-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gm6gtpg77N5TQ6wTi3FPfUldjIGDzWcg5P1AM5ZJ+d6fnFI+qtdFrZIXfZ45itrG DOF8fUW8rc57YQqf4vDUMA== 0000950169-96-000218.txt : 19960724 0000950169-96-000218.hdr.sgml : 19960724 ACCESSION NUMBER: 0000950169-96-000218 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960603 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960723 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCIA INC CENTRAL INDEX KEY: 0000935001 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 521407998 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25378 FILM NUMBER: 96597862 BUSINESS ADDRESS: STREET 1: 300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4103327532 MAIL ADDRESS: STREET 1: 300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 8-K 1 HCIA SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K 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) Item 5. Other Events. LBA Health Care Acquisition. On July 19, 1996, the Registrant and HealthVISION, Inc. ("HealthVISION"), the parent company of LBA Health Care Management, Inc. ("LBA"), entered into an Agreement and Plan of Reorganization whereby the Registrant will acquire all of the capital stock of HealthVISION for $100 million in cash and $30 million in the Registrant's Common Stock (492,960 shares). Prior to the consummation of the acquisition, all of the assets and liabilities of HealthVISION not associated with LBA will be distributed to the current stockholders of HealthVISION. The closing of the acquisition is subject to a number of conditions, including approval by the stockholders of HealthVISION. Stockholders representing in excess of a majority of HealthVISION's voting shares outstanding have agreed to vote in favor of the transaction. It is currently anticipated that the acquisition will be consummated in mid-August 1996. The Company has obtained a bank commitment to fund a portion of the acquisition price. 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 Item 7. Financial Statements and Exhibits. (a) Financial Statements INDEX TO FINANCIAL STATEMENTS
Page 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
3 Notes to Consolidated Financial Statements.................................................. F-35 Unaudited Financial Statements of HealthVISION, Inc: Consolidated Balance Sheets (December 31, 1995 and March 31, 1996).......................... F-50 Consolidated Statements of Operations (Three Months ended March 31, 1995 and 1996).............................................................. F-51 Consolidated Statements of Changes in Stockholders' Equity (Period from February 12, 1994 (Inception) through March 31, 1996).................... F-52 Consolidated Statements of Cash Flows (Three Months ended March 31, 1995 and 1996).............................................................................. F-53 Notes to Financial Statements............................................................... F-54 4 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 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 DATIS CORPORATION BALANCE SHEET
May 31, May 31, March 31, 1994 1993 1993 ----------- ----------- ---------- ASSETS 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 =========== ============ ==========
The accompanying notes are an integral part of these financial statements. F-3 DATIS CORPORATION STATEMENT OF OPERATIONS
Year ended Two Months Year ended May 31, ended May 31, March 31, 1994 1993 1993 ------------ ------------ ----------- 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 =========== ========== ===========
The accompanying notes are an integral part of these financial statements. F-4 DATIS CORPORATION STATEMENT OF CASH FLOWS
Year ended Two Months ended Year ended May 31, May 31, March 31, 1994 1993 1993 ------------ -------------- ------------ 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
The accompanying notes are an integral part of these financial statements. F-5 DATIS CORPORATION STATEMENT OF SHAREHOLDERS' DEFICIT
Common Stock Notes Receivable Total ------------ Accumulated from Shareholders' Shares Amount Deficit Shareholders Deficit ------- -------- ------------ ---------------- ------------- 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 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 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 3. Balance Sheet Components Property and equipment:
May 31, May 31, March 31, 1994 1993 1993 ---------- ----------- ------------ 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 ========== ========== ==========
Included in the table above are property and equipment acquired under capital leases as follows:
May 31, May 31, March 31, 1994 1993 1993 ---------- ---------- ---------- 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: 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 ========== ========== ==========
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 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 A schedule of future minimum noncancelable lease payments is as follows:
Capital Operating Year ending May 31, Leases Leases -------- --------- 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 ==========
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:
Year Two Months Year ended ended ended May 31, May 31, March 31, 1994 1993 1993 ---------- ---------- --------- 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) =========== ========= ========
F-11 The significant components of deferred income taxes are as follows:
May 31, May 31, April 1, 1994 1993 1993 ---------- ---------- -------- 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 ========== =========== =========
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:
Year ended March 31, 1993 -------------- Leases.......................................................... $ 51,000 Accrued liabilities and reserves not currently deductible....... (60,000) Depreciation.................................................... (39,000) Other........................................................... (3,000) ------ $ (51,000)
====== F-12 The effective tax rates differ from the federal statutory rates by applying the applicable federal statutory income tax rate to pretax income as follows:
May 31, May 31, March 31, 1994 1993 1993 ---------- ---------- ---------- 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% ===== ===== ===
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 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 Activity under the Plan is summarized as follows:
Shares Outstanding Options Available Number of Exercise for Grant Shares Price --------- ----------- ------------ 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
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 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 DATIS CORPORATION BALANCE SHEET March 31, 1995 (in thousands) (Unaudited) ASSETS 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 =======
See accompanying notes to financial statements. F-17 DATIS CORPORATION STATEMENT OF OPERATIONS Ten Months ended March 31, 1994 and 1995 (in thousands) (Unaudited)
1994 1995 ---- ---- 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) ====== ========
See accompanying notes to financial statements. F-18 DATIS CORPORATION STATEMENT OF SHAREHOLDERS' DEFICIT Ten Months ended March 31, 1995 (in thousands) (Unaudited)
Notes Receivable Total Common Stock Accumulated from Shareholder's Shares Amount Deficit Shareholders Deficit ------ ------- ----------- ------------ ------------- 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) ===== ==== ======= ==== =======
See accompanying notes to financial statements. F-19 DATIS CORPORATION STATEMENTS OF CASH FLOWS Ten months ended March 31, 1994 and 1995 (in thousands) (Unaudited)
1994 1995 ------- -------- 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 ====== ========
See accompanying notes to financial statements. F-20 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 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 WILLIAM M. MERCER, INCORPORATED NATIONAL HEALTH ANALYSIS UNIT BALANCE SHEETS December 31, 1994 and September 30, 1995
December 31, September 30, 1994 1995 ------------ ------------- ASSETS 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 ======== ========
F-23 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
Nine months Year ended December 31, ended ----------------------- September 30, 1993 1994 1995 ---- ---- ---------- 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 =========== ========== ==========
See accompanying notes to financial statements. F-24 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
Nine months Year ended December 31, ended ------------------------ September 30, 1993 1994 1995 ---- ---- ------------- 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..................................... $ -- $ -- $ -- =========== ======= =========
See accompanying notes to financial statements. F-25 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 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:
Nine months ended Year ended December 31, September 30, 1993 1994 1995 ---- ---- ------------ 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 ========== ========== ==========
F-27 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:
Nine months ended Year ended December 31, September 30, 1993 1994 1995 ---- ---- ------------ 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 ========== ========== ==========
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 (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 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. Walnut Creek, California January 26, 1996, except Note 12, as to which the date is July 19, 1996 F-30 HealthVISION, Inc. Consolidated Balance Sheets
December 31, December 31, 1994 1995 --------------------- -------------------- 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 ===================== ====================
See accompanying notes. F-31 HealthVISION, Inc. Consolidated Statements of Operations
For the period February 2, 1994 (inception) through Year ended December 31, December 31, 1994 1995 --------------------- ------------------- 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) ===================== ===================
See accompanying notes. F-32 HealthVISION, Inc. Consolidated Statements of Changes in Stockholders' Equity For the Period February 2, 1994 (Inception) through December 31, 1995
Series A-1 Series A-2 7% Convertible Convertible Additional Preferred Preferred Preferred Common Paid-In Stock Stock Stock Stock Capital ----------------------------------------------------------------------------- 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 =============================================================================
Cumulative Total Accumulated Translation Stockholders' Deficit Adjustment Equity ------------------------------------------------ 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 ================================================
F-33 HealthVISION, Inc. Consolidated Statements of Cash Flows
For the Period February 2, 1994 (Inception) through Year Ended December 31, December 31, 1994 1995 ------------------- ------------------- 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 =================== ===================
See accompanying notes. F-34 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 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 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 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 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 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 HealthVISION, Inc. Notes to Consolidated Financial Statements (Continued) 6. Long-Term Debt
December 31, ----------------------------- 1994 1995 ----------------------------- 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 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:
December 31, ------------------------------ 1994 1995 ------------------------------ 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 $ -- $ -- ========= =========
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 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 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 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 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 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 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 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 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 A current minority stockholder of HealthVISION has threatened suit in connection with the purchase by HealthVISION in September 1995 of the assets of the predecessor of LBA. The outcome of this matter cannot be predicted with certainty at this time. In connection with the distribution by HealthVISION of its assets and liabilities not associated with LBA, the assignee of such assets and liabilities has agreed to indemnify and hold HealthVISION, LBA and HCIA harmless from and against any liability associated with the potential claim. Certain current stockholders of HealthVISION have guaranteed such indemnity. 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). HealthVISION, Inc. Consolidated Balance Sheets (unaudited)
December 31, March 31, 1995 1996 ------------ --------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,589,457 $ 317,947 Accounts receivable 1,664,784 1,814,030 Intercompany receivable 129,009 135,322 Prepaid expenses 521,951 709,644 Investment in LBA Health Care Management Inc. 15,978,182 15,978,182 ----------- ----------- Total current assets 19,883,383 18,955,125 Equipment and furniture, net 1,946,000 1,985,710 Intangible, net 3,208,781 3,219,344 ----------- ----------- Total assets $25,038,164 $24,160,179 =========== =========== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 1,280,222 1,014,611 Accrued compensation and related liabilities 1,080,644 1,184,553 Deferred revenue 1,177,358 1,498,564 Other accrued liabilities 1,134,640 1,223,527 Current portion of long-term debt 557,979 646,796 ----------- ----------- Total current liabilities 5,230,843 5,568,051 Long-term debt, less current portion 703,129 796,246 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 286,900 shares at March 31, 1996 (unaudited) (aggregate liquidation preference $31,695,649 at March 31, 1996--unaudited) 2,570 2,870 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 March 31, 1996 -unaudited) (aggregate liquidation preference $10,978,182 at March 31, 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 March 31, 1996 -unaudited) (aggregate liquidation preference $10,000,000 at March 31, 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 March 31, 1996 -unaudited) 45,884 45,884 Additional paid-in capital 48,546,696 51,546,396 Accumulated deficit (29,252,891) (33,524,275) Cumulative translation adjustment (319,690) (356,616) ----------- ----------- Total stockholders' equity 19,104,192 17,795,882 ----------- ----------- Total liabilities and stockholders' equity $25,038,164 $24,160,179 =========== ===========
See Independent Accountants' Review Report. F-50 HealthVISION Inc. Consolidated Statements of Operations (Unaudited)
For the Three Month Periods Ended March 31, 1995 1996 --------------------------- (unaudited) Revenues: Software licenses $ 491,628 $553,279 Maintenance and services 786,418 1,069,436 Hardware 208,686 206,338 ------------ ------------ Total revenue 1,486,732 1,829,053 ------------ ------------ Cost of revenues: Software licenses, maintenance and services 1,131,797 1,443,229 Hardware 133,447 118,308 ------------ ------------ Total cost of revenue 1,265,244 1,561,537 ------------ ------------ Gross profit 221,488 267,516 Operating expenses: Product development 1,038,918 1,386,464 Sales and marketing 948,848 1,340,530 General and administration 971,772 1,790,424 ------------ ------------ Total operating expenses 2,959,538 4,517,418 ------------ ------------ Loss from operations (2,738,050) (4,249,902) ------------ ------------ Other income (expense): Foreign exchange gain -- 42 Interest income 63,114 3,559 Interest expense -- (25,083) ------------ ------------ Total other income (expense), net 63,114 (21,482) ------------ ------------ Net loss (2,674,936) (4,271,384) Preferred stock dividend 348,485 469,782 ------------ ------------ Net loss available to common stockholders $ (3,023,421) $ (4,741,166) ============ ============
F-51 HealthVISION Inc. Consolidated Statements of Changes in Stockholders' Equity For the Period February 2, 1994 (Inception) Through March 31, 1996 (unaudited)
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 --------- ----------- ----------- ------- ---------- ----------- ----------- 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 30,000 shares of 7% preferred stock at $100 per share.......................... 300 -- -- -- 2,999,700 -- -- Net loss......................... -- -- -- -- -- (4,271,384) -- Translation adjustment........... -- -- -- -- -- -- (36,926) ------- ------- -------- ------- ----------- ------------ --------- Balance at March 31, 1996.......... $ 2,870 $52,785 $28,838 $45,884 $51,546,396 $(33,524,275) $(356,616) ======= ======= ======== ======= =========== ============ ========= TOTAL STOCKHOLDERS' EQUITY -------------- 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.......................... 3,000,000 Net loss......................... (4,271,384) Translation adjustment........... (36,926) ------------ Balance at March 31, 1996.......... $ 17,795,882 ============
F-52 HealthVISION, Inc. Consolidated Statements of Cash Flows For the Three Months Ended March 31, 1995 and 1996 (unaudited)
For the Three Month Periods Ended March 31, ----------------------------------- 1995 1996 ---- ---- (unaudited) Cash flows from operating activities: Net loss $(2,674,936) $(4,271,384) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 364,403 570,482 Capitalized software development costs -- (343,291) Change in operating assets and liabilities: Accounts receivable (397,371) (149,246) Intercompany receivable -- (6,313) Prepaid expenses (49,776) (187,693) Accounts payable 319,387 (265,611) Accrued compensation and related liabilities 223,624 103,909 Deferred revenue 26,408 321,206 Other accrued liabilities (17,982) 88,887 ----------- ----------- Total adjustments 468,693 132,330 ----------- ----------- Net cash used in operating activities (2,206,243) (4,139,054) Cash flows used by investing activities: Purchase of equipment and furniture (658,171) (34,964) ----------- ----------- Net cash used in investing activities (658,171) (34,964) ----------- ----------- Cash flows provided by financing activities: Proceeds from issuance of 7% redeemable preferred stock -- 3,000,000 Principal payments made on long-term debt and capital leases (208,736) (60,566) ----------- ----------- Net cash provided by (used in) financing activities (208,736) 2,939,434 ----------- ----------- Effect of exchange rate changes on cash 29,381 (36,926) ----------- ----------- Net decrease in cash and equivalents (3,043,769) (1,271,510) Cash and equivalents, beginning of period 6,207,043 1,589,457 ----------- ----------- Cash and equivalents, end of period $ 3,163,274 $ 317,947 =========== ===========
F-53 HealthVISION, Inc. Notes to Consolidated Financial Statements For the Three-Month Periods Ended March 31, 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 (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 and $3,573,328 for the three-month period ended March 31, 1996, resulting in an accumulated deficit of $32,826,219 at March 31, 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 INTERIM FINANCIAL INFORMATION The financial information for the three-month periods ended March 31, 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 (c) Exhibits. Exhibit No. 2 Agreement and Plan of Reorganization by and among the Company and HealthVISION, Inc. dated as July 19, 1996. 99 Press Releases. 5 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: July 22, 1996 By: /s/ Barry C. Offutt Barry C. Offutt, Senior Vice President and Chief Financial Officer 6 EXHIBIT INDEX Exhibit No. 2 Agreement and Plan of Reorganization between the Company and HealthVISION, Inc. dated as of July 19, 1996 99 Press Releases EX-2 2 EXHIBIT 2 EXHIBIT 2 AGREEMENT AND PLAN OF REORGANIZATION BETWEEN HCIA INC., HCIA SUB INC. AND HEALTHVISION, INC. AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement"), dated as of July 19, 1996, is made and entered into by and between HCIA Inc., a Maryland corporation ("HCIA"), HCIA Sub Inc., a Delaware corporation ("Sub"), and HealthVISION, Inc., a Delaware corporation ("HVI"). RECITALS WHEREAS, the Boards of Directors of HCIA and HVI have determined that it is desirable and in the best interests of their respective companies and stockholders that Sub, a wholly-owned subsidiary of HCIA, be merged into HVI on the terms and subject to the conditions set forth in this Agreement and the Certificate of Merger substantially in the form attached hereto as Exhibit A. WHEREAS, as a condition to the Merger (as defined below), HCIA requires that HVI distribute, and HVI is willing to distribute immediately prior to the Effective Time of the Merger to HVI's stockholders of record prior to the Merger, all of the capital stock of a newly incorporated wholly owned subsidiary, to which, prior to the Merger, all of the assets of HVI will be assigned, contributed or otherwise transferred other than (i) all of the shares of LBA (as defined below) owned by HVI on the date hereof, and (ii) certain other assets as the parties mutually agree, and that HVI be released from, or mutually acceptable adequate provisions be made for, all liabilities and obligations of HVI other than as mutually agreed by the parties, so that, after giving effect to such distribution, the business and operations of HVI will consist solely of the business and operations conducted by LBA immediately prior to the Effective Time of the Merger. WHEREAS, the distribution contemplated in the previous clause will be made in accordance with the Distribution Agreement (as defined below). WHEREAS, as a condition to the Merger, HVI requires that HCIA assume, and HCIA will assume simultaneously with the consummation of the Merger, certain liabilities and obligations of HVI and LBA as set forth herein. NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements herein contained, HCIA, Sub and HVI agree as follows: Section 1. Definitions. The following words shall have the following meanings when used in this Agreement: "Business Condition" shall mean the business, financial condition, results of operations or assets of an entity. "Cash Portion" shall mean the sum of $100,000,000, less (i) all cash amounts to be paid pursuant to the LBA Bonus Payments, (ii) all amounts represented by the LBA Indebtedness 1 as of the Closing Date and (iii) all expenses incurred by HVI and LBA in connection with the transactions contemplated by this Agreement, including, but not limited to, legal and accounting fees and the fees of investment bankers for HVI and LBA, as such fees are certified by Spinco on the Closing Date (the "Third Party Fees"). "Certificate of Merger" shall mean the Certificate of Merger to be entered into by and between HVI and Sub providing for the merger of Sub with and into HVI, in the form of Exhibit A attached hereto and made a part hereof. "Closing" shall mean the acts and events which take place on the Closing Date for the purpose of consummating the transactions contemplated by this Agreement. "Closing Date" shall mean 10:00 A.M., Eastern Standard Time, on the third business day after the satisfaction or waiver (as provided herein) of all conditions set forth in Section 8 (except for such conditions which can only be performed at the Closing Date), or such other date and time as may be mutually agreed upon by HCIA and HVI. "Commission" shall mean the Securities and Exchange Commission of the United States. "Credit Agreements" shall mean the Credit Agreement by and among HVI, The First National Bank of Boston, as Agent, and the other parties thereto, dated September 27, 1995, the Credit Agreement by and between LBA and Imperial Bank, dated September 27, 1995, as the same may have been amended from time to time, and all guaranties, security agreements, stock pledge agreements, instruments and documents related thereto. "Delaware Code" shall mean the General Corporation Law of the State of Delaware. "Distribution" shall mean the distribution, on the Distribution Date, of all of the outstanding shares of Spinco Common Stock held by HVI to the holders of record of HVI Common Stock, HVI Series A-1 Stock and HVI Series A-2 Stock on the Distribution Record Date, which distribution shall be deemed to have been effected by HVI upon delivery by HVI to the distribution agent referred to in the Distribution Agreement of an instruction directing the distribution agent to effect the distribution of the Spinco Common Stock in accordance with Section 3.4 of the Distribution Agreement. "Distribution Agreement" shall mean the Distribution Agreement between HVI and Spinco in substantially the form attached hereto as Exhibit B. "Distribution Date" shall mean the Closing Date; provided, however, that the Distribution shall occur immediately prior to the Effective Time of the Merger. 2 "Distribution Record Date" shall mean the close of business on the date to be determined by HVI's Board of Directors as the record date for the Distribution, which date shall be prior to the Closing Date. "Effective Time of the Merger" shall be 5:00 p.m., Baltimore, Maryland time, on the Closing Date. "Escrow Agent" shall mean the escrow agent referred to in the Escrow Agreement. "Escrow Agreement" shall mean the Escrow Agreement substantially in the form attached hereto as Exhibit C. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "HCIA Statements" shall mean (i) the consolidated balance sheets of HCIA as of December 31, 1994 and 1995 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 1994 and 1995, in each case reported upon by independent certified public accountants, (ii) the unaudited consolidated balance sheet of HCIA as of March 31, 1996 and the related consolidated statements of operations and cash flows for the three months ended March 31, 1996, and (iii) if issued prior to the Closing Date, the unaudited consolidated balance sheet of HCIA as of June 30, 1996 and the related consolidated statements of operations and cash flows for the three months ended June 30, 1996 (the statements referred to in clauses (ii) and (iii), "HCIA Interim Statements"). For purposes of this Agreement, each of the financial statements hereinabove referred to shall be deemed to include the notes and schedules with respect thereto. "HCIA Stock" shall mean shares of the common stock of HCIA, $.01 par value per share. "HVI Capital Stock" shall mean shares of the capital stock of HVI. "HVI Common Stock" shall mean shares of the common stock of HVI, $.01 par value per share. "HVI Disclosure Schedule" shall mean the disclosure schedule of HVI attached hereto as Exhibit F. "HVI Retained Assets" shall have the same meaning as "HVI Retained Assets" in Section 1.1 of the Distribution Agreement. "HVI Retained Liabilities" shall have the same meaning as "HVI Retained Liabilities" in Section 1.1 of the Distribution Agreement. 3 "HVI Series A-1 Stock" shall mean shares of the Series A-1 Convertible Preferred Stock of HVI, $.01 par value per share. "HVI Series A-2 Stock" shall mean shares of the Series A-2 Convertible Preferred Stock of HVI, $.01 par value per share. "HVI 7% Stock" shall mean shares of the 7% Preferred Stock of HVI, $.01 par value per share. "HVI Statements" shall mean (i) the consolidated balance sheets of HVI and its consolidated subsidiaries as of December 31, 1994 and 1995 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 31, 1994 and 1995, in each case reported upon by independent certified public accountants, and (ii) the unaudited consolidated balance sheet of HVI and its consolidated subsidiaries as of May 31, 1996 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the five months ended May 31, 1996 (the "HVI Interim Statements"). For purpose of this Agreement, each of the financial statements hereinabove referred to shall be deemed to include the notes and schedules with respect thereto. "HVI Subsidiaries" shall mean all of the corporations set forth on the Disclosure Schedule as subsidiaries of HVI. "HVI Transferred Assets" shall have the same meaning as "HVI Transferred Assets" in Section 1.1 of the Distribution Agreement. "HVI Transferred Liabilities" shall have the same meaning as "HVI Transferred Liabilities" in Section 1.1 of the Distribution Agreement. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended. "LBA" shall mean LBA Health Care Management, Inc. "LBA Bonus Payments" shall mean any and all obligations to pay bonus compensation to Lawrence J. Byrne and Kevin J. Hicks as set forth in the Executive Bonus Compensation Agreements, dated as of May 1, 1996, between LBA and each of Lawrence J. Byrne and Kevin J. Hicks, and as set forth in paragraph 6 of the respective Executive Employment Agreements, dated as of May 1, 1996, as amended, among HVI, LBA and each of Ray Padilla, Christopher McBride, Michelle Mann and Timothy W. Dodge. "LBA Indebtedness" shall mean all Liabilities and indebtedness (including any accrued interest and pre-payment penalties payable) owing under or represented by the Credit Agreements as of the Closing Date. 4 "LBA Statements" shall mean (i) the balance sheet of LBA as of December 31, 1995, and the related statements of operations, change in stockholders' equity and cash flows for the year ended December 31, 1995, in each case reported upon by independent certified public accountants, and (ii) the unaudited balance sheet of LBA as of May 31, 1996 and the related statements of operations, changes in stockholders' equity and cash flows for the five months ended May 31, 1996 (the "LBA Interim Statements"). For purposes of this Agreement, each of the financial statements hereinabove referred to shall be deemed to include the notes with respect thereto. "Liabilities" shall mean any and all debts, liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including those debts, liabilities and obligations arising under any law, rule, regulation, action, threatened action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Material Adverse Effect" shall mean, with respect to any entity, any condition, event, change or occurrence that has had or may reasonably be expected to have a material adverse effect on the Business Condition of such entity. "Merger" shall mean the merger of Sub with and into HVI pursuant to the Certificate of Merger. "Non-Competition Agreement(s)" shall mean the agreements substantially in the form attached hereto as Exhibit D to be entered into between HCIA and each of Lawrence J. Byrne and Kevin J. Hicks. "Organizational Documents" shall mean the certificate or articles of incorporation and bylaws of the referenced corporation. "Registration Rights Agreement" shall mean the registration rights agreement substantially in the form attached hereto as Exhibit E. "Securities Act" shall mean the Securities Act of 1933, as amended. "Spinco" shall mean the wholly owned subsidiary of HVI to which HVI will transfer the HVI Transferred Assets and the HVI Transferred Liabilities pursuant to the terms of the Distribution Agreement. "Spinco Common Stock" shall mean Spinco's common stock, par value $0.01 per share. "Stockholders' Agent" shall mean Warburg, Pincus Investors, L.P., or such other stockholder or stockholders chosen by the stockholders of 5 HVI to act as the representative of HVI's stockholders in enforcing any rights and undertaking any obligations on behalf of HVI's stockholders under this Agreement and under the Escrow Agreement. "Sub Stock" shall mean shares of the common stock of the Sub, $.01 par value per share. "Subsidiary" shall mean a corporation or other entity the voting securities of which are sufficient to elect at least a majority of the board of directors or other managers of such corporation or other entity and which are owned or otherwise controlled directly or indirectly by such parent corporation or other entity. "Transfer Effective Date" shall mean the date, as determined by the Board of Directors of HVI, on which the transactions contemplated by the Distribution Agreement shall be effective, which in any case shall be prior to the Effective Time of the Merger. Section 1.A. Transactions Contemplated by the Distribution Agreement. 1.A.1 Distribution of Spinco Common Stock (a) Provided that this Agreement shall not have been terminated in accordance with Section 9 hereof: (i) HVI shall, on the Transfer Effective Date, contribute to Spinco all of the HVI Transferred Assets in accordance with the Distribution Agreement; (ii) HVI shall, on the Transfer Effective Date, effect an amendment to its certificate of incorporation changing its name from "HealthVISION, Inc."; (iii) HVI shall use all reasonable efforts to obtain releases from, cause Spinco to assume, indemnify HVI and Sub from or, in accordance with the terms of the Distribution Agreement, otherwise provide for the payment or recovery by HVI or Sub with respect to the HVI Transferred Liabilities prior to the Closing Date; and (iv) HVI shall declare the Distribution to holders of HVI Common Stock, HVI Series A-1 Stock and HVI Series A-2 Stock on the Distribution Record Date, which shall be conditioned only upon the Merger on the Closing Date. (b) The Distribution shall be effected in accordance with the terms of the Distribution Agreement, which shall also govern the relative rights and obligations of Spinco and HVI, as surviving corporation, after the Merger, with respect to the Distribution. 1.A.2. HVI Stock Options and Warrants. On the Transfer Effective Date, HVI shall cause (i) all options outstanding under the HVI 1994 Stock Incentive Plan, (ii) all options outstanding under the HVI 1995 Non-Employee Director Stock Option Plan, and (iii) the 6 Warrant, dated July 1995, granted to MMC/GATX Partnership No. I, to be assumed by Spinco in accordance with the terms of the Distribution Agreement. Section 2. The Merger.The Merger 2.1 Merger; Effective Time of the Merger. Subject to the terms and conditions of this Agreement and of the Certificate of Merger, Sub will be merged into HVI in accordance with Section 251 of the Delaware Code and the terms and conditions set forth in this Agreement, including, without limitation, the conditions set forth in Section 8 below. The Certificate of Merger shall be executed by HVI prior to or upon the Closing. After execution of the Certificate of Merger, it shall be filed in accordance with the Delaware Code on the Closing Date. 2.2 Closing. The Closing will take place at the offices of HCIA, 300 East Lombard Street, Baltimore, Maryland 21202, on the Closing Date. 2.3 Effects of the Merger. At the Effective Time of the Merger, (i) the separate existence of Sub shall cease and Sub shall be merged with and into HVI (Sub and HVI are sometimes referred to herein as the "Constituent Corporations" and HVI after the Effective Time of the Merger is sometimes referred to herein as the "Surviving Corporation"), (ii) the Certificate of Incorporation of Sub shall be the Certificate of Incorporation of the Surviving Corporation, (iii) the Bylaws of Sub shall be the Bylaws of the Surviving Corporation, (iv) the directors of Sub shall be the directors of the Surviving Corporation, (v) the officers of Sub shall be the officers of the Surviving Corporation, and (vi) the Merger shall, from and after the Effective Time of the Merger, have all the effects provided by applicable law. Section 3. Effect of the Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates. 3.1 Effect on Capital Stock. At the Effective Time of the Merger, by virtue of the Merger and without any action on the part of the holder of any shares of HVI Capital Stock: (a) Capital Stock of Sub. All issued and outstanding shares of Sub Stock shall be converted into 1,000 shares of HVI Common Stock. Each stock certificate of Sub evidencing ownership of shares of Sub Stock shall evidence ownership of such shares of HVI Common Stock. (b) Cancellation of HVI Capital Stock. After the conversion of HVI Capital Stock contemplated by Section 3.1(c), all shares of HVI Capital Stock that are not owned by Sub shall be canceled and no stock of HCIA or other consideration shall be delivered in exchange therefor. (c) Conversion of HVI Capital Stock. Each share of HVI Capital Stock which is issued and outstanding immediately prior to the Effective Time of the Merger (other than shares of HVI Capital Stock held by persons who exercise dissenters' rights under Section 262 of the Delaware Code ("Dissenting Shares")), by virtue of the Merger and without 7 any action on the part of the holders thereof, shall be converted into the right to receive shares of HCIA Stock and cash as follows (the "Merger Consideration"): (i) each share of HVI 7% Stock shall be converted into the right to receive (x) that number of shares of HCIA Stock equal to the quotient obtained by dividing (1) 492,967, less (i) the number of shares of HCIA Stock delivered pursuant to Sections 3.1(c)(ii) and (iii) hereinbelow and (ii) the number of shares of HCIA Stock to be delivered pursuant to the LBA Bonus Payments, by (2) the number of shares of HVI 7% Stock issued and outstanding at the Effective Time of the Merger and (y) that amount of cash equal to the quotient obtained by dividing (1) the Cash Portion of the Merger Consideration, less the aggregate Cash Portion payable pursuant to Sections 3.1(c)(ii) and (iii) hereinbelow by (2) the number of shares of HVI 7% Stock issued and outstanding at the Effective Time of the Merger; (ii) each share of HVI Series A-1 Stock shall be converted into the right to receive, at the option of the holder thereof made prior to August 8, 1996, either (i) that amount of cash equal to $2.0797 or (ii) that number of shares of HCIA Stock equal to the quotient obtained by dividing 2.0797 by 60.856. In the event a holder fails to make an election by the close of business on August 7, 1996, the holder shall be deemed to have elected to receive cash in exchange for each share; (iii) each share of HVI Series A-2 Stock shall be converted into the right to receive, at the option of the holder thereof made prior to August 8, 1996, either (i) that amount of cash equal to $3.4677 or (ii) that number of shares of HCIA Stock equal to the quotient obtained by dividing 3.4677 by 60.856. In the event a holder fails to make an election by the close of business on August 7, 1996, the holder shall be deemed to have elected to receive cash in exchange for each share; and (iv) each share of Common Stock shall be canceled and shall not be entitled to any Merger Consideration. Provided, however, that no rights to receive fractional shares of HCIA Stock or any interest in fractional shares of HCIA Stock shall arise under this Agreement, and no certificates or scrip representing fractional shares of HCIA Stock shall be issued. Stockholders of HVI who would otherwise be entitled to such fractional shares or interests therein shall receive cash in lieu thereof upon surrender of their certificates for HVI Capital Stock in exchange for certificates of HCIA Stock. The cash price payable with respect to fractional shares shall be based upon $60.856 per share. (d) Payment of Merger Consideration. From and after the Effective Time of the Merger, each holder of a certificate theretofore representing issued and outstanding shares of HVI Capital Stock, excluding certificates representing shares of HVI Capital Stock held in HVI's treasury and excluding certificates representing shares of HVI Capital Stock held by Dissenting Stockholders (as defined hereinbelow) shall be entitled, upon the surrender of such certificates to HCIA, accompanied by a properly completed and executed letter of transmittal, (i) subject to (ii) hereinbelow, to receive in exchange therefor a certificate or certificates representing 8 that whole number of shares of HCIA Stock that is equal to the whole number of shares of HCIA Stock into which the holder's shares of HVI Capital Stock have been converted, (ii) in the case of each Indemnitee (as that term is defined in the Escrow Agreement) to have a certificate representing that whole number of shares of HCIA Stock as is set forth next to their name on Exhibit A to the Escrow Agreement, delivered into escrow pursuant to Section 3(e) herein, and, provided that the stockholder shall have surrendered its certificates theretofore representing shares of HVI Capital Stock accompanied by a properly completed and executed letter of transmittal, shall have the right to receive such certificates representing HCIA Stock upon termination of the escrow to the extent provided by the Escrow Agreement, (iii) to receive any payment due in lieu of fractional shares, and (iv) to receive payment, if any, of the Cash Portion of the Merger Consideration. If any certificate for shares of HCIA Stock is to be issued in a name other than that in which a surrendered certificate for shares of HVI Capital Stock is then registered, such surrender shall be accompanied by payment of any applicable transfer taxes and documents required for a valid transfer. If a holder of HVI Capital Stock claims that a certificate has been lost, stolen or destroyed, HCIA shall deliver to such holder, and to the Escrow Agent, respectively, the HCIA Stock and cash into which such HVI Capital Stock has been converted pursuant to Section 3.1(c) herein upon receipt of evidence of ownership of such HVI Capital Stock, and appropriate indemnification, in each case reasonably satisfactory to HCIA. From and after the Effective Time of the Merger and until surrendered and exchanged as hereinabove provided, each certificate theretofore representing issued and outstanding shares of HVI Capital Stock, excluding certificates representing shares of HVI Capital Stock held in HVI's treasury and excluding certificates representing shares of HVI Capital Stock held by Dissenting Stockholders, shall be deemed for all corporate purposes, except as hereinafter provided, to evidence the right to receive the Merger Consideration. Unless and until any such certificate shall be so surrendered, the holder of such certificate shall not have any right to receive any dividends paid or other distributions made to the holders of record of HCIA Stock after the Effective Time of the Merger. Upon surrender of any such outstanding certificate of HVI Capital Stock, the surrendering holder of record thereof shall receive all dividends and other distributions (other than dividends and other distributions which are required to be delivered to the Escrow Agent pursuant to the Escrow Agreement) with respect to the total number of shares of HCIA Stock into which his HVI Capital Stock was converted, which shall have been paid or made with respect to HCIA Stock which is outstanding as of a record date after the Effective Time of the Merger, but without interest thereon. All such dividends, distributions and stock certificates unclaimed at the end of one year from the Effective Time of the Merger shall be retained by HCIA, after which the holders of the shares not receiving payment of such dividends and distributions shall look, subject to applicable escheat or other laws, as general creditors only to HCIA for payment thereof. (e) Delivery of HCIA Stock to Escrow Agent. At the Effective Time of the Merger, the certificates of HCIA Stock which the holders of HVI Capital Stock are entitled to have delivered pursuant to clause (ii) of Section 3.1(d), shall be delivered by HCIA to the Escrow Agent under the Escrow Agreement and shall be received, held and disposed of by the Escrow Agent pursuant and subject to the terms and conditions thereof. Until distribution of the shares of 9 HCIA Stock held in escrow pursuant to the terms of the Escrow Agreement, HCIA shall have a security interest in such shares to secure the indemnification obligation to HCIA pursuant to the Escrow Agreement. For purposes of perfection of an enforceable security interest by HCIA in the Escrow Fund (as defined in the Escrow Agreement) and for federal tax purposes, possession of the shares by the Escrow Agent shall be considered to be possession by HCIA. (f) Adjustments. In the event HCIA shall declare, pay, make or effect between the date of this Agreement and the Effective Time of the Merger (a) any stock dividend or other distribution in respect of the HCIA Stock payable in shares of capital stock of HCIA, (b) any stock split or other subdivision of outstanding shares of HCIA Stock into a larger number of shares, (c) any combination of outstanding shares of HCIA Stock into a smaller number of shares, (d) any reclassification of HCIA Stock into other shares of capital stock or securities, or (e) any exchange of the outstanding shares of HCIA Stock, in connection with a merger or consolidation of HCIA or sale by HCIA of all or part of its assets, for a different number or class of shares of stock or securities of HCIA or for the shares of the capital stock or other securities of any other corporation, appropriate adjustment shall be made in the ratio for the conversion of shares of HVI Capital Stock into shares of HCIA Stock as may be required to put the holders of the HVI Capital Stock in the same position as if the record date, with respect to any such transaction or transactions which shall so occur, had been immediately after the Effective Time of the Merger, or otherwise to carry out the intents and purposes of this Agreement; provided, however, that HCIA shall have the right, without any adjustments under this Section, to issue additional shares of HCIA Stock or additional amounts of debt securities, whether convertible or not, in connection with a bona fide sale thereof for fair market value, the exercise of stock options, or the acquisition of the assets or stock of other corporations, partnerships or proprietorships which HCIA may acquire for fair market value, and HCIA shall have the right to grant stock options and stock appreciation rights to its employees under any employee stock option plan or a plan providing for stock appreciation rights heretofore or hereafter provided for by the stockholders of HCIA. (g) Dissenters' Rights. To the extent holders of HVI Capital Stock shall be entitled to dissenters' rights in connection with the Merger under Section 262 of the Delaware Code, Dissenting Shares shall not be converted into the Merger Consideration but shall be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the law of the State of Delaware. HVI shall give HCIA prompt notice of any demand received by HVI for appraisal of HVI Capital Stock, and HCIA shall have the right to participate in all negotiations and proceedings with respect to such demand. HVI agrees that, except with the prior written consent of HCIA, or as required under the Delaware Code, it will not voluntarily make any payment with respect to, or settle or offer to settle, any such demand for appraisal. Each holder of Dissenting Shares ("Dissenting Stockholder") who, pursuant to the provisions of the Delaware Code becomes entitled to payment of the value of shares of HVI Capital Stock, shall receive payment therefor after the Closing Date (but only after the value therefor shall have been agreed upon or finally determined pursuant to such provisions), but the payment thereof shall nevertheless be subject to the terms and conditions of this Agreement. After the Effective Time of the Merger, in the event a Dissenting Stockholder fails to make an effective demand for appraisal or loses or withdraws his or her right to receive payment of the value of shares of HVI Capital Stock under Section 262 of 10 the Delaware Code, upon surrender by such Dissenting Stockholder of his or her certificate(s) theretofore representing shares of HVI Capital Stock, HCIA shall pay the Merger Consideration to which such Dissenting Stockholder is then entitled under this Section 3.1. (h) No Further Ownership Rights in HVI Capital Stock. The Merger Consideration paid upon the surrender for exchange of shares of HVI Capital Stock in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares of HVI Capital Stock (excluding any rights arising under this Agreement and any claims arising under law relating to the Merger). From and after the Effective Time of the Merger, there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the shares of HVI Capital Stock which were outstanding immediately prior to the Effective Time of the Merger. Section 4. Representations and Warranties. 4.1 Representations and Warranties of HVI. Except as set forth on the HVI Disclosure Schedule, HVI hereby represents and warrants to HCIA and Sub as follows: (a) Organization, Standing and Power. HVI has only those Subsidiaries set forth on the Disclosure Schedule and does not own any equity interest, directly or indirectly, in any other corporation, partnership, joint venture, firm or other entity. Each of HVI and LBA is a corporation duly organized, validly existing and in good standing under the laws of its respective state of incorporation, has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction where the nature of the properties owned, leased or operated by it or the business transacted by it requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on HVI or LBA. HVI has delivered (or will deliver, in the case of resolutions not yet adopted) to HCIA true, correct and complete copies of the minute books of each of HVI and LBA. (b) Capital Structure. (i) As of the date hereof, the authorized capital stock of HVI consists of: (x) Preferred Stock. 1,000,000 shares of HVI 7% Stock, 336,900 shares of which are issued and outstanding; 5,500,000 shares of Series A-1 Stock, 5,278,529 shares of which are issued and outstanding; and 3,000,000 shares of HVI Series A-2 Stock, 2,883,756 of which shares are issued and outstanding. (y) Common Stock. 40,000,000 shares of HVI Common Stock, 4,588,438 shares of which are issued and outstanding. 11 (ii) 1,309,108 shares of HVI Common Stock are reserved for issuance under the HVI's 1994 Stock Option Plan, of which 1,105,525 shares are subject to outstanding options as of the date hereof. (iii) 50,000 shares of HVI Common Stock are reserved for issuance under the HVI's 1995 Non-Employee Director Stock Option Plan, of which 6,000 shares are subject to outstanding options as of the date hereof. (iv) All outstanding shares of HVI Capital Stock are, and any shares of HVI Capital Stock which are issued prior to the Closing Date will be, validly issued, fully paid and nonassessable and not subject to preemptive rights except as described in the HVI Disclosure Schedule. Except as described in the HVI Disclosure Schedule, there are no options, warrants, calls, conversion rights, commitments or agreements of any character obligating HVI to issue, deliver or sell, or cause to be issued, delivered or sold, any additional shares of HVI Capital Stock or obligating HVI to grant, extend or enter into any such option, warrant, call, conversion right, commitment or agreement. (v) HVI is the record and beneficial owner of all of the issued and outstanding shares of capital stock of LBA and no other person has any interests, inchoate or otherwise, in such shares or in the ownership of LBA. Each repurchase of capital stock by HVI or LBA has been effected in compliance with applicable provisions of law and Organizational Documents of HVI or LBA, as the case may be, and HVI or LBA, as the case may be, has paid for such capital stock in full satisfaction of its obligations in connection with such repurchase. Except as described in the HVI Disclosure Schedule, neither HVI nor LBA has any outstanding stock or securities convertible into or exchangeable for any shares of its capital stock, nor any preemptive or similar rights to subscribe for or to purchase, or any other rights to subscribe for or to purchase, or any options for the issuance (contingent or otherwise) of, or any call, commitment or claim of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of either HVI or LBA. Except as set forth in the HVI Disclosure Schedule, neither HVI nor LBA is subject to any obligation (contingent or otherwise) to purchase or otherwise retire any shares of its capital stock. There is no agreement to which either HVI or LBA is a party restricting the transfer of any shares of HVI's or LBA's capital stock. Except as described in the HVI Disclosure Schedule, HVI is not required to file, nor has it filed, pursuant to Section 12 of the Exchange Act, a registration statement relating to any class of securities of HVI. (c) Authority. HVI has all requisite power and authority to enter into this Agreement and the Certificate of Merger and, subject to approval of this Agreement and the Certificate of Merger by the holders of HVI Capital Stock, to consummate the transactions contemplated hereby and thereby. Subject to such approval by the holders of HVI Capital Stock, the execution and delivery of this Agreement and the Certificate of Merger and the consummation of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action by HVI. The Board of Directors of HVI has resolved that this Agreement and the Merger are fair to holders of HVI Capital Stock and that the Board will recommend the approval of this Agreement and the Merger by holders of HVI Capital Stock. This Agreement 12 has been duly executed and delivered by HVI. This Agreement constitutes and the Certificate of Merger, when executed and delivered by HVI, will constitute, valid and binding obligations of HVI enforceable in accordance with their respective terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, fraudulent conveyance, insolvency or similar laws affecting creditors' rights and remedies generally. The execution and delivery of this Agreement and the Certificate of Merger do not, and the consummation of the transactions contemplated hereby and thereby will not, conflict with or result in any violation of, require the consent of any third party under, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under (i) any provision of the Organizational Documents of either HVI or LBA or (ii) any loan or credit agreement, note, mortgage, indenture, lease, or other contract, agreement, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to HVI or LBA or their respective properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency, commission or other governmental authority or instrumentality (a "Governmental Entity"), is required by either HVI or LBA in connection with the execution and delivery of this Agreement or the Certificate of Merger or the consummation by HVI of the transactions contemplated hereby or thereby, except for the filing of (i) the Certificate of Merger with the Secretary of State of the State of Delaware, (ii) a Pre-Merger Notification pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (the "H-S-R Act"), and (iii) appropriate documents with the relevant authorities of other states in which the HVI is qualified to do business. (d) HVI and LBA Financial Statements. HVI has furnished HCIA with true, correct and complete copies of the HVI Statements and the LBA Statements. The HVI Statements and LBA Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods indicated and fairly present the financial position of HVI and LBA as of the dates thereof, and the results of each of their operations and cash flows for the periods then ended (except that the HVI Unaudited Statements and LBA Unaudited Statements do not include footnotes as required by generally accepted accounting principles). Since December 31, 1995, there has been no change in HVI's or LBA's accounting policies, and since December 31, 1995, there has been no change in LBA's estimates of contingent liabilities. (e) No Violations. The business of each of HVI and LBA has been conducted and is being conducted in compliance in all material respects with all applicable laws, rules, regulations, judgments, decrees and orders of any Governmental Entity applicable to such business. There are no judgments or outstanding orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency or by arbitration) against LBA or against any of its assets, businesses or properties. (f) No Defaults. Neither HVI nor LBA is in default or violation, and no event has occurred which would place either HVI or LBA in default or violation with the passage of time, of any term, condition or provision of (i) their Organizational Documents; (ii) any judgment, decree or order applicable to HVI or LBA; or (iii) any mortgage, note, 13 indenture, contract, agreement, lease or other instrument or commitment to which HVI or LBA is now a party or by which HVI or LBA or any of its respective properties or assets may be bound. (g) Litigation. Except as set forth in the HVI Disclosure Schedule, there is no action, suit or proceeding pending or, to HVI's knowledge, threatened, against either HVI or LBA which in any manner challenges or seeks to prevent, enjoin, alter or delay any of the transactions contemplated hereby, and, to HVI's knowledge, there are no facts or circumstances which would give rise to any of the foregoing. There is no investigation pending or, to HVI's knowledge, threatened against either HVI or LBA or any of their respective officers or directors, before any federal, state, municipal or other governmental department, commission, board, bureau, agency, instrumentality or other Governmental Entity. The HVI Disclosure Schedule sets forth, with respect to any pending action, suit, proceeding or investigation to which either HVI or LBA is a party, the forum, the parties thereto, the subject matter thereof and the amount of damages claimed or other remedy requested. (h) Absence of Certain Changes. Except as set forth in the HVI Disclosure Schedule, since December 31, 1995, each of HVI and LBA, as the case may be, has conducted its business in the ordinary course and there has not occurred: (i) any adverse change in the Business Condition of LBA; (ii) any amendments or changes in the Organizational Documents of LBA; (iii) any damage, destruction or loss, whether covered by insurance or not, adversely affecting the assets, businesses or properties of LBA; (iv) any redemption, repurchase or other acquisition of shares of capital stock of HVI or LBA, or any declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the capital stock of HVI or LBA; (v) any increase or change in the compensation or benefits, including severance, change-in-control or any similar benefits, payable or to become payable by LBA to any of its employees; (vi) any acquisition or sale of property of LBA, except sales of inventory in the ordinary course of business; (vii) any (A) incurrence, assumption or guarantee by LBA of any debt for borrowed money or (B) other than issuances reserved for and reflected as set forth in Section 4.1(b) hereinabove, issuance by either HVI or LBA of, or any commitment by either HVI or LBA to issue, any shares of capital stock or securities convertible into or exchangeable or exercisable for any shares of capital stock, or any alteration in any term of any outstanding security; (viii) any labor dispute, or any union organizing campaign; (ix) any entry into any commitment or transaction (including any capital expenditure) other than in the ordinary course of business consistent with past practice; (x) any increase or modification in any bonus, pension, insurance or other employee benefit plan, payment or arrangement made to, for or with any of its employees; (xi) any transfer or grant of a right under any Intellectual Property Rights (as defined in Section 4.l(p) hereinbelow); (xii) any entry into any agreement granting an exclusive license to any Intellectual Property Rights or providing for a new material business relationship; or (xiii) any agreement by LBA to do any of the foregoing. (i) Absence of Undisclosed Liabilities. LBA does not have any liabilities or obligations (whether absolute, accrued or contingent), whether or not required under generally accepted accounting principles to be accrued, shown, disclosed or indicated in a consolidated balance sheet of LBA, except (i) liabilities, obligations or contingencies that are accrued or reserved against in the LBA Statements, or (ii) liabilities incurred or 14 obligations or contingencies reserved against since May 31, 1996, in the ordinary course of business in amounts usual and normal for LBA, or as required in connection with the transactions contemplated hereby. (j) Certain Agreements. Neither the execution and delivery of this Agreement or the Certificate of Merger nor the consummation of the transactions contemplated hereby or thereby will (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of HVI or LBA, under any Plan of HVI or LBA (as defined in Section 4.l(l)) or otherwise, except for the LBA Bonus Payments, (ii) increase any benefits otherwise payable under any Plan of HVI or LBA or otherwise, or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (k) Taxes. (i) For purposes of this Agreement, the following definitions shall apply: (A) The term "Taxes" shall mean all taxes, however denominated, including any interest, penalties or other additions to tax that may become payable in respect thereof, imposed by any federal, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, all income or profits taxes, payroll and employee withholding taxes, social security taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business license taxes, real and personal property taxes, stamp taxes, and other similar governmental charges. (B) The term "Returns" shall mean all reports, estimates, declarations of estimated tax, information statements and returns relating to, or required to be filed in connection with, any Taxes. (ii) All Returns required to be filed prior to the date of this Agreement by HVI and LBA have been duly filed on a timely basis and such Returns are true, complete and correct in all material respects, except as set forth in the HVI Disclosure Schedule. All Taxes shown to be payable on such Returns or otherwise due have been paid in full on a timely basis or have been accrued on the HVI Statements or the LBA Statements, and no other Taxes are payable by HVI or LBA with respect to items or periods covered by such Returns. No claim has ever been made in any jurisdiction where HVI or LBA does not file Returns that it is or may be subject to tax in that jurisdiction. Each of HVI and LBA has withheld and paid over all Taxes required to have been withheld and paid over in connection with amounts paid or owing to any employee or other third party. There are no liens on any of the assets of HVI or LBA with respect to Taxes, other than liens for Taxes not yet due and payable. Neither HVI nor LBA has filed a Return containing a disclosure statement under Section 6662 of the Internal Revenue Code or any similar provision of state, local, foreign or other law. 15 (iii) HVI has furnished or caused to be furnished to HCIA true and complete copies of (A) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received by or on behalf of any of HVI and LBA relating to Taxes, and (B) all federal and state income or franchise tax returns for each of HVI and LBA, in each case for all periods ending on and after February 14, 1994. Any tax liabilities for years that have not been examined or have not closed by the applicable statute of limitations will not have a Material Adverse Effect on HVI or LBA. No deficiencies have been asserted with respect to Taxes of either HVI or LBA. Neither HVI or LBA is a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or proposed against HVI or LBA. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of HVI or LBA. Neither HVI nor LBA has requested any extension of time to file any Return which has not since been filed. Neither HVI nor LBA has ever been a party to any tax sharing agreement. Neither HVI nor LBA is otherwise currently under the obligation to pay any Tax obligation of any other person No power of attorney has been granted by HVI or LBA that is currently in force with respect to any matter relating to Taxes. There are no requests for rulings, subpoenas, or requests for information pending to any taxing authority. (iv) Neither HVI nor LBA is a party to any safe harbor lease within the meaning of Section 168(f)(8) of the Internal Revenue Code, as in effect prior to amendment by the Tax Equity and Fiscal Responsibility Act of 1982. Neither HVI nor LBA is, nor has ever been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Internal Revenue Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Neither HVI nor LBA is a "consenting corporation" under Section 341(f) of the Internal Revenue Code. Neither HVI nor LBA has made any payments, nor is either obligated to make any payments, nor is HVI or LBA a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G or 162(m) of the Internal Revenue Code. (v) Set forth on the HVI Disclosure Schedule is a summary of the net operating loss carryforwards available to HVI, as of the dates set forth therein, subject to applicable limitations contained in the Internal Revenue Code. HVI shall provide at Closing the summary of net operating loss carryforwards through July 31, 1996. (l) Employee Benefit Plans. (i) HVI has provided HCIA with a list of all plans, whether oral or written, in which any active, former or retired employees of LBA participate (individually a "Plan" and collectively the "Plans"). The term Plans shall include (A) any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (B) any profit sharing, pension, deferred compensation, bonus, stock option, stock purchase, severance, retainer, consulting, health, welfare or incentive plan or agreement whether legally binding or not, (C) any plan or policy providing for "fringe benefits" to its employees, including but not limited to vacation, paid holidays, personal leave, employee discount, educational benefit or similar programs, and (D) any employment agreement, or each oral or written contract, commitment and understanding with each current or former director, 16 officer, employee or stockholder or any associate or relative of any thereof, which is not immediately terminable without cost or other liability to LBA. (ii) Neither HVI nor any member of the HVI controlled group or affiliated service group, as defined in Section 414 of the Internal Revenue Code ("Members of the Group") is, or has at any time been, a party to any multiemployer plan as defined under Section 3(37) of ERISA ("Multiemployer Plan"), or is required to contribute to any such Multiemployer Plan. (iii) Neither HVI nor any Members of the Group has at any time sponsored or maintained, directly or indirectly, an employee pension benefit plan that was subject to the minimum funding requirements of ERISA or is subject to Title IV of ERISA. (iv) Each Plan which is an "employee benefit plan," as defined in Section 3(3) of ERISA, complies in all material respects by its terms and in operation with the requirements provided by any and all statutes, orders or governmental rules or regulations currently in effect and applicable to the Plan, including but not limited to ERISA and the Internal Revenue Code. (v) LBA has filed or caused to be filed on a timely basis and distributed to employees and/or participants in the Plans on a timely basis, each and every return, report, statement, notice, declaration and other documents required by any federal, state or local government agency (including, without limitation, the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation and the Securities and Exchange Commission), with respect to each Plan sponsored or maintained by LBA. Furthermore, LBA has withheld and remitted to the proper depository all income taxes and wage taxes on benefits derived under the Plans, to the extent such withholding and remittance is required by law. (vi) Each Plan intended to qualify under Section 401(a) of the Internal Revenue Code is the subject of a favorable unrevoked determination letter issued by the Internal Revenue Service as to its qualified status, the Internal Revenue Service has not threatened to revoke any favorable determination letter or opinion letter with respect to each Plan, and nothing has occurred since the date of the most recent determination letter to cause the loss of any Plan's qualification. (vii) All contributions for all periods ending prior to the Closing Date (including periods from the first day of the current plan year to the Closing Date) have been made prior to the Closing Date by LBA. (viii) All insurance premiums have been paid in full, subject only to normal retrospective adjustments in the ordinary course, with regard to the Plans for plan years ending on or before the Closing Date. With respect to periods from the close of the most recent plan year through the Closing Date with respect to the Plans, all insurance premiums due or payable through the Closing Date have been or will be paid in full, and no such premium is overdue or in a grace period for late payment. 17 (ix) With respect to each Plan: (A) no prohibited transactions (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code) have occurred; (B) no action or claim (other than routine claims for benefits made in the ordinary course of Plan administration for which Plan administrative review procedures have not been exhausted) is pending, or to HVI's knowledge, threatened or imminent against or with respect to the Plan, any employer who is participating (or who has participated) in any Plan or any fiduciary (as defined in Section 21(A) of ERISA) of the Plan; and (C) Neither HVI nor LBA, nor, to HVI's knowledge, any fiduciary of any Plan has any knowledge of any facts which could give rise to any action or claim against or with respect to any Plan, any employer who is participating (or who has participated) in any Plan or any fiduciary (as defined in Section 3(21)(A) of ERISA), of any Plan. (x) Neither HVI nor LBA, nor, to HVI's knowledge, any fiduciary with respect to any Plan has any liability or is threatened with any liability (whether joint or several) (i) for the termination of any single employer plan under Sections 4062 or 4064 of ERISA or any multiple employer plan under Section 4063 of ERISA, (ii) for any interest payments required under Section 302(e) of ERISA or Section 412(m) of the Internal Revenue Code, (iii) for any excise tax imposed by Sections 4971, 4975, 4976, 4977, 4979, or 4980 of the Internal Revenue Code, or (iv) to a fine under Section 502 of ERISA. (xi) Neither HVI nor any of the Members of the Group have incurred any withdrawal liability with respect to any Multiemployer Plan within the meaning of Sections 4201 and 4204 of ERISA, and no liabilities exist with respect to withdrawals from any Multiemployer Plans which could subject HVI or any Members of the Group to any controlled group liability under ERISA. (xii) None of the Plans that are welfare benefit plans within the meaning of Section 3(1) of ERISA provide for benefits or coverage for any former or retired employee or their beneficiaries, except to the extent required by Section 4980B of the Internal Revenue Code or Sections 601 through 608, inclusive, of ERISA. (xiii) All of the Plans of LBA and any employer who is participating (or who has participated) in any Plan, to the extent applicable, have complied with the continuation of group health coverage provisions contained in Section 4980B of the Internal Revenue Code and Sections 601 through 608, inclusive, of ERISA. (xiv) True, correct and complete copies of all documents creating or evidencing any Plan have been made available to HCIA, and true, correct and complete copies of all reports, forms and other documents required to be filed with any governmental entity or distributed to Plan participants or employees (including, without limitation, summary plan 18 descriptions, Forms 5500 and summary annual reports for the past three (3) years for all Plans subject to ERISA) have been made available to HCIA. A true, correct and accurate summary of any oral agreement or unwritten Plan described in subsection (l)(i) hereof has been made available to HCIA. (xv) All expenses and liabilities relating to all of the Plans have been, and will on the Closing Date be fully and properly accrued on HVI's and LBA's books and records and disclosed in accordance with generally accepted accounting principles and in Plan financial statements. (xvi) Any fidelity bond required to be obtained by HVI or LBA under ERISA with respect to any Plan has been obtained and is in full force and effect. (xvii) HVI and LBA have each, to the extent applicable with respect to each Plan, made available to HCIA copies of the three most recent attorney's responses to an auditor's request for information. (xviii) There are no pending investigations, proceedings or other matters concerning any Plan before the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation, or any other governmental agency, other than determination letter applications filed with the Internal Revenue Service. (xix) There are no leased employees employed by LBA (as such term is defined in Section 414(n) of the Internal Revenue Code) that must be taken into account with respect to the requirements of the Plan set forth under Section 414(n)(3) of the Internal Revenue Code. (m) Properties, Liens, Etc. Except as reflected in the HVI Statements and LBA Statements, and except for liens for current taxes not yet delinquent or being protested in good faith by appropriate proceedings and set forth in the HVI Disclosure Schedule, LBA owns, free and clear of any liens, claims, charges, options or other encumbrances, all of its tangible and intangible property, real and personal, whether or not reflected in the LBA Statements (except that sold or disposed of in the ordinary course of business since the date of such Statements or property acquired pursuant to financing leases as reflected in the LBA Statements). All plants, structures, machinery and equipment owned or leased by LBA and used in the operation of its business are in good and satisfactory operating condition for the requirements of its business as presently conducted, except for ordinary wear and tear. Except for property described as leased or licensed in the Disclosure Schedule, there are no material assets of LBA which are owned by third parties and used by LBA in the ordinary course of its business. Neither HVI nor LBA holds fee title to any real property. (n) Major Contracts. The Disclosure Schedule sets forth a true and complete list of all written or oral contracts, agreements and other instruments not made in the ordinary course of business that are material to the Business Condition of LBA and to which LBA is a party, or made in the ordinary course of business and referred to in clauses (i) through (xiv) of 19 this Section 4.l(n). The Disclosure Schedule sets forth a true and complete list of the all of the following contracts to which LBA is a party: (i) union contract, employment contract or arrangement providing for future compensation with any officer, consultant, director or employee which is not terminable by it on 30 days' notice or less without penalty or obligation to make payments related to such termination; (ii) plan, contract or arrangement providing for bonuses, pensions, severance benefits, deferred compensation, retirement payments, profit-sharing or the like; (iii) joint venture contract or arrangement or other similar agreement which involves a sharing of profits with other persons; (iv) any individual agreement in which the annual amount involved exceeds $75,000 in aggregate amount; (v) lease for real or personal property; (vi) any agreement, license, franchise, permit, indenture or authorization which has not been terminated or performed in its entirety which may be, by its terms, terminated, impaired or materially adversely affected by reason of the execution of this Agreement, the Certificate of Merger, the Closing, or the transactions contemplated hereby or thereby; (vii) except with respect to trade indebtedness incurred in the ordinary course of business, instruments evidencing or related in any way to (a) indebtedness or the guarantee of any indebtedness incurred in the acquisition of products, companies or other entities, or (b) indebtedness or the guarantee of any indebtedness for borrowed money by way of direct loan, sale of debt securities, purchase money obligation, conditional sale, guarantee or otherwise (including, but not limited to, any commitment or arrangement to enter into such indebtedness or guarantee); (viii) license agreement, either as licensor or licensee; (ix) agreement or arrangement for the sale of any assets, properties or rights; (x) contract containing covenants purporting to limit, or which would have the effect of limiting, the freedom of LBA to compete in any line of business in any geographic area; 20 (xi) contract, agreement or other instrument or other understanding between LBA and any affiliated party, including, but not limited to, any stockholder, director or officer of LBA; (xii) all agreements with sales representatives, distributors and dealers; (xiii) any agreement or royalty arrangement relating to the use by a third party of the Intellectual Property Rights used by LBA or the use by LBA of any third party's intellectual property or other assets; or (xiv) any other agreement, contract or arrangement which is material to the Business Condition of LBA. HVI has supplied HCIA with true, correct and complete copies of all contracts, agreements or other instruments set forth on the HVI Disclosure Schedule. All agreements, contracts, leases and other instruments listed on the HVI Disclosure Schedule (the "LBA Contracts") are valid and in full force and effect, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. LBA has not, nor has any other party thereto, breached any provision of, or defaulted in any material respect under the terms of, any of the LBA Contracts where such breach or default has not been cured. No party to any of the LBA Contracts has canceled or threatened to cancel any such Contract. (o) Interests of Certain Persons. None of the officers, directors, employees, consultants or stockholders of HVI or LBA has any direct or indirect interest in any property, real or personal, tangible or intangible, including inventions, patents, copyrights, trademarks or trade names, used in the business of LBA, including without limitation any interest in any Intellectual Property Rights (as defined below) used by LBA. No officer of HVI or LBA has any financial interest in any corporation, partnership, joint venture or other entity that is engaged in a business which is competitive with that conducted by LBA or otherwise does any business with LBA. (p) Intellectual Property. (i) LBA owns, and/or has the exclusive right to use, sell, license, dispose of, and (subject to compliance with legal formalities) bring actions for infringement of all Intellectual Property Rights necessary or required for, or used in, the conduct of the business of LBA as presently conducted. (ii) LBA has the right to use, sell and license all data necessary or required for, or used in, the conduct of the business of LBA as presently conducted, and the use of such data by LBA does not breach any agreement to which it is a party or by which the use of such data is governed. 21 (iii) The execution, delivery and performance of this Agreement and the Certificate of Merger, the consummation of the Merger and the consummation of the other transactions contemplated hereby and thereby will not breach, violate or conflict with any instrument or agreement governing any Intellectual Property Right necessary or required for, or used in, the conduct of the business of LBA as presently conducted and will not cause the forfeiture or termination or give rise to a right of forfeiture or termination of any such Intellectual Property Right or in any way impair the right of LBA, HCIA or the Surviving Corporation to use, sell, license or dispose of, either as part or all of a current product of LBA (determined as of the date of this Agreement) or subsequent to the Closing as part or all of a product of HCIA or a Subsidiary of HCIA, or to bring any action for the infringement of, any such Intellectual Property Right or portion thereof. (iv) Neither the development, manufacture, marketing, license, sale or use of any product currently licensed or sold by LBA or currently under development violates or will violate any license or agreement to which LBA is a party or infringes or will infringe any Intellectual Property Right of any other party; there is no pending or, to the knowledge of HVI, threatened claim or litigation contesting the validity, ownership or right to use, sell, license or dispose of any Intellectual Property Right necessary or required for, or used in, the conduct of the business of LBA as presently conducted nor, to the knowledge of HVI, is there any basis for any such claim, nor has LBA received any notice asserting that any such Intellectual Property Right or the proposed use, sale, license or disposition thereof conflicts or will conflict with the rights of any other party, nor is there any basis for any such assertion; to the knowledge of HVI, there is no infringement on the part of any third party of Intellectual Property Rights used by LBA. (v) LBA has taken all commercially reasonable steps necessary (including, without limitation, entering into confidentiality and non-disclosure agreements with all officers, employees and consultants to LBA with access to or knowledge of Intellectual Property Rights) to maintain the secrecy and confidentiality of, and its proprietary rights in, all Intellectual Property Rights necessary or required for, or used in, the conduct of the business of LBA as presently conducted. HVI has provided HCIA with a true, correct and complete list of all applications, filings and other formal actions made or taken pursuant to federal, state, local and foreign laws by LBA material to the Business Condition of LBA to perfect or protect the interests of LBA in Intellectual Property Rights, including, without limitation, all patents, patent applications, trademarks, trademark applications, service marks and copyright or mask work registrations material to the Business Condition of LBA. As used in this Agreement, the term "Intellectual Property Rights" shall mean all industrial and intellectual property rights, including, without limitation, patents, patent applications, patent rights, mask work rights, trademarks, trademark applications, trade names, service marks, service mark applications, copyrights, copyright applications, franchises, licenses, know-how, trade secrets, proprietary processes and formulae, all source and object code, compilations (whether or not subject to copyright protection), algorithms, inventions, development tools and all documentation and media relating to the above. 22 (q) Personnel, Powers of Attorney and Bank Accounts. HVI has provided HCIA with lists of (i) the names of all employees of LBA, including their position, date of hire, accrued vacation, wage or salary and bonus, (ii) the names of all persons, if any, holding a power of attorney on behalf of HVI or LBA, and (iii) the names and addresses of all banks and other institutions (including brokerage firms and mutual funds) at which LBA has accounts, deposits, cash balances or safety deposit boxes, including account and identification numbers, the names of all persons authorized to draw on or give instructions with respect to such accounts or deposits or to have access thereto. All cash in such accounts is held in demand deposits and is not subject to any restriction or limitation as to withdrawal. (r) Employees. Except as set forth in the Seller Disclosure Schedule, no officer or key employee of LBA provided notice of intention to terminate his or her employment with, or terminated his or her employment with LBA since December 31, 1994. No current officer or key employee of LBA has given notice to LBA of his or her intention to terminate his or her employment with LBA. No employee of LBA is subject to any secrecy or noncompetition agreement or any agreement or restriction of any kind that would impede in any way the ability of such employee to carry out fully all activities of such employee in furtherance of the business of LBA as currently operated after the Effective Time of the Merger. No third party has claimed in writing that any person employed by or affiliated with LBA has violated or may be violating any of the terms or conditions of his past employment, non-competition or non-disclosure agreement with such third party, or disclosed or may be disclosing or utilized or may be utilizing any trade secret or proprietary information or documentation of such third party or interfered or may be interfering in the employment relationship between such third party and any of its present or former employees. (s) Insurance. HVI has provided HCIA with a true and complete list and description of all policies of insurance maintained by LBA since December 31, 1994. Such insurance or comparable insurance will be maintained in full force and effect to and including the Effective Time of the Merger. All premiums for such policies have been paid in full and no notice of cancellation or termination has been received. The HVI Disclosure Schedule contains a true, correct and complete list of any claims made against such insurance policies since December 31, 1994. All of the insurable properties of LBA are insured in amounts and coverages and against risks and losses which are usually insured against by persons holding and operating similar assets, businesses or properties. LBA has not been denied or refused any insurance since December 31, 1994. (t) Disclosure. No representation or warranty made by HVI in this Agreement, nor any application, document, written information, statement, financial statement, certificate, schedule or exhibit prepared and furnished or to be prepared and furnished by HVI or its representatives pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. 23 (u) No Indemnification Liabilities. Seller has no knowledge of any existing liabilities that require LBA to indemnify any officer, director, employee or agent of LBA for acts or omissions by such persons acting on behalf of LBA or existing agreements to provide indemnification for such liabilities. There are no pending or, to the knowledge of HVI, threatened claims against any director, officer, employee or agent of LBA or any other person which could give rise to any claim for indemnification from or against LBA. (v) Corporate Records. The minute books of HVI and LBA, copies of which have been provided to HCIA, are accurate and complete in all material respects and reflect (i) all material resolutions adopted and all other actions authorized or ratified by the directors or stockholders of each of HVI and LBA, and (ii) all actions by the directors, stockholders or employees of HVI and LBA with respect to the capital stock of HVI and LBA and options, warrants and other rights to purchase capital stock of HVI and LBA. HVI has previously delivered to HCIA true and complete copies of the Organizational Documents of each of HVI and LBA, all as currently in effect. (w) Accounting Matters. Neither HVI nor LBA, nor, to the knowledge of HVI, any director, officer, agent, employee, consultant or other person associated with or acting on behalf of HVI or LBA, has on behalf of HVI or LBA or in connection with the business of HVI or LBA (a) used any corporate funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity or (b) made any direct or indirect unlawful payments to government officials or others from corporate funds or established or maintained any unlawful or unrecorded funds. (x) Environmental Laws. Neither the business nor operation of HVI or LBA nor any of their respective assets are or have been operated or currently used in a manner which violates or violated any applicable law of any governmental authority regarding usage, storage or disposal of any toxic or hazardous waste, chemical or other material (herein "Environmental Laws") and no condition or event has occurred which, with notice or the passage of time or both, would constitute a violation of any such Environmental Laws. Neither HVI nor LBA nor any of their respective operations is the subject of any litigation or proceeding before a governmental authority involving a demand for damages or other potential liability with respect to violations of Environmental Laws. Neither HVI nor LBA has buried, dumped, disposed, spilled or released any pollutants, contaminants, or hazardous or toxic wastes, substances or materials on, beneath or about the real property used by HVI or LBA or any property adjacent thereto in violation of any Environmental Laws. (y) Assets Sufficient for Conduct of Business. The tangible assets of LBA described in the LBA Statements constitute all of the assets and properties historically required for the operation of LBA's business. (z) Brokers. Except as set forth on the HVI Disclosure Schedule, neither HVI nor LBA has used or consulted with any broker, investment banker or finder in connection with this Agreement and neither LBA nor HCIA has or shall have any liability or otherwise suffer or incur any loss as a result of or in connection with any brokerage, investment 24 banker's or finder's fee or other commission of any person retained, or purported to be retained, by or on behalf of HVI or LBA, or any of HVI's stockholders, in connection with any of the transactions contemplated by this Agreement. 4.2 Representations and Warranties of HCIA. HCIA hereby represents and warrants to HVI as follows: (a) Organization, Standing and Power. The Subsidiaries of HCIA are Sub and those companies listed as subsidiaries in the HCIA Commission Reports (as that term is defined hereinbelow) (the "HCIA Companies"). Each of the HCIA Companies is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation, has all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its businesses as now being conducted, and is duly qualified and in good standing to do business in each jurisdiction where the nature of the properties owned, leased or operated by it or the business transacted by it requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect on the HCIA Companies, taken as a whole. HCIA has delivered (or will deliver, in the case of resolutions not yet adopted) to HVI complete and correct copies of resolutions of the Boards of Directors and stockholders of HCIA, if any, and Sub adopted in connection with the transactions contemplated by this Agreement, all of which remain in full force and effect, except to the extent modified by subsequently delivered resolutions. (b) Authority. HCIA and Sub each have all requisite power and authority to enter into this Agreement. HCIA and Sub have all requisite power and authority to consummate the transactions contemplated hereby and thereby. The execution and delivery by HCIA and Sub of this Agreement, and the consummation of the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of HCIA and Sub. This Agreement has been duly executed and delivered by HCIA and Sub and constitutes a valid and binding obligation of HCIA and Sub enforceable in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, or other similar laws affecting the enforcement of creditors' rights generally, and except that the availability of equitable remedies is subject to the discretion of the court before which any proceeding therefor may be brought. The execution and delivery of this Agreement does not, and the consummation of the transactions contemplated hereby will not, conflict with or result in any violation of, or constitute a default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under (i) any provision of the Organizational Documents of the HCIA Companies or (ii) any loan or credit agreement, note, mortgage, indenture, lease, or other contract, agreement, instrument, permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the HCIA Companies or their respective properties or assets. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to HCIA or Sub in connection with the execution and delivery of this Agreement or the consummation by HCIA and Sub of the transactions contemplated hereby, except for the (i) filing of the Certificate of Merger with the Secretary of State of the State of Delaware and (ii) a Pre-Merger Notification pursuant to the H-S-R Act. 25 (c) Capital Structure. (i) As of the date hereof, the authorized capital stock of HCIA consists of 15,500,000 shares of capital stock, consisting of 15,000,000 shares of HCIA Stock, and 500,000 shares of preferred stock, $.01 par value. As of the date hereof, there were (x) 9,274,387 shares of HCIA Common Stock issued and outstanding and no shares of preferred stock issued and outstanding and (y) 1,002,873 shares of HCIA Stock reserved for issuance under HCIA's 1994 Stock and Incentive Plan, 1995 Non-Employee Directors Stock Option Plan and outstanding non-plan stock options. All shares of HCIA Stock outstanding as of the date hereof are duly authorized, validly issued, fully paid, nonassessable and free of pre-emptive rights. The shares of HCIA Stock to be issued in the Merger will be validly issued, fully paid, nonassessable, free of pre-emptive rights, and free and clear of any security interests, claims, liens, pledges, options, encumbrances, charges, agreements, voting trusts, proxies or other arrangements, restrictions or other legal or equitable limitations of any kind, except as may otherwise be set forth in the Registration Rights Agreement. (ii) The authorized capital stock of Sub consists of 100,000 shares of common stock, $.01 par value per share, of which 1,000 shares are issued and outstanding. (iii) HCIA is the record and/or beneficial owner of all of the issued and outstanding shares of capital stock of each of its Subsidiaries and no other person has any interests, inchoate, or otherwise, in such shares or in the ownership of any of HCIA's Subsidiaries. Each repurchase of capital stock by any of the HCIA Companies has been effected in compliance with applicable provisions of law and such Company's Organizational Documents and such Company has paid for such capital stock in full satisfaction of any obligations in connection with such repurchase. (d) HCIA Commission Reports. HCIA has made, or will make, available to HVI (i) HCIA's Annual Report on Form 10-K for the year ended December 31, 1995, including all exhibits thereto and items incorporated therein by reference, (ii) HCIA's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996, including all exhibits thereto and items incorporated therein by reference, (iii) the proxy statement relating to HCIA's Annual Meeting of Stockholders to be held on August 7, 1996 and (iv) HCIA's Prospectus dated as of April 30, 1996 (items (i) through (iv) in this sentence being referred to collectively as the "HCIA Commission Reports"). As of their respective dates, the HCIA Commission Reports did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Since December 31, 1995, HCIA has filed all forms, reports and documents with the Commission required to be filed by it pursuant to the Securities Act and the Exchange Act and the rules and regulations promulgated thereunder, each of which complied as to form, at the time such form, document or report was filed, in all material respects with the applicable requirements of the Securities Act and the Exchange Act and the applicable rules and regulations promulgated thereunder. 26 (e) Financial Statements. HCIA has delivered HVI with true, correct and complete copies of the HCIA Statements. The HCIA Statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods presented, and fairly present the consolidated results of operations of HCIA and its Subsidiaries as of the dates thereof and the consolidated cash flows for the periods then ended (except that the HCIA Unaudited Statements do not include footnotes as required by generally accepted accounting principles). (f) No Violations. The business of each of the HCIA Companies has been conducted and is being conducted in compliance in all material respects with all applicable laws, rules, regulations, judgments, decrees and orders of any Governmental Entity applicable to such business. There are no judgments or outstanding orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency or by arbitration) against any of the HCIA Companies or against any of their respective assets, businesses or properties. (g) No Defaults. None of the HCIA Companies is in default or violation, and no event has occurred which would place any of the HCIA Companies in default or violation with the passage of time, of any term, condition or provision of (i) their Organizational Documents; (ii) any judgment, decree or order applicable to any HCIA Company; or (iii) any mortgage, note, indenture, contract, agreement, lease or other instrument or commitment to which any HCIA Company is now a party or by which any HCIA Company or any of its respective properties may be bound. (h) Litigation. Except as set forth in the HVI Disclosure Schedule, there is no action, suit or proceeding pending or threatened, against any HCIA Company, or involving any of their respective assets, businesses or properties, or which in any manner challenges or seeks to prevent, enjoin, alter or delay any of the transactions contemplated hereby, and there are no facts or circumstances which would give rise to any of the foregoing. There is no investigation pending or threatened against any of the HCIA Companies or any of their respective officers or directors, before any federal, state, municipal or other governmental department, commission, board, bureau, agency, instrumentality or other Governmental Entity. (i) Absence of Certain Changes. Since December 31, 1995 and except as disclosed in its Commission Reports, there has not occurred: (i) any material adverse change in the Business Condition of HCIA and its Subsidiaries, taken as a whole; (ii) any amendments or changes to the Articles of Incorporation of HCIA (except for the proposed increase to the number of authorized shares of HCIA Stock from 15,000,000 shares to 50,000,000 shares); or (iii) any redemption, repurchase, or other acquisition of shares of capital stock of HCIA by HCIA. (j) Disclosure. No representation or warranty made by HCIA in this Agreement, nor any application, document, written information, statement, financial statement, certificate, schedule or exhibit prepared and furnished or to be prepared and furnished by HCIA or its representatives pursuant hereto or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state a 27 material fact necessary to make the statements or facts contained herein or therein not misleading in light of the circumstances under which they were furnished. (k) Brokers. Neither HVI nor LBA nor any officer, director, employee or stockholder of HVI or LBA has or shall have any liability or otherwise suffer or incur any loss as a result of or in connection with any brokerage, investment banker's or finder's fee or other commission of any person retained, or purported to be retained, by or on behalf of any of the HCIA Companies in connection with any of the transactions contemplated by this Agreement. Section 5. Covenants of HVI. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time of the Merger, HVI agrees (except as expressly contemplated by this Agreement or to the extent that HCIA shall otherwise consent in writing, which consent shall not be unreasonably withheld) that, except as contemplated by the Distribution Agreement: 5.1 Conduct of Business. HVI and LBA shall each carry on its business only in the normal and ordinary course in substantially the same manner as heretofore conducted and use its best efforts consistent with past practice and policies to preserve intact its present business organizations, retain the services of its present officers and key employees and preserve the goodwill of its customers, suppliers, dealers, distributors and others having business dealings with them, with a view to preserving their goodwill and ongoing businesses without material impairment at the Effective Time of the Merger. HVI shall promptly notify HCIA of any event or occurrence or emergency not in the ordinary course of business of HVI or LBA that is material or adverse to the Business Condition of LBA. HVI shall not permit LBA to, without the prior written consent of HCIA: (i) hire any management personnel or terminate any employee; (ii) change the salary, compensation or benefit amounts of any officer, or, except in accordance with past practices, change the salary, compensation or benefit of any other employee or agent; (iii) grant any severance or termination pay to any officer or director or employee; (iv) transfer to any person or entity any rights to Intellectual Property Rights, or enter into any agreement providing for either a license of Intellectual Property Rights or a new material business relationship; (v) enter into any commitment or transaction (A) involving an amount in excess of $75,000, or (B) not in the ordinary course of business; 28 (vi) violate, amend or otherwise change in any material way the terms of any of the LBA Contracts; (vii) enter into or amend any agreements pursuant to which any other party is granted marketing, distribution or manufacturing rights of any type or scope with respect to any of LBA's products; or (viii) commence a lawsuit other than: (a) for the routine collection of bills; (b) for injunctive relief on the grounds that LBA has suffered immediate and irreparable harm not compensable in money damages, provided that HVI has obtained the prior written consent of HCIA, which consent shall not be unreasonably withheld; or (c) for a breach of this Agreement. 5.2 Dividends; Changes in Stock. Except as expressly contemplated by this Agreement or the Distribution Agreement, or to the extent HCIA shall otherwise consent in writing, neither HVI nor LBA shall (i) declare or pay any dividends on or make other distributions (whether in cash, stock or property) in respect to any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for, shares of capital stock or (iii) repurchase or otherwise acquire, directly or indirectly, any shares of its capital stock. 5.3 Issuance of Securities. Except for the issuance of additional shares of HVI 7% Stock or as expressly contemplated by this Agreement or the Distribution Agreement, neither HVI nor LBA shall issue, deliver or sell, or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock of any class or securities convertible into, or subscriptions, rights, warrants or options to acquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities. 5.4 Organizational Documents. Except as expressly contemplated by this Agreement or the Distribution Agreement, neither HVI nor LBA shall amend its Organizational Documents without the prior consent of HCIA, which consent shall not unreasonably be withheld. 5.5 Exclusivity; Acquisition Proposals. Unless and until this Agreement shall have been terminated by either party pursuant to Section 9.1 hereof, neither HVI nor LBA shall (nor will HVI or LBA permit any of its officers, directors, agents, representatives or affiliates to) directly or indirectly take any of the following actions with any party other than HCIA, Sub and their respective designees: (i) solicit, encourage, initiate or participate in any negotiations, inquiries or discussions with respect to any offer or proposal to acquire, either directly or by acquiring the capital stock of HVI, all or substantially all of LBA's business and properties or capital stock, whether by merger, purchase of assets, tender offer or otherwise; (ii) enter into or execute any agreement or plan of reorganization, merger agreement or other agreement calling for the sale, either directly or by acquiring the capital stock of HVI, of all or substantially all of LBA's business and properties; (iii) make or authorize any public statement, recommendation or solicitation with respect to any merger, purchase of assets or any offer or proposal relating to the foregoing other than with respect to the Merger; or (iv) assist or cooperate with any person to 29 make any proposal to purchase, either directly or by acquiring the capital stock of HVI, all or any part of the capital stock or assets of LBA, other than inventory or other assets in the ordinary course of business. 5.6 No Acquisitions. Neither HVI nor LBA shall acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof or otherwise acquire or agree to acquire any assets, except for acquisitions of inventory and other supplies in the ordinary course of business consistent with past practices; provided, however, that this provision shall not be deemed to prohibit any act if, after the Closing, the liability for such act shall be assigned to Spinco as part of the Distribution Agreement and neither HVI, LBA nor HCIA shall have any liability or responsibility therefor. 5.7 No Dispositions. Neither HVI nor LBA shall sell, lease, license or otherwise dispose of any of its assets, except the sale of inventory in the ordinary course of business consistent with prior practice; provided, however, that this provision shall not be deemed to prohibit any act if, after the Closing, the liability for such act shall be assigned to Spinco as part of the Distribution Agreement and neither HVI, LBA nor HCIA shall have any liability or responsibility therefor. 5.8 Indebtedness; Other Liabilities. Neither HVI nor LBA shall incur any indebtedness for borrowed money, or guarantee any such indebtedness or issue or sell any debt securities or guarantee any debt securities of others or pay, discharge or satisfy any claim, liability or obligation (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business, and consistent with past practices, of liabilities reflected or reserved against in the HVI Unaudited Statements and LBA Unaudited Statements, or except as contemplated by this Agreement; provided, however, that (i) this provision shall not be deemed to prohibit any act if, after the Closing, the liability for such act shall be assigned to Spinco as part of the Distribution Agreement and neither HVI, LBA nor HCIA shall have any liability or responsibility therefor and (ii) LBA shall be entitled to repay LBA Indebtedness provided that on the Closing Date LBA shall have cash on hand of not less than $700,000. 5.9 No Revaluation. LBA shall not revalue any of its assets as recorded on the LBA Unaudited Statements, including without limitation writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business. 5.10 Plans. LBA shall not adopt or amend any of its Plans. LBA shall not enter into any employment contracts or pay any special bonuses or special remuneration to any officers, directors or employees or increase the salaries or wage rates of its employees. 5.11 Breach of Representations and Warranties. Neither HVI nor LBA will take any action which would cause or constitute a breach of any of the representations and warranties set forth in Section 4.1 or which would cause any of such representations and warranties to be inaccurate, it being understood that HVI and LBA may continue to operate their respective 30 business in the ordinary course consistent with the other covenants contained in this Section 5. In the event of, and promptly after becoming aware of, the occurrence of or the pending or threatened occurrence of any event which would cause or constitute such a breach or inaccuracy, HVI will give reasonably detailed notice thereof to HCIA. 5.12 Consents. After execution of this Agreement, each of HVI and LBA will promptly apply for or otherwise seek, and use commercially reasonable efforts to obtain, all consents and approvals required with respect to the HVI Companies for the consummation of the Merger, except such consents and approvals as HCIA and HVI agree in writing that HVI and LBA shall not seek to obtain. 5.13 Commercially Reasonable Efforts. HVI and LBA will use their commercially reasonable efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to Closing under this Agreement. 5.14 Taxes. Without the prior written consent of HCIA, neither HVI nor LBA shall make or change any election, change any annual accounting period, adopt or change any accounting method, file any amended Return, enter into any closing agreement, settle any Tax claim or assessment relating to HVI or LBA, surrender any right to claim refund of Taxes, or consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to HVI or LBA, if any such election, adoption, change, amendment, agreement, settlement, surrender, or consent would have the effect of causing or increasing a Tax liability of HVI or LBA that would have an adverse effect on HVI or LBA. HVI and LBA shall prepare and timely file any Returns and amendments thereto required to be filed by HVI and LBA and shall pay all taxes when due on or before the Closing Date. HCIA shall have a reasonable opportunity to review such Returns and amendments thereto. Each of HVI and LBA shall pay or discharge or cause to be paid and discharged all Taxes upon or against it or any of its properties or assets before the same shall become delinquent and before penalties accrue thereon. Between the date of this Agreement and the Closing Date, HVI shall give HCIA and its authorized representatives full access to all properties, books, records and Returns of or relating to HVI and LBA in order that HCIA may have full opportunity to make such investigations as it shall desire to make of the affairs and Tax situation of HVI and LBA, provided that such access and investigations shall occur during normal business hours and shall not unreasonably interfere with the normal business operations of HVI and LBA. 5.15 Access to Information. HVI and LBA will cooperate fully with HCIA in its investigation of HVI and LBA and will disclose in good faith to HCIA all material facts regarding the business and affairs of HVI and LBA requested by HCIA. HVI and LBA will afford to the officers, independent accountants, counsel and other representatives of HCIA reasonable access to the properties, books, records and personnel of HVI and LBA in order that HCIA may have a full opportunity to make such investigation as it needs to make of HVI and LBA solely for purposes of this transaction. 5.16 Stockholder Approval. HVI shall submit the following for the approval of the holders of HVI Capital Stock on or prior to August 9, 1996: (i) approval of the Merger; (ii) 31 appointment of the Stockholders' Agent; and (iii) approval of the payments of the LBA Bonus Payments, such approval to be obtained in accordance with the requirements of Section 280G of the Internal Revenue Code and the rules and regulations promulgated thereunder. 5.17 Distribution Agreement. Prior to the Closing Date, HVI shall, and shall cause Spinco to, duly execute and deliver the Distribution Agreement. HVI shall perform all of its obligations under the Distribution Agreement which are to be performed by it prior to the Effective Time of the Merger and HVI shall cause Spinco to perform all of its obligations under the Distribution Agreement which are to be performed prior to the Effective Time of the Merger. HVI covenants that the Distribution Agreement will not be amended, waived, terminated or otherwise modified prior to the Effective Time of the Merger without the prior written consent of HCIA. Section 6. Covenants of HCIA. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time of the Merger, HCIA agrees (except as expressly contemplated by this Agreement or to the extent that HVI shall otherwise consent in writing, which consent shall not be unreasonably withheld) that: 6.1 Breach of Representations and Warranties. HCIA will not take any action which would cause or constitute a breach of any of the representations and warranties set forth in Section 4.2 or which would cause any of such representations and warranties to be inaccurate. In the event of, and promptly after becoming aware of, the occurrence of or the pending or threatened occurrence of any event which would cause or constitute such a breach or inaccuracy, HCIA will give reasonably detailed notice thereof to HVI. 6.2 Consents. After execution of this Agreement, HCIA will promptly apply for or otherwise seek, and use all commercially reasonable best efforts to obtain, all material consents and approvals required with respect to HCIA for the consummation of the Merger, except such consents and approvals as HCIA and HVI agree HCIA will not seek to obtain. 6.3 Commercially Reasonable Efforts. HCIA will use commercially reasonable efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to Closing under this Agreement. Section 7. Additional Agreements. In addition to the foregoing, HCIA and HVI each agree to take the following actions after the execution of this Agreement: 7.1 Legal Conditions to the Merger. Each of HVI and LBA will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on HVI or LBA with respect to the Merger and will promptly cooperate with and furnish information to HCIA in connection with any such requirements imposed upon HCIA, Sub 32 or any other Subsidiary of HCIA in connection with the Merger. HVI and LBA will take all reasonable actions to obtain (and to cooperate with HCIA and its Subsidiaries in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other third party (except any consent, authorization or approval which HCIA and HVI agree HVI shall not seek to obtain) required to be obtained or made by HVI or LBA (or by HCIA or any of its Subsidiaries) in connection with the Merger or the taking of any action contemplated thereby or by this Agreement or the Certificate of Merger. Each of HCIA and Sub will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on them with respect to the Merger and will promptly cooperate with and furnish information to HVI in connection with any such requirements imposed upon HVI and its Subsidiaries in connection with the Merger. HCIA and Sub will take all reasonable actions to obtain (and to cooperate with HVI and LBA in obtaining) any consent, authorization, order or approval of, or exemption by, any Governmental Entity or other third party (except any consent, authorization or approval which HCIA and HVI agree HCIA shall not seek to obtain) required to be obtained or made by HCIA or any of its Subsidiaries (or by HVI or LBA) in connection with the Merger or the taking of any action contemplated thereby or by this Agreement or the Certificate of Merger. 7.2 Expenses. All costs and expenses incurred in connection with this Agreement, the Certificate of Merger and the transactions contemplated hereby and thereby, whether or not the Merger is effective, shall be paid by the party incurring such expense. Pursuant to the Distribution Agreement, HVI shall assign the liability for such costs and expenses to Spinco. 7.3 Additional Agreements. In case at any time after the Effective Time of the Merger any further action is reasonably necessary to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Constituent Corporations, the proper officers and directors of each constituent corporation to this Agreement shall take all such necessary action. 7.4 Assumption of Certain Liabilities by HCIA. Concurrently with the Effective Time of the Merger, HCIA shall assume all Liabilities represented by the LBA Bonus Payments (including the obligations to deliver shares of HCIA Stock), and the LBA Indebtedness. Concurrently with the Effective Time of the Merger, HCIA shall satisfy all Liabilities represented by the LBA Indebtedness. 7.5 Payment of Third Party Expenses. On the Closing Date, HCIA shall pay to Spinco, in cash, an amount equal to the Third Party Expenses, upon receipt of a certification by Spinco of the amount thereof. Section 8. Conditions Precedent. 33 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions unless waived in writing by both HVI and HCIA: (a) No Injunction. No injunction or other order entered by a state or federal court of competent jurisdiction shall have been issued and remain in effect which would prohibit or make illegal the consummation of the transactions contemplated hereby. (b) No Prohibitive Change in Law. There shall have been no law, statute, rule or regulation, domestic or foreign, enacted or promulgated which would prohibit or make illegal the consummation of the transactions contemplated hereby. (c) Distribution Agreement Conditions. The conditions precedent to the Distribution set forth in Section 3.3 of the Distribution Agreement shall have been satisfied or waived. (d) Stockholder and Board of Director Approval. This Agreement and the Certificate of Merger shall have been approved and adopted by the Board of Directors of HVI and holders of the HVI Capital Stock as required by law and the Organizational Documents of HVI. (e) Approvals. All authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained other than any such authorizations, consents, orders, approvals, filings or waiting period expirations which, if not obtained or made, would not have a Material Adverse Effect on the Business Conditions of the HCIA Companies, taken as a whole, or of HVI or LBA. (f) Pre-Merger Notification. The termination or expiration of all waiting periods in connection with the filings made by or on behalf of HCIA and HVI (and by any other person in connection with this Agreement) with the Federal Trade Commission (the "FTC") and the United States Department of Justice ("Justice") pursuant to the H-S-R Act and the regulations promulgated thereunder, with no outstanding requests for additional information or clarification to be supplied by either HCIA or HVI (or any other person filing in connection with this Agreement) (provided that the parties agree to use their best efforts to respond timely to all such requests) and no outstanding notice of either the FTC or Justice indicating that further action will be taken by either of them with respect to the transactions contemplated by this Agreement. 8.2 Further Conditions to Obligations of HCIA. The obligations of HCIA to effect the Merger are subject to the satisfaction of the following conditions, unless waived by HCIA: (a) Representations and Warranties. The representations and warranties of HVI set forth in this Agreement shall be true and correct in all material respects (other than 34 such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true in all respects, and except to the extent such representations refer to a specified date) as of the date of this Agreement and as of the Closing Date as though made on and as of such dates except as set forth in the HVI Disclosure Schedule, and HCIA shall have received a certificate signed on behalf of HVI by an officer of HVI to such effect. (b) Performance by HVI of Obligations. HVI shall have performed in all material respects all obligations and covenants required to be performed by it under this Agreement and the Certificate of Merger prior to the Closing Date, and HCIA shall have received a certificate signed on behalf of HVI by an officer of HVI to such effect. (c) Opinion of HVI's Counsel. HCIA shall have received an opinion dated as of the Closing Date of Dorsey & Whitney LLP, counsel to HVI, substantially in the form attached hereto as Exhibit G. (d) Certified Resolutions. HCIA shall have received a certificate of the corporate secretary of HVI attesting to the adoption of resolutions by the Board of Directors and holders of HVI Capital Stock approving this Agreement, the Certificate of Merger and the transactions contemplated hereby. (e) Dissenting Stockholders. As of the Closing Date, the number of Dissenting Shares shall not, taken together, exceed 10% of the total number of issued and outstanding shares of HVI Capital Stock as of the Closing Date. (f) No Outstanding Options. There shall be no outstanding options or other rights to purchase HVI Capital Stock and there shall be no outstanding rights of any person to purchase or otherwise require the issuance of any HVI Capital Stock. (g) Non-Competition Agreements. The Non-Competition Agreements shall have been duly executed and delivered by the parties thereto other than HCIA. (h) Escrow Agreement. The Escrow Agreement shall have been duly executed and delivered by the parties thereto other than HCIA. (i) Resignations. Each of the officers and directors of HVI and LBA shall have duly executed and delivered to HCIA a resignation letter, in a form satisfactory to HCIA, resigning from each of his positions as an officer or director of HVI and LBA immediately after the Effective Time of the Merger. (j) Registration Rights Agreement. Each of the parties to the Registration Rights Agreement other than HCIA shall have duly executed and delivered a counterpart of the Registration Rights Agreement. 35 (k) Distribution Agreement. The Distribution shall have been consummated. 8.3 Further Conditions of Obligation of HVI. The obligation of HVI to effect the Merger is subject to the satisfaction of the following conditions, unless waived by HVI: (a) Representations and Warranties. The representations and warranties of HCIA set forth in this Agreement shall be true and correct in all material respects (other than such representations and warranties which are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true in all respects, and except to the extent such representations refer to a specified date) as of the date of this Agreement and as of the Closing Date as though made on and as of such dates, prior to the Closing Date, and HVI shall have received a certificate signed on behalf of HCIA by an officer of HCIA to such effect. (b) Performance by HCIA and Sub of Obligations. HCIA and Sub shall have performed in all material respects all obligations and covenants required to be performed by them under this Agreement and the Certificate of Merger prior to the Closing Date, and HVI shall have received a certificate signed on behalf of HCIA by an officer of HCIA to such effect. (c) Certified Resolutions. HVI shall have received a certificate of the corporate secretary of HCIA and Sub attesting to the adoption of resolutions by the Boards of Directors of HCIA and Sub, and of HCIA as sole stockholder of Sub, approving this Agreement, the Certificate of Merger and the transactions contemplated hereby. (d) Opinion of HCIA's Counsel. HVI shall have received an opinion dated the Closing Date of the Vice President and General Counsel to HCIA, substantially in the form attached hereto as Exhibit H. (e) Registration Rights Agreement. HCIA shall have duly executed and delivered the Registration Rights Agreement. 36 Section 9. Termination, Amendment and Waiver. 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time of the Merger, whether before or after approval of matters presented in connection with the Merger to the holders of Seller Capital Stock: (a) by mutual consent of the Board of Directors of HCIA and HVI; (b) by either HCIA or HVI if there has been a material breach of any representation, warranty, covenant or agreement contained in this Agreement on the part of the other party set forth in this Agreement and such breach has not been cured within thirty (30) days of written notice of such material breach from the non-breaching party; or (c) by HVI or HCIA if the Merger shall not have been consummated before September 1, 1996, or such later date as the Board of Directors of HVI and HCIA may mutually agree, for any reason other than matters within the direct control of such party. Where action is taken to terminate this Agreement pursuant to this Section 9.1, it shall be sufficient for such action to be authorized by the Board of Directors of the party taking such action. 9.2 Effect of Termination. In the event of termination of this Agreement by either the HVI or HCIA as provided in Section 9.1, this Agreement and the Certificate of Merger shall forthwith become void and there shall be no liability or obligation on the part of HCIA, Sub or HVI or their respective officers or directors, except for liabilities arising out of any breach of any representation, warranty, covenant or agreement contained in this Agreement. 9.3 Amendment. This Agreement may be amended by the parties hereto, by action taken by their respective Boards of Directors and at any time before or after approval of matters presented in connection with the Merger by the holders of HVI Capital Stock, but after any such stockholder approval no amendment shall be made which by law requires the further approval of holders of HVI Capital Stock without obtaining such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. 9.4 Extension; Waiver. At any time prior to the Effective Time of the Merger, any party hereto, by action taken by its Board of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties made to such party contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions for the benefit of such party contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing on behalf of such party. 37 Section 10. Survival of Representations; Indemnification. 10.1 Survival of Representations, Warranties, Covenants and Agreements. All representations, warranties, covenants and agreements in this Agreement shall survive the Merger for a period of one (1) year following the Closing Date; provided, however, that the representation of HCIA in Section 4.2(c) shall survive indefinitely. No claim or action for breach of any representation, warranty, covenant or agreement shall be asserted or maintained by any party hereto after the expiration thereof pursuant to the preceding sentence except for claims made in writing prior to such expiration or actions (whether instituted before or after such expiration) based on any claim made in writing prior to such expiration. In the event of a breach of any of such representations, warranties, covenants or agreements, the party to whom such representations, warranties, covenants or agreements have been made shall have all rights and remedies for such breach available to it under the provisions of this Agreement, the Distribution Agreement and the Escrow Agreement. 10.2 Indemnification of HCIA. (a) Pursuant to the Escrow Agreement and subject to the various requirements, provisions and limitations set forth in the Escrow Agreement and this Agreement (including but not limited to Sections 10.2(b) and 10.2(c)), each of HVI and HCIA, and their respective directors, officers, employees, affiliates, agents and stockholders (collectively, the "HCIA Indemnitees") shall be indemnified and held harmless from and against any and all losses, liabilities, costs and claims arising out of, based upon or resulting from (x) any inaccuracy of any representation or warranty of HVI which is contained in or made pursuant to this Agreement or (y) any breach by HVI or LBA of any of their agreements, covenants or obligations contained in or made pursuant to this Agreement. (b) The HCIA Indemnitees shall not assert any claims or bring any action under Section 10 of this Agreement or under the Escrow Agreement until such time as the cumulative aggregate losses, liabilities, costs and claims of the HCIA Indemnitees (including any and all fees and expenses of any kind related thereto) exceed $500,000. If the aggregate amounts due to the HCIA Indemnitees under this Section 10 exceed such threshold, then the HCIA Indemnitees shall have the right to recover all amounts in excess of such threshold. Notwithstanding anything contained in this Agreement to the contrary, for purposes of computing the amount of cumulative aggregate claims for HCIA Indemnitees subject to the threshold provided above, the amount of such claims shall be reduced by an amount equal to the net reduction, if any, in the liability for federal, state or local taxes, which reduction would not have been realized but for the payment made by the Indemnitee for which indemnification is sought hereunder. (c) The parties agree, except as set forth in Section 10.2(d) hereinbelow, (i) that the remedies provided in Section 10.2 shall be the sole and exclusive remedies which any HCIA Indemnitee shall have from and after the Closing Date against HVI or any of HVI's directors, officers, employees, affiliates, agents or stockholders for any breach of the representations, warranties and covenants contained in this Agreement, and (ii) that the HCIA 38 Stock placed into escrow under the Escrow Agreement shall be the sole and exclusive source of funds from which claims by the HCIA Indemnitees may be satisfied. (d) Notwithstanding any other provision to the contrary contained herein, the parties agree that nothing contained in this Agreement, including the provisions of this Section 10, shall (i) limit the potential remedies of the HCIA Indemnitees with respect to any intentional or willful fraud, intentional or willful misrepresentation or intentional or willful deceit committed by HVI, or any stockholder, director, officer, employee or agent of HVI or (ii) limit the potential remedies of HVI arising from a breach by Spinco of its agreements, covenants or obligations contained in or made pursuant to the Distribution Agreement, except to the extent that any claim, loss, liability or cost of HVI for which HVI is entitled to be indemnified under the Distribution Agreement has been claimed as a loss, liability or cost for indemnity by an HCIA Indemnitee under this Section 10.2. 10.3 Indemnification by HCIA. HCIA shall (i) indemnify and hold harmless HVI and each of its directors, officers, employees, affiliates, agents and stockholders as of the Closing Date (collectively, the "HVI Indemnitees") from and against any and all losses, damages, liabilities, costs and claims arising out of, based upon or resulting from (x) any inaccuracy of any representation or warranty of HCIA or Sub which is contained in or made pursuant to this Agreement or (y) any breach by HCIA or Sub of any of their agreements, covenants or obligations contained in or made pursuant to this Agreement and (ii) reimburse the HVI Indemnities for any and all fees and expenses of any kind related thereto. 10.4 Procedure for Indemnification. (a) If an HCIA Indemnitee or an HVI Indemnitee (an "Indemnitee") shall receive notice or otherwise learn of the assertion by a person (including any governmental entity) who is not party to this Agreement of any claim or of the commencement by any such person of any action (a "Third-Party Claim") with respect to which a person (an "Indemnifying Party") is or may be obligated to provide indemnification pursuant to this Agreement, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third-Party Claim; provided, that the failure of any Indemnitee to give notice as required by this Section 10.4 shall not relieve the Indemnifying Party of its obligations under this Section 10, except to the extent that such Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third-Party Claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the indemnifiable loss that has been or may be sustained by such indemnitee. (b) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third-Party Claim, provided that the Indemnifying Party must confirm in writing that it agrees that the Indemnitee is entitled to indemnification hereunder in respect of such Third-Party Claim. Within 30 days of the receipt of notice from an Indemnitee in accordance with Section 10.4(a) (or sooner, if the nature of such Third- 39 Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether to assume responsibility for such Third-Party Claim (provided that if the Indemnifying Party does not so notify the Indemnitee of its election within 30 days after receipt of such notice from the Indemnitee, the Indemnifying Party shall be deemed to have elected not to assume responsibility for such Third-Party Claim). After notice from an Indemnifying Party to an Indemnitee of its election to assume responsibility for a Third Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Section 10 for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; provided, that if the defendants in any such claim include both the Indemnifying Party and one or more Indemnitees and in such Indemnitees' reasonable judgment a conflict of interest between such Indemnitees and such Indemnifying Party exists in respect of such claim, such Indemnitees shall have the right to employ separate counsel and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party. If an Indemnifying Party elects not to assume responsibility for a Third-Party Claim (which election may be made only in the event of a good faith dispute that a claim was inappropriately tendered under Section 10.2 or Section 10.3, as the case may be) such Indemnitee may defend or (subject to the following sentence) seek to compromise or settle such Third-Party Claim. Notwithstanding the foregoing, an Indemnitee may not settle or compromise any claim without prior written notice to the Indemnifying Party, which shall have the option within ten days following the receipt of such notice (i) to disapprove the settlement and assume all past and future responsibility for the claim, including reimbursing the Indemnitee for prior expenditures in connection with the claim, (ii) to disapprove the settlement and continue to refrain from participation in the defense of the claim, in which event the Indemnifying Party shall have no further right to contest the amount or reasonableness of the settlement if the Indemnitee elects to proceed therewith, (iii) to approve the amount of the settlement, reserving the Indemnifying Party's right to contest the Indemnitee's right to indemnity, or (iv) to approve and agree to pay the settlement. In the event the Indemnifying Party makes no response to such written notice from the Indemnitee, the Indemnifying Party shall be deemed to have elected option (ii). (c) If an Indemnifying Party chooses to defend or to seek to compromise any Third-Party Claim, the Indemnitee shall cooperate in the defense or settlement or compromise of such Third-Party Claim and the Indemnitee shall make available to such Indemnifying Party any personnel and any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense. (d) Notwithstanding anything else in this Section 10.4 to the contrary, an Indemnifying Party shall not settle or compromise any Third-Party Claim without the prior written consent of the Indemnitee who is subject to such Third-Party Claim unless such settlement or compromise contemplates as an unconditional term thereof the giving by such claimant or plaintiff to the Indemnitee of a written release from all liability in respect of such Third-Party Claim (and provided further that such settlement may not provide for any non-monetary relief by Indemnitee without the written consent of the Indemnitee). In the event the Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee declines to accept any such settlement or compromise that contains an unconditional release of the Indemnitee, such 40 Indemnitee may continue to contest such Third-Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third-Party claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise which such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to pursue such Third-Party Claim. (e) Any claim on account of an indemnifiable loss which does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall have a period of 15 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 15-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 15-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party under applicable law or under this Agreement. (f) If the amount of any indemnifiable loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement or otherwise, the amount of such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (g) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. Section 11. General Provisions. 11.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given upon the earlier of receipt or, if mailed by registered or certified mail (return receipt requested), three days after such mailing to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): 41 (a) if to HCIA or Sub, to: HCIA Inc. 300 East Lombard Street Baltimore, Maryland 21202 Attention: Vice President and General Counsel Facsimile No.: (410) 752-4159 with a copy to: Whiteford, Taylor & Preston L.L.P. Seven Saint Paul Street Baltimore, Maryland 21202 Attention: D. Scott Freed, Esquire Facsimile No.: (410) 347-9414 (b) if to the HVI, to: HealthVISION, Inc. 141 Stony Circle, Suite 150 Santa Rosa, California 95401 Attention: President Facsimile No.: (707) 528-4500 with a copy to: Dorsey & Whitney LLP Pillsbury Center South 220 South Sixth Street Minneapolis, Minnesota 55402-1498 Attention: David J. Lubben, Esquire Facsimile No.: (612) 340-8738 11.2 Interpretation. When a reference is made in this Agreement to Sections or Exhibits, such reference shall be to a Section of or Exhibit to this Agreement unless otherwise indicated. The words "include," "includes" and "including" when used herein shall be deemed in each case to be followed by the words "without limitation." The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 11.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart. 42 11.4 Integration. This Agreement and the Exhibits and Schedules hereto, and the Confidentiality Agreement previously executed between HVI and HCIA, (a) constitute the entire agreement among the parties with respect to the subject matter hereof and the agreements contemplated hereby, and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof; (b) except for indemnities provided in Section 10 hereinabove, are not intended to confer upon any other person any rights or remedies hereunder; and (c) shall be binding upon and inure to the benefit of the parties hereto and shall not be assigned by operation of law or otherwise except as otherwise specifically provided. 11.5 Governing Law. Except as otherwise specifically provided in this Agreement, this Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of New York, without regard to conflict of law principles, as such laws are applied to contracts entered into and to be performed entirely in New York by New York residents. 11.6 No Third-Party Beneficiaries.No Third-Party Beneficiaries Except for the indemnities provided in Section 10 hereinabove, nothing contained in this Agreement shall be construed to give any person other than HCIA, HVI and Sub any legal or equitable right, remedy or claim under or with respect to this Agreement. 11.7 SUBMISSION TO JURISDICTION. THE PARTIES HERETO HEREBY AGREE THAT ANY ACTION TO ENFORCE ANY CLAIM ARISING OUT OF THIS AGREEMENT SHALL BE BROUGHT IN A FEDERAL COURT HAVING SUBJECT MATTER JURISDICTION AND LOCATED IN THE STATE OF MARYLAND. HVI AND THE STOCKHOLDERS OF HVI FURTHER IRREVOCABLY CONSENT TO THE SERVICE OF PROCESS OUT OF SAID COURTS BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID TO IT AT THE APPROPRIATE ADDRESS SET FORTH IN SECTION 10.2 AND AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW, (A) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON IT IN ANY SUCH SUIT, ACTION OR PROCEEDING AND (B) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO IT. NOTHING HEREIN CONTAINED SHALL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. HVI AND THE STOCKHOLDERS OF HVI HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY FEDERAL COURT LOCATED IN THE STATE OF MARYLAND AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 43 11.8 Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. No party hereto may assign its rights hereunder to another person without the consent of the other party. 11.9 Severability. Any provision of this Agreement which is determined to be invalid or unenforceable will be ineffective to the extent of such determination without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such remaining provisions. 11.10 Cumulative Rights. Except as expressly limited hereunder, the rights, powers and remedies of each party hereunder shall be in addition to, and not in limitation of, all rights, powers and remedies provided by law or in equity, or under any other agreement between the parties. All of such rights, powers and remedies shall be cumulative, and may be exercised successively or concurrently. 11.11 Publicity and Notice. No press release or announcement concerning the transactions contemplated by this Agreement shall be issued by any party hereto without the prior consent of the other party, such consent not to be unreasonably withheld or delayed; except for such release or announcement as the party issuing the release or announcement may, in the exercise of its reasonable judgment, determine to be required by law, rule or regulation. It is acknowledged by the parties hereto that HCIA intends to announce the execution of this Agreement as of the date hereof or shortly thereafter, and shall also announce the Closing on the date thereof or shortly thereafter. [Signatures on next page] 44 IN WITNESS WHEREOF, the parties have duly executed this Agreement and Plan of Reorganization under seal as of the date first above written. WITNESS: HCIA INC. By:/s/ George D. Pillari (SEAL) George D. Pillari Chairman & CEO HCIA SUB INC. By: /s/ George D. Pillari (SEAL) George D. Pillari President HEALTHVISION, INC. By: /s/ Robert Hawkins (SEAL) Robert Hawkins Chairman 45 EXHIBITS Exhibit A Certificate of Merger Exhibit B Form of Distribution Agreement Exhibit C Form of Escrow Agreement Exhibit D Form of Non-Competition Agreement Exhibit E Form of Registration Rights Agreement Exhibit F HVI Disclosure Schedule Exhibit G Form of Legal Opinion of Dorsey & Whitney, LLP Exhibit H Form of Legal Opinion of HCIA Vice President and General Counsel EX-99 3 EXH 99 PRESS RELEASES EXHIBIT 99 Contact: HCIA Inc. Ms. Jean Chenoweth (410) 895-7515 PRESS RELEASE HCIA SIGNS DEFINITIVE AGREEMENT TO ACQUIRE LBA HEALTH CARE MANAGEMENT FOR $130 MILLION Baltimore, July 22, 1996 -- HCIA Inc. (NASDAQ:HCIA) today announced that is has executed a definitive agreement to acquire LBA Health Care Management, Inc., a subsidiary of HealthVISION, INC., for $130 million. LBA is a health care information company that develops and markets information products that analyze and benchmark detailed clinical outcomes and labor productivity. Based in Denver, LBA's primary customers include hospitals and integrated delivery systems. LBA employs 162 staff and had revenues of approximately $7.4 million for the three months ended March 31, 1996. HCIA plans to use its ICCS (trademark symbol) system to integrate the detailed clinical data collected by LBA from approximately 250 hospital-customers, resulting in a significant expansion of HCIA's ICCS-level data bases. Additionally, LBA, through its well-regarded clinical implementation staff, has developed methodologies for modifying clinical practice behavior and quantifying the resultant cost savings and quality-of-care improvements. In order to acquire LBA, HCIA will acquire all of the capital stock of HealthVISION. Prior to the closing of the acquisition the business of HealthVISION not associated with LBA will be transfered to a newly formed corporation whose shares will be held by certain current stockholders of HealthVISION. The purchase price for the acquisition is approximately $130 million (which includes the payment of certain liabilities), of which $100 million is payable in cash and $30 million is payable through the delivery of 492,960 shares of common stock of HCIA. The transaction has received federal regulatory clearance and is expected to be completed by mid-August, subject to the approval of HealthVISION's stockholders. Stockholders representing in excess of a majority of HealthVISION's voting shares outstanding have agreed to vote in favor of the transaction. The acquisition will be accounted for as a purchase transaction. HCIA expects to record a non-recurring charge of approximately $41.2 million in the quarter ending September 30, 1996 relating to the acquisition of in-process research and development. HCIA has obtained a bank commitment to fund the cash portion of the acquisition and plans to file a registration statement with the Securities and Exchange Commission to register the sale of approximately 2,000,000 shares of HCIA common stock by HCIA and approximately 217,000 shares of HCIA common stock by certain stockholders of HealthVISION. HCIA intends to utilize the proceeds of the planned offering to repay the bank financing incurred in connection with the acquisition. "We are excited about the prospect of integrating LBA's specialized data bases, as well as our clinical methodologies and expertise with HCIA's industry-leading databases and software platforms," said Larry Byrne, Founder of LBA. "A combined HCIA-LBA product line should allow us to offer more comprehensive and sophisticated solutions that improve quality and efficiency by modifying clinical practice patterns," he added. "The acquisition of LBA should strengthen HCIA's long-term position as a health care information content provider," said George D. Pillari, Chairman and CEO of HCIA. "The business combination should allow HCIA to continue to promote ICCS (trademark symbol)-based data standards and to fortify the Company's clinical implementation methodologies and staff," he added. An investor's conference call is scheduled for 11:30 a.m. EDT Monday, July 22, 1996. Please contact Ms. Jean Chenoweth, Senior Vice President, Industry Relations at (410) 895-7515 for further information. HCIA Inc. is a leading health care information content company that develops and markets clinical and financial decision support systems to hospitals, integrated delivery systems, managed care organizations, and pharmaceutical manufacturers. The Company's databases and products are used to benchmark clinical performance and outcomes, and to manage the cost and delivery of health care. This press release, other than the historical financial information, consists of forward-look statements that involve a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are (i) variations in quarterly results, (ii) development by competitors of new or superior products or entry into the market of new competitors, (iii) the Company's dependence on key personnel, (iv) management of the Company's growth and expansion, including assimilation of any potential acquisitions, (v) dependence on intellectual property rights, (vi) dependence on major customers, (vii) changes in the health care industry from both a regulatory and financial perspective, (viii) volatility of the Company's stock price and (ix) other risks detailed from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. ### Contact: HCIA Inc. Ms. Jean Chenoweth (410) 895-7515 HCIA ANNOUNCES SECOND QUARTER RESULTS BALTIMORE, MD, JULY 22, 1996--HCIA Inc. (NASDAQ: HCIA) today announced results for the second quarter and six months ended June 30, 1996. For the quarter, revenues increased 35 percent to $16.5 million and net income per share, before a one-time charge, increased 60 percent to $0.24, compared with the second quarter of 1995. For the six months ended June 30, 1996, revenues increased 46 percent to $30.7 million and net income per share, before the charge, increased 81 percent to $0.38. Including the charge, the Company had a net loss per share of $0.04 for the quarter and net income per share of $0.10 for the six months ending June 30, 1996. HCIA recorded a one-time charge of $4.4 million in the second quarter related to the acquisition of in-process research and development associated with the previously announced acquisition of Response Healthcare Information Management, Inc. Columbia/HCA Healthcare Corporation executed a three-year contract extension with HCIA. The new agreement provides Columbia/HCA with corporate licenses to portions of HCIA's DataBridge (trademark symbol) family of data-handling technologies, as well as licenses to several of HCIA's comparative databases. The Company also announced that it extended its contract with Amgen, Inc. through the end of 1997. An investor's conference call is scheduled for 11:30 a.m. EDT Monday, July 22, 1996. Please contact Ms. Jean Chenoweth, Senior Vice President, Industry Relations at (410) 895-7515 for further information. HCIA Inc. is a leading health care information content company that develops and markets clinical and financial decision support systems to hospitals, integrated delivery systems, managed care organizations, and pharmaceutical manufacturers. The Company's databases and products are used to benchmark clinical performance and outcomes, and to manage the cost and delivery of health care. This press release, other than the historical financial information, consists of forward-look statements that involve a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are (i) variations in quarterly results, (ii) development by competitors of new or superior products or entry into the market of new competitors, (iii) the Company's dependence on key personnel, (iv) management of the Company's growth and expansion, including assimilation of any potential acquisitions, (v) dependence on intellectual property rights, (vi) dependence on major customers, (vii) changes in the health care industry from both a regulatory and financial perspective, (viii) volatility of the Company's stock price and (ix) other risks detailed from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. ##### Selected financial information follows. (HCIA Logo) HCIA Inc. and Subsidiaries Condensed Summary Balance Sheet (in thousands) June 30, 1996 December 31, 1995 (Unaudited) Cash and short-term investments $ 26,139 $ 26,470 Trade accounts receivable 24,531 16,623 Total current assets 53,837 45,329 Total assets $ 124,054 $ 108,401 Total current liabilities $ 11,866 $ 9,658 Total long-term liabilities -- 699 Stockholders' equity $ 112,188 $ 98,044 (HCIA Logo) HCIA Inc. and Subsidiaries Condensed Summary of Operations (Unaudited) 3 Months Ended 6 Months Ended June 30 June 30 1996 1995 1996 1995 (in thousands except per share amount) Revenue $16,489 $12,256 $30,718 $21,005 Write-off of acquired in-process research and development costs 4,372 -- 4,372 -- Operating income (loss) (763) 1,909 1,166 2,346 Income (Loss) Before Income Taxes and Minority Interest (539) 2,136 1,590 2,724 Benefit (Provision) for Income Taxes 212 (951) (626) (1,189) Net Income (loss) $ (327) $ 1,164 $ 964 $ 1,507 Net Income (loss) per share $ (0.04) $ 0.15 $ 0.10 $ 0.21 Weighted Average Shares Outstanding 9,153 7,804 9,549 7,173 In connection with the Response acquisition, the Company recorded a one-time charge related to acquired in-process research and development costs. Exclusive of this charge, operating income, net income and net income per share would have been $3,608,000, $2,339,000 and $0.24 for the three months ended June 30, 1996 and $5,538,000, $3,631,000 and $0.38 for the six months ended June 30, 1996. -----END PRIVACY-ENHANCED MESSAGE-----