception) through
December 31, 1994 and the year ended December 31, 1995)................................. F-32
Consolidated Statements of Changes in Stockholders' Equity
(Period from February 2, 1994 (Inception) through December 31, 1994
and the year ended December 31, 1995)................................................... F-33
Consolidated Statements of Cash Flows (Period from February 2, 1994 (Inception) through
December 31, 1994, and the year ended December 31, 1995)................................ F-34
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Notes to Consolidated Financial Statements.................................................. F-35
Unaudited Financial Statements of HealthVISION, Inc:
Consolidated Balance Sheets (December 31, 1995 and June 30, 1996).......................... F-50
Consolidated Statements of Operations (Six Months ended
June 30, 1995 and 1996).............................................................. F-51
Consolidated Statements of Changes in Stockholders' Equity
(Period from February 12, 1994 (Inception) through June 30, 1996).................... F-52
Consolidated Statements of Cash Flows (Six Months ended June 30, 1995
and 1996).............................................................................. F-53
Notes to Financial Statements............................................................... F-54
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Datis Corporation:
We have audited the accompanying balance sheet of Datis Corporation as
of March 31, 1993, and the related statements of operations, shareholders'
deficit, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Datis Corporation as
of March 31, 1993, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Jose, California
June 17, 1993
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Datis Corporation
In our opinion, the accompanying balance sheet and the related
statements of operations, of cash flows and of shareholders' deficit present
fairly, in all material respects, the financial position of Datis Corporation at
May 31, 1994 and 1993, and the results of its operations and its cash flows for
the year ended May 31, 1994 and the two months ended May 31, 1993, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As described in Note 11, in connection with the acquisition of the
Company by HCIA Inc. in April 1995, the Company has modified its financial
statement presentation to conform with the financial reporting requirements of
the Securities and Exchange Commission.
PRICE WATERHOUSE LLP
San Jose, California
July 22, 1994, except as to Note 11
which is as of July 24, 1995
F-2
<PAGE>
DATIS CORPORATION
BALANCE SHEET
</TABLE>
<TABLE>
<CAPTION>
May 31, May 31, March 31,
1994 1993 1993
----------- ----------- ----------
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 123,000 $ 58,000 $ 53,000
Accounts receivable, net of allowance for doubtful
accounts of $231,000, $343,000 and $185,000.................. 2,172,000 1,951,000 3,407,000
Income taxes receivable........................................ 563,000 -- --
Prepaid expenses and other..................................... 55,000 39,000 39,000
------------ ------------ ----------
Total current assets......................................... 2,913,000 2,048,000 3,499,000
Property and equipment, net (Note 3).............................. 1,606,000 1,567,000 1,239,000
Other assets...................................................... 49,000 49,000 119,000
------------ ------------ ----------
$ 4,568,000 $ 3,664,000 $4,857,000
============ ============ ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations (Note 6).......... $ 320,000 $ 323,000 $ 205,000
Accounts payable............................................... 508,000 274,000 653,000
Bank borrowings (Note 4)....................................... 922,000 200,000 --
Accrued liabilities (Note 3)................................... 1,802,000 1,781,000 2,427,000
Current portion of long-term debt (Note 5)..................... 118,000 79,000 67,000
----------- ------------ ---------
Total current liabilities.................................... 3,670,000 2,657,000 3,352,000
Capital lease obligations, net of current portion (Note 6)........ 230,000 288,000 113,000
Long-term debt, net of current portion (Note 5)................... 279,000 197,000 213,000
Other liabilities................................................. 32,000 43,000 39,000
----------- ------------ ---------
Total liabilities............................................ 4,211,000 3,185,000 3,717,000
----------- ------------ ----------
Commitments (Note 6)
Redeemable convertible preferred stock (Note 8):
Series A, no par value, 1,500,000 shares authorized,
1,285,716, 1,285,716, and 1,285,716 shares issued and
outstanding.................................................. 872,000 872,000 872,000
Series B, no par value, 1,000,000 shares authorized,
425,000, 425,000 and 425,000 shares issued and
outstanding.................................................. 507,000 507,000 507,000
----------- ------------ ----------
Total redeemable convertible preferred stock................. 1,379,000 1,379,000 1,379,000
----------- ------------ ----------
Shareholders' deficit:
Common stock, no par value, 10,000,000 shares
authorized, 1,029,797, 1,003,097, and 1,003,097 shares
issued and outstanding (Note 9).............................. 241,000 224,000 224,000
Accumulated deficit............................................ (1,223,000) (1,084,000) (423,000)
Notes receivable from shareholders............................. (40,000) (40,000) (40,000)
----------- ------------ ----------
Total shareholders' deficit.................................. (1,022,000) (900,000) (239,000)
----------- ------------ ----------
$ 4,568,000 $ 3,664,000 $4,857,000
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DATIS CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Two Months Year ended
May 31, ended May 31, March 31,
1994 1993 1993
------------ ------------ -----------
<S> <C>
Net revenues:
Basic reports..................................................... $ 6,070,000 $ 247,000 $ 6,252,000
Special reports................................................... 2,920,000 182,000 2,570,000
----------- ---------- -----------
8,990,000 429,000 8,822,000
----------- ---------- -----------
Total net revenues..............................................
Operating expenses:
Cost of revenues.................................................. 3,639,000 513,000 2,708,000
Selling and marketing............................................. 3,435,000 353,000 3,047,000
General and administrative........................................ 1,383,000 451,000 1,071,000
Research and development.......................................... 576,000 95,000 562,000
----------- ---------- -----------
Total operating expenses........................................ 9,033,000 1,412,000 7,388,000
----------- ---------- -----------
Income (loss)from operations......................................... (43,000) (983,000) 1,434,000
Interest expense..................................................... 189,000 24,000 128,000
----------- ---------- -----------
Income (loss) before income taxes.................................... (232,000) (1,007,000) 1,306,000
Income tax provision (benefit) (Note 7).............................. (93,000) (320,000) 515,000
----------- ---------- -----------
Income (loss) before extraordinary credit and cumulative effect of
change in accounting principle.................................... (139,000) (687,000) 791,000
Extraordinary credit - utilization of net operating loss
carryforwards..................................................... -- -- 41,000
----------- ---------- -----------
Income (loss) before cumulative effect of change in method of
accounting for income taxes....................................... (139,000) (687,000) 832,000
Cumulative effect of change in method of accounting for income
taxes............................................................. -- (26,000) --
----------- ---------- -----------
--
Net income (loss).................................................... $ (139,000) $ (661,000) $ 832,000
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DATIS CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended Two Months ended Year ended
May 31, May 31, March 31,
1994 1993 1993
------------ -------------- ------------
<S> <C>
Net income (loss).................................................... $ (139,000) $ (661,000) $ 832,000
Adjustments to reconcile net income (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization..................................... 620,000 102,000 331,000
Loss on sale of property and equipment............................ 7,000 -- --
Change in assets and liabilities:
Accounts receivable............................................. (221,000) 1,456,000 (1,793,000)
Income taxes receivable......................................... (563,000) -- --
Prepaid expenses and other...................................... (16,000) -- (1,000)
Other assets.................................................... -- (17,000) (18,000)
Deferred income taxes........................................... -- 94,000 (51,000)
Accounts payable and accrued expenses........................... 222,000 (724,000) 579,000
Deferred revenue................................................ 104,000 139,000 441,000
Income taxes payable............................................ (71,000) (440,000) 322,000
Other liabilities............................................... (11,000) (3,000) (13,000)
----------- ----------- ------------
Net cash provided (used) by operating activities.............. (68,000) (54,000) 629,000
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment............................. (336,000) (70,000) (557,000)
Proceeds from the sale of property and equipment................ 4,000 -- --
----------- ------------ ------------
Net cash used by investing activities......................... (332,000) (70,000) (557,000)
----------- ----------- ------------
Cash flows from financing activities:
Borrowings under revolving line of credit....................... 722,000 200,000 --
Proceeds from issuance of long-term debt........................ 297,000 -- --
Principal payments on capital lease obligations................. (395,000) (67,000) (166,000)
Repayment of long-term debt..................................... (176,000) (4,000) (96,000)
Issuance of common stock, net................................... 17,000 -- 29,000
Payment of note receivable from shareholders.................... -- -- 6,000
----------- ----------- ------------
Net cash provided (used) by financing activities.............. 465,000 129,000 (227,000)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents................. 65,000 5,000 (155,000)
Cash and cash equivalents at beginning of period..................... 58,000 53,000 208,000
----------- ----------- ------------
Cash and cash equivalents at end of period........................... $ 123,000 $ 58,000 $ 53,000
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................................ $ 197,000 $ 20,000 $ 97,000
Income taxes.................................................... 116,000 -- 243,000
Noncash investing and financing activities:
Equipment acquired under capital leases......................... 334,000 360,000 132,000
Conversion of convertible subordinated debentures to
common stock.................................................. -- -- 20,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DATIS CORPORATION
STATEMENT OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Notes Receivable Total
------------ Accumulated from Shareholders'
Shares Amount Deficit Shareholders Deficit
<S> <C> ------- -------- ------------ ---------------- -------------
Balance at March 31, 1992............... 954,097 $176,000 $(1,255,000) $(46,000) $(1,125,000)
Net income............................. -- -- 832,000 -- 832,000
Conversion of subordinated debentures
to common stock..................... 20,000 20,000 -- -- 20,000
Exercise of stock options.............. 29,000 28,000 -- -- 28,000
Payment of Note Receivable............. -- -- -- 6,000 6,000
--------- -------- ----------- -------- -----------
Balance at March 31, 1993.............. 1,003,097 224,000 (423,000) (40,000) (239,000)
Net loss............................... -- -- (661,000) -- (661,000)
--------- -------- ----------- -------- -----------
Balance at May 31, 1993................ 1,003,097 224,000 (1,084,000) (40,000) (900,000)
Net loss............................... -- -- (139,000) -- (139,000)
Issuance of common stock............... 27,300 21,000 -- -- 21,000
Repurchase of common stock............. (600) (4,000) -- -- (4,000)
--------- -------- ----------- -------- -----------
Balance at May 31, 1994................ 1,029,797 $241,000 $(1,223,000) $(40,000) $(1,022,000)
========= ======== =========== ======== ===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DATIS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. The Company
Datis Corporation (the "Company") provides customized and syndicated
research in the form of reports and data bases for hospital associations and
business coalitions throughout the United States using patient case
abstracts provided by participating hospitals and other available information.
Such reports are used by hospital management to help make decisions involving
hospital operations, financial and strategic planning marketing, and
regulatory reporting. The Company changed its fiscal year end from March 31 to
May 31, effective April 1, 1993.
The Company enters into contracts with individual client hospitals
through state hospital associations. For the year ended May 31, 1994, four
state hospital associations and their affiliated hospitals accounted for
approximately 16%, 13%, 12% and 12% of the Company's total revenues. For
the year ended March 31, 1993, five associations accounted for approximately
17%, 14%, 13%, 13% and 11% of total revenues.
2. Significant Accounting Policies
Property and equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
which range from three to seven years. Computer equipment under capital leases
is amortized over the shorter of the lease term or the estimated useful lives of
the equipment. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful lives of the improvements.
Revenue recognition
Revenue is recognized at the culmination of the earnings process when
the data collection and editing process has been completed. Costs incurred
subsequent to the completion of the earnings process and prior to delivery of
the product to the customer are accrued at the time of revenue recognition. Such
costs relate primarily to printing and fulfillment and are not significant in
relation to the overall product costs. Cash collections made prior to the
completion of specific reports are presented as deferred revenue in the
accompanying balance sheet.
Income taxes
Effective April 1, 1993, income taxes are computed under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("FAS 109"). Current income tax expense or benefit represents the amount
of income taxes expected to be payable or refundable for the current period. A
deferred income tax liability or asset, net of valuation allowance, is
established for the expected future consequences resulting from the difference
F-7
<PAGE>
between the financial reporting and income tax bases of assets and liabilities
and from net operating loss and tax credit carryforwards. Deferred income tax
expense or benefit represents the net change during the period in the deferred
income tax liability or asset. During fiscal 1993 deferred income taxes were
computed under the provisions of Accounting Principles Board Opinion No. 11.
Cash equivalents
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
Concentration of credit risk
The majority of the Company's accounts receivable are from hospitals
throughout the United States with credit terms of generally 30 days and which
are not collateralized. The Company maintains adequate reserves for potential
credit losses and such losses, which have been minimal, have been within
management estimates.
Research and development
Research and development costs are experienced as incurred.
Reclassifications
The Company's previously issued fiscal 1993 financial statements
presented its operating expenses under the following captions: personnel,
office, travel and meeting, purchased services, data processing, and other
operating. Subsequent to the issuance of the fiscal 1993 financial statements,
the Company determined that the presentation of its operating expenses under the
following captions would be more meaningful and in accordance with industry
practice: cost of revenues, selling and marketing, general and administrative,
and research and development. Accordingly, the fiscal 1993 operating expenses
have been reclassified to conform to the current presentation. Such
reclassification had no effect on total revenues, total operating expenses,
operating income or net income.
F-8
<PAGE>
3. Balance Sheet Components
Property and equipment:
</TABLE>
<TABLE>
<CAPTION>
May 31, May 31, March 31,
1994 1993 1993
---------- ----------- ------------
<S> <C>
Computer and office equipment........................ $ 2,628,000 $ 2,069,000 $ 1,681,000
Furniture and fixtures............................... 464,000 385,000 358,000
Leasehold improvements............................... 211,000 206,000 191,000
----------- ----------- ---------
3,303,000 2,660,000 2,230,000
Less accumulated depreciation and amortization....... (1,697,000) (1,093,000) (991,000)
----------- ----------- ---------
$1,606,000 $1,567,000 $1,239,000
========== ========== ==========
</TABLE>
Included in the table above are property and equipment acquired under capital
leases as follows:
<TABLE>
<CAPTION>
May 31, May 31, March 31,
1994 1993 1993
---------- ---------- ----------
<S> <C>
Computer and office equipment........................ $1,320,000 $ 986,000 $ 626,000
Furniture and fixtures............................... 58,000 58,000 58,000
---------- ---------- ----------
1,378,000 1,044,000 684,000
Less accumulated amortization........................ (792,000) (461,000) (399,000)
---------- ---------- ----------
$ 586,000 $ 583,000 $ 285,000
========== ========== ==========
Accrued liabilities:
<CAPTION>
May 31, May 31, March 31,
1994 1993 1993
---------- ---------- ----------
Salaries and commissions............................. $ 631,000 $ 545,000 $ 891,000
Deferred revenue..................................... 1,016,000 912,000 773,000
Income taxes payable................................. -- 71,000 511,000
Other................................................ 155,000 253,000 252,000
---------- --------- ----------
$1,802,000 $1,781,000 $2,427,000
========== ========== ==========
</TABLE>
4. Bank Borrowings
The Company has a revolving line of credit arrangement with a bank. The
arrangement, which allows for up to $1,000,000 to be drawn (based on 75% of
eligible accounts receivable), is secured by certain assets of the Company, and
bears interest at prime plus 2.5% (9.75%, 9.0% and 9.0% at May 31, 1994, 1993
and March 31, 1993, respectively). This arrangement also allows for additional
sub-facility borrowings of up to $250,000 in excess of the qualifying accounts
receivable collateral base; however, total borrowings cannot exceed $1,000,000.
Upon receipt of the Company's 1994 income tax refund, this sub-facility will be
deleted in its entirety. Under the credit arrangement, the Company must maintain
specified financial ratios on a monthly basis. The line of credit is payable
upon demand and expires September 30, 1994. The credit arrangement also has a
sublimit of $150,000 for the issuance of letters of credit, of which $32,000 was
outstanding in connection with the guaranty of certain operating lease
commitments at May 31, 1994. The Company had total outstanding borrowings of
$922,000 under the credit arrangement at May 31,1994.
F-9
<PAGE>
5. Long-term Debt
The Company has outstanding a series of subordinated notes which
originated in 1990 and 1991 and mature in fiscal 1995 and 1996. The notes bear
interest at the rate of 10% per annum and provide holders the option to receive
the Company's services in lieu of principal and interest payments. For the years
ended May 31, 1994 and March 31, 1993, approximately $147,000 and $77,000,
respectively, in subordinated debt principal and related interest were exchanged
for services.
Revenues include billings to hospitals who are holders of subordinated
notes of the Company in the amounts of $243,000, $2,000 and $365,000 for the
periods ended May 31,1994, May 31, 1993 and March 31, 1993, respectively.
At May 31, 1994, the Company had three secured notes totaling $268,000.
These notes, which are secured by specific furniture and equipment, bear
interest at rates ranging from 9.99% to 11.25% and mature between 1996 and 1998.
Aggregate maturities of long-term debt at May 31, 1994 are as follows:
Year ending May 31,
1995................................................ $118,000
1996................................................ 164,000
1997................................................ 67,000
1998................................................ 28,000
1999 and thereafter................................. 20,000
--------
$397,000
========
6. Leases
The Company leases certain computer and office equipment, furniture and
office space under noncancelable capital and operating leases which expire in
various years through 1999.
F-10
<PAGE>
A schedule of future minimum noncancelable lease payments is as
follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending May 31, Leases Leases
-------- ---------
<S> <C>
1995......................................................... $358,000 $508,000
1996......................................................... 213,000 548,000
1997......................................................... 29,000 540,000
1998......................................................... -- 289,000
1999 and thereafter.......................................... -- 106,000
-------- -------
Total minimum lease payments................................. 600,000 $1,991,000
==========
Less amount representing interest............................ (50,000)
--------
Present value of future minimum lease payments............... 550,000
Less current portion......................................... (320,000)
----------
$ 230,000
==========
</TABLE>
Rent expenses on the office lease is recognized on the straight-line
basis over the lease term to properly reflect certain escalation clauses. Total
rent expense under operating leases was approximately $414,000, $57,000 and
$309,000 for the periods ended May 31, 1994 and 1993 and March 31, 1993,
respectively.
7. Income Taxes
The income tax provision (benefit) comprises the following:
<TABLE>
<CAPTION>
Year Two Months Year
ended ended ended
May 31, May 31, March 31,
1994 1993 1993
---------- ---------- ---------
<S> <C>
Current:
Federal..................................................... $(93,000) $(440,000) $455,000
State....................................................... -- -- 111,000
----------- --------- --------
(93,000) (440,000) 566,000
--
Deferred:
Federal..................................................... -- 120,000 (44,000)
State....................................................... -- -- (7,000)
----------- --------- --------
-- 120,000 (51,000)
----------- --------- --------
$(93,000) $(320,000) $515,000
=========== ========= ========
Utilization of net operating loss carryforwards............... $ -- $ -- $(41,000)
=========== ========= ========
</TABLE>
F-11
<PAGE>
The significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
May 31, May 31, April 1,
1994 1993 1993
---------- ---------- --------
<S> <C>
Deferred tax liabilities:
Depreciation.................................................... $ 42,000 $ 22,000 $ --
---------- ----------- ---------
42,000 22,000 --
---------- ----------- ---------
Deferred tax assets:
Depreciation.................................................... -- -- (10,000)
Accrued liabilities and reserves not
currently deductible.......................................... (139,000) (174,000) (110,000)
Net operating loss carryforwards................................ (210,000) (360,000) (360,000)
----------- ----------- ---------
(349,000) (534,000) (480,000)
----------- ----------- ---------
(307,000) (512,000) (480,000)
Less valuation allowance............................................. 307,000 512,000 360,000
---------- ----------- ---------
Net deferred tax assets.............................................. $ -- $ -- $ 120,000
========== =========== =========
</TABLE>
Upon adoption of FAS 109 at April 1, 1993, the Company had $480,000
of net deferred tax assets. At that time, management believed it was more
likely than not that approximately $120,000 of such assets were realizable
based on projected future operating results. Due to the Company's operating
results in the two months ended May 31, 1993 and fiscal 1994, management
concluded it was more likely than not that such assets were not realizable and,
therefore, a full valuation allowance was provided.
The components of the deferred income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
Year ended
March 31, 1993
--------------
<S> <C>
Leases.......................................................... $ 51,000
Accrued liabilities and reserves not currently deductible....... (60,000)
Depreciation.................................................... (39,000)
Other........................................................... (3,000)
------
$ (51,000)
</TABLE> ======
F-12
<PAGE>
The effective tax rates differ from the federal statutory rates by
applying the applicable federal statutory income tax rate to pretax income as
follows:
<TABLE>
<CAPTION>
May 31, May 31, March 31,
1994 1993 1993
---------- ---------- ----------
<S> <C>
Federal statutory rate.......................................... (34)% (34)% 34%
State taxes, net of federal benefit............................. -- -- 5
Change in valuation allowance................................... (6) 4 --
Alternative minimum tax effect and other........................ -- (2) --
(40)% (32)% 39%
===== ===== ===
</TABLE>
At May 31, 1994, the Company had federal net operating loss
carryforwards of approximately $600,000 which expire between 2001 and 2009.
As a result of an "ownership change," as defined under Internal Revenue
Code Section 382, which occurred in April 1988, the utilization of approximately
$400,000 of federal net operating loss carryforwards is subject to an annual
limitation of approximately $40,000. Due to a change in the Company's tax year
end, as defined under Revenue Procedure 84-34, which occurred at March 31, 1991,
the utilization of approximately $200,000 of federal net operating loss
carryforwards is subject to an annual limitation of approximately $70,000.
8. Redeemable Convertible Preferred Stock
Through May 31, 1994, the Company authorized 2,500,000 shares of
preferred stock of which 1,500,000 shares were designated Series A and 1,000,000
shares were designated Series B. At May 31, 1994 and May 31, 1993, and at March
31, 1993, 1,285,716 shares of Series A and 425,000 shares of Series B redeemable
convertible preferred stock were issued and outstanding.
The rights, preferences, privileges, and restrictions relating to the
Series A and B redeemable convertible preferred stocks are as follows:
(bullet) Commencing on March 31, 1994 and on each of the next three
anniversaries (the "Scheduled Redemption Dates"), upon receipt of
a written request received from holders of two-thirds of the Series A
and Series B redeemable convertible preferred stock, the Company
will redeem 25% per year of the outstanding shares, at a rate of $.70
per share for Series A and $1.20 per share for Series B (the
"Redemption Price").
(bullet) At the shareholders' option, each share of Series A and B redeemable
convertible preferred stock is convertible into one share of common
stock, subject to certain antidilution provisions, at any time after
issuance and on or prior to the fifth day prior to any redemption date.
Shares of common stock reserved for conversion of the Series A and B
stock total
F-13
<PAGE>
1,500,000 and 1,000,000, respectively. The preferred shares are
automatically converted in the event of an initial public offering
with minimum proceeds of $3,000,000 and an offering price of at least
$1.40 per share.
(bullet) Holders are entitled to a preferential cash dividend at the rate of
$.07 per share for Series A and $.12 per share for Series B per
year, as declared by the Board of Directors. Holders are also
entitled to proportional cash or stock dividends as, and if,
paid to common shareholders. The rights to cash dividends are
noncumulative until December 30, 1994.
(bullet) Each holder is entitled to the number of votes equal to the number of
shares of common stock into which shares of Series A and B
redeemable convertible preferred stock could be converted. Voting
rights and powers are equal to the voting rights and powers of common
stock.
(bullet) In the event of liquidation, the holders are entitled to receive
distributions, in the amount of $.70 per share for Series A and $1.20
per share for Series B, plus all declared and cumulative dividends.
(bullet) In the event of an acquisition of the Company or a sale of all or
substantially all the Company's assets, the holders shall be paid for
$.70 per share for Series A and $1.20 per share for Series B in
cash or in securities of the acquiring corporation.
9. Common Stock
During 1986, the Company adopted an employee stock purchase plan and
reserved 200,000 shares of common stock for sale and issuance to employees,
directors, officers, and consultants of the Company at prices not less than the
current estimated fair value of the shares, as determined by the Board of
Directors, at the date of grant.
During 1988, the Company adopted the 1988 Stock Option Plan (the
"Plan") and reserved 500,000 shares of common stock for sale and issuance to
employees, directors, officers, and consultants. On April 27, 1993, the number
of shares of common stock reserved for sale under the Plan was increased to
750,000. Under the Plan, the Company may grant either nonstatutory stock options
or incentive stock options. Incentive stock options are granted to employees,
directors, or officers at prices not less than the estimated fair value of the
Company's common stock, as determined by the Board of Directors, on the grant
date. Nonstatutory stock options are granted to employees, directors, officers,
or consultants at prices not less than 85% of the estimated fair value of the
Company's common stock. Options vest 20% each year over five years, provided
that such person is still employed by the Company.
F-14
<PAGE>
Activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Shares Outstanding Options
Available Number of Exercise
for Grant Shares Price
--------- ----------- ------------
<S> <C> <C> <C>
Balance at March 31, 1992.............................. 218,400 278,200 $ 0.40-$1.00
Granted................................................ (207,650) 207,650 $ 1.00-$4.00
Canceled............................................... 35,500 (35,500) $ 1.00-$2.00
Exercised.............................................. -- (29,000) $ 0.45-$1.00
-------- -------
Balance at March 31, 1993.............................. 46,250 421,350 $ 0.40-$4.00
Additional shares reserved............................. 250,000 -- --
Granted................................................ (5,700) 5,700 $ 4.00
2,700 (2,700) $ 0.45-$2.00
-------- -------
Balance at May 31, 1993................................ 293,250 424,350 $ 0.40-$4.00
Granted................................................ (112,600) 112,600 $ 2.00-$8.00
Canceled............................................... 48,120 (48,120) $ 0.45-$8.00
-- (27,300) $ 0.40-$8.00
-------- -------
Balance at May 31, 1994................................ 228,770 461,530 $ 0.40-$8.00
========= =======
Exercisable at May 31, 1994............................ 204,040 $ 0.40-$8.00
</TABLE>
10. Subsequent Events
On June 10, 1994, the Board authorized an offer to individuals who had
previously received options at exercise prices of $4.00 and $8.00 per share the
right to exchange those options for new options at an exercise price of $2.00
per share. Holders of options for approximately 138,550 shares are expected to
exchange existing options for the new grants at $2.00 per share.
In July 1994, the Company borrowed $55,000 from a shareholder under a
Promissory Note Agreement. The Note bears interest at 9.5% with principal and
interest due on September 15, 1994. In a separate transaction, the Company
received $200,000 from nine other shareholders under a $500,000 Loan and Warrant
Agreement. Effective July 28, 1994, the nine Convertible Promissory Notes bear
an interest rate of 9%. The principal and accrued interest is due and payable
upon demand at any time after January 27, 1995, unless otherwise earlier
converted into equity securities as set forth in the Loan and Warrant
Agreements.
In August 1994, the Texas Hospital Association and the Louisiana
Hospital Association advised the Company that they were terminating their
Association Agreements effective
F-15
<PAGE>
December 31, 1994. The Texas program will be open to bidding by prospective
vendors for the period beginning January 1, 1995 and the Company has been
invited to submit a bid. For the year ended May 31, 1994, approximately 19% of
the Company's revenues came from affiliated hospitals under these agreements.
11. Subsequent Event (Unaudited)
On April 11, 1994, the Company agreed to be acquired by HCIA Inc.
("HCIA") for approximately $14.25 million in cash. The acquisition was effected
through an Agreement and Plan of Reorganization (the "Agreement") whereby a
subsidiary of HCIA merged into Datis. Pursuant to the Agreement, each share of
Datis Capital Stock was converted to the right to receive cash equal to the
quotient obtained by dividing (a) the sum of cash purchase price and the
aggregate exercise price of all options to purchase Datis common stock which are
exercised between the date of the Agreement and the effective date of the merger
and (b) the total number of shares of Datis Capital Stock outstanding on the
effective date of the Merger. The acquisition was completed on April 28, 1995.
In connection with its acquisition by HCIA, the Company has modified
its financial statements to conform with the financial reporting requirements of
the Securities and Exchange Commission. In addition to including expanded
footnote disclosures, the Company has classified its redeemable preferred stock
in the accompanying balance sheet outside shareholders' deficit. In the
Company's previously-issued financial statements, the Company classified its
redeemable preferred stock as a component of shareholders' equity, which is an
acceptable presentation for a non-public entity. This reclassification has no
effect on the Company's previously-reported operations or net income.
F-16
<PAGE>
DATIS CORPORATION
BALANCE SHEET
March 31, 1995
(in thousands)
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents....................................................... $ 350
Accounts receivable, net........................................................ 1,036
Prepaid expenses and other...................................................... 65
--------
Total current assets......................................................... 1,451
Property and equipment, net.......................................................... 1,400
Other assets......................................................................... 36
--------
Total assets................................................................. $2,887
========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations.................................... $ 282
Accounts payable and accrued expenses........................................... 944
Bank borrowings................................................................. 400
Deferred revenue................................................................ 1,066
Current portion of long-term debt............................................... 133
Notes payable to shareholders................................................... 500
--------
Total current liabilities....................................................... 3,325
Capital lease obligations, net of current portion.................................... 128
Long-term debt, net of current portion............................................... 162
Other liabilities.................................................................... 23
--------
Total liabilities............................................................. 3,638
--------
Redeemable convertible preferred stock:
Series A.......................................................................... 872
Series B.......................................................................... 507
--------
Total redeemable convertible preferred stock.................................. 1,379
--------
Shareholders' deficit:
Common Stock.................................................................... 241
Accumulated deficit............................................................. (2,371)
-------
Total shareholders' deficit................................................... (2,130)
Total liabilities, redeemable convertible preferred stock -------
and shareholders' deficit................................................... $ 2,887
=======
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
DATIS CORPORATION
STATEMENT OF OPERATIONS
Ten Months ended March 31, 1994 and 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C>
Net revenues:
Basic reports...................................................... $4,898 $ 4,559
Special reports.................................................... 2,280 1,898
------ --------
Total net revenues............................................... 7,178 6,457
------ --------
Operating expenses:
Cost of revenues................................................... 3,007 3,292
Selling and marketing.............................................. 2,732 2,470
General and administrative......................................... 1,228 1,305
Research and development........................................... 491 404
------ --------
Total operating expenses......................................... 7,458 7,471
------ --------
Loss from operations.................................................... (280) (1,014)
Interest expense, net................................................... 129 134
------ --------
Loss before income taxes................................................ (409) (1,148)
Income tax benefit...................................................... (163) --
------ --------
Net loss $ (246) $ (1,148)
====== ========
</TABLE>
See accompanying notes to financial statements.
F-18
<PAGE>
DATIS CORPORATION
STATEMENT OF SHAREHOLDERS' DEFICIT
Ten Months ended March 31, 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Notes
Receivable Total
Common Stock Accumulated from Shareholder's
Shares Amount Deficit Shareholders Deficit
------ ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance June 1, 1994............... 1,030 $241 $(1,223) $(40) $(1,022)
Payment of Note Receivable......... -- -- -- 40 40
Net loss........................... -- -- (1,148) -- (1,148)
----- ---- ------- ---- -------
Balance March 31, 1995............. 1,030 $241 $(2,371) -- $(2,130)
===== ==== ======= ==== =======
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
DATIS CORPORATION
STATEMENTS OF CASH FLOWS
Ten months ended March 31, 1994 and 1995
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C>
Net loss................................................................................ $ (246) $(1,148)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization........................................................ 495 543
Change in operating assets and liabilities:
Accounts receivable.................................................................. 540 1,136
Income taxes receivable.............................................................. (621) 569
Prepaid expenses and other........................................................... (58) (9)
Other assets......................................................................... (86) 13
Accounts payable and accrued expenses................................................ (45) (351)
Deferred revenue..................................................................... 41 51
------ --------
Net cash provided by operating activities............................................... 20 804
------ --------
Cash flows from investing activities:
Purchases of property and equipment.................................................. (266) (179)
------ --------
Cash flows from financing activities:
Borrowings (repayments) under line of credit......................................... 550 (522)
Borrowings from shareholders......................................................... -- 500
Proceeds from issuance of long-term debt............................................. 212 --
Repayment of long-term debt.......................................................... (59) (112)
Principal payments on capital lease obligations...................................... (327) (298)
Issuance of common stock............................................................. 21 34
------ --------
Net cash provided (used) by financing activities........................................ 397 (398)
------ --------
Net increase in cash and cash equivalents............................................... 151 227
Cash and cash equivalents at beginning of period........................................ 58 123
------ --------
Cash and cash equivalents at end of period.............................................. $ 209 $ 350
====== ========
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE>
DATIS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1995
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited interim financial statements of Datis have
been prepared on the basis of generally accepted accounting principles. In the
opinion of management, these statements reflect all adjustments, consisting only
of normal, recurring adjustments, necessary for a fair presentation of Datis'
financial condition, results of operations and cash flows for the periods
presented. The results of operations for the ten months ended March 31, 1995 may
not be indicative of the results that may be expected for the full year ending
May 31, 1995. These financial statements and notes should be read in conjunction
with the financial statements and notes included elsewhere herein.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
William M. Mercer, Incorporated:
We have audited the accompanying balance sheet of William M. Mercer,
Incorporated National Health Analysis Unit (the Unit) as of December 31, 1994
and September 30, 1995, and the related statements of operations and cash flows
for the years ended December 31, 1993 and 1994 and the nine months ended
September 30, 1995. These financial statements are the responsibility of the
Unit's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of William M. Mercer,
Incorporated National Health Analysis Unit as of December 31, 1994 and September
30, 1995, and the results of its operations and its cash flows for the years
ended December 31, 1993 and 1994 and the nine months ended September 30, 1995 in
conformity with generally accepted accounting principles.
As described in note 5, the operations and certain assets of the Unit
were sold to HCIA Inc. pursuant to an asset purchase agreement dated November 8,
1995.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 30, 1996
F-22
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
BALANCE SHEETS
December 31, 1994 and September 30, 1995
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995
------------ -------------
ASSETS
<S> <C>
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $199,417 in 1994 and $295,663 in 1995............... $876,241 $778,940
Prepaid expenses and other assets, net............................... 106,818 96,766
-------- --------
Total current assets................................................... 983,059 875,706
Furniture and equipment, net........................................... 1,400 8,000
-------- --------
Total assets........................................................... $984,459 $883,706
======== ========
LIABILITIES
Current liabilities:
Accrued salaries and wages........................................... $144,500 $176,000
Accrued expenses..................................................... 120,600 122,000
Amount payable to other divisions.................................... 719,359 585,706
-------- --------
Total liabilities...................................................... $984,459 $883,706
======== ========
</TABLE>
F-23
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
STATEMENTS OF OPERATIONS
Years ended December 31, 1993 and 1994
and nine months ended September 30, 1995
<TABLE>
<CAPTION>
Nine months
Year ended December 31, ended
----------------------- September 30,
1993 1994 1995
---- ---- ----------
<S> <C>
Revenue.............................................. $ 4,736,848 $7,287,936 $5,752,768
----------- ---------- ----------
Expenses
Salaries, wages and benefits.................... 4,049,247 4,976,713 3,918,852
Other operating expenses........................ 1,821,042 2,146,777 1,672,043
Provision for doubtful accounts................. 1,947 136,269 90,446
Depreciation and amortization................... 6,829 23,989 51,505
----------- ---------- ----------
Total operating expenses............................. 5,879,065 7,283,748 5,732,846
----------- ---------- ----------
Operating income (loss).............................. $(1,142,217) $ 4,188 $ 19,922
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
STATEMENTS OF CASH FLOWS
Years ended December 31, 1993 and 1994
and nine months ended September 30, 1995
<TABLE>
<CAPTION>
Nine months
Year ended December 31, ended
------------------------ September 30,
1993 1994 1995
---- ---- -------------
<S> <C>
Cash flows from operating activities:
Operating income (loss)................................... $(1,142,217) $4,188 $ 19,922
Adjustments to reconcile to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 6,829 23,989 51,505
(Increase) decrease in accounts receivable............. (240,179) (76,171) 97,301
Increase in prepaid expenses and other assets.......... (37,028) (58,611) (41,064)
Increase in accrued salaries and wages................. 32,400 40,500 31,500
Increase (decrease) in accrued expenses................ 45,700 (19,000) 1,400
Increase (decrease) in amount payable to other
divisions............................................ 192,278 89,293 (133,653)
----------- ------- ---------
Net cash provided by (used in) operating
activities............................... (1,142,217) 4,188 26,911
----------- ------- ---------
Cash flows from investing activities
-- acquisition of furniture and equipment -- -- (6,989)
----------- ------- ---------
Cash flows from financing activities --
funding (distribution) of net loss (income) by (to) parent 1,142,217 (4,188) (19,922)
----------- ------- ---------
Net increase in cash...................................... -- -- --
Cash at beginning of period............................... -- -- --
----------- ------- ---------
Cash at end of period..................................... $ -- $ -- $ --
=========== ======= =========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
NOTES TO FINANCIAL STATEMENTS
December 31, 1993 and 1994 and September 30, 1995
(1) Background
William M. Mercer, Incorporated ("Mercer"), a subsidiary of Mercer
Consulting Group, Inc., is a consulting firm providing advice and services
to the management of organizations throughout the world in the areas of
human resources, including retirement, health care and compensation
consulting. The National Health Analysis Unit of Mercer (the "Unit")
provides a database service to clients of other Mercer divisions for the
analysis of healthcare costs. The service, known as the Comprehensive
Health Analysis Management Program ("CHAMP") was begun in 1988.
The accompanying financial statements reflect the historical accounts
of the Unit as recorded by Mercer. Included in these accounts are
allocations of shared expenses and overhead costs associated with operating
the facility in which the Unit is located as well as all local level general and
administrative costs. These accounts do not include allocations of corporate
office general and administrative costs or income taxes that were incurred by
Mercer, as such costs are not allocated by Mercer to its operating division.
In management's opinion, the Mercer corporate office general and administrative
costs, if allocated, would not be material to the expenses of the Unit. Net
income or loss from operations of the Unit accrues to Mercer; therefore no
Unit equity accounts are maintained.
(2) Summary of Significant Accounting Policies
Furniture and Equipment
Furniture and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated on a straight-line basis over their
estimated useful lives of three to ten years.
Computer Software Costs
Costs for internally developed software are accounted for in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." At
December 31, 1994 and September 30, 1995, as technological feasibility related
to current software development had not yet been achieved, no such costs had
been capitalized.
F-26
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
NOTES TO FINANCIAL STATEMENTS -- (Continued)
During 1993, 1994 and the nine months ended September 30, 1995, the Unit
incurred expenses for research and development of approximately $1,040,000,
$1,360,000 and $1,020,000, respectively.
Computer software that is purchased from outside vendors is capitalized
when purchased and amortized on a straight-line basis over an estimated life of
three years.
Revenue Recognition
Revenues are derived from contracts and agreements for standard
services, special projects and software licensing fees. Revenue for standard
services is recognized in the period that the service is provided to the
customer. Revenue for special projects is recognized on a percentage of
completion basis using the cost to cost method. Revenue from software license
agreements is recognized when delivery has occurred, collectibility is probable
and remaining obligations are no longer significant.
Allocations of Shared Expenses and Overheads
Certain expenses incurred by Mercer which benefit more than one of its
divisions, including the Unit, are allocated according to an estimate of each
division's proportionate share of the pooled expenses. Expenses allocated to the
Unit include those for compensation, employee benefits, facilities,
communications, shared administrative and accounting services and information
technology.
(3) Related Party Transactions
Services provided by the Unit are to clients of other Mercer divisions.
Revenues for such services are derived directly from such clients or via
pass-through billing from the other Mercer divisions. The sources of revenue
included in the accompanying statements of operation are as follows:
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31, September 30,
1993 1994 1995
---- ---- ------------
<S> <C>
Direct billing to Mercer clients..................... $ 127,002 $ 282,892 $ 401,345
Pass-through billing from other Mercer divisions..... 4,609,846 7,005,044 5,351,423
----------- ---------- -----------
Total.............................. $4,736,848 $7,287,936 $5,752,768
========== ========== ==========
</TABLE>
F-27
<PAGE>
WILLIAM M. MERCER, INCORPORATED
NATIONAL HEALTH ANALYSIS UNIT
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Operating expenses of the Unit include allocations from Mercer of
shared expenses as follows:
<TABLE>
<CAPTION>
Nine months
ended
Year ended December 31, September 30,
1993 1994 1995
---- ---- ------------
<S> <C> <C>
Compensation......................................... $ 72,679 $ 59,772 $ 47,015
Employee benefits.................................... 64,639 79,230 62,208
Facilities........................................... 596,426 563,247 401,959
Communications....................................... 91,441 106,578 71,196
Shared Administrative and Accounting Services........ 108,937 144,488 136,764
Information Technology............................... 200,000 200,000 150,000
---------- ---------- ----------
Total.............................. $1,134,122 $1,153,315 $ 869,142
========== ========== ==========
</TABLE>
Compensation, employee benefits, communications costs and shared
administrative and accounting expenses are allocated based upon the number of
employees within the division, with consideration of actual direct benefit
derived when applicable. Facility expenses are allocated on a square
footage basis. Information technology costs have been allocated based on
an estimate of the market value of services provided. In management's
opinion, the methods of allocation are reasonable.
(4) Contingent Liabilities
From time to time, the Unit is subject to claims and suits arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate resolution of pending legal
proceedings will not have a material effect on the Unit's financial statements.
F-28
<PAGE>
(5) Subsequent Event
On December 15, 1995, Mercer sold the Unit to HCIA Inc. ("HCIA") for
$17,500,000 in cash pursuant to an Asset Purchase Agreement ("Agreement")
dated November 8, 1995. HCIA is primarily engaged in providing clinical and
financial information on the health care industry. Included in the sale are
the CHAMP database service, the related software documentation, client
information and certain fixed assets. In addition, certain of the Unit's staff
will become employees of HCIA and Mercer has agreed not to compete with HCIA in
providing services similar to those previously provided by the Unit.
F-29
<PAGE>
Report of Independent Auditors
To the Board of Directors and Stockholders
HealthVISION, Inc.
We have audited the accompanying consolidated balance sheets of HealthVISION,
Inc. as of December 31, 1995 and 1994, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year ended December
31, 1995 and for the period February 2, 1994 (inception) through December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
HealthVISION, Inc. as of December 31, 1995 and 1994 and the consolidated results
of its operations and its cash flows for the year ended December 31, 1995 and
for the period February 2, 1994 (inception) through December 31, 1994 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Walnut Creek, California
January 26, 1996, except Note 12,
as to which the date is July 30, 1996
F-30
<PAGE>
HealthVISION, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1994 1995
--------------------- --------------------
<S> <C>
Assets
Current assets:
Cash and cash equivalents $ 6,207,043 $ 1,589,457
Accounts receivable, less allowance for doubtful accounts of
$35,645 and $413,126, respectively 1,205,964 1,664,784
Intercompany receivable -- 129,009
Prepaid expenses 70,117 521,951
Investment in LBA Health Care Management Inc. -- 15,978,182
--------------------- --------------------
Total current assets 7,483,124 19,883,383
Equipment and furniture, net 640,196 1,946,000
Intangibles, net 4,486,093 3,208,781
--------------------- --------------------
Total assets $12,609,413 $25,038,164
===================== ====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,729,517 $ 1,280,222
Accrued compensation and related liabilities 151,828 1,080,644
Deferred revenue 1,875,506 1,177,358
Other accrued liabilities 104,114 1,134,640
Current portion of long-term debt 314,702 557,979
--------------------- --------------------
Total current liabilities 4,175,667 5,230,843
Long-term debt, less current portion 309,178 703,129
Commitments and contingencies
Stockholders' equity:
7% preferred stock, $.01 par value; authorized - 1,000,000 shares; issued
and outstanding - 201,900 and 256,900 shares at December
31, 1994 and 1995, respectively (aggregate liquidation
preference $28,225,867) 2,020 2,570
Convertible preferred stock, Series A-1, $.01 par value; authorized -
5,500,000 shares; issued and outstanding 5,278,529 shares at December 31,
1995 (none at December 31, 1994) (aggregate liquidation preference
$10,978,182) -- 52,785
Convertible preferred stock, Series A-2, $.01 par value;
authorized - 3,000,000 shares; issued and outstanding - 2,883,756 shares
at December 31, 1995 (none at December 31, 1994) (aggregate liquidation
preference $10,000,000) -- 28,838
Common stock, $.01 par value; authorized - 40,000,000 shares;
issued and outstanding - 4,575,918 and 4,588,438 shares at
December 31, 1994 and December 31, 1995, respectively 45,759 45,884
Additional paid-in capital 22,145,443 48,546,696
Accumulated deficit (14,127,983) (29,252,891)
Cumulative translation adjustment 59,329 (319,690)
--------------------- --------------------
Total stockholders' equity 8,124,568 19,104,192
--------------------- --------------------
Total liabilities and stockholders' equity $ 12,609,413 $ 25,038,164
===================== ====================
</TABLE>
See accompanying notes.
F-31
<PAGE>
HealthVISION, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the period
February 2, 1994
(inception) through Year ended
December 31, December 31,
1994 1995
--------------------- -------------------
<S> <C>
Revenue:
Software licenses $ 1,371,285 $ 2,144,612
Maintenance and services 3,255,923 4,005,525
Hardware 3,001,538 999,197
--------------------- -------------------
Total revenue 7,628,746 7,149,334
Cost of revenue:
Software licenses, maintenance and services 3,832,351 4,537,400
Hardware 2,496,165 825,799
--------------------- -------------------
Total cost of revenue 6,328,516 5,363,199
--------------------- -------------------
Gross profit 1,300,230 1,786,135
Operating expenses:
Product development 3,386,533 6,761,448
Sales and marketing 2,150,206 5,593,380
General and administration 1,655,259 4,289,450
Write-off of in-process technology 8,400,000 700,000
--------------------- -------------------
Total operating expenses 15,591,998 17,344,278
--------------------- -------------------
Loss from operations (14,291,768) (15,558,143)
Other income (expense):
Foreign exchange gain - 362,711
Interest income 171,243 104,932
Interest expense (7,458) (34,408)
--------------------- -------------------
Total other income (expense), net 163,785 433,235
--------------------- -------------------
Net loss (14,127,983) (15,124,908)
Preferred stock dividend 1,052,951 1,482,916
--------------------- -------------------
Net loss available to common stockholders $(15,180,934) $(16,607,824)
===================== ===================
</TABLE>
See accompanying notes.
F-32
<PAGE>
HealthVISION, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Period February 2, 1994 (Inception) through December 31, 1995
<TABLE>
<CAPTION>
Series A-1 Series A-2
7% Convertible Convertible Additional
Preferred Preferred Preferred Common Paid-In
Stock Stock Stock Stock Capital
-----------------------------------------------------------------------------
<S> <C>
Balance at February 2, 1994 $ -- $ -- $ -- $ -- $ --
Issuance of 156,250 shares of 7% preferred
stock at $100 per share 1,563 -- -- -- 15,623,437
Issuance of 3,317,850 shares of common stock
at $.449 per share -- -- -- 33,179 1,455,548
Exchange of 288,604 shares of common stock at
$.449 per share in connection with the
acquisition of HVC Holdings Canada Ltd.
And HealthVISION Corporation -- -- -- 2,886 126,609
Issuance of 45,650 share of 7% preferred
stock at $100 per share 457 -- -- -- 4,564,543
Issuance of 969,464 shares of common stock at
$.398 per share -- -- -- 9,694 375,306
Net loss -- -- -- -- --
Translation adjustment -- -- -- -- --
-----------------------------------------------------------------------------
Balance at December 31, 1994 2,020 -- -- 45,759 22,145,443
Issuance of 5,278,529 shares of convertible
preferred Series A-1 stock for $2.080 per
share in connection with the acquisition -- 52,785 -- -- 10,925,397
of LBA
Issuance of 1,441,878 shares of convertible
preferred Series A-2 stock for cash at
$3.468 per share -- -- 14,419 -- 4,985,581
Issuance of 1,441,878 shares of convertible
preferred Series A-2 stock for cash at $3.468 -- -- 14,419 -- 4,985,581
per share
Issuance of 12,520 shares of common stock at
$.429 per share upon exercise of options -- -- -- 125 5,244
Issuance of 55,000 shares of 7% preferred
stock for conversion of bridge financing
at $100 per share 550 -- -- -- 5,499,450
Net loss -- -- -- -- --
Translation adjustment -- -- -- -- --
=============================================================================
Balance at December 31, 1995 $ 2,570 $ 52,785 $ 28,838 $ 45,884 $48,546,696
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
Cumulative Total
Accumulated Translation Stockholders'
Deficit Adjustment Equity
------------------------------------------------
<S> <C>
Balance at February 2, 1994 $ -- $ -- $ --
Issuance of 156,250 shares of 7% preferred
stock at $100 per share -- -- 15,625,000
Issuance of 3,317,850 shares of common stock
at $.449 per share -- -- 1,488,727
Exchange of 288,604 shares of common stock at
$.449 per share in connection with the
acquisition of HVC Holdings Canada Ltd.
And HealthVISION Corporation -- -- 129,495
Issuance of 45,650 share of 7% preferred
stock at $100 per share -- -- 4,565,000
Issuance of 969,464 shares of common stock at
$.398 per share -- -- 385,000
Net loss (14,127,983) -- (14,127,983)
Translation adjustment -- 59,329 59,329
------------------------------------------------
Balance at December 31, 1994 (14,127,983) 59,329 8,124,568
Issuance of 5,278,529 shares of convertible
preferred Series A-1 stock for $2.080 per
share in connection with the acquisition -- -- 10,978,182
of LBA
Issuance of 1,441,878 shares of convertible
preferred Series A-2 stock for cash at
$3.468 per share -- -- 5,000,000
Issuance of 1,441,878 shares of convertible
preferred Series A-2 stock for cash at $3.468 -- -- 5,000,000
per share
Issuance of 12,520 shares of common stock at
$.429 per share upon exercise of options -- -- 5,369
Issuance of 55,000 shares of 7% preferred
stock for conversion of bridge financing
at $100 per share -- -- 5,500,000
Net loss (15,124,908) -- (15,124,908)
Translation adjustment -- (379,019) (379,019)
================================================
Balance at December 31, 1995 $(29,252,891) $ (319,690) $ 19,104,192
================================================
</TABLE>
F-33
<PAGE>
HealthVISION, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period
February 2, 1994
(Inception)
through Year Ended
December 31, December 31,
1994 1995
------------------- -------------------
<S> <C>
Operating activities
Net loss $(14,127,983) $(15,124,908)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization of equipment and furniture 256,145 608,076
Write-off of in-process technology 8,400,000 700,000
Amortization of intangibles 1,202,695 1,323,501
Changes in operating assets and liabilities:
Accounts receivable 3,055,790 (458,820)
Intercompany receivable -- (129,009)
Prepaid expenses 28,937 (451,834)
Accounts payable 348,657 (449,295)
Accrued compensation and related liabilities 151,828 928,816
Deferred revenue (2,064,323) (698,148)
Other accrued liabilities (988,819) 1,030,526
------------------- -------------------
Total adjustments 10,390,910 2,403,813
------------------- -------------------
Net cash used in operating activities (3,737,073) (12,721,095)
Investing activities
Purchase of equipment and furniture (471,801) (972,763)
Capitalized software development costs (81,502) (46,189)
Purchase of software license -- (700,000)
Acquisition of HVC Holdings Canada Ltd. and HealthVISION Corporation (12,416,927) --
Cash acquired from purchase of subsidiaries 851,192 --
Acquisition of LBA Health Care Management Inc. -- (5,000,000)
------------------- -------------------
Net cash used in investing activities (12,119,038) (6,718,952)
Financing activities
Proceeds from issuance of common stock 1,873,727 5,369
Proceeds from issuance of 7% redeemable preferred stock 20,190,000 --
Proceeds from issuance of convertible Series A-2 preferred stock -- 5,000,000
Proceeds from long-term debt and bridge financing -- 10,500,000
Principal payments made on long-term debt (38,220) (303,889)
------------------- -------------------
Net cash provided by financing activities 22,025,507 15,201,480
Effect of exchange rate changes on cash 37,647 (379,019)
------------------- -------------------
Net increase (decrease) in cash and equivalents 6,207,043 (4,617,586)
Cash and equivalents, beginning of period -- 6,207,043
------------------- -------------------
Cash and equivalents, end of period $ 6,207,043 $ 1,589,457
=================== ===================
Supplemental schedule of non-cash investing and financing activities:
Purchase of equipment under capital lease arrangements $ -- $ 941,117
=================== ===================
Issuance of common stock to acquire HVC Holdings Canada Ltd. and
HealthVISION Corporation $ 129,495 $ --
=================== ===================
Issuance of 7% preferred stock to convert bridge financing $ -- $ 5,500,000
=================== ===================
Issuance of Series A-1 convertible preferred stock to acquire LBA Health
Care Management, Inc. $ -- $10,978,182
=================== ===================
Issuance of A-2 convertible preferred stock to convert bridge financing $ -- $ 5,000,000
=================== ===================
</TABLE>
See accompanying notes.
F-34
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1995 and
for the period February 2, 1994 (inception) through December 31, 1994
1. The Company, Organization and Basis of Presentation
HealthVISION, Inc. (the "Company") was organized as a Delaware corporation on
February 2, 1994, began operations on February 15, 1994 and was incorporated to
acquire HVC Holdings Canada Ltd., HealthVISION Corporation and their
subsidiaries. The Company develops, markets and supports health care information
products focused on lowering costs of health care and improving clinical
processes for integrated delivery systems, hospitals and office-based
physicians.
On February 14, 1994, the Company acquired substantially all of the business,
assets, and liabilities of HVC Holdings Canada Ltd., HealthVISION Corporation
(the "Predecessor Company") and their subsidiaries for $13,994,016. The
transaction was recorded using the purchase method of accounting. Accordingly, a
basis of accounting of $13,994,016 was established based on the purchase price,
resulting in purchase price in excess of fair market value of net liabilities
assumed.
On September 27, 1995, LBA Health Care Management, Inc., a newly formed
subsidiary of the Company, acquired substantially all of the business, assets,
and liabilities of LBA Health Care Management, Inc. and Healthcare Data Source,
Inc. (collectively, "LBA") for approximately $51,178,000. The transaction was
recorded using the purchase method of accounting. Accordingly, a basis of
accounting of $49,850,853 was established based on the purchase price, resulting
in purchase price in excess of fair market value of net assets acquired.
The consolidated financial statements include the accounts of HealthVISION, Inc.
and its subsidiary companies, all of which are wholly owned, except for LBA,
which is being accounted for on the cost basis in accordance with FASB 94 as the
Company has committed to sell this subsidiary and therefore control is deemed
temporary (see Note 12). These statements reflect the activity of the Company
and its subsidiaries, except for LBA, and all related intercompany transactions
and balances have been eliminated in consolidation.
The Company's financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company has incurred significant
losses of $15,124,908 for the year ended December 31, 1995, resulting in an
accumulated deficit of $29,252,891. The Company's future plans include
successful completion of additional financings, adjusting the level of its
operations to provide the cash necessary to continue operations through at least
January 1, 1997 and achieving future profitable operations.
F-35
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies
Revenue recognition
Software license - Revenue from license contracts is recognized on a
percentage-of-completion method with progress-to-completion measured based upon
labor costs incurred.
Maintenance and services - Maintenance and services include revenue derived from
maintenance, implementation and professional services related to project
management, training and hardware support. Revenue from maintenance is
recognized over the period the customer support services are provided. Service
revenues are recognized on a percentage-of-completion method with
progress-to-completion measured based upon labor costs incurred.
Hardware revenue - Hardware revenues represent revenue from sales of computers
and related network equipment. Revenue from hardware sales is recognized at the
later of shipment of the product or completion of significant obligations to the
customer.
Deferred revenue - Deferred revenues result from advance billings for which
revenues have not been recognized.
The Company's revenue recognition policy is in accordance with the provisions of
the American Institute of Certified Public Accountants' Statement of Position
91-1, "Software Revenue Recognition."
Cash and cash equivalents
Cash and cash equivalents consist of demand deposits and commercial paper in
highly liquid short-term investments with original maturities of less than 90
days. Such investments are stated at cost, which approximates market value.
Accounts receivable
Accounts receivable are primarily from health care organizations in the United
States and Canada. The Company conducts ongoing credit evaluations of its
customers, maintains reserves for potential credit losses and does not require
collateral.
Intangibles
Intangibles reflect the allocation of the excess purchase price resulting from
the acquisition. Amortization is based upon the period of expected economic
benefit which are as follows: assembled workforce -- 3 years and software -- 4-5
years.
F-36
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Intangibles (continued)
Acquired technology which is in process, has not reached technological
feasibility, and has no alternative future use is written off in the period in
which it is acquired. The write-off of in-process technology was $8,400,000 and
$700,000 for the period February 2, 1994 (inception) through December 31, 1994
and the year ended December 31, 1995, respectively.
The Company performs evaluations as of each balance sheet date assessing the
recoverability and amortization of intangibles by determining whether the
intangibles can be recovered through the estimated undiscounted cash flows of
the businesses acquired over the remaining amortization period. The Company
considers external factors relating to each acquired business, including
technological advances, competition, regulatory developments and trends of the
businesses and other pertinent factors in making its assessment. The Company
does not believe there currently are any factors that would require an
adjustment to the carrying value of its intangibles or their remaining lives as
of December 31, 1995.
Equipment and furniture
Equipment and furniture are recorded at cost less accumulated depreciation.
Depreciation is computed using rates calculated to amortize the cost of the
assets less their residual values over their estimated useful lives of three to
five years. Leasehold improvements are amortized over the terms of the
respective leases, or useful lives of the assets, whichever is shorter.
Software development costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs to complete a software product once technological feasibility
has been established are capitalized and amortized over the estimated economic
life of the software product on the straight-line basis, generally over three to
five years. At each balance sheet date, the Company performs an evaluation
assessing the recoverability of the unamortized capitalized costs by comparing
such costs to the net realizable value of the related product. Costs related to
the development of new software products incurred prior to establishing
technological feasibility are expensed as incurred. Software development costs
capitalized in periods ending December 31, 1994 and December 31, 1995 amounted
to $81,502 and $46,189, respectively. Amortization charged to operations as an
element of cost of sales of purchased software and capitalized software
development costs amounted to $869,576 and $996,834 for the periods ended
December 31, 1994 and December 31, 1995, respectively.
F-37
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
2. Summary of Significant Accounting Policies (continued)
Research and development
Costs to develop the Company's products are expensed as incurred in accordance
with Statement of Financial Accounting Standards No. 2, "Accounting for Research
and Development Costs," which establishes accounting and reporting standards for
research and development.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under Statement
109, the liability method is used to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Foreign currency translation
Assets and liabilities denominated in foreign currencies (primarily Canadian
dollars) are translated into U.S. dollars at the exchange rate on the balance
sheet date. Income and expense items are translated at average rates of exchange
prevailing during the period. Translation adjustments are accumulated and
reported as a separate component of stockholders' equity. Transaction
adjustments are recorded in other income/expense in the period in which they
occur.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-based compensation
In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued and is effective for the
Company's fiscal year 1996. The Company intends to continue to account for
employee stock options in accordance with APB Opinion No. 25 and will make the
necessary pro forma disclosures in fiscal year 1996.
F-38
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
3. Business Acquisitions
On February 14, 1994, the Company acquired all of the outstanding common shares
of the Predecessor Company. The business acquisition was accounted for by the
purchase method and the results of operations of the Predecessor Company are
included in the Company's consolidated financial statements beginning February
15, 1994. The allocation of the purchase price of $13,994,016 was as follows:
Current assets $ 5,212,000
Equipment and furniture 416,128
----------
5,628,128
Liabilities 7,075,722
----------
Net liabilities assumed 1,447,594
Cash and stock consideration 12,546,422
----------
Total purchase price $13,994,016
==========
A summary of the purchase price allocation at February 14, 1994 is as follows:
Current and other assets $ 5,628,128
In-process technology 8,400,000
Software 4,580,000
Assembled workforce 1,014,016
Deferred tax asset 2,170,000
Deferred tax liability (2,170,000)
----------
Total purchase price 19,622,144
Liabilities assumed (7,075,722)
----------
Cash and stock consideration $12,546,422
==========
On September 27, 1995, the Company acquired substantially all of the assets
of LBA. The aggregate purchase price (including closing costs) of LBA was
$51,178,182. The acquisition was financed through the issuance of debt
financings aggregating $35,000,000, the issuance of $10,978,172 (5,278,529
shares) of Series A-1 convertible preferred stock and $5,000,000 of cash
proceeds from the issuance of 1,441,878 shares of Series A-2 convertible
preferred stock. As discussed in Note 1, LBA has not been consolidated due to
control being temporary. Therefore, the Company has only recorded its investment
of $15,978,172, which is recorded on a cost basis, and has pushed down all debt,
net assets and excess purchase price relating to the purchase to LBA. The
allocation of the purchase price was as follows:
Total purchase price $51,178,182
Fair market value of net assets acquired (1,327,329)
-----------
Excess purchase price over fair market value of net assets
acquired ("excess purchase price") $49,850,853
===========
F-39
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
4. Intangibles
December 31,
----------------------------
1994 1995
----------------------------
Assembled work force $1,014,016 $1,014,016
Software 4,661,502 4,707,691
--------- ---------
5,675,518 5,721,707
Less accumulated amortization (1,189,425) (2,512,926)
--------- ---------
Intangibles, net $4,486,093 $3,208,781
========= =========
5. Equipment and Furniture
December 31,
---------------------------
1994 1995
---------------------------
Furniture and fixtures $ 87,126 $ 512,741
Computer equipment 643,109 1,954,383
Office equipment 109,513 235,277
Leasehold improvements 48,181 99,408
-------- ---------
887,929 2,801,809
Less accumulated depreciation and amortization (247,733) (855,809)
-------- ---------
Equipment and furniture, net $640,196 $1,946,000
======== =========
F-40
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
6. Long-Term Debt
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
<S> <C> -----------------------------
Loan from Western Diversification Fund, noninterest bearing,
due in six semiannual installments beginning October 1, 1994 $ 615,842 $ 421,846
Other amounts, including capital lease obligations, bearing
interest at rates ranging from 8% to 15.5% per annum,
payable in varying monthly installments plus interest
through 1998 8,038 839,262
-------- ---------
623,880 1,261,108
Less current portion (314,702) (557,979)
-------- ---------
Long-term debt $ 309,178 $ 703,129
======== =========
Scheduled maturities of long-term debt for the periods ended December 31 are as
follows:
Notes Capital Lease
Payable Obligations
---------- ------------
1996 $ 316,385 $ 332,793
1997 105,461 363,046
1998 - 318,223
1999 - -
2000 - -
-------- ---------
Total minimum payments $ 421,846 1,014,062
========
Less amount representing interest (174,800)
---------
Present value of minimum payments $ 839,262
=========
Equipment and furniture and the related accumulated depreciation under capital
leases at December 31, 1994 and December 31, 1995 were $632,938 and $632,938 and
$941,117 and $156,853, respectively.
F-41
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
6. Long-Term Debt (continued)
Master Equipment Lease Agreement
Effective July 24, 1995, the Company entered into a Master Equipment Lease
Agreement which provides for a lease facility of up to $2,000,000. The lease
facility is available to be drawn until December 31, 1995. The initial term of
each lease schedule is 36 months, at the end of which the Company must renew the
lease or purchase the leased equipment. As of December 31, 1995, $941,117 was
outstanding under the lease facility.
7. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1994 and 1995
are as follows:
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1995
------------------------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,200,000 $ 9,700,000
--------- ---------
Total deferred tax assets 4,200,000 9,700,000
Deferred tax liabilities:
Purchased intangibles from business acquisitions (1,700,000) (1,200,000)
--------- ---------
Total deferred tax liabilities (1,700,000) (1,200,000)
Valuation allowance for deferred tax assets (2,500,000) (8,500,000)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
The change in the valuation allowance for the years ended December 31,
1994 and 1995 was $2,500,000 and $6,000,000, respectively.
F-42
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
7. Income Taxes (continued)
As of December 31, 1995, the Company has total U.S. and foreign (primarily
Canada) net operating and other loss carryforwards of approximately $25,000,000
for income tax purposes that expire in various years, depending upon the country
in which the loss was incurred. When realized, the tax benefit of the
utilization of acquired net operating loss carryforwards of HVC Holdings Canada,
Ltd., HealthVISION Corporation and their subsidiaries will first be utilized to
reduce noncurrent intangible assets related to the acquisition of these
companies and then income tax expense. Due to the "change in ownership"
provisions of the Tax Reform Act of 1986, utilization of the Company's net
operating carryforwards could be subject to an annual limitation if a more than
50% change in ownership of the value of the Company's stock has occurred over a
three-year period.
8. Stockholders' Equity
7% preferred stock
The Company's 7% preferred stock consists of 1,000,000 authorized shares of $.01
par preferred stock of which 201,900 and 55,000 shares had been issued in 1994
and 1995, respectively at $100 per share totaling $25,690,000. The 7% preferred
stock is non-voting, cumulative and is entitled to a dividend rate of 7% of the
amount contributed. Preferred stock shares are not convertible into common
stock. The Company may redeem any or all of the 7% preferred stock, at any time,
at a price equal to $100 per share plus an amount equal to any and all dividends
accrued and unpaid. In the event of any liquidation, dissolution or winding up
of the Company, before any distribution or payment is made to the holders of
Series A-1 and A-2 convertible preferred stock and common stock, the holders of
7% preferred stock shall be entitled to an amount equal to $100 per share plus
any and all dividends accrued and unpaid as of the date of such distribution or
payment. Cumulative dividends earned but undeclared were $1,052,951 and
$2,535,867 at December 31, 1994 and December 31, 1995, respectively.
Convertible preferred stock
In September 1995, the Board of Directors authorized the designation of
5,500,000 shares of Series A-1 convertible preferred stock and 3,000,000 shares
of Series A-2 convertible preferred stock with stated par value of $.01.
F-43
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Stockholders' Equity (continued)
Convertible preferred stock (continued)
The following table summarizes the convertible preferred stock as of December
31, 1995:
Total Per Share Proceeds
Authorized Outstanding Liquidation Liquidation Net of
Series Shares Shares Preferences Preference Issuance Costs
------ ----------- ----------- ----------- ----------- --------------
A-1 5,500,000 5,278,529 $10,978,182 $2.08 $10,978,182
A-2 3,000,000 2,883,756 10,000,000 $3.47 10,000,000
-------- -------- ---------- ----------
8,500,000 8,162,285 $20,978,182 $20,978,182
========= ========= ========== ==========
In addition to the liquidation preference, holders of Series A-1 and A-2
convertible preferred stock are entitled to receive any declared but unpaid
dividends with respect to such stock. No dividends have been declared as of
December 31, 1995. If liquidation occurs, redeemable preferred stockholders are
entitled to receive a distribution of their liquidation preference first,
followed by a pro-rata distribution to Series A-1 and A-2 convertible preferred
stockholders, and thereafter, any remaining assets will be distributed to common
stockholders.
The convertible preferred stock has voting rights equivalent to the number of
common shares into which it is convertible. Each share of convertible preferred
stock is convertible into one share of common stock at the option of the
stockholder, subject to certain antidilution adjustments. Additionally,
conversion is automatic upon the closing of an underwritten public offering of
common stock with aggregate proceeds to the Company of at least $15,000,000. The
Company, at the option of the Board of Directors, may on or after January 1,
2002 redeem at any time all, or from time to time any portion, of the Series A-1
or A-2 convertible preferred stock at the following cash redemption prices per
share if redeemed during the periods specified plus, in each case, an amount per
share equal to all dividends declared but unpaid:
Twelve Months Series A-1 Series A-2
Beginning January 1 Redemption Price Redemption Price
------------------ --------------- ----------------
2002 $3.18 $5.31
2003 $3.41 $5.68
2004 $3.64 $6.08
2005 $3.90 $6.50
2006 and thereafter $4.17 $6.96
F-44
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
8. Stockholders' Equity (continued)
Convertible preferred stock (continued)
The Company may also, at its option, redeem all or any portion of the Series A-1
or A-2 convertible preferred stock concurrently with the closing of an
underwritten public offering of common shares at a cash redemption price of 100%
of the public offering price plus an amount per share in cash equal to all
dividends declared but unpaid.
Reverse stock split
On November 27, 1995, the Board of Directors approved a 1-for-2.5208 reverse
stock split of issued and outstanding common shares. All shares and per share
information in the accompanying consolidated financial statements have been
retroactively adjusted to reflect the reverse stock split.
Warrants
In connection with the acquisition of LBA in September 1995, the Company issued
warrants to purchase 555,380 shares of its common stock at a price of $.63 per
share. The warrants vest at a rate of 25% after each anniversary date. The
warrants expire at the earlier of ten years from the date of grant or any
unvested warrants are automatically terminated pursuant to a public offering of
at least $30,000,000.
In connection with its Master Equipment Lease Agreement, the Company issued to
the lessor a warrant to purchase 39,670 shares of its common stock at a price of
$5.04 per share (the "Warrant"). The Warrant expires at the earlier of ten years
after the date of grant (July 1995) or five years after the closing of an
initial public offering of the Company's common stock. The holder also has the
right to convert the Warrant into a number of shares of the Company's common
stock based on the value of the warrant given the then-current fair market value
of the Company's common stock.
F-45
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Stock Options
1994 Stock Option Plan
The Company's 1994 Stock Option Plan (the "Stock Option Plan") was adopted in
February 1994. The maximum number of shares authorized to be issued under the
Stock Option Plan, as amended, is 1,309,108 shares of common stock. The
Compensation Committee of the Company designated 362,583 of the shares
authorized to be issued under the Stock Option Plan as bonus options (the "Bonus
Options"). Outstanding options granted under the Plan generally vest and become
exercisable at a rate of 30% 18 months after the date of grant and an additional
10% every 6 months thereafter, subject to continued service as an employee;
however, outstanding Bonus Options vest and become exercisable 10 days prior to
the termination date of the Bonus Option, subject to continued service as an
employee.
Generally, the term of each outstanding option is ten years. The exercise price
for options granted under the Stock Option Plan is at least equal to 100% of the
fair market value of the common stock of the Company on the date of grant. The
Stock Option Plan permits the granting of stock options, including incentive
stock options ("ISOs") as defined under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and non-qualified stock options ("NQSOs")
which do not qualify as ISOs.
In order to protect all of the rights of Bonus Option holders in the event of a
Liquidity Event (as defined below), Bonus Option agreements provide for the
acceleration of vesting of all or a portion of outstanding Bonus Options upon
the occurrence of a Liquidity Event. A Liquidity Event is defined as either (i)
the consummation of an underwritten initial public offering of the Company's
common stock, which has been registered under the Securities Act of 1933, as
amended, or successor provision, or (ii) a Change of Control, as defined.
F-46
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
9. Stock Options (continued)
1994 Stock Option Plan (continued)
Stock option transactions are summarized as follows:
Exercise
Options Price
----------- --------------
Outstanding at February 2, 1994 -- $ --
Granted 138,250 .43
Exercised -- --
Canceled -- --
-------- ----------
Outstanding at December 31, 1994 138,250 .43
Granted 1,166,739 .43
Exercised (12,519) .43
Canceled (288,773) .43 - 1.05
-------- ----------
Outstanding at December 31, 1995 1,003,697 $.43 - 1.05
========= =============
Of the shares under options granted, 28,799 shares ranging in price from $.43 to
$1.05 are exercisable and 292,892 shares under options are available for future
grant as of December 31, 1995.
1995 Non-Employee Director Stock Option Plan
On November 27, 1995, the Company adopted the 1995 Non-Employee Director Stock
Option Plan (the "Director Stock Option Plan"). The Director Stock Option Plan
provides for an automatic grant of NQSOs to purchase 3,000 shares of common
stock to non-employee directors on the date such individuals are first appointed
directors of the Company, and an automatic grant of an option to purchase an
additional 1,000 shares of common stock on the day after each subsequent annual
meeting of the Company's stockholders. The option price is equal to the fair
market value of the common stock on the date of grant. Initial option grants
vest and become exercisable as to one-third of the shares covered by the option
on each annual anniversary of the date of grant if the holder remains a director
on such date, provided that such options may become fully exercisable upon a
director's resignation from the Board of Directors or death of the holder.
Annual option grants vest and become exercisable as to 100% of the shares
covered by the option on the six-month anniversary of the date of grant if the
holder remains a director on such date, provided that such options may become
fully exercisable upon a director's resignation from the Board of Directors or
death of the holder. The Company has reserved 50,000 shares of common stock for
issuance under the Director Stock Option Plan.
F-47
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingencies
Guarantee of loan facilities of LBA
On September 27, 1995, LBA entered into a Senior Credit Agreement by and between
LBA and the senior bank. Subject to the terms and conditions of the Senior
Credit Agreement, LBA is entitled to borrow up to $25,750,000 from the senior
bank, on a revolving basis, through the maturity date of the credit facility,
which is September 1999. As of December 31, 1995, the entire balance of
$25,750,000 was outstanding. The LBA obligations under the Senior Credit
Agreement are secured by a security interest in favor of the senior bank in
substantially all of the assets of LBA. In addition, the Company provided a
security interest in substantially all of its assets, including its shares of
capital stock in subsidiary and affiliated corporations, to secure the
obligations of LBA to the senior bank under the Senior Credit Agreement, and the
Company provided an unlimited guaranty in favor of the senior bank with respect
to the obligations of LBA under the Senior Credit Agreement. Similarly, another
subsidiary of the Company granted a security interest in substantially all of
its assets, including its shares of capital stock of subsidiary and affiliated
corporations, to secure the obligations of LBA to the senior bank under the
Senior Credit Agreement, and an unlimited guaranty in favor of the senior bank
with respect to the obligations of LBA and the Senior Credit Agreement.
A second and subordinated credit facility in the amount of $10,150,000 was
entered into by and between LBA and a bank pursuant to a Credit Agreement by and
between LBA and a bank also dated September 27, 1995 (the "Subordinated Credit
Agreement"). Under the terms of the Subordinated Credit Agreement, LBA borrowed
$10,150,000 from the bank. As of December 31, 1995, the entire balance of
$10,150,000 was outstanding. To secure these obligations, LBA granted a security
interest in substantially all of its assets in favor of the bank. The Company
granted a security interest to the bank in its shares of capital stock in its
subsidiaries and affiliates to secure the obligations of LBA under the
Subordinated Credit Agreement. The Company also provided an unlimited guaranty
of LBA's obligations under the Subordinated Credit Agreement and major
stockholders of the Company provided limited guaranties in favor of the bank
with respect to LBA's obligations under the Subordinated Credit Agreement
similar to those provided for the senior bank. In addition, the bank received a
$9,239,000 letter of credit bearing an interest rate of 1.5%, due quarterly, if
the letter of credit is outstanding, naming the bank as beneficiary.
The above agreements contain certain restrictive covenants, including the
maintenance of certain financial ratios and limitations on additional
borrowings, mergers, acquisitions, dispositions and the payment of dividends.
The agreements also provide for additional payments of principal from excess
cash flow.
F-48
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
10. Commitments and Contingencies (continued)
Guarantee of loan facilities of LBA (continued)
In addition, the above borrowings under the Senior Credit and Credit Agreements
are not shown as outstanding on the Company's consolidated financial statements
since LBA is not consolidated (See Note 1).
Operating leases
Future minimum payments, under noncancellable office and equipment operating
leases with initial terms of one year or more, consist of the following for the
periods ended December 31:
1996 $ 860,918
1997 870,799
1998 867,016
1999 808,628
2000 152,436
Thereafter 31,950
---------
$3,591,747
=========
Total rent expense under all operating leases was approximately $488,000 and
$1,074,000 for the period ended December 31, 1994 and for the year ended
December 31, 1995, respectively.
Legal proceedings
A subsidiary of the Company is currently a defendant to a civil complaint filed
on July 6, 1995, in the Supreme Court of British Columbia, Canada, by Stratford
General Hospital. The complaint alleges that Stratford General Hospital entered
into a contract with the subsidiary for the maintenance and support of an
integrated hospital management information system and that the subsidiary has
refused to perform its obligations under such alleged contract. Stratford
General Hospital is seeking unspecified compensatory damages from the
subsidiary. The subsidiary has filed a defense denying that it entered into such
alleged contract with Stratford General Hospital. The Company believes that the
suit is totally without merit and intends to defend its position vigorously.
While the ultimate outcome of this lawsuit cannot at this time be predicted with
certainty, management does not presently expect that this matter will have a
material adverse effect on the consolidated financial position, cash flows or
results of operations of the Company.
F-49
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements (Continued)
11. Information by Geographic Area
Information regarding the Company's operations by geographic area for the
periods February 2, 1994 through December 31, 1994 and the year ended
December 31, 1995 and for the periods then ended is as follows:
1994 1995
-------- --------
Revenues:
Canada $ 5,704,972 $ 5,872,663
United States 329,244 309,297
Other 1,594,530 967,354
------------ ------------
Total $ 7,628,746 $ 7,149,334
------------ ------------
Operating losses:
Canada $ (4,581,920) $ (5,232,133)
United States (9,397,136) (10,351,197)
Other (312,712) 25,187
------------ ------------
Total $(14,291,768) $(15,558,143)
------------ ------------
Total assets:
Canada $ 1,586,726 $ 2,453,637
United States 10,559,703 22,169,386
Other 462,984 415,141
------------ ------------
Total $ 12,609,413 $ 25,038,164
------------ ------------
12. Subsequent Events
Proposed sale of LBA
On July 19, 1996, the Company entered into a definitive agreement to
sell LBA.
7% Preferred Stock
Subsequent to December 31, 1995, the Company issued 80,000 shares of 7%
preferred at $100 per share for total cash proceeds of $8,000,000. The 7%
preferred stock has the same terms as previously issued 7% preferred (see
Note 8).
In connection with the purchase by HealthVISION, Inc. in September 1995 of the
assets of the predecessor of LBA, a current minority stockholder of
HealthVISION, Inc. threatened suit. The Company and certain other parties
executed an agreement on July 30, 1996, which, upon consummation of the
Company's contemplated transaction with HCIA, Inc. will resolve any
disagreements between the parties as of that date and provides for a release of
all claims.
HealthVISION, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ ---------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,589,457 $ --
Accounts receivable 1,664,784 1,690,081
Intercompany receivable 129,009 3,135
Prepaid expenses 521,951 668,453
Investment in LBA Health Care Management Inc. 15,978,182 15,978,182
----------- -----------
Total current assets 19,883,383 18,339,851
Equipment and furniture, net 1,946,000 1,841,686
Intangible, net 3,208,781 3,185,717
----------- -----------
Total assets $25,038,164 $23,367,254
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,280,222 396,475
Accrued compensation and related liabilities 1,080,644 1,401,845
Deferred revenue 1,177,358 1,236,457
Other accrued liabilities 1,134,640 1,007,529
Current portion of long-term debt 557,979 515,241
----------- -----------
Total current liabilities 5,230,843 4,557,547
Long-term debt, less current portion 703,129 797,517
Commitments and contingencies
Stockholders' equity:
7% preferred stock, $.01 par value, authorized
-1,000,000 shares; issued and outstanding
-256,900 shares at December 31, 1995 and 326,900
shares at June 30, 1996 (unaudited)
(aggregate liquidation preference $36,238,778 at
June 30, 1996--unaudited) 2,570 3,270
Convertible preferred stock, Series A-1, $.01 par value;
authorized -5,500,000 shares; issued and outstanding -
5,278,529 shares at December 31, 1995 (5,278,529 at
June 30, 1996--unaudited) (aggregate liquidation
preference $10,978,182 at June 30, 1996--unaudited) 52,785 52,785
Convertible preferred stock, Series A-2, $.01 par value;
authorized 3,000,000 shares; issued and outstanding
-2,883,756 shares at December 31, 1995 (2,883,756 at
June 30, 1996--unaudited) (aggregate liquidation
preference $10,000,000 at June 30, 1996--unaudited) 28,838 28,838
Common stock, $.01 par value; authorized 40,000,000
shares; issued and outstanding -4,588,438 shares at
December 31, 1995 (4,588,438 at June 30, 1996
--unaudited) 45,884 45,884
Additional paid-in capital 48,546,696 55,545,996
Accumulated deficit (29,252,891) (37,295,396)
Cumulative translation adjustment (319,690) (369,187)
----------- -----------
Total stockholders' equity 19,104,192 18,012,190
----------- -----------
Total liabilities and stockholders' equity $25,038,164 $23,367,254
=========== ===========
</TABLE>
See Independent Accountants' Review Report.
F-50
<PAGE>
HealthVISION Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
For the Six
Month Periods Ended June 30,
1995 1996
---------------------------
(unaudited)
<S> <C> <C>
Revenues:
Software licenses $ 1,078,718 $1,488,578
Maintenance and services 1,673,348 1,864,455
Hardware 534,610 231,712
------------ ------------
Total revenue 3,286,676 3,584,745
------------ ------------
Cost of revenues:
Software licenses, maintenance and services 2,345,711 3,141,840
Hardware 313,966 138,511
------------ ------------
Total cost of revenue 2,659,677 3,280,351
------------ ------------
Gross profit 626,999 304,394
Operating expenses:
Product development 2,799,199 3,387,155
Sales and marketing 2,398,081 2,671,102
General and administration 2,016,396 2,241,320
------------ ------------
Total operating expenses 7,213,676 8,299,577
------------ ------------
Loss from operations (6,586,677) (7,995,183)
------------ ------------
Other income (expense):
Foreign exchange gain -- (43)
Interest income 83,398 26,996
Interest expense -- (74,275)
------------ ------------
Total other income (expense), net 83,398 (47,322)
------------ ------------
Net loss (6,503,279) (8,042,505)
Preferred stock dividend 700,842 1,012,911
------------ ------------
Net loss available to common stockholders $ (7,204,121) $ (9,055,416)
============ ============
</TABLE>
F-51
<PAGE>
HealthVISION Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the Period February 2, 1994 (Inception) Through June 30, 1996
(unaudited)
<TABLE>
<CAPTION>
SERIES A-1 SERIES A-2
7% CONVERTIBLE CONVERTIBLE ADDITIONAL CUMULATIVE
PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED TRANSLATION
STOCK STOCK STOCK STOCK CAPITAL DEFICIT ADJUSTMENT
--------- ----------- ----------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 2, 1994........ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 156,250 shares of 7%
preferred stock at $100 per
share.......................... 1,563 -- -- -- 15,623,437 -- --
Issuance of 3,317,850 shares of
common stock at $.449 per
share.......................... -- -- -- 33,179 1,455,548 -- --
Exchange of 288,604 shares of
common stock at $.449 per share
in connection with the
acquisition of HVC Holdings
Canada Ltd. And HealthVISION
Corporation.................... -- -- -- 2,886 126,609 -- --
Issuance of 46,650 share of 7%
preferred stock at $100 per
share.......................... 457 -- -- -- 4,564,543 -- --
Issuance of 969,464 shares of
common stock at $.398 per
share.......................... -- -- -- 9,694 375,306 -- --
Net loss......................... -- -- -- -- -- (14,127,983) --
Translation adjustment........... -- -- -- -- -- -- 59,329
------- ------- -------- ------- ----------- ----------- ---------
Balance at December 31, 1994....... 2,020 -- -- 45,759 22,145,443 (14,127,983) 59,329
Issuance of 5,278,529 shares of
convertible preferred Series
A-1 stock for $2.080 per share
in connection with the
acquisition of LBA............. -- 52,785 -- -- 10,925,397 -- --
Issuance of 1,441,878 shares of
convertible preferred Series
A-2 stock for cash at $3.468
per share...................... -- -- 14,419 -- 4,985,581 -- --
Issuance of 1,441,878 shares of
convertible preferred Series
A-2 stock for cash at $3.468
per share...................... -- -- 14,419 -- 4,985,581 -- --
Issuance of 12,520 shares of
common stock at $.429 per share
upon exercise of options....... -- -- -- 125 5,244 -- --
Issuance of 55,000 shares of 7%
preferred stock for conversion
of bridge financing at $100 per
share.......................... 550 -- -- -- 5,499,450 -- --
Net loss......................... -- -- -- -- -- (15,124,908) --
Translation adjustment........... -- -- -- -- -- -- (379,019)
------- ------- -------- ------- ----------- ------------ ---------
Balance at December 31, 1995....... $ 2,570 $52,785 $28,838 $45,884 $48,546,696 $(29,252,891) $(319,690)
Issuance of 70,000 shares of 7%
preferred stock at $100 per
share.......................... 700 -- -- -- 6,999,300 -- --
Net loss......................... -- -- -- -- -- (8,042,505) --
Translation adjustment........... -- -- -- -- -- -- (49,497)
------- ------- -------- ------- ----------- ------------ ---------
Balance at June 30, 1996.......... $ 3,270 $52,785 $28,838 $45,884 $55,545,996 $(37,295,396) $(369,187)
======= ======= ======== ======= =========== ============ =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance at February 2, 1994........ $ --
Issuance of 156,250 shares of 7%
preferred stock at $100 per
share.......................... 15,625,000
Issuance of 3,317,850 shares of
common stock at $.449 per
share.......................... 1,488,727
Exchange of 288,604 shares of
common stock at $.449 per share
in connection with the
acquisition of HVC Holdings
Canada Ltd. And HealthVISION
Corporation.................... 129,495
Issuance of 46,650 share of 7%
preferred stock at $100 per
share.......................... 4,565,000
Issuance of 969,464 shares of
common stock at $.398 per
share.......................... 385,000
Net loss......................... (14,127,983)
Translation adjustment........... 59,329
------------
Balance at December 31, 1994....... 8,124,568
Issuance of 5,278,529 shares of
convertible preferred Series
A-1 stock for $2.080 per share
in connection with the
acquisition of LBA............. 10,978,182
Issuance of 1,441,878 shares of
convertible preferred Series
A-2 stock for cash at $3.468
per share...................... 5,000,000
Issuance of 1,441,878 shares of
convertible preferred Series
A-2 stock at $3.468
per share...................... 5,000,000
Issuance of 12,520 shares of
common stock at $.429 per share
upon exercise of options....... 5,369
Issuance of 55,000 shares of 7%
preferred stock for conversion
of bridge financing at $100 per
share.......................... 5,500,000
Net loss......................... (15,124,908)
Translation adjustment........... (379,019)
------------
Balance at December 31, 1995....... $ 19,104,192
Issuance of 30,000 shares of 7%
preferred stock at $100 per
share.......................... 7,000,000
Net loss......................... (8,042,505)
Translation adjustment........... (49,497)
------------
Balance at June 30, 1996.......... $ 18,012,190
============
</TABLE>
F-52
<PAGE>
HealthVISION, Inc.
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1995 and 1996
(unaudited)
<TABLE>
<CAPTION>
For the Six
Month Periods Ended June 30,
-----------------------------------
1995 1996
---- ----
(unaudited)
<S> <C>
Cash flows from operating activities:
Net loss $(6,503,279) $(8,042,505)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 987,459 1,200,908
Change in operating assets and liabilities:
Accounts receivable (429,184) (25,297)
Intercompany receivable -- 125,874
Prepaid expenses (72,947) (146,502)
Accounts payable 315,232 (883,747)
Accrued compensation and related liabilities 616,017 321,201
Deferred revenue (203,647) 59,099
Other accrued liabilities (71,881) (127,111)
----------- -----------
Total adjustments 1,141,049 524,425
----------- -----------
Net cash used in operating activities (5,362,230) (7,518,080)
Cash flows used by investing activities:
Purchase of equipment and furniture (1,467,473) --
Capitalized software development costs -- (641,813)
----------- -----------
Net cash used in investing activities (1,467,473) (641,813)
----------- -----------
Cash flows provided by financing activities:
Proceeds from issuance of 7% redeemable preferred stock -- 7,000,000
Proceeds from long-term debt and bridge financing 3,869,382 --
Principal payments made on long-term debt and capital leases (198,322) (380,067)
----------- -----------
Net cash provided by (used in) financing activities 3,671,060 6,619,933
----------- -----------
Effect of exchange rate changes on cash 70,398 (49,497)
----------- -----------
Net decrease in cash and equivalents (3,088,245) (1,589,457)
Cash and equivalents, beginning of period 6,207,043 1,589,457
----------- -----------
Cash and equivalents, end of period $ 3,118,798 $ --
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Purchase of equipment under capital lease arrangements $ -- $ 431,717
=========== ===========
</TABLE>
F-53
<PAGE>
HealthVISION, Inc.
Notes to Consolidated Financial Statements
For the Six-Month Periods Ended June 30, 1996 and 1995
(unaudited)
1. THE COMPANY, ORGANIZATION AND BASIS OF PRESENTATION
HealthVISION, Inc. (the "Company") was organized as a Delaware corporation
on February 2, 1994, began operations on February 15, 1994 and was incorporated
to acquire HVC Holdings Canada Ltd., HealthVISION Corporation and their
subsidiaries. The Company develops, markets and supports healthcare information
products focused on lowering costs of health care and improving clinical
processes for integrated delivery systems, hospitals and office-based
physicians.
On February 14, 1994, the Company acquired substantially all of the
business, assets, and liabilities of HVC Holdings Canada Ltd., HealthVISION
Corporation (the "Predecessor Company") and their subsidiaries for $13,994,016.
The transaction was recorded using the purchase method of accounting.
Accordingly, a basis of accounting of $13,994,016 was established based on the
purchase price, resulting in purchase price in excess of fair market value of
net liabilities assumed.
On September 27, 1995, LBA Health Care Management, Inc., a newly formed
subsidiary of the Company, acquired substantially all of the business, assets,
and liabilities of LBA Health Care Management, Inc. and Healthcare Data Source,
Inc. (collectively, "LBA") for approximately $51,178,000. The transaction was
recorded using the purchase method of accounting. Accordingly, a basis of
accounting of $49,850,853 was established based on the purchase price, resulting
in purchase price in excess of fair market value of net assets acquired.
The consolidated financial statements include the accounts of HealthVISION,
Inc. and its subsidiary companies, all of which are wholly owned, except for
LBA, which is being accounted for on the cost basis in accordance with FASB 94
as the Company has committed to sell this subsidiary and therefore control is
deemed temporary. These statements reflect the activity of the Company and its
subsidiaries, except for LBA, and all related intercompany transactions and
balances have been eliminated in consolidation.
The Company's financial statements have been prepared on the basis that the
Company will continue as a going concern. The Company has incurred significant
losses of $15,124,908 for the year ended December 31, 1995 and $8,042,505 for
the six-month period ended June 30, 1996, resulting in an accumulated deficit
of $37,295,396 at June 30, 1996. The Company's future plans include successful
completion of additional financing, adjusting the level of its operations to
provide the cash necessary to continue operations through at least January 1,
1997 and achieving future profitable operations.
F-54
<PAGE>
2. INTERIM FINANCIAL INFORMATION
The financial information for the six-month periods ended June 30, 1995
and 1996 is unaudited but includes all adjustments (consisting only of normal
recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position at such date and of the operating results
and cash flows for such periods. The results for the interim periods are not
necessarily indicative of results expected for the entire year ended December
31, 1996.
These interim financial statements should be read in conjunction with the
summary of significant accounting policies and notes to the consolidated
financial statements included in the Company's December 31, 1995 consolidated
financial statements included elsewhere herein.
F-55
<PAGE>
(c) Exhibits.
Exhibit No.
2 Agreement and Plan of Reorganization by and between the
Company and HealthVISION, Inc. dated as July 19, 1996,
previously filed.
99 Press Releases, previously filed.
5
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HCIA Inc.
Date: August 13, 1996 By: /s/ Barry C. Offutt
Barry C. Offutt,
Senior Vice President and
Chief Financial Officer
6
<PAGE>
