-----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, NWvijikGdU0yPjT+imccoFXxB76KJxKGhmJPLyIGrSt6q818G4SnHQGvonnUgUR0 IorknBH6Nm7617k/n3tJaw== 0000950144-99-003729.txt : 19990402 0000950144-99-003729.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003729 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIE INC CENTRAL INDEX KEY: 0001000231 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 582112366 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27056 FILM NUMBER: 99581264 BUSINESS ADDRESS: STREET 1: 1850 PKWY PLACE STE 1100 CITY: MARIETTA STATE: GA ZIP: 30067 BUSINESS PHONE: 7704238450 MAIL ADDRESS: STREET 1: 1850 PKWY PLACE STE 1100 CITY: MARIETTA STATE: GA ZIP: 30067 FORMER COMPANY: FORMER CONFORMED NAME: HEALTHDYNE INFORMATION ENTERPRISES INC DATE OF NAME CHANGE: 19950907 10-K 1 HIE INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------ FORM 10-K ------------ (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-27056 HIE, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-2112366 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1850 PARKWAY PLACE, SUITE 1100 30067 MARIETTA, GEORGIA (Zip Code) (Address of principal executive offices) (770) 423-8450 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.01 par value per share (together with associated preferred stock purchase rights) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock (based upon the closing sales price quoted on the Nasdaq National Market) held by nonaffiliates as of March 19, 1999 was approximately $97,197,700. As of March 19, 1999, 25,311,458 shares of the registrant's Common Stock, par value $0.01 per share (together with associated preferred stock purchase rights), were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 1999 Annual Meeting of Shareholders are incorporated by reference into Part III. 2 TABLE OF CONTENTS
PAGE NUMBER ------ Part I Item 1. Business..................................................................................3 Factors That May Affect Future Performance...............................................11 Item 2. Properties...............................................................................23 Item 3. Legal Proceedings........................................................................23 Item 4. Submission of Matters to a Vote of Security Holders......................................23 Executive Officers of the Registrant................................................................24 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................26 Item 6. Selected Financial Data..................................................................27 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...............................40 Item 8. Financial Statements and Supplementary Data..............................................40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.....................................................................41 Part III Item 10. Directors and Executive Officers of the Registrant *.....................................41 Item 11. Executive Compensation *.................................................................41 Item 12. Security Ownership of Certain Beneficial Owners and Management *.........................41 Item 13. Certain Relationships and Related Transactions *.........................................41 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................42
*Incorporated by reference to the Registrant's Proxy Statement for the 1999 Annual Meeting of Shareholders. 2 3 CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including, in particular, forward-looking statements under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements; however, this Report also contains other forward-looking statements in addition to historical information. Actual results may differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are the factors set forth below in "Item 1. Business -- Factors That May Affect Future Performance." By making these forward-looking statements, HIE, Inc. does not undertake to update them in any manner except as may be required by its disclosure obligations in filings it makes with the Securities and Exchange Commission (the "Commission") under the Federal securities laws. In this Report, the words "Company," "HIE," "we," "our," "ours," and "us" refer to HIE, Inc. and its subsidiaries. HIE owns the Cloverleaf(R) and EMerge(TM) trademarks in the United States. Trademarks, trade names or service marks of other companies appearing elsewhere in this Report are the property of their respective owners. PART I ITEM 1. BUSINESS The Company was incorporated in Georgia on June 15, 1994 and changed its name from Healthdyne Information Enterprises, Inc. to HIE, Inc. on February 24, 1999. The Company's principal executive offices are located at 1850 Parkway Place, Suite 1100, Marietta, Georgia 30067, and its telephone number is (770) 423-8450. The Company maintains a web site at http://www.hie.com. The reference to HIE's web address does not constitute incorporation by reference of the information contained at the site. During 1998, the Company operated in two segments: (i) the licensing of integration software products and performance of related integration services and (ii) the providing of consulting services related to information systems integration for healthcare organizations. See Note 13 of the Notes to Consolidated Financial Statements for financial information with respect to segments. On December 31, 1998, HIE sold the assets comprising its Integrated Services Group, which provided these consulting services related to information systems integration for healthcare organizations, to Superior Consultant Company, Inc., a wholly-owned subsidiary of Superior Consultant Holdings Corporation. The purchase price for the sale of the Integrated Services Group was $2.2 million in cash, subject to adjustment based on the actual collection of accounts receivable of the Integrated Services Group. 3 4 OVERVIEW HIE develops, markets and supports enterprise application integration ("EAI") software and services. HIE's principal product suite, the Cloverleaf EAI Suite, offers organizations a scaleable and reusable software integration engine as well as related components to integrate efficiently their disparate information technology ("IT") systems. HIE's solutions are targeted for specific vertical industries, including healthcare and finance, by supporting industry-specific computing protocols, among other things. HIE also offers EMerge, a processware product which improves the efficiency, quality of care and administration in a healthcare organization by enabling it to continuously track patients, doctors, insurance plan members and their records across different organizations and information systems. PRODUCTS AND SERVICES HIE's EAI software products are designed to provide a configurable infrastructure for enterprise-wide application integration. HIE's Cloverleaf EAI Suite facilitates the integration of business processes and information and enables customers to use common business terminology to make decisions about how and when data will be shared throughout the enterprise. HIE's EMerge product is a process-oriented application of integration technology which improves workflow in a healthcare organization's front office. Cloverleaf EAI Suite HIE's Cloverleaf EAI Suite consists of the Cloverleaf Integration Engine and related integration components, adapters and utilities. The Cloverleaf EAI Suite is designed to allow information in the form of messages, records or transactions to be easily exchanged, transformed and routed between disparate applications. As a result, the Cloverleaf EAI Suite can simplify and accelerate integration projects in environments with a wide range of applications, message structures, platforms and legacy technologies. The Cloverleaf EAI Suite consists of the following components: Cloverleaf Integration Engine. The Cloverleaf Integration Engine replaces costly, individual point-to-point interfaces with an easily configured and managed hub-and-spoke architecture. The Cloverleaf Integration Engine provides a reliable, high performance messaging platform that supports asynchronous and synchronous connections to a range of application programs, databases, objects and protocols. It routes and reformats data, adapts to and bridges communications protocols and combines and disassembles messages to keep applications synchronized. Graphical configuration clients allow users to quickly and easily develop sophisticated flow logic to direct and modify messages to support the organization's business integration rules. Other functions include proactive management, alerting and testing functions. Cloverleaf OM3 Components. The Cloverleaf OM3 components allow creation of new message adapters and extensions to core technology within a distributable, object-oriented framework. The Cloverleaf OM3 components include OM3 XFormer, an inheritance transformation engine that applies already completed and re-usable work to future solutions, and OM3 Rules, a publish-and-subscribe engine which enables rules-based routing of messages. 4 5 Cloverleaf Adapters. Cloverleaf adapters provide record format and message protocol libraries that support popular packaged applications and industry-standard message models in order to provide application-level and transport-level integration. Adapters to extend the Cloverleaf EAI Suite are continually under development. These include vertical domain-specific application adapters, adapters to popular enterprise resource planning systems, adapters to other messaging protocols and message transport systems and adapters for emerging interoperability standards. The list of adapters is added to frequently by HIE's development team, its strategic partners and distributors and its customers. Cloverleaf Utilities. The Cloverleaf utilities provide system- and transport-level integration and enable users to program extended functionality into the Cloverleaf EAI Suite. Cloverleaf's utilities also include a software developer's kit that allows vendors or developers to embed the robust functionality of Cloverleaf components into their own applications. HIE is currently shipping Cloverleaf Integration Engine 3.5.2 and Cloverleaf OM3 1.1, and expects to release updates or new versions during 1999. In addition to the Cloverleaf EAI Suite that HIE markets directly to the healthcare market, HIE currently sells three branded versions of the Cloverleaf EAI Suite. - Pathways Interface Manager, a private label version of the Cloverleaf Integration Engine and selected healthcare adapters distributed by McKesson HBOC, Inc. ("McKessonHBOC") - Cloverleaf finance, a Cloverleaf EAI Suite specifically bundled for trade-oriented banking and securities applications which includes pre-built adapters and features required for successful implementations in the Society for Worldwide Interbank Financial Telecommunication ("S.W.I.F.T.") and Straight Through Processing (STP) environments common to international banking and trading - HIE Message Broker, a bundled offering being co-marketed by International Business Machines Corporation ("IBM") and HIE which consists of MQSeries from IBM, and the Cloverleaf Integration Engine, certain Cloverleaf components, the MQSeries adapter and certain other adapters from HIE HIE also offers the Cloverleaf Gateway, an integration engine designed primarily for independent software vendors seeking to bundle selected integration features with their own product. The Cloverleaf Gateway enables vendors to easily and quickly integrate their applications with their customers' existing IT environments. EMerge EMerge helps healthcare providers and payors identify and track persons, such as patients, members and physicians, and their related records across organizations and information systems. Healthcare information systems typically have proprietary master person index ("MPI") keys to reference data related to each person (e.g. a patient record) held in its database. EMerge is an enterprise-wide MPI ("EMPI") product built with healthcare process logic on top of HIE's EAI technology. EMerge integrates the MPIs of multiple, disparate healthcare information systems so that a physician or other healthcare provider can request or link to information on these systems. It identifies and tracks patients and encounter summaries across 5 6 the continuum of patient care and offers front-end and back-end integration capabilities. EMerge also minimizes the duplication of patient records, improves data access time and ensures accurate linkages of disparate clinical information. EMerge provides process-level integration and an indexing system applied specifically to the healthcare industry. As of December 31, 1998, EMerge was installed in 11 healthcare locations. HIE is currently at EMerge release level 3.0 and expects to release updates or new versions during 1999. Services HIE offers the following comprehensive design, implementation, maintenance and education services related to its integration products, including: - pre-implementation assessment services - software implementation - dedicated onsite integration personnel to work with a customer's staff to define integration procedures, implement interfaces, manage the transition of the customer's staff from its old system to a new HIE solution and manage integration projects on an ongoing basis - offsite management of a customer's integration needs - assistance for time-critical, highly complex integration projects on an as-needed basis - open-enrollment training courses to provide users of HIE's products with training on system essentials, intermediate level and advanced courses - training on system administration, project management, operating system, networking, programming languages and record format standards HIE provides training courses at client-hosted facilities on a request basis and tutoring services as refreshers and enhanced skill-building before or after training. In addition, computer-based training is available for certain refresher and general prerequisite training courses. HIE's service personnel bring significant expertise that can be used to handle a variety of integration-related projects. Examples of such projects include: - helping a customer analyze system configurations to improve system performance - designing a custom automatic backup and archiving system to protect a customer's integration infrastructure - evaluating a customer's record layouts and translations (a project which can be the foundation for maintaining system update records or alerting a customer to potential Year 2000 problems) In addition to its integration and system administration services, HIE provides its customers with comprehensive training and 24 hour/7 day technical support for its products via telephone, electronic mail and its web site. 6 7 CUSTOMERS The "enterprise" is HIE's target customer. An enterprise is either a single entity with multiple departments or multiple entities that are joined together to fulfill a common mission. For example, a hospital, which has laboratory, radiology, pharmacy and other departments, is an enterprise, and an integrated healthcare delivery network, which consists of hospitals, clinics, imaging centers, physicians, home healthcare providers, management service organizations, employers, payors and others, is also an enterprise. Since its inception in 1994, HIE has focused on providing products and services to customers in the healthcare market, and substantially all of HIE's revenue comes from customers in the healthcare market. For example, sales to healthcare organizations accounted for substantially all of HIE's total revenue for the year ended December 31, 1998. HIE's products are currently available to customers in versions specifically designed to meet the needs of companies in the healthcare and financial industries. HIE plans to expand into the utilities, transportation and government markets, although to date HIE has not generated significant revenues from any of these markets. While approximately 92% of HIE's revenues in 1998 were generated within the United States, HIE has customers in several countries worldwide. No single customer accounted for more than 10% of the Company's revenue in either 1998 or 1997. In the year ended December 31, 1996, sales of software and services to one customer, Promina Health Systems, accounted for approximately 20% of HIE's total revenue. Approximately 35%, 18% and 16% of HIE's total revenue in 1998, 1997 and 1996 were generated by third-party distributors of its products. No single distributor provided customers to HIE that accounted for more than 10% of HIE's revenue in either 1997 or 1996. During fiscal 1998, distributors accounted for approximately 80% of HIE's software sales, and one distributor, McKessonHBOC, accounted for approximately 40% of HIE's software license revenue and approximately 18% of HIE's total revenue. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Backlog" regarding information about backlog orders. SALES AND MARKETING HIE sells its products and services both through independent distributors and its direct sales force. HIE focuses on selling to the healthcare market through distributors and selling into other vertical markets through its direct sales force. During fiscal 1998, distributors accounted 7 8 for approximately 80% of HIE's software sales. HIE has made initial sales of its solutions for use in the financial sector, and plans to expand its offerings in each of the transportation and utilities and government markets by establishing additional distributor relationships, undertaking further research and development and adding staff with significant industry expertise. As of December 31, 1998, HIE employed a total of 14 individuals in its direct sales force. HIE's sales people are located throughout the United States and in Great Britain and Germany. HIE's typical healthcare sales cycle is between three and six months. HIE expects the sales cycles for other targeted vertical markets generally to be longer than the sales cycle for the healthcare market, particularly as HIE initially penetrates these new markets. HIE conducts extensive marketing programs including direct mail, media relations, user group and partnership relations, advertising and trade shows. HIE also sponsors an annual user conference that provides it with the opportunity to exchange information with its customers on HIE's products and trends in the industry. As of December 31, 1998, HIE employed a total of seven individuals in marketing. HIE has marketing and distribution relationships with, among others, McKessonHBOC, DST Systems, Inc., Per-Se Technologies (a division of Medaphis), LifeLine Networks B.V., Clinicomp, Trace and Siemens. Additionally, HIE recently has developed a marketing relationship with IBM. RESEARCH AND DEVELOPMENT HIE has made substantial investments in EAI technology through product development and acquisition. HIE spent $5.1 million, $3.4 million and $3.3 million on research and development activities during 1998, 1997 and 1996, respectively. Its product suite has evolved from message brokers first produced by predecessors as early as 1991. As of December 31, 1998, HIE had a development staff of 35, which included the original architects of the core EAI products. HIE categorizes its product development management into four coordinated groups: Component Framework. This group creates the reusable objects and components that form the essential building blocks of HIE's EAI and processware products. Message Broker. This group is responsible for the development, integration and quality engineering of the Cloverleaf EAI Suite, including its Cloverleaf Integration Engine, Cloverleaf OM3 components and other messaging brokering products. Solutions. This group constructs and integrates the various industry application and workflow adapters for the Cloverleaf EAI Suite, for such products as the Cloverleaf finance S.W.I.F.T. module. Processware. This group is responsible for HIE's healthcare processware product, EMerge, which draws on EAI technology produced by the other development groups. 8 9 COMPETITION The market for HIE's products is intensely competitive and is expected to become increasingly competitive as current competitors expand their product offerings and new competitors enter the market. HIE's current competitors include a number of companies offering one or more solutions to the application integration problem, some of which are directly competitive with HIE's products. HIE faces competition for product sales and services from a number of sources, including the following: - "in-house" IT departments of potential customers or distributors - other vendors offering EAI software directly competitive with our products, such as IBM, New Era of Networks, Software Technologies Corp. and TSI International Ltd. - systems integrators and professional service organizations and consultants - other vendors of software that address only certain technology components of EAI solutions Many of these companies have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition, and a larger installed base of customers than HIE. Many of these competitors also may have well-established relationships with HIE's current and potential customers in our targeted markets. In addition, many of these competitors have extensive knowledge of EAI generally and of specific vertical markets, and may be in a better position than HIE to devote significant resources toward the development, promotion and sale of products generally or in specific vertical markets. HIE believes that the principal competitive factors affecting its market include product features such as heterogeneous computing platforms, responsiveness to customer needs, scaleability, adaptability, support of a broad range of functionality, performance, ease of use, quality, price, and availability of professional services for product implementation, customer service and support, effectiveness of sales and marketing efforts, and company and product reputation. Although HIE believes that it currently competes favorably with respect to such factors, there can be no assurance that it can maintain its competitive position against current and potential competitors, especially those with greater financial, marketing, service, support, technical and other resources than HIE. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS HIE's success and ability to compete are dependent in part upon its proprietary technology. HIE relies on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect its proprietary rights. Despite HIE's efforts to protect its proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection. Moreover, the laws of certain countries do not protect HIE's proprietary rights to the same extent as do the laws of the United States. In addition, attempts may be made to copy or reverse engineer aspects of HIE's products or to 9 10 obtain and use information that HIE regards as proprietary. Accordingly, there can be no assurance that HIE will be able to protect its proprietary rights against unauthorized third-party copying or use, which could materially and adversely affect HIE's business, financial condition or results of operations. Moreover, there can be no assurance that others will not develop products that infringe HIE's proprietary rights, or that are similar or superior to those developed by HIE. Policing the unauthorized use of HIE's products is difficult and litigation may be necessary in the future to enforce HIE's intellectual property rights, to protect HIE's trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on HIE's business, financial condition or results of operations. There can be no assurance that third parties will not claim infringement by HIE with respect to current or future products. HIE expects that EAI software developers will increasingly be subject to infringement claims as the number of products in different industry segments overlap. In addition, there can be no assurance that legal action claiming patent infringement will not be commenced against HIE, or that HIE would necessarily prevail in such litigation given the complex technical issues and inherent uncertainties in patent litigation. In the event a patent claim against HIE was successful or HIE could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, HIE's business, financial condition and results of operations would be materially adversely affected. EMPLOYEES As of December 31, 1998, HIE employed 172 persons. Of these employees, 31 were engaged in sales and marketing, 81 were in services, 35 were in research and development and 25 were in general and administrative functions. None of these employees are represented by a labor union or subject to any collective bargaining agreement, and HIE has experienced no work stoppages. Management believes that its relationship with its employees is good and that the future success of HIE depends in large part on its ability to attract and retain qualified personnel. 10 11 FACTORS THAT MAY AFFECT FUTURE PERFORMANCE In addition to other factors and matters discussed elsewhere herein, factors that, in the view of HIE, could cause actual results to differ materially from those discussed in forward-looking statements are set forth below. All forward-looking statements attributable to HIE or persons acting on our behalf are expressly qualified in their entirety by the following cautionary statements. OUR OPERATING RESULTS VARY SIGNIFICANTLY AND OUR PAST OPERATING RESULTS MAY NOT BE INDICATIVE OF OUR FUTURE PERFORMANCE Although we have experienced revenue growth in recent quarters, such growth may not be sustainable, and you should not use our past results to predict future operating margins and results. Additionally, we have a limited operating history upon which you can base your evaluation of our business and prospects. Prior to 1998, we experienced a history of losses, and we have not yet been consistently profitable on an annual basis. At December 31, 1998, we had an accumulated deficit of approximately $21.3 million. Our future operating results will depend on many factors, including the following: - the continued growth of the EAI software market - the size and timing of orders for our products, especially from major distributors such as McKessonHBOC - the amount and timing of services revenue - the length of the sales cycle for our products - potential delays in our implementations at customer sites - continued development of distribution channels - our ability to penetrate new vertical markets - changes in demand for our products - introduction of new products or product enhancements by us or our competitors - changes in prices of our products and those of our competitors - the effects of global economic conditions on capital expenditures for software - amount and timing of expenditures relating to expansion of our business - variability in the mix of services we perform versus those performed by our third-party service providers FACTORS AFFECTING FLUCTUATIONS IN OUR QUARTERLY RESULTS Our quarterly operating results have fluctuated significantly in the past and may vary significantly in the future. Quarterly revenues and operating results depend upon, among other things, the volume and timing of customer contracts and service orders received, as well as the amount of each contract which we are able to recognize as revenue. These factors are difficult to forecast. In addition, as is common in the software industry, a significant portion of our license 11 12 revenue in a given quarter historically has been recorded in the last month of that quarter. However, our expense levels for each quarter are based primarily on our estimates of future revenues and are largely fixed. As a result, we may be unable to adjust spending rapidly enough to compensate for any unexpected revenue shortfall. Any significant shortfall in revenues in relation to our planned expenditures would seriously harm our business, financial condition and results of operations. Our Dependence On Sales To Distributors May Impact Our Quarterly Results We primarily use distributors to sell EAI solutions in our principal market, the healthcare market. As a result, distributor practices may have a significant impact on our quarterly results. Sales of our products to a limited number of distributors may account for a significant amount of revenue for a particular quarter. For example, in the fourth quarter of 1998, sales to a major distributor, McKessonHBOC, accounted for almost one-half of our total revenue and substantially all of our software license revenue. Our distributors may not purchase significant amounts of our products in a particular quarter, if at all. Further, changes or delays in distributor orders may cause significant variability in our revenue for any particular quarter. Seasonality May Impact Our Quarterly Results Our operating results have also experienced certain seasonal fluctuations. Historically, our revenues have been higher in the fourth quarter and lower in the first quarter of each year. We believe that our seasonality is due in part to the calendar year budgeting cycles of many of our customers and our incentive compensation policies, which tend to reward our sales personnel for achieving year-end rather than quarterly revenue quotas. In future periods, we expect that these seasonal trends may continue to cause first quarter license revenues to decrease from the level achieved in the preceding quarter. As a result of these and other factors, our quarterly revenues may fluctuate significantly, and we cannot predict with certainty our quarterly revenues and operating results. Further, we believe that period-to-period comparisons of our operating results are not necessarily a meaningful indication of future performance. It is likely that in one or more future quarters our results may fall below the expectations of securities analysts and investors. If this occurs, the trading price of our common stock would likely decline. OUR COMMON STOCK PRICE MAY BE HIGHLY VOLATILE The trading price of our common stock may be volatile. The stock market in general, and the market for technology and software companies in particular, has, from time to time, experienced extreme volatility that often has been unrelated to the operating performance of particular companies. These broad market and industry fluctuations may significantly affect the trading price of our common stock, regardless of our actual operating performance. The trading price of our common stock could be affected by a number of factors, including: - changes in expectations of our future financial performance - changes in securities analysts' estimates (or the failure to meet such estimates) - announcements of technological innovations 12 13 - customer and distributor relationship developments - conditions affecting our targeted markets in general - quarterly fluctuations in our revenues and financial results In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted. If this were to happen to us, litigation would be expensive and would divert management's attention. SUBSTANTIALLY ALL OF OUR REVENUE IS ASSOCIATED WITH THE HEALTHCARE MARKET Substantially all of our revenue comes from customers in the healthcare market. For example, sales to healthcare organizations accounted for substantially all of our total revenue for the year ended December 31, 1998. As a result, our business, financial condition and results of operations are influenced by conditions affecting this industry. Our healthcare distributors and customers may not continue to purchase our products and services. Consequently, our failure to maintain our relationships with our current distributors and customers or to add new distributors or customers that make significant purchases of our products and services would seriously harm our business, financial condition and results of operations. Many healthcare organizations are consolidating to create integrated healthcare delivery systems with greater market power. These organizations may try to use their market power to negotiate price reductions for our applications and services. As the healthcare industry consolidates, competition for customers will become more intense and the importance of acquiring each customer will become greater. If we were forced to reduce our prices for products or services, our operating results would suffer. The healthcare market itself is highly regulated and is subject to changing political, economic and regulatory influences. These factors affect the purchasing practices and operation of healthcare organizations. Changes in current healthcare financing and reimbursement systems could cause us to make unplanned enhancements of applications or services, or result in delays or cancellations of orders or in the revocation of endorsement of our applications and services by healthcare participants. Federal and state legislatures have periodically considered programs to reform or amend the U.S. healthcare system at both the federal and state level. These programs may contain proposals to increase governmental involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare market participants operate. Healthcare market participants may respond by reducing their investments or postponing investment decisions, including investments in our applications and services. We do not know what effect any proposals would have on our business. OUR SOFTWARE LICENSE REVENUE IS SUBSTANTIALLY DEPENDENT ON ONE PRODUCT SUITE Substantially all of our software license revenue in 1998 was derived from sales of our Cloverleaf EAI Suite. While we have introduced other relatively new integration software products, such as EMerge, we anticipate that our Cloverleaf EAI Suite will continue to account for a substantial amount of our software license revenue for the foreseeable future. Our future success will depend on continued market acceptance of our Cloverleaf EAI Suite and enhancements to these products. Competition, technological change or other factors could 13 14 reduce demand for, or market acceptance of, our Cloverleaf EAI Suite. A decline in demand for our Cloverleaf EAI Suite would seriously harm our business, financial condition and results of operations. WE DEPEND ON SERVICES REVENUE Services revenue represented a majority of our total revenue for each of 1998, 1997 and 1996. We anticipate that services revenue will continue to account for a substantial amount of our total revenue for the foreseeable future. - Because services revenue has lower gross margins than software license revenue, an increase in the percentage of total revenue represented by services revenue or an unexpected decrease in software license revenue could have a detrimental impact on our overall gross margins and our operating results - We subcontract certain product implementation, customer support and training services to third-party service providers. Revenue from these third-party service providers generally carries lower gross margins than our service business overall; as a result, our services revenue and related margins may vary from period to period, depending on the mix of revenue from third-party service providers - Services revenue depends in part on ongoing renewals of support contracts by our customers, some of which may not renew their support contracts If our services revenue is lower than anticipated, our business, financial condition and results of operations could be seriously harmed. Our ability to increase services revenue will depend in large part on our ability to increase the scale of our professional services organization. We may not be able to do so. FAILURE TO EXPAND INTO NEW MARKETS WOULD SERIOUSLY HARM OUR BUSINESS We are currently focusing on expanding our EAI solutions into new vertical markets. We may not be successful in marketing our products and services to new markets. Since our inception in 1994, we have focused on providing products and services to customers in the healthcare market. Accordingly, we have limited experience in other markets. HIE has recently entered into the financial services market. Our current plans are to expand into the utilities, transportation and government markets, although to date we have not generated significant revenues from any of these markets. New markets that we are currently targeting, or may target in the future, have significantly different characteristics than the healthcare market. Further, new markets may require a high degree of industry-specific expertise that we do not currently have. In order to be successful in new markets, we will need to enter into strategic relationships with distributors, engage industry consultants with market-specific expertise and acquire or make significant investments in companies, products and technologies that focus on the specific markets. Additionally, we may need to change our pricing structures, sales methods, sales personnel, consulting services and customer service. We cannot assure you that we will be able to successfully carry out any of these steps or be successful in entering new markets. Additionally, 14 15 our inability to market our products and services in these new vertical markets would seriously harm our business, financial condition and results of operations. OUR GROWTH IS DEPENDENT UPON THE DEVELOPMENT OF OUR DISTRIBUTOR SALES MODEL We believe that our future growth depends heavily on developing and maintaining successful strategic relationships with third-party distributors. Currently, we are focusing on sales to distributors in the healthcare market as opposed to direct sales to end-users. As such, we place a strong emphasis on developing and maintaining relationships with entities in a position to distribute our products. Approximately 34%, 16% and 16% of our total revenue in 1998, 1997 and 1996 were generated by third-party distributors of our products. Although we have entered into written distribution agreements with all of our significant healthcare distributors, these agreements typically do not restrict them from distributing our competitors' products and do not require them to purchase any minimum amount of our products. Additionally, many of our distributors pre-purchase our products in volume and, consequently, may not make purchases of our products every quarter. We cannot assure you that we will be able to maintain existing relationships, develop new relationships or that any such relationships will prove to be effective in distributing our products. If we lose any of our distributor relationships, such as McKessonHBOC, or fail to establish new relationships, or if our distributors fail to successfully sell our products, we would not be able to execute our business strategy and our business would suffer significantly. WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS As part of our business strategy, we may focus on acquiring, or making significant investments in, complementary companies, products and technologies. Future acquisitions may subject us to the following risks: - the difficulty of incorporating new operations, technology and personnel into one company - the potential disruption of our ongoing business - the additional expense associated with amortization of acquired intangible assets - the maintenance of uniform standards, controls, procedures and policies - the impairment of relationships with employees and customers We cannot assure you that we will successfully overcome these risks or any other problems that we encounter in connection with any future acquisitions. Integrating any newly acquired businesses or technologies may be expensive and time-consuming. We do not know if we will be able to complete any future acquisitions or that we will be able to successfully integrate any acquired business, or that any anticipated efficiencies will be realized. For example, in May 1998, we acquired HUBLink, Inc. As a result of this acquisition, we integrated HUBLink, Inc.'s message broker product, OM3, with our Cloverleaf EAI Suite. However, we can not assure you that we will be successful in integrating any future businesses or technologies. If we are unable to integrate any newly acquired entities or 15 16 technologies effectively, our results of operations could suffer. Further, it may be necessary for us to finance any future acquisitions through public or private financings. Any equity or debt financings, if available at all, may be on terms that are not favorable to us and, in the case of equity financings, may result in dilution to our shareholders. WE MAY BE UNABLE TO EXPAND OUR DIRECT SALES AND PROFESSIONAL SERVICES ORGANIZATIONS Currently, we market our products to distributors and end-users in certain vertical markets through our internal sales force. Additionally, clients that license our products often engage our professional services organization to assist with support, training, consulting and implementation of our EAI solutions. Our ability to achieve significant revenue growth in the future will greatly depend on our ability to recruit and train sufficient technical, customer support and direct sales personnel, particularly additional sales personnel focusing on new vertical markets that we target. Any new professional services personnel will require training and education and take time to reach full productivity. We have in the past and may in the future experience difficulty in recruiting qualified sales, technical and support personnel. To meet our needs for such personnel, we may need to use more costly third-party consultants and independent contractors to supplement our own professional services organization. Our inability to maintain an adequate direct sales force and professional services organization could seriously harm our business, financial condition and results of operations. OUR FAILURE TO MANAGE GROWTH OF OPERATIONS MAY ADVERSELY AFFECT US Our current information systems, procedures and controls may not continue to support any growth in our operations and may hinder our ability to exploit the market for EAI products and services, specifically outside of the healthcare market. We cannot be certain that we will continue to experience or successfully manage growth. Our inability to sustain or manage our growth could seriously harm our business, financial condition and results of operations. To manage any growth, we must continue to: - expand our sales, marketing and customer support organizations - invest in the development of enhancements to existing products and new products that meet changing customer needs - further develop our technical and marketing expertise in our targeted vertical markets so that we can influence and respond to emerging industry standards - improve our operational processes and management controls SALES AND IMPLEMENTATION CYCLES FOR OUR EAI SOLUTIONS CAN BE LENGTHY Sales cycles for our EAI solutions can be lengthy. Our typical sales cycle to customers in the healthcare market ranges between three to six months from our initial contact with a potential customer to the sale of our EAI solutions. Our typical sales cycle for customers outside of the healthcare market is generally longer, ranging from six to nine months. A key element of our strategy is to market our EAI solutions directly to large organizations in markets other than healthcare. As we enter into new markets, the length of our sales cycles will likely increase. We are unable to control many factors that will influence our customers' buying decisions. The sales 16 17 and implementation process involves a significant technical evaluation and commitment of capital and other resources by our customers. The sale and implementation of our solutions are subject to delays due to our customers' internal budgets and procedures for approving large capital expenditures and deploying new technologies. Additionally, we will need to expend substantial resources to integrate our applications with the existing legacy and client-server architectures of large organizations in disparate markets. We have limited experience in integrating our applications in markets other than healthcare, and we may experience delays in the integration process. These delays would, in turn, delay our ability to generate revenue from these applications and seriously harm our business, financial condition and results of operations. OUR MARKETS ARE HIGHLY COMPETITIVE We compete in markets that are intensely competitive. We will be required to devote a significant amount of resources to enter into and expand our presence in our targeted markets. Additionally, in order to maintain our market share in the healthcare market, we must preserve our relationships with our current customers as well as establish relationships with new customers. We expect the markets for our products and services to become more competitive as current competitors expand their product offerings and new competitors enter the market. Increased competition could result in price reductions, reduced gross margins and loss of market share, any of which could seriously harm our business, financial condition and results of operations. Our principal competitors include: Internal IT Departments We face competition and sales resistance from the internal IT departments of potential customers that have developed or may develop in-house systems that may substitute for our products. We expect that internally developed application integration systems will continue to be a principal source of competition for the foreseeable future. In particular, we may face difficulties making sales to organizations whose internal development groups have already progressed significantly toward completion of systems that our products might replace, or where the underlying technologies used by such groups differ fundamentally from our products. Software and Middleware Vendors We face competition from a variety of software and middleware vendors that provide EAI products in different vertical markets. These competitors include, among others: - companies offering EAI products - companies offering enterprise master person index solutions - IT consulting firms - original equipment manufacturers - relational database vendors 17 18 Systems Integrators and Professional Service Organizations We also may face competition from systems integrators and professional service organizations that design and develop custom systems and perform custom integration of systems and applications. Certain of these firms may possess industry specific expertise or reputations among our potential customers. These systems integrators and consulting firms can resell our products, and we may engage in joint marketing and sales efforts with them. We may rely upon these firms for recommendations of our products during the evaluation stage of the purchase process, as well as for implementation and customer support services. These systems integrators and consulting firms may have similar, and often more established, relationships with our competitors, and there can be no assurance that these firms will not market or recommend software products that are competitive with our products. Many of these companies have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition, and a larger installed base of customers than we do. Many of our competitors also may have well-established relationships with our current and potential customers in our targeted markets. In addition, many of these competitors have extensive knowledge of EAI generally and of specific vertical markets, and may be in a better position than we are to devote significant resources toward the development, promotion and sale of their products generally or in specific vertical markets. Current and potential competitors may also respond more quickly than we can to new or emerging technologies and changes in customer requirements. They may have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. We also expect that competition will increase as a result of software industry consolidations. We cannot assure you that we will be able to compete successfully against current and future competitors, or that competitive pressure we face will not significantly harm our business, financial condition and results of operations. WE MUST KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY TO REMAIN COMPETITIVE The market for our products is characterized by rapid technological change, frequent new product introductions and enhancements, changes in customer demands and evolving industry standards. Our existing products could be rendered obsolete if we fail to keep up in any of these ways. We have also found that the technological life cycles of our products are difficult to estimate, partially because they may vary according to the particular application or vertical market segment. We believe that our future success will depend upon our ability to continue to enhance our current product line while we concurrently develop and introduce new products that keep pace with competitive and technological developments. These developments require us to continue to make substantial product development investments. Existing Products We currently serve a customer base with a wide variety of hardware, software, database and networking platforms. To gain broad market acceptance, we believe that we will have to 18 19 support our products on a variety of platforms. Our success will depend on, among others, the following factors: - our ability to integrate our products with multiple platforms, especially relative to our competition in our targeted markets - the portability of our products, particularly the number of hardware platforms, operating systems and databases that our products can source or target - the integration of additional software modules under development with existing products - our management of software development being performed by third-party developers Future Products We cannot assure you that we will be successful in developing and marketing future product enhancements or new products that respond to technological changes, shifting customer preferences or evolving industry standards. This is especially true in new vertical markets that we plan to enter. We may experience difficulties that could delay product enhancements or new products or increase our costs to develop these products. If we are unable to develop and introduce new products or enhancements of existing products in a timely and affordable manner or if we experience delays in the commencement of commercial shipments of new products and enhancements, then customers may forego purchases of our products and purchase those of our competitors. OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY Our success depends upon our ability to maintain the proprietary and confidential technology incorporated in our products. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We presently have no patents. Despite our efforts to protect our proprietary rights, existing copyright, trademark and trade secret laws afford only limited protection. In addition, the laws of certain foreign countries do not protect our rights to the same extent as do the laws of the United States. Attempts may be made to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. We cannot assure you that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Furthermore, policing the unauthorized use of our products is difficult, and litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of our resources. INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS CAN BE COSTLY AND RESULT IN THE LOSS OF SIGNIFICANT RIGHTS It is possible that third parties will claim that we have infringed their current or future intellectual property rights. We expect that EAI software developers may increasingly be subject to infringement claims as the number of products in different industry segments overlap. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements, any of which could 19 20 seriously harm our business, financial condition and results of operations. We cannot assure you that such royalty or licensing agreements, if required, would be available on terms acceptable to us, if at all. Additionally, we cannot assure you that legal action claiming intellectual property infringement will not be commenced against us, or that we would prevail in such litigation given the complex technical issues and inherent uncertainties in litigation. In the event an intellectual property claim against us was successful and we could not obtain a license on acceptable terms or license a substitute technology or redesign to avoid infringement, our business, financial condition and results of operations would be seriously harmed. Even if we prevail in litigation, the expense of litigation could be significant and could seriously harm our business, financial condition and results of operation. WE RELY ON THIRD PARTIES FOR TECHNOLOGY IN OUR PRODUCTS We depend upon third-party suppliers to provide software that is incorporated in certain of our products. We do not have control over the scheduling and quality of work of such third-party software suppliers. Additionally, the third-party software may not continue to be available to us on commercially reasonable terms, if at all. Our agreements to license certain third-party software will terminate after specified dates unless they are renewed. If we cannot maintain licenses to key third-party software, shipments of our products could be delayed until equivalent software could be developed or licensed and integrated into our products. THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS While approximately 90% of our revenues in 1998 were generated within the United States, we have customers in several countries worldwide. International sales in certain foreign markets are subject to a variety of risks, including - difficulties in establishing and managing international distribution channels - localizing software products for sales in foreign markets and enforcing intellectual property rights - fluctuations in the value of foreign currencies, including the Euro - changes in duties and quotas - introduction of tariff or non-tariff barriers - economic, political and regulatory changes In addition, to the extent profit is generated or losses are incurred in foreign countries, our effective income tax rate may be materially affected. We do not currently engage in hedging transactions, but we may do so in the future. We cannot assure you that any of the factors described above will not seriously harm our business, financial condition and results of operations. FAILURE TO RECRUIT AND RETAIN KEY EMPLOYEES WILL SERIOUSLY HARM OUR BUSINESS Our success is highly dependent upon the continued service and skills of our executive officers and other key technical, sales and marketing employees. We do not maintain key man 20 21 life insurance on any of our employees, and we have not entered into employment agreements with any key employees that provide for any fixed term of service. In addition, our future success will depend considerably on our ability to attract and retain highly skilled employees and management personnel. Competition for such personnel is intense. We cannot assure you that we will be successful in attracting and retaining highly skilled employees and management personnel. Further, we anticipate growth and expansion into areas and activities which may require the addition of new highly skilled employees and the development of additional expertise by existing management personnel. Any new highly skilled personnel may require training and education and take time to reach full productivity. The failure to attract and retain such employees or to develop such expertise could seriously harm our business, financial condition or operating results. OUR PRODUCTS MAY BE AFFECTED BY UNKNOWN SOFTWARE DEFECTS Our products depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects, particularly when first introduced or when enhancements or new versions are released. Although we conduct extensive testing, we may not discover software defects that affect our new or current products or enhancements until after they are deployed. Although we have not experienced any material software defects to date, it is possible that, despite testing by us, defects may occur in our software. These defects could cause performance interruptions, which could damage our reputation with existing or potential customers, increase our service costs, cause us to lose revenue, delay market acceptance or divert our development resources, any of which could cause our business to suffer. WE MAY INCUR MATERIAL COSTS IN CONNECTION WITH PRODUCT LIABILITY CLAIMS Since many of our clients use our products to integrate important applications in their organizations, any errors, defects or other performance problems of our products could result in financial or other damages to our clients. Additionally, we provide services to assist certain customers in identifying and correcting potential Year 2000 problems. In the event of any errors, defects or other performance problems in our products or services, our clients could seek damages for losses from us, which, if successful, could seriously harm our business, financial condition or results of operations. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could negate such limitation of liability provisions. We have not experienced any product liability claims to date. However, a product liability claim brought against us, even if not successful, would likely be time consuming and costly. YEAR 2000 RISKS MAY RESULT IN MATERIAL ADVERSE EFFECTS ON OUR BUSINESS The Year 2000 issue refers generally to the data structure and processing problem that may prevent systems from properly processing date-sensitive information when the year changes to 2000. As a result, in less than a year, IT and non-IT systems used by many companies may need to be upgraded to address Year 2000 problems. We have formed a Year 2000 task force which is evaluating our systems, products and key external relationships to ascertain material Year 2000 issues and solutions. The Year 2000 issue could result in the following risks for us: 21 22 - we may not be able to modify our products, services offerings, IT and non-IT systems in a timely and successful manner to comply with the Year 2000 requirements, which could have a material adverse effect on our operating results - The system failures due to Year 2000 problems of third parties with whom we have a material relationship may have a material adverse effect on our operating results - our customers may reallocate capital expenditures to fix Year 2000 problems and defer purchases of our software - we may be subject to a claim involving our products or Year 2000 assessment services which could have a material adverse effect on our business, results of operations and financial condition GOVERNMENT REGULATION COULD ADVERSELY AFFECT OUR BUSINESS Our business is subject to government regulation. Existing as well as new laws and regulations could adversely affect our business. Some computer applications and software are considered medical devices and are subject to regulation by the United States Food and Drug Administration (the "FDA"). We do not believe that our current products or services provided to the healthcare industry are subject to FDA regulation. However, we may expand our application and service offerings into areas that subject us to FDA regulation. We have no experience in complying with FDA regulations. We believe that complying with FDA regulations would be time consuming, burdensome and expensive and could delay our introduction of new applications or services. By virtue of our products and services provided to the healthcare industry, we are subject to extensive regulation relating to the confidentiality and release of patient records, which are included in our databases. Federal and state regulations govern both the disclosure and the use of confidential patient medical record information. Although compliance with these laws and regulations is at present principally the responsibility of the hospital, physician or other healthcare provider, regulations governing patient confidentiality rights are evolving rapidly. Additional legislation governing the distribution of medical records has been proposed at both the state and federal level. This legislation may require holders of such information to implement security measures. It may be expensive to implement security or other measures designed to comply with any new legislation. We cannot assure you that changes to state or federal laws will not materially restrict the ability of healthcare organizations to submit information from patient records using our software products. 22 23 ITEM 2. PROPERTIES HIE leases approximately 9,315 square feet of office space in Marietta, Georgia for its principal executive and administrative offices and its corporate sales and marketing facilities. This lease expires in February 2003 and currently requires monthly rental payments of approximately $16,123. HIE also leases approximately 12,797 square feet of office space in Dallas, Texas for monthly rental payments of approximately $19,945, pursuant to a lease which expires in November 2000. HIE also leases approximately 9,550 square feet of office space in Columbus, Ohio for monthly rental payments of approximately $10,023, pursuant to a lease which expires in August 1999. ITEM 3. LEGAL PROCEEDINGS As of the date hereof, there are no material legal proceedings pending against HIE. From time to time, HIE is involved in legal proceedings and litigation arising in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1998. 23 24 EXECUTIVE OFFICERS OF THE REGISTRANT The following persons are the current executive officers of HIE. Certain information as of December 31, 1998 relating to the executive officers, which has been furnished to HIE by the individuals named, is set forth below.
NAME AGE POSITION ---- --- -------- Robert I. Murrie 53 President, Chief Executive Officer and Director J. Edward Pearson, Jr. 36 Senior Vice President - Finance, Chief Financial Officer, Treasurer and Secretary Mark D. Shary 38 Senior Vice President - Commercial Business and Director Carolyn R. Jolley 49 Senior Vice President - Client Services Joseph A. Blankenship 29 Vice President - Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary
Robert I. Murrie has served as a director and the President and Chief Executive Officer of HIE since October 1997. He was President of Healthcare Communications, Inc., a wholly-owned subsidiary of HIE, from April 1997 to October 1997 and served as a Client Partner of HIE (a senior sales executive position) from January 1996 to April 1997. Prior to joining HIE, Mr. Murrie served as President and Chief Executive Officer of Nurse on Call, a managed care service company, from 1992 to December 1995 and held several senior executive positions at HBO & Company from 1985 to 1992, including President and Chief Executive Officer of Healthquest, Inc., a wholly-owned subsidiary of HBO & Company, from 1988 to 1992. J. Edward Pearson, Jr. has served as Senior Vice President - Finance, Chief Financial Officer, Secretary and Treasurer of HIE since December 1998. In October 1994, Mr. Pearson co-founded Criterion Health Strategies, Inc., an affiliate of HIE which was a systems integration solutions provider for hospitals, integrated delivery networks and specialty healthcare providers. He served as the Chief Financial Officer and Executive Vice President of Criterion Health Strategies, Inc. until it was acquired by HIE in December 1997, after which he worked with HIE's Integrated Services Group until being elected to his current positions. From 1990 to 1994, Mr. Pearson was Chief Financial Officer and Executive Vice President of Inforum, Inc., a provider of planning and marketing information and decision support software products to hospitals and managed care organizations. Mark D. Shary has served as a director of HIE since June 1, 1998 and as Senior Vice President Commercial Business since February 1999. He previously served as Senior Vice President - Product Planning of HIE from May 1998 through January 1999 and as Chief Financial Officer, Treasurer and Secretary of HIE from May 1998 until November 1998. Mr. Shary joined HIE when HIE acquired HUBLink, Inc. in May 1998, where he had served as Chief Executive Officer since founding that company in 1992. From 1982 until 1992, Mr. Shary served in a number of executive and staff capacities at Ernst & Young LLP, including Senior Manager from 1989 to 1992. 24 25 Carolyn R. Jolley has served as Senior Vice President - Client Services of HIE since December 1997 and as Vice President of HIE from October 1997 until December 1997. Ms. Jolley joined HIE when HIE acquired Healthcare Communications, Inc., where Ms. Jolley had served as Vice President, Client Services since May 1993. Prior to joining Healthcare Communications, Inc., Ms. Jolley was an account executive for Shared Financial Systems, Inc., an integration engine company serving the banking industry, from September 1990 until April 1993. Joseph A. Blankenship has served as Vice President - Controller, Chief Accounting Officer, Assistant Treasurer and Assistant Secretary of HIE since January 1999. Mr. Blankenship served as Corporate Controller of Decorative Home Accents, Inc., a textile manufacturer, from October 1996 to December 1998, and as Director of Accounting of Allegiant Physician Services, Inc., a healthcare services company, from April 1994 to October 1996. 25 26 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS HIE's common stock, $0.01 par value per share, together with associated preferred stock purchase rights, is traded on the Nasdaq National Market under the symbol "HDIE." The following table sets forth the high and low sales prices of the common stock as reported by the Nasdaq National Market for the periods indicated.
HIGH LOW ------- ------ 1997 First Quarter............................................. $ 6.25 $ 3.63 Second Quarter............................................ 4.00 2.25 Third Quarter............................................. 3.50 2.19 Fourth Quarter............................................ 3.13 1.38 1998 First Quarter............................................. $ 2.97 $ 1.44 Second Quarter............................................ 4.28 2.63 Third Quarter............................................. 4.81 2.81 Fourth Quarter............................................. 5.47 1.94
As of March 8, 1999, there were approximately 1,923 holders of record of HIE's common stock. The Company has never paid any cash dividends with respect to its common stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain all earnings, if any, for use in the expansion of the Company's business. The payment of dividends, if any, in the future with respect to the Company's common stock is within the discretion of the Board of Directors and will depend on the Company's earnings, capital requirements, financial condition and other relevant factors. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" regarding restrictions in HIE's credit agreement on HIE's ability to pay dividends. On May 12, 1998, the Company issued approximately 2.7 million shares of its common stock in connection with the Company's acquisition by merger of HUBLink, Inc. In connection with the HUBLink merger, the Company also issued (i) 124,923 shares of HIE common stock to Scott A. Jones in exchange for the cancellation of a promissory note in the original principal amount of $500,000, (ii) 100,000 shares of HIE common stock to Volpe, Brown, Whelan & Company, LLC in lieu of the cash fee required pursuant to the terms of an engagement letter, and (iii) a warrant to purchase up to 32,751 shares of HIE common stock at a per share exercise price of $3.15, which warrant is exerciseable at any time until December 31, 1999, to Robert J. Massey in exchange for cancellation of a warrant to purchase 82.6712 shares of HUBLink, Inc. common 26 27 stock at a per share exercise price of $1,247.02. These issuances were exempt from registration under Section 4(2) of the Securities Act as transactions not involving a public offering. In addition, the HUBLink, Inc. shareholders, Mr. Jones, Volpe, Brown, Whelan & Company, LLC and Mr. Massey were sophisticated and had access to information about the Company. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with HIE's consolidated financial statements and related notes thereto, and with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report. The selected consolidated financial statement data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 are derived from HIE's audited consolidated financial statements and give retroactive effect to the 1998 merger of a subsidiary of HIE and HUBLink, Inc., which merger was accounted for as a pooling of interests. Historical results are not necessarily indicative of results of operations to be expected in the future.
For the period from 6/15/94 For the years ended December 31, (date of --------------------------------------------- incorporation) 1998 1997 1996 1995 to 12/31/94 -------- -------- -------- -------- --------------- (In thousands, except for per share data) Statements of Operations: Total revenue.............................. $27,184 $ 18,064 $20,243 $ 11,248 $ 1,405 Operating earnings (loss).................. $ 1,599* $ (8,506)* $ 497 $ (9,891)* $ (1,487) Net earnings (loss)........................ $ 1,498* $ (8,596)* $ 107 $(10,961)* $ (1,496) Diluted net earnings (loss) per share of $ 0.06* $ (0.38)* $ 0.01 $ (0.60)* $ (0.08) common stock............................ Shares used in the calculation of diluted net earnings (loss) per share of common stock................................... 24,867 22,587 21,277 18,302 17,720
* Includes non-recurring pre-tax and after-tax charges of $1.1 million, $6.4 million and $5.4 million, or $0.04, $0.28 and $0.30 net loss per share, in 1998, 1997 and 1995, respectively (see Notes 1 and 3 of Notes to Consolidated Financial Statements).
As of December 31, --------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (In thousands) Consolidated Balance Sheet Data: Total assets ....................... $31,535 $28,940 $33,085 $22,793 $11,467 Long-term debt and obligations under capital leases, excluding current installments .................... $ 642 $ 316 $ 4,316 $ 5,462 $ 169
27 28 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain of the statements made in this Item 7 and in other portions of this Report and in documents incorporated by reference herein are forward-looking statements. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Such factors include, without limitation, those discussed in "Item 1. Business -- Factors That May Affect Future Performance" herein. Overview HIE develops and markets EAI solutions and provides related implementation, maintenance and support services to companies seeking to connect their disparate software applications and data repositories. HIE has served customers in the healthcare market since 1994 and has recently begun providing its software and services to financial institutions. HIE's products are designed to enable companies to more effectively administer the disparate elements of their IT systems by linking both new and existing software to form a more efficient IT environment. The Company was incorporated in Georgia in June 1994 as Healthdyne Information Enterprises, Inc., a wholly-owned subsidiary of Healthdyne, Inc., and was initially focused on providing enterprise-wide clinical information management solutions for healthcare delivery networks. In November 1995, Healthdyne, Inc. distributed all of the outstanding shares of HIE common stock in a spin-off. In October 1997, HIE redefined its strategic direction to focus on providing software products and services to support the enterprise-wide integration of information. As part of its new strategic focus, HIE (1) acquired HUBLink, Inc., a privately-held integration software product company, in May 1998 in a pooling-of-interests transaction and (2) sold assets related to certain non-strategic consulting services to Superior Consultant Holdings Corporation in December 1998. HIE sells its software products to distributors and application vendors, as well as directly to end-users. Software license sales typically are full-use licenses, which provide the end-user with full functionality of the product. Less expensive limited use licenses are also available, which restrict the functionality of the product or the number of application interfaces. A typical distributor or application vendor agreement includes an initial purchase of software for resale with additional licenses purchased periodically during the term of the agreement. Sales directly to end-users are generally for perpetual licenses for a one-time, up-front fee. HIE recognizes revenue from two primary sources, software licenses and services. Software license revenue is recognized in accordance with the criteria set forth in Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. Accordingly, HIE recognizes software license revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectibility is probable. 28 29 Services revenue includes fees for product implementation and integration services, software support and maintenance agreements and education. Product implementation and integration services are generally provided under contracts with terms of less than one year. Revenue is recognized as the work is performed or, in the case of a fixed fee contract, on a percentage-of-completion basis, even though some services may be prepaid. Software support and maintenance services are generally provided under one-year renewable service contracts for a prepaid standard fee. Revenue is recognized ratably on a straight-line basis over the term of the contract. Education classes are provided for a standard per-student charge and revenue is recognized as the service is provided. Research and development expenses are accounted for in accordance with the provisions of the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS 86"). SFAS 86 requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on HIE's product development model, technological feasibility is established upon completion of a working model. In 1998 and 1997, HIE capitalized $1.2 million and $0.5 million, respectively, of software development costs in accordance with SFAS 86. HIE is increasingly focused on selling its solutions through third-party distributors, and its future success depends on its ability to continue to develop and maintain successful relationships with effective distributors. One distributor, McKessonHBOC, accounted for approximately 40% of HIE's software licensing revenue and approximately 18% of HIE's total revenue in 1998. HIE's future success also depends on continued demand for its software integration design, implementation and maintenance services. Services and other revenue comprised approximately 54% of HIE's total revenue in 1998. 29 30 Results of Operations The following table sets forth both HIE's total revenue and the percentage of total revenue (unless otherwise indicated) for each component included in HIE's Consolidated Statements of Operations for the years indicated:
Years Ended December 31, -------------------------------------- 1998 1997 1996 --------- -------- -------- Total HIE Revenue (in 000's) ........................ $ 27,184 $ 18,064 $ 20,243 Revenue: Software ....................................... 45.7 % 40.9 % 42.6 % Services and other ............................. 54.3 % 59.1 % 57.4 % -------- -------- -------- Total revenue .............................. 100.0 % 100.0 % 100.0 % -------- -------- -------- Cost of revenue: Software (as a % of software revenue) .......... 6.9 % 13.9 % 10.5 % Services and other (as a % of services and other revenue) ..................................... 48.1 % 56.4 % 55.5 % Total cost of revenue ...................... 29.3 % 39.0 % 36.3 % -------- -------- -------- Gross profit ............................... 70.7 % 61.0 % 63.7 % -------- -------- -------- Operating expenses: Sales and marketing ............................ 24.5 % 29.7 % 26.8 % Research and development ....................... 14.3 % 16.5 % 12.5 % General and administrative ..................... 22.1 % 26.5 % 21.8 % Merger costs ................................... 3.9 % -- % -- % Obsolete software and other write-offs ......... -- % 25.7 % -- % Purchased in-process research and development .. -- % 9.7 % -- % -------- -------- -------- Operating earnings (loss) .................. 6.0 % (47.2)% 2.5 % Losses of affiliate ................................. -- % (0.8)% -- % Interest expense .................................... (0.9)% (2.4)% (3.2)% Interest income ..................................... 0.6 % 2.8 % 1.2 % -------- -------- -------- Earnings (loss) before income taxes ........ 5.7 % (47.6)% 0.5 % Income taxes ........................................ -- % -- % -- % -------- -------- -------- Net earnings (loss) ........................ 5.5 % (47.6)% 0.5 % ======== ======== ========
30 31 Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenue Revenue increased by 50% to $27.2 million in the year ended December 31, 1998 from $18.1 million in the year ended December 31, 1997. Software. Software license revenue increased by 68% to $12.4 million in the year ended December 31, 1998 from $7.4 million in the year ended December 31, 1997. As a percentage of total revenue, software license revenue increased to 45.7% in the year ended December 31, 1998 from 40.9% in the year ended December 31, 1997. The dollar increase in software license revenue was primarily due to increased sales of software to third-party distributors. The increase in software license revenue as a percentage of total revenue was primarily due to the dollar increase in software sales to third-party distributors added in the latter half of 1998. During 1998, HIE focused its marketing efforts primarily on software sales to third-party distributors and application vendors. The addition of new distributors and application vendors facilitated HIE's revenue growth during 1998 and third-party distributors comprised approximately 80% of software sales during 1998. Services and other. Services and other revenue increased by 38% to $14.8 million in the year ended December 31, 1998 from $10.7 million in the year ended December 31, 1997. As a percentage of total revenue, services and other revenue decreased to 54.3% in the year ended December 31, 1998 from 59.1% in the year ended December 31, 1997. The dollar increase in services and other revenue was primarily due to an increase in the sale and completion of projects as well as an increase in service personnel productivity. The decrease in services and other revenue as a percentage of total revenue was primarily due to increased software sales to third-party distributors added in the third and fourth quarters of 1998. Cost of Revenue Software. Cost of software license revenue consists principally of royalty payments to third parties for software products that were sold with HIE's products, software purchased from third parties for resale, and amortization of capitalized software development costs. Cost of software license revenue decreased by 17% to $0.9 million in the year ended December 31, 1998 from $1.0 million in the year ended December 31, 1997. As a percentage of software license revenue, cost of software license revenue decreased to 6.9% in the year ended December 31, 1998 from 13.9% in the year ended December 31, 1997. The dollar decrease in cost of software license revenue resulted primarily from a write-off of obsolete software in late 1997 which resulted in a lower amortization of purchased software expense for 1998. The decrease in cost of software license revenue as a percentage of software license revenue was primarily due to the write-off of obsolete software in 1997 and to increased software license revenue. Services and other. Cost of services and other revenue consists primarily of personnel, facility and systems costs incurred in providing product implementation, integration project, maintenance, consulting and education services. Cost of services and other revenue increased by 18% to $7.1 million in the year ended December 31, 1998 from $6.0 million in the year ended December 31, 1997. As a percentage of services and other revenue, cost of services and other 31 32 revenue decreased to 48.1% in the year ended December 31, 1998 from 56.4% in the year ended December 31, 1997. The dollar increase in cost of services and other revenue was primarily due to an increase in service personnel necessary to complete service projects. The decrease in cost of services and other revenue as a percentage of services and other revenue was primarily due to increases in service personnel productivity. Operating Expenses Sales and marketing. Sales and marketing expense consists primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and promotional expenses. Sales and marketing expense increased by 24% to $6.7 million in the year ended December 31, 1998 from $5.4 million in the year ended December 31, 1997. As a percentage of total revenue, sales and marketing expense decreased to 24.5% in the year ended December 31, 1998 from 29.7% in the year ended December 31, 1997. The dollar increase in sales and marketing expense was primarily due to initial marketing for solutions being developed for new vertical markets other than the healthcare market. The decrease in sales and marketing expense as a percentage of total revenue was primarily due to increased distribution to third-party distributors versus direct sales. Research and development. Research and development expense includes personnel costs, contract services, and travel associated with the development of new products, enhancements of existing products and quality assurance activities. Research and development expense increased by 30% to $3.9 million in the year ended December 31, 1998 from $3.0 million in the year ended December 31, 1997. As a percentage of total revenue, research and development expense decreased to 14.3% in the year ended December 31, 1998 from 16.5% in the year ended December 31, 1997. The dollar increase in research and development expense was primarily due to an increase in development personnel and contract programmers needed to support planned product expansion in vertical markets other than healthcare. The decrease in research and development expense as a percentage of total revenue was primarily due to an increase in revenue and, to a lesser extent, to increased capitalization of costs related to internally developed software to $1.2 million in 1998 from $0.5 million in 1997. The increased capitalization of internally developed software costs was a result of increased spending on software development projects in connection with planned expansion into additional vertical markets. General and administrative. General and administrative expense consists primarily of personnel costs, outside professional fees, and software and equipment costs associated with the finance, legal, human resources, information systems, and administrative functions of HIE. General and administrative expense increased by 26% to $6.0 million in the year ended December 31, 1998 from $4.8 million in the year ended December 31, 1997. As a percentage of total revenue, general and administrative expense decreased to 22.1% in the year ended December 31, 1998 from 26.5% in the year ended December 31, 1997. The dollar increase in general and administrative expense was primarily due to increases in recruiting costs, telecommunication expenses and other general and administrative expenses as a result of an overall increase in personnel and revenue growth. The decrease in general and administrative expense as a percentage of total revenue was primarily due to increased revenue and elimination of redundant costs in the second half of 1998 related to the acquisition of HUBLink, Inc. by HIE. 32 33 Merger costs. Merger costs consist of investment banking, legal and accounting fees, travel and severance costs in connection with HIE's acquisition of HUBLink, Inc. on May 12, 1998. In connection with the acquisition of HUBLink, HIE incurred $1.1 million of one-time charges in the year ended December 31, 1998. Obsolete software and other write-offs. Obsolete software and other write-offs consist of certain assets that were written-off or fully reserved relating to HIE's redefined strategic direction in October 1997. In the year ended December 31, 1997, HIE wrote-off or fully reserved certain assets totaling $4.7 million that no longer contributed to HIE's new strategic direction, including the following: (1) the net book value of certain third-party and internally developed software totaling $2.7 million; (2) accounts receivable totaling $1.1 million and project completion costs totaling $0.6 million, both related to the software that HIE ceased selling and distributing under its new strategic direction; and (3) other costs totaling $0.3 million. Purchased in-process research and development. Purchased in-process research and development consists of costs for software integration products that HIE purchased in connection with its acquisition of Criterion Health Strategies, Inc. in 1997. The total costs incurred were $1.7 million in the year ended December 31, 1997. Income taxes. HIE had no provision for income taxes in the years ended December 31, 1998 or 1997 as a result of HIE utilizing net operating loss carryforwards in 1998 and a net operating loss for 1997. As of December 31, 1998, HIE had net operating loss carryforwards for tax reporting purposes of approximately $18.4 million, which expire at various dates from 2007 through 2018. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenue Revenue decreased by 11% to $18.1 million in the year ended December 31, 1997 from $20.2 million in the year ended December 31, 1996. Sales of software and services to one customer, Promina Health Systems, accounted for approximately 20% of HIE's total revenue in the year ended December 31, 1996. Software. Software license revenue decreased by 14% to $7.4 million in the year ended December 31, 1997 from $8.6 million in the year ended December 31, 1996. As a percentage of total revenue, software license revenue decreased to 40.9% in the year ended December 31, 1997 from 42.6% in the year ended December 31, 1996. The dollar decrease in software license revenue was primarily due to a reduction in integration engine software license revenue and, to a lesser extent, to reductions in sales of certain products that HIE elected to discontinue as part of its redefined strategic direction in October 1997. The decrease in software license revenue as a percentage of total revenue was primarily due to the decrease in software license revenue. Services and other. Services and other revenue decreased by 8% to $10.7 million in the year ended December 31, 1997 from $11.6 million in the year ended December 31, 1996. As a percentage of total revenue, services and other revenue increased to 59.1% in the year ended December 31, 1997 from 57.4% in the year ended December 31, 1996. The dollar decrease in services and other revenue was primarily due to a relatively low level of service personnel 33 34 productivity at the beginning of 1997 and HIE's decision to de-emphasize hardware sales. This was partially offset by increased software maintenance revenue. The increase in services and other revenue as a percentage of total revenue was primarily due to a decrease in total revenue. Cost of Revenue Software. Cost of software license revenue increased by 13% to $1.0 million in the year ended December 31, 1997 from $0.9 million in the year ended December 31, 1996. As a percentage of software license revenue, cost of software license revenue increased to 13.9% in the year ended December 31, 1997 from 10.5% in the year ended December 31, 1996. The dollar increase in cost of software license revenue was primarily attributable to an increase in the amount of third-party software products resold by HIE. The increase in cost of software license revenue as a percentage of software license revenue was primarily a result of the higher cost of third-party software products compared to HIE's proprietary software products and the decrease in software license revenue. Services and other. Cost of services and other revenue decreased by 7% to $6.0 million in the year ended December 31, 1997 from $6.4 million in the year ended December 31, 1996. As a percentage of services and other revenue, cost of services and other revenue increased to 56.4% in the year ended December 31, 1997 from 55.5% in the year ended December 31, 1996. The dollar decrease in cost of services and other revenue was primarily a result of the decrease in hardware revenue in 1997 discussed above. The increase in cost of services and other revenue as a percentage of services and other revenue was attributable to a relatively low level of service personnel productivity at the beginning of 1997, partially offset by the reduction in hardware sales cost of revenue, which has a relatively high cost of revenue. Operating Expenses Sales and marketing. Sales and marketing expense was $5.4 million in both the year ended December 31, 1997 and the year ended December 31, 1996. As a percentage of total revenue, sales and marketing expense increased to 29.7% in the year ended December 31, 1997 from 26.8% in the year ended December 31, 1996. The increase in sales and marketing expense as a percentage of total revenue was primarily due to the decrease in total revenue. Research and development. Research and development expense increased by 17% to $3.0 million in the year ended December 31, 1997 from $2.5 million in the year ended December 31, 1996. As a percentage of total revenue, research and development expense increased to 16.5% in the year ended December 31, 1997 from 12.5% in the year ended December 31, 1996. The dollar increase in research and development expense was primarily due to increased expenditures for enterprise-level object-oriented integration engine technology development, offset somewhat by decreased expenditures for a software product that was discontinued in 1997. The increase in research and development expense as a percentage of total revenue was primarily due to an increase in expenditures overall and to a decrease in capitalization of costs related to internally developed software to $0.5 million in 1997 from $0.8 million in 1996. The decreased capitalization of internally developed software costs was a result of decreased spending on certain software development projects that were ultimately discontinued in 1997. 34 35 General and administrative. General and administrative expense increased by 8% to $4.8 million in the year ended December 31, 1997 from $4.4 million in the year ended December 31, 1996. As a percentage of total revenue, general and administrative expense increased to 26.5% in the year ended December 31, 1997 from 21.8% in the year ended December 31, 1996. The dollar increase in general and administrative expense was primarily due to an increase in expenditures related to HIE's change in strategic direction. The increase in general and administrative expense as a percentage of total revenue was primarily due to a decrease in total revenue. Obsolete software and other write-offs. Obsolete software and other write-offs consist of certain assets that were written-off or fully reserved relating to HIE's redefined strategic direction in October 1997. In the year ended December 31, 1997, HIE wrote-off or fully reserved certain assets totaling $4.7 million that no longer contributed to HIE's new strategic direction, including the following: (1) the net book value of certain third-party and internally developed software totaling $2.7 million; (2) accounts receivable totaling $1.1 million and project completion costs totaling $0.6 million, both related to the software that HIE ceased selling and distributing under its new strategic direction; and (3) other costs totaling $0.3 million. No such obsolete software and other write-offs were incurred during the year ended December 31, 1996. Purchased in-process research and development. Purchased in-process research and development consists of costs for software integration products that HIE purchased in connection with its acquisition of Criterion Health Strategies, Inc. in 1997. The total costs incurred were $1.7 million in the year ended December 31, 1997. Income taxes. HIE had no provision for income taxes in 1997 and 1996 due to the net loss incurred in 1997 and the utilization of available net operating loss carryforward benefits in 1996. Liquidity and Capital Resources HIE financed its operations from inception through the November 1995 spin-off primarily through equity investments totaling $22.0 million by Healthdyne, Inc. Following the spin-off, Healthdyne, Inc. made no additional advances or equity infusions in HIE. During November 1996, HIE sold 2.75 million shares of its common stock in a follow-on public offering and received proceeds of $10.3 million, after deducting offering-related expenses. In addition, HIE received proceeds of $5.2 million, after deducting offering-related expenses, from various private placements of common stock and from employee stock option and purchase plans from 1995 through 1998. HIE generally uses capital leases to finance additions of computer equipment. HIE also periodically borrows under established lines of credit for working capital purposes. Prior to the completion of the follow-on offering in November 1996, HIE used its available cash and cash flow from operating activities to pay acquired debt and acquisition financing-related debt, as those obligations matured. Subsequent to the follow-on offering in November 1996, HIE used $800,000, $400,000 and $200,000 of cash during November 1996, April 1997 and September 1997, respectively, to prepay a portion of long-term debt at a discount. 35 36 HIE also invested $995,000 during 1997 to satisfy its funding commitment to Criterion Health Strategies, Inc. HIE plans to use the remainder of the net proceeds from the equity sources referred to above to pay debt as it matures and for working capital and general corporate purposes. HIE had working capital of $7.4 million at December 31, 1998 compared to working capital of $2.7 million at December 31, 1997. The increase in working capital was generated primarily through operating earnings and the exercise of stock options. Net cash used in operating activities increased to $3.7 million in the year ended December 31, 1998 from $1.7 million in the year ended December 31, 1997. The increase in net cash used in operating activities was attributable to an increase in accounts receivable offset by an increase in deferred revenue and net earnings for the year ended December 31, 1998. Net cash used in investing activities decreased to $0.3 million in the year ended December 31, 1998 from $2.3 million in the year ended December 31, 1997. This decrease in net cash used in investing activities was primarily a result of HIE's sale of the Integrated Services Group in the fourth quarter of 1998, which generated $1.5 million in cash. No gain or loss was recognized on the transaction. Net cash used in financing activities decreased to $0.6 million used in the year ended December 31, 1998 from $1.0 million provided in the year ended December 31, 1997. Principal payments on long-term debt increased $2.5 million to $3.8 million for the year ended December 31, 1998 compared to $1.3 million for the year ended December 31, 1997. This increase was offset by issuances of common stock and borrowings under line of credit facilities. HIE's net borrowings from its line of credit facilities totaled approximately $1.5 million for the year ended December 31, 1998 compared to $0.1 million for the year ended December 31, 1997. In August 1998, HIE entered into a new line of credit agreement providing for borrowings of up to $5.0 million, with the maximum amount available under the line at any time dependent on HIE's accounts receivable. As of December 31, 1998, $3.0 million of the facility was available to HIE of which $2.5 million in borrowings were outstanding. The facility is for a one year term, with borrowings bearing interest at the bank's prime rate plus 1% (8.75% as of December 31, 1998). The line of credit agreement contains certain covenants, including a provision prohibiting HIE from paying dividends on its common stock. HIE plans to maintain the $5.0 million line of credit for unanticipated needs and financial flexibility. HIE is committed to make expenditures under non-cancelable operating leases and capital lease agreements for certain facilities and equipment. These leases expire at various dates through 2003. At December 31, 1998, HIE had $2.9 million in outstanding capital and operating lease obligations. HIE believes that currently available cash, anticipated cash flow from operations and borrowings under existing or future credit facilities will be sufficient to meet HIE's requirements for at least the next twelve months. HIE may seek to raise additional financing to support expansion, develop new or enhanced applications and services, respond to competitive pressures, acquire complementary businesses or technologies or take advantage of favorable market 36 37 conditions. In such event, or if HIE's cash needs or plans change, HIE may seek to raise additional funds by selling debt or equity securities, by entering into strategic relationships or through other arrangements. There can be no assurance, however, that HIE will be able to raise any additional amounts on reasonable terms, if at all. Backlog As of December 31, 1998, HIE's revenue backlog totaled $8.7 million compared with $8.3 million as of December 31, 1997. Revenue backlog is comprised of maintenance fees paid in advance, contracted for implementation services and other unearned revenue relating to accepted orders or agreements for the delivery of HIE's products and services. Revenue included in backlog is generally expected to be recognized over the next twelve months. Generally, customer orders and agreements included in backlog are subject to cancellation and there can be no assurance that backlog will be realized. Consequently, backlog is not necessarily indicative of future results. Recent Accounting Pronouncement Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), was issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants in October 1997, effective for financial statements for fiscal years beginning after December 15, 1997. On January 1, 1998, HIE adopted SOP 97-2. In accordance with SOP 97-2, revenue from the license of software is generally recognized upon shipment of the software and fulfillment of acceptance terms, provided that the fee is fixed or determinable and collection of the resulting receivable is deemed probable. Service revenue is recognized as the work is performed or, in the case of a fixed-fee contract, on the percentage of completion basis, even though some services are prepaid. The implementation of this statement has not had a material impact on HIE's consolidated financial statements. However, SOP 97-2 includes restrictive provisions regarding specific terms of software arrangements which, if present, require deferral of revenue recognition beyond the point of delivery of the software. Future competitive conditions may arise that could necessitate changes in HIE's business practices and the contract terms of its software arrangements. Such changes may require deferral of revenue recognition and periodic operating results could be adversely affected. Year 2000 The Year 2000 issue refers generally to the data structure and processing problem that may prevent systems from properly processing date-sensitive information when the year changes to 2000. The Year 2000 issue affects IT systems, such as computer programs and various types of electronic equipment that process date information by using only two digits rather than four digits to define the applicable year, and thus may recognize a date using "00" as the year 1900 rather than the year 2000. The issue also affects some non-IT systems, such as devices which rely on a microcontroller to process date information. The Year 2000 issue could disrupt a company's operations by generating erroneous data or causing system failures or miscalculations. 37 38 State of Readiness HIE has formed a Year 2000 task force which is systematically evaluating its systems, products and key external relationships to ascertain material Year 2000 issues and solutions. HIE's Year 2000 readiness program has two phases: (1) assessment and (2) remediation (including modification, upgrading, replacement and validation by third parties). HIE's Year 2000 readiness program is an ongoing process involving continual evaluation and may be subject to change in response to new developments. HIE's products and services. HIE is in the process of assessing the Year 2000 readiness of all products available currently or previously sold to customers and distributors. HIE expects this assessment to be complete in mid-1999. Although HIE does not generally warrant the Year 2000 readiness of its products, it has disclosed to its customers and distributors that its products are "Year 2000 ready." HIE has defined "Year 2000 ready" as the ability for a product component to initialize and operate normally on and after January 1, 2000; and, where applicable, the ability to correctly manipulate, display, store and exchange with other components of its system all dates, either prior, during, or after January 1, 2000. However, HIE's products are configurable and programmable by end users, and Year 2000 problems relating to re-configurations and programming extensions to HIE's base product generated by an end user cannot be anticipated by HIE. HIE also markets its products and services as a solution for addressing the Year 2000 problem. As part of its Year 2000 risk assessment services, HIE executes an application that browses all Cloverleaf site configuration files and provides a listing of the date fields that are at risk and where the fields are integrated within the Cloverleaf system. After executing its Year 2000 risk assessment application, HIE provides the customer with a written report describing the location of these at risk fields and the application interface that is affected. HIE attempts to limit by contract, both with its customers and with the parties that license technology to HIE, its liability for damages arising in rendering its products and services. Despite this precaution, there can be no assurance that the limitations of liabilities set forth in its contracts would be enforceable or would otherwise protect HIE from liability for damages. In addition, HIE's products are generally integrated into enterprise systems involving sophisticated hardware and complex software products that HIE cannot adequately evaluate for Year 2000 problems. HIE may face claims based on Year 2000 problems in other companies' products, or issues arising from the integration of multiple products within an overall system. Internal IT and non-IT systems. HIE is in the process of implementing new software for its accounting, internal network and timekeeping functions in order to consolidate various systems under its new strategic direction and integrate HUBLink's operations. Representations made by software vendors for these new systems, including Year 2000 readiness, will be validated at the completion of that implementation, which is expected to be early 1999. Non-IT systems, such as telecommunications systems, as well as existing IT systems are currently being assessed. 38 39 Other third parties. HIE has surveyed with a questionnaire material vendors and suppliers of systems used by HIE for internal IT and research and development in order to determine the extent to which HIE is vulnerable to any failure by such material third parties to remediate their respective Year 2000 problems and resolve such problems to the extent practicable. HIE expects the assessment to be complete in early 1999 and will take the necessary remediation action, including changing to vendors who are Year 2000 compliant or installing internal IT systems, to minimize the Year 2000 non-compliance risk with respect to third parties. HIE has not conducted a Year 2000 survey of the distributors and financial institutions with whom it has material relationships. Year 2000 Costs and Contingency Plans To date, HIE has not incurred any material costs directly associated with its Year 2000 readiness efforts nor accelerated the replacement of any system due to Year 2000 issues. HIE does not anticipate that it will incur either significant operating expenses or significant capital expenditures to address Year 2000 issues with respect to its internal systems and the software products and services that it markets. In view of HIE's Year 2000 assessment and remediation efforts to date, and the limited activities that remain to be completed, HIE's contingency plans consist of plans to re-route phone calls, manual accounting and restoring working systems with backup files. HIE is in the final stages of development of these contingency plans, which are expected to be completed by mid-1999. Risks of Year 2000 Issues In light of its compliance efforts, HIE does not believe that the Year 2000 issue will materially adversely affect operations or results of operations, and does not expect implementation to have a material impact on HIE's consolidated financial statements. However, there can be no assurance that HIE's systems will be Year 2000 compliant prior to December 31, 1999, or that the failure of any such system will not have a material adverse effect on HIE's business, results of operations and financial condition. In addition, to the extent the Year 2000 problem has a material adverse effect on business, operations or financial condition of third parties with whom HIE has material relationships, such as customers, distributors, vendors, suppliers and financial institutions, the Year 2000 problem could have a material adverse effect on HIE's business, results of operations and financial condition. Although HIE has not been a party to any litigation or arbitration proceeding involving its products or services related to Year 2000 issues, HIE may in the future be required to defend its products or services in such proceedings or to negotiate resolutions of claims based on Year 2000 issues. The costs of defending and resolving Year 2000-related disputes, regardless of the merits of such disputes, and any liability HIE may have for Year 2000-related damages, including consequential damages, could materially adversely affect its business, results of operations and financial condition. There also can be no assurance that HIE will be able to obtain or maintain insurance coverage for such liabilities, that such coverage will continue to be available on acceptable terms, or that such coverage will be available in amounts to cover one or more large claims. The assertion of claims against HIE that exceed available insurance coverage or changes 39 40 in HIE's insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on HIE's business, financial condition and results of operations. The above Year 2000 discussion contains forward-looking statements reflecting management's current assessment and estimates with respect to HIE's Year 2000 readiness efforts and the impact of Year 2000 issues on HIE's business, financial condition and results of operations. Various factors, many of which are beyond the control of HIE, could cause actual plans and results to differ materially from those contemplated by such assessments, estimates and forward-looking statements. Some of these factors include, but are not limited to, the accuracy of the Year 2000 assurances, disclosures or representations by HIE's customers, distributors, vendors, suppliers, financial institutions and other third parties with whom it has material relationships, availability of qualified personnel and other IT resources and any actions of third parties with respect to Year 2000 problems. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company currently maintains all cash in United States dollars in highly liquid, interest-bearing, investment-grade instruments with maturities of less than three months, which the Company considers cash equivalents; therefore the Company has no "market risk sensitive investments," and no disclosure is required under this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 Independent Auditors' Report....................................................................F-1 Consolidated Balance Sheets.....................................................................F-2 Consolidated Statements of Operations...........................................................F-3 Consolidated Statements of Shareholders' Equity.................................................F-4 Consolidated Statements of Cash Flows...........................................................F-5 Notes to Consolidated Financial Statements......................................................F-7
40 41 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders HIE, Inc. We have audited the accompanying consolidated balance sheets of HIE, Inc. (formerly Healthdyne Information Enterprises, Inc.) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HIE, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Atlanta, Georgia January 26, 1999 F-1 42 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
December 31, --------------------- 1998 1997 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 3,167 $ 7,777 Trade accounts receivable, less allowances of $720 and $626 at December 31, 1998 and 1997, respectively (note 1(d)) 12,295 5,977 Other current assets (note 7) 2,555 1,375 -------- -------- Total current assets 18,017 15,129 Notes receivable 82 335 Purchased software, net (notes 1(e) and 1(k)) 1,946 2,397 Capitalized software development costs, net (notes 1(f) and 1(k)) 1,606 564 Property and equipment, net (note 4) 2,289 1,939 Excess of cost over net assets of businesses acquired, net (note 3) 7,535 8,503 Other assets 60 73 -------- -------- Total assets $ 31,535 $ 28,940 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt and obligations under capital leases (note 6) $ 2,911 $ 5,175 Accounts payable, principally trade 1,276 863 Accrued liabilities (note 5) 1,718 2,821 Deferred revenue 4,690 3,597 -------- -------- Total current liabilities 10,595 12,456 Long-term debt and obligations under capital leases, excluding current installments (note 6) 642 316 Other liabilities - 476 -------- -------- Total liabilities 11,237 13,248 Shareholders' equity (note 8): Preferred stock, without par value. Authorized 20,000 shares; designated Series A cumulative preferred stock 500 shares; issued none - - Common stock, $0.01 par value. Authorized 50,000 shares; 24,972 and 23,563 issued and outstanding shares at December 31, 1998 and 1997, respectively 250 236 Additional paid-in capital 41,301 38,280 Deferred compensation - (73) Accumulated deficit (21,253) (22,751) -------- -------- Total shareholders' equity 20,298 15,692 -------- -------- Commitments (notes 9 and 11) Total liabilities and shareholders' equity $ 31,535 $ 28,940 ======== ========
See accompanying notes to consolidated financial statements F-2 43 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years ended December 31, -------------------------------------- 1998 1997 1996 -------- -------- -------- Revenue (note 12): Software $ 12,432 $ 7,388 $ 8,622 Services and other 14,752 10,676 11,621 -------- -------- -------- Total revenue 27,184 18,064 20,243 -------- -------- -------- Cost of revenue: Software 852 1,026 907 Services and other 7,102 6,025 6,449 -------- -------- -------- Total cost of revenue 7,954 7,051 7,356 -------- -------- -------- Gross profit 19,230 11,013 12,887 Operating expenses: Sales and marketing 6,672 5,362 5,435 Research and development 3,882 2,977 2,540 General and administrative (including related party expenses of $10, $13 and $51 for the respective periods) (note 2) 6,017 4,784 4,415 Merger costs (notes 1(k) and 3) 1,060 - - Obsolete software and other write-offs (note 1(k)) - 4,650 - Purchased in-process research and development (note 3) - 1,746 - -------- -------- -------- Operating earnings (loss) 1,599 (8,506) 497 -------- -------- -------- Losses of affiliate (note 3) - (151) - Interest expense (254) (436) (643) Interest income 153 497 253 -------- -------- -------- Earnings (loss) before income taxes 1,498 (8,596) 107 Income taxes (note 7) - - - -------- -------- -------- Net earnings (loss) $ 1,498 $ (8,596) $ 107 ======== ======== ======== Net earnings (loss) per share of common stock (note 1(m)): Basic $ 0.06 $ (0.38) $ 0.01 ======== ======== ======== Diluted $ 0.06 $ (0.38) $ 0.01 ======== ======== ======== Shares used in the calculation of net earnings (loss) per share of common stock (note 1(m)): Basic 24,031 22,587 19,863 ======== ======== ======== Diluted 24,867 22,587 21,277 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 44 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Common Stock Additional Total ----------------------- Paid-in Deferred Accumulated Shareholders' Shares Amount Capital Compensation Deficit Equity ----------- --------- ----------- ------------- ----------------- ------------- Balance at December 31, 1995 18,754 $ 188 $ 24,066 $ (23) $(14,262) $ 9,969 Issuance of common stock in public and private offerings, net of offering expenses of $654 2,919 29 11,025 -- -- 11,054 Stock options exercised 905 9 452 -- -- 461 Employee stock plan purchases 14 -- 58 -- -- 58 Deferred compensation related to granting of stock options -- -- 29 (29) -- -- Amortization of deferred compensation, net of forfeitures -- -- (75) 29 -- (46) Net earnings -- -- -- -- 107 107 -------- -------- -------- -------- -------- -------- Balance at December 31, 1996 22,592 226 35,555 (23) (14,155) 21,603 Issuance of common stock in an acquisition 416 4 1,095 -- -- 1,099 Issuance of common stock in private offerings, net of offering expenses of $20 280 3 1,236 -- -- 1,239 Stock options exercised 193 2 31 -- -- 33 Employee stock plan purchases 82 1 169 -- -- 170 Deferred compensation related to granting of stock options -- -- 233 (233) -- -- Amortization of deferred compensation, net of forfeitures -- -- (39) 183 -- 144 Net loss -- -- -- -- (8,596) (8,596) -------- -------- -------- -------- -------- -------- Balance at December 31, 1997 23,563 236 38,280 (73) (22,751) 15,692 Issuance of common stock in satisfaction of investment banker advisory fee 100 1 405 -- -- 406 Issuance of common stock in satisfaction of note payable to HUBLink shareholder 125 1 507 -- -- 508 Stock options exercised 1,092 11 1,491 -- -- 1,502 Employee stock plan purchases 92 1 140 -- -- 141 Amortization of deferred compensation, net of forfeitures -- -- -- 73 -- 73 Income tax benefits arising from stock option exercises -- -- 478 -- -- 478 Net earnings -- -- -- -- 1,498 1,498 -------- -------- -------- -------- -------- -------- Balance at December 31, 1998 24,972 $ 250 $ 41,301 $ -- $(21,253) $ 20,298 ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. F-4 45 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, ------------------------------------- 1998 1997 1996 -------- -------- ------ Cash flows from operating activities: Net earnings (loss) $ 1,498 $ (8,596) $ 107 Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Obsolete software and other write-offs - 4,614 - Purchased in-process research and development - 1,746 - Losses of affiliate - 151 - Provision for doubtful accounts 270 445 383 Depreciation and amortization 2,165 1,816 1,738 Compensation related to stock options, net 73 144 (46) Increase in trade accounts receivable (8,457) (1,206) (2,934) Increase in other current assets (302) (711) (197) Increase (decrease) in trade accounts payable 413 (767) 814 Increase (decrease) in accrued liabilities (419) 122 728 Increase in deferred revenue 1,093 503 1,289 -------- -------- ------ Net cash provided by (used in) operating activities (3,666) (1,739) 1,882 -------- -------- ------ Cash flows from investing activities: Purchased software (112) (445) (1,713) Capitalized software development costs (1,249) (467) (789) Capital expenditures (258) (303) (486) Change in other non-current assets and liabilities, net (210) (1,071) 112 Proceeds from disposition of business 1,517 - - -------- -------- ------ Net cash used in investing activities (312) (2,286) (2,876) -------- -------- ------ Cash flows from financing activities: Proceeds from issuance of long-term debt - 583 67 Principal payments on long-term debt (3,797) (1,261) (4,159) Net borrowings under line of credit 1,522 120 250 Proceeds from issuances of common stock 1,643 1,589 11,573 -------- -------- ------ Net cash provided by (used in) financing activities (632) 1,031 7,731 -------- -------- ------ Net increase (decrease) in cash and cash equivalents (4,610) (2,994) 6,737 Cash and cash equivalents at beginning of year 7,777 10,771 4,034 -------- -------- ------ Cash and cash equivalents at end of year $ 3,167 $ 7,777 $ 10,771 ======== ======== ========
F-5 46 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (In thousands)
Years ended December 31, -------------------------------------- 1998 1997 1996 --------- --------- --------- Supplemental disclosures of cash paid for: Interest $ 254 $ 190 $ 279 ========= ========= ========= Income taxes $ - $ - $ - ========= ========= ========= Supplemental disclosures of non-cash investing and financing activities: Equipment acquired under capital lease obligations $ 844 $ 467 $ 132 ========= ========= ========= Obligations incurred in connection with acquisitions $ - $ 840 $ - ========= ========= ========= Issuance of common stock in connection with an acquisition $ - $ 1,099 $ - ========= ========= ========= Issuance of common stock in satisfaction of note payable to HUBLink shareholder $ 508 $ - $ - ========= ========= ========= Issuance of common stock in satisfaction of investment banker advisory fee $ 406 $ - $ - ========= ========= ========= Income tax benefits arising from stock option exercises $ 478 $ - $ - ========= ========= ========= Disposal of business: Assets disposed of $ 2,445 $ - $ - Liabilities disposed of (278) - - Amount in escrow (650) - - --------- --------- --------- Proceeds from disposition of business $ 1,517 $ - $ - ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 47 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (1) Summary of Significant Accounting Policies (a) Business HIE, Inc. and subsidiaries (collectively referred to as "HIE" or the "Company") provide software tools and services to achieve the enterprise-wide integration of information. HIE was incorporated on June 15, 1994 in the State of Georgia and is headquartered in Marietta, Georgia. HIE was a wholly owned subsidiary of Healthdyne, Inc. ("Healthdyne") until November 6, 1995 at which time Healthdyne distributed all of the outstanding shares of HIE to the Healthdyne shareholders (the "Spin-off"). On February 24, 1999, the Company changed its name from Healthdyne Information Enterprises, Inc. to HIE, Inc. (b) Basis of Consolidated Financial Statement Presentation The consolidated financial statements include the accounts of the Company and its subsidiaries, as appropriate (see note 3). The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the consolidated balance sheets and income and expenses for the periods. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with original maturities of three months or less. (d) Revenue Revenue is derived from the sale of integration software tools and from providing related education, consulting, project management, implementation, support and other integration services. Revenue from software licensing and support fees is recognized in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition. Software revenue is recognized based on four criteria proscribed by SOP 97-2, which are: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable, and (4) collectibility is probable. All service revenue is recognized as the work is performed or, in the case of a fixed fee contract, on the F-7 48 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) percentage-of-completion basis, even though some services are prepaid. Deferred revenue represents advance payments or billings for software licenses, services, or support in advance of revenue recognition. The Company established business relationships with several new distributors in 1998 and 1997 and therefore, limited historical data is available on which to base estimates of future returns, allowances and warranties. Management of the Company has provided an allowance for expected returns, allowances and warranties based on historical rates. The amounts of returns, allowances and warranties ultimately incurred could differ materially in the near term from the allowances calculated. (e) Purchased Software Purchased software includes the cost of purchased integration software tools and the cost of software acquired in connection with business combinations. It also includes the cost of licenses to use, embed and sell software tools developed by others. These costs are being amortized ratably based on the projected revenue associated with these purchased or licensed tools and products or the straight-line method over five years, whichever method results in a higher level of annual amortization. Amortization expense related to purchased software amounted to $563, $886 and $620 in 1998, 1997 and 1996, respectively. Accumulated amortization related to purchased software totaled $1,341 and $778 at December 31, 1998 and 1997, respectively. (See notes 1(k) and 3.) (f) Research and Development and Capitalized Software Development Costs Prior to the determination of technological feasibility for software tools, research and development costs are expensed as incurred. After determination of technological feasibility and before the release of the software tools for general availability, the development costs related to such tools are capitalized. These costs are being amortized ratably based on the projected revenue associated with these tools or the straight-line method over five years, whichever method results in a higher level of annual amortization. The Company capitalized $1,249, $467 and $789 of software development costs in 1998, 1997 and 1996, respectively. Amortization expense related to capitalized software development costs was $207, $101 and $39 in 1998, 1997 and 1996, respectively. Accumulated amortization related to capitalized software development costs totaled $329 and $122 at December 31, 1998 and 1997, respectively. (See note 1(k). (g) Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided on the straight-line method over an estimated useful life of five years. Amortization of leasehold improvements is recorded over the F-8 49 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) shorter of the lives of the related assets or the lease terms and is included in depreciation expense. (h) Excess of Cost Over Net Assets of Businesses Acquired The excess of cost over net assets of businesses acquired (goodwill) is being amortized using the straight-line method over 15 years. Amortization expense related to acquired businesses amounted to $672, $672, and $682 in 1998, 1997 and 1996, respectively. At each balance sheet date, the Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. Accumulated amortization related to goodwill totaled $2,611 and $1,939 at December 31, 1998 and 1997, respectively. (See note 3.) (i) Long-Lived Assets and Long-Lived Assets to be Disposed of The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) Stock Option Plans Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense to be recognized over the related vesting period would generally be determined on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants as if the fair-value-based method F-9 50 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS 123 (see note 8). (k) Non-recurring Charges The Company incurred the following non-recurring charges during 1998 and the fourth quarter of 1997:
Fourth Quarter 1998 1997 ------- --------- Obsolete software and other write-offs $ - $ 4,650 Purchased in-process research and development - 1,746 Merger costs 1,060 - ------- ------- $ 1,060 $ 6,396 ======= =======
Merger costs resulting from the Company's acquisition of HUBLink Inc., which was accounted for as a pooling of interests, include investment banking fees, legal and accounting fees, travel and severance costs (see note 3). The total merger costs were $1,060 during 1998. During the fourth quarter of 1997, in conjunction with a change in executive management, the Company ceased selling and distributing, and consequently wrote-off, certain third-party and internally developed software, related project costs and accounts receivable, and other costs that no longer contributed to the Company's redefined business direction stated in note 1 (a) above. In connection with the acquisition of Criterion Health Strategies, Inc. during 1997, the Company recorded a non-recurring charge related to purchased in-process research and development costs for integration software tools. The amount of the non-recurring charge was equal to the estimated current fair value of specifically identified technologies for which technological feasibility had not yet been established pursuant to Statement of Financial Accounting Standards No. 86, Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed and for which future alternative uses did not exist at the time of acquisition (see note 3). (l) Income Taxes The Company accounts for income taxes using the asset and liability approach in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred income taxes are recognized F-10 51 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Additionally, the effect on deferred taxes of a change in tax rates is recognized in earnings in the period that includes the enactment date. Income tax benefits are not recognized unless ultimate realization of such benefits is more likely than not. (m) Net Earnings (Loss) Per Share of Common Stock On December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which prescribes the calculation methodology and financial reporting requirements for basic and diluted earnings per share. Basic earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding. Diluted earnings (loss) per common share available to common shareholders are based on the weighted average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options, determined using the treasury stock method. (n) Operating Segments On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. During 1998, the Company operated in two segments: (i) the licensing of integration software products and performance of related integration services and (ii) the providing of consulting services related to information systems integration for healthcare organizations (see note 13). (o) Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. The Company has no "other comprehensive income" to report for the three years ended December 31, 1998. F-11 52 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (2) Related Party Transactions Matria Healthcare, Inc. ("Matria"), which was formed in a merger involving Healthdyne in March 1996, provides certain legal, tax, data processing, personnel and accounting services to the Company. Amounts charged to the Company related to such services, which have been reflected as general and administrative expenses in the accompanying consolidated statements of operations, were $10, $13, and $51 in 1998, 1997 and 1996, respectively. Charges for services provided by Matria to the Company are generally determined based on estimates of actual time in providing such services to the Company using actual costs without markup. To the extent that charges for such services and for costs incurred by Matria on the Company's behalf are allocations of common expenses, such allocations are based on one or more criteria such as asset or revenue size, relative transaction volume, employee headcounts, facility size and other relevant criteria. The Company believes that such allocation methods result in reasonable approximations of the common expenses related to the Company. (3) Acquisitions and Dispositions Integrated Services Group On December 31, 1998, the Company disposed of assets comprising of its Integrated Services Group ("ISG") to Superior Consulting Company, Inc., a wholly-owned subsidiary of Superior Consultant Holdings Corporation, in exchange for cash of $2.2 million, of which $650 is held in escrow until certain conditions are met. ISG provides consulting services related to information systems integration for healthcare organizations. ISG comprised approximately 12.3% of the Company's revenue in 1998 (see note 13). There was no gain or loss resulting from this disposal. HUBLink, Inc. In May, 1998, the Company issued 2.9 million shares of its common stock in exchange for all outstanding common stock of HUBLink, Inc. ("HUBLink") of Columbus, Ohio, an integration software tool company. This business combination has been accounted for as a pooling-of-interests combination. Merger costs totaling $1,060 resulting from the Company's acquisition of HUBLink include investment banking fees, legal and accounting fees, travel and severance costs. The financial position and results of operations of the Company have been restated for all periods prior to the Merger to give retroactive effect to the Merger. F-12 53 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below:
Years ended December 31, ------------------------- 1997 1996 ----------- --------- Revenue: HIE $15,552 $16,151 HUBLink 2,512 4,092 ------- ------- Combined $18,064 $20,243 ======= ======= Net earnings (loss): HIE $(6,166) $ 1,183 HUBLink (2,430) (1,076) ------- ------- Combined $(8,596) $ 107 ======= =======
The 1998 pre-merger revenue and net earnings for HUBLink were $2,584 and $234, respectively. Criterion Health Strategies, Inc. In October 1994, the Company committed to make certain loans to Criterion Health Strategies, Inc. ("CHS") of Nashville, Tennessee, a provider of data management software tools and services, with such loans being convertible into a 64% equity ownership interest in CHS. During December 1995, Massey Burch Capital Corp. ("Massey Burch") agreed to share equally HIE's funding commitment to CHS in exchange for half of HIE's potential equity ownership interest in CHS. In December 1996, HIE acquired an option (the "Option") to purchase Massey Burch's potential equity ownership interest in CHS. In June 1997, the existing and potential equity ownership interests of various parties in CHS were restructured and all equity ownership interests in CHS held by persons other than HIE and Massey Burch were canceled in exchange for the grant of options to purchase 199 shares of HIE common stock to CHS executive management and other employees at the fair value on the date of grant. On December 31, 1997, HIE exercised the Option to acquire Massey Burch's 50% equity ownership interest in CHS, bringing HIE's equity ownership interest in CHS to 100%, in exchange for 416 shares of HIE common stock and warrants to purchase 50 shares of HIE common stock for $1.59 per share exercisable through December 2003. The warrants were still outstanding at December 31, 1998. Prior to HIE's acquisition of the majority interest in CHS, the Company's share of the losses of CHS was netted against notes receivable from CHS and shown as losses of affiliate in the accompanying consolidated financial statements. CHS' results of operations were included in the Company's consolidated statements of operations beginning on January 1, 1998. F-13 54 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) The acquisition of CHS was accounted for using the purchase method of accounting. The total purchase price of CHS was $3,200. The acquisition resulted in purchased in-process research and development of $1,746, which was expensed in 1997, purchased software of $715 and additional cost over net assets acquired of $336. The Company also assumed an $840 obligation to a third party for the exclusive use of a software tool in the healthcare industry. The purchased in-process research and development charge relates to a back-end software integration tool research and development project designed to facilitate the analysis of data stored in various disparate information systems. The amount of this purchased in-process research and development charge was determined based on the present value of management's estimate of the future cash flows (discounted by a risk-adjusted weighted average cost of capital of 45%) expected to be derived from the new software integration tool for its estimated eight-year life subsequent to the completion of the project, after consideration of the fair value of the other CHS assets acquired. At the date of acquisition, management estimated that this research and development project was approximately 50% complete measured in terms of the total estimated man-hours for the project. During 1998, this project was completed with costs incurred of $150. The following pro forma financial information presents the combined results of operations of HIE and CHS as if the acquisition had occurred as of January 1, 1997, after giving effect to certain adjustments, including the amortization of goodwill and purchased software and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had HIE and CHS constituted a single entity during 1997.
Year ended December 31, 1997 ----------------- Revenue $ 18,834 ======== Net loss $ (9,146) ======== Net loss per share $ (0.40) ========
F-14 55 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (4) Property and Equipment Property and equipment are summarized as follows:
December 31, ---------------------- 1998 1997 ---------- --------- Machinery and equipment $ 2,067 $ 1,842 Furniture and fixtures 484 471 Equipment under capital leases 1,822 978 Leasehold improvements 110 99 -------- ------- 4,483 3,390 Less accumulated depreciation and amortization 2,194 1,451 -------- ------- Net property and equipment $ 2,289 $ 1,939 ======== =======
(5) Accrued Liabilities Accrued liabilities are summarized as follows:
December 31, --------------------- 1998 1997 ---------- -------- Benefits and compensation $ 1,061 $ 739 Project completion costs 352 1,076 License fee - 560 Other 305 446 ------- ------ $ 1,718 $2,821 ======= ======
F-15 56 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (6) Long-term Debt Long-term debt consists of the following:
December 31, -------------------------- 1998 1997 ------------- ---------- Lines of credit (see below) $ 2,492 $ 970 Promissory note payable - paid-off in 1998 - 3,309 Note payable to commercial banking institution - paid-off in 1998 - 350 Note payable to HUBLink shareholder - extinguished through issuance of common stock - 285 Obligations under capital leases - equipment leases; interest ranging from 9% to 17% with various monthly payments and maturing at various dates through September 1, 2003 1,061 577 ------- ------- 3,553 5,491 Less current installments 2,911 5,175 ------- ------- Long-term debt, excluding current installments $ 642 $ 316 ======= =======
Approximate aggregate minimum annual payments due on long-term debt and capital leases subsequent to December 31, 1998 are as follows: 1999, $2,911; 2000, $402; 2001, $198; 2002, $27; and 2003, $15. In August 1998, the Company entered into a new $5.0 million line of credit of which $3.0 million was available for borrowing under the borrowing base limitation at December 31, 1998. The balance outstanding under the line of credit was $2.5 million on December 31, 1998. The line of credit is for a one-year term, with borrowings bearing interest at the bank's prime rate plus 1% (8.75% at December 31, 1998). The Company plans to maintain the $5.0 million line of credit for unanticipated needs and financial flexibility. On December 31, 1997, the Company had a $2.0 million line of credit agreement with a bank, which was subsequently replaced by the $5.0 million line of credit mentioned above. Amounts outstanding under this agreement carried interest at the bank's prime rate plus 1% (9.50% at December 31, 1997) and were payable on demand. No amounts were outstanding on December 31, 1997. HUBLink had a $1.0 million line of credit agreement with another bank with an outstanding balance of $970 at December 31, 1997. Amounts outstanding under this agreement carried interest at .375% above the bank's prime rate (8.5% at December 31, 1997). On May 12, 1998, the outstanding balance on this line of credit was paid in full and the line of credit was terminated. F-16 57 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (7) Income Taxes The provision for income taxes includes income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future and any increase or decrease in the valuation allowance for deferred income tax assets. A reconciliation of the expected income tax (expense) benefit (based on the U.S. Federal statutory rate) to the actual income tax (expense) benefit is as follows:
Years ended December, 31 ----------------------------------- 1998 1997 1996 ----------- ----------- ------- Computed expected income tax (expense) benefit $ (524) $ 3,008 $ (37) Goodwill amortization and other non- deductible expenses (261) (266) (178) Losses in excess of allowable carrybacks - (2,689) (465) Utilization of prior year financial statement losses 367 - 680 Losses of affiliate - (53) - Decrease in valuation allowance 416 - - Other 2 - - ------- ------- ----- $ - $ - $ - ======= ======= =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax asset are as follows:
December, 31 --------------------- 1998 1997 ----------- ------- Deferred tax assets (liabilities): Allowance for doubtful accounts $ 70 $ 61 Accruals and reserves not deducted for tax purposes 13 213 Depreciation and amortization (140) (172) Net operating loss carryforwards 6,441 5,942 Revenue recognition - 272 Tax credit carryforwards 260 266 ----- ------ Total gross deferred tax asset 6,644 6,582 Less valuation allowance 6,166 6,582 ------ ------ Net deferred tax asset, included in other current assets $ 478 $ - ====== ======
F-17 58 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) Under SFAS 109, deferred income tax assets and liabilities are recognized for differences between the financial statement carrying amounts and the tax bases of assets and liabilities which will result in future deductible or taxable amounts and for net operating loss and tax credit carryforwards. A valuation allowance is then established to reduce the deferred income tax assets to the level at which it is "more likely than not" that any tax benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss and tax credit carryforwards depends on having sufficient taxable income within the carryback and carryforward periods. Sources of taxable income that may allow for the realization of tax benefits include (1) taxable income in the current year or prior years that is available through carryback, (2) future taxable income that will result from the reversal of existing taxable temporary differences, and (3) future taxable income generated by future operations. The valuation allowance for deferred income tax assets at December 31, 1998 and 1997 was $6,166 and $6,582, respectively. The net (decrease) increase in the valuation allowance for deferred income tax assets for the years ended December 31, 1998 and 1997 was $(416) and $3,422, respectively. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of the deferred tax assets, net of existing valuation allowances at December 31, 1998. At December 31, 1998, the Company had the following estimated credits and net operating loss carryforwards available for Federal income tax reporting purposes to be applied against future taxable income and tax liabilities:
Net Foreign Business operating Year of expiration credit credit loss ------------------ ------------ ----------- ---------- 1999 $ 4 $ - $ - 2000 23 - - 2007 - 3 5 2008 - 38 838 2009 - - 2,069 2010 - 49 1,938 2011 - 34 7,160 2012 - 109 5,616 2018 - - 777 ----- ------- --------- $ 27 $ 233 $ 18,403 ===== ======= =========
The net operating loss carryforward of $18,403 includes deductions of approximately $3,878 related to the exercise of stock options, which will be credited to additional paid-in capital when recognized. The alternative minimum tax net operating loss carryforward approximates the regular net operating loss carryforward. A portion of the net operating F-18 59 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) loss (approximately $8,165) is limited by Section 382 of the Internal Revenue Code of 1986, as amended, to an annual utilization of approximately $749. (8) Shareholders' Equity Public and Private Offerings On November 4, 1996, the Company sold 2,750 shares of its common stock and received proceeds of approximately $10,325, net of offering expenses of $634. In 1997 and 1996, HUBLink issued 280 and 169 equivalent shares of HIE common stock and received proceeds of $1,239 and $729, respectively, net of offering costs of $20 in each year. Stock Option Plans The Company maintains five stock option plans for the benefit of key employees, nonemployee directors, and certain directors and employees of Healthdyne (with such Healthdyne-related plan being established pursuant to the Spin-off). A total of 5,268 shares of the Company's common stock have been authorized for issuance under these plans. Most of the stock options granted under these plans are exercisable in equal amounts over three years and expire in six years. Other terms of options granted under the plans are determined by the Stock Option Committee of the Company's Board of Directors, subject to the terms of the respective plans. The per share weighted-average fair values of stock options granted during 1998, 1997 and 1996 were $1.20, $1.14 and $2.02, respectively, on the date of grant using the Black- Scholes option-pricing model with the following assumptions:
1998 1997 1996 ---------- --------- -------- Expected volatility 44% 40% 41% Expected dividend yield none none none Risk-free interest rate 5.30% 5.50% 6.25% Expected life of stock options 5 years 5 years 5 years
F-19 60 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) The Company applies APB Opinion No. 25 in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements, unless the stock options were granted at an exercise price below fair value at the grant date, in which case the difference between the exercise price and the fair value has been recorded as deferred compensation cost and is being amortized over the relevant period of benefit. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's reported net earnings (loss) and related per share amounts would have been changed to the pro forma amounts indicated below:
1998 1997 1996 ------- ------- ------- Net earnings (loss): As reported $ 1,498 $(8,596) $ 107 Pro forma 649 (9,301) (717) Diluted net earnings (loss) per share: As reported $ 0.06 $ (0.38) $ 0.01 Pro forma 0.03 (0.41) (0.04)
A summary of stock option transactions under these plans during 1998, 1997 and 1996 is shown below:
Option price per share ---------------------- Number Weighted of shares Range average --------- ----- ------- Options outstanding at December 31, 1995 3,027 $0.23 - $3.28 $1.05 Granted 1,072 $2.37 - $5.88 $4.31 Exercised (905) $0.23 - $1.50 $0.50 Canceled or expired (253) $0.23 - $4.81 $2.96 ------- Options outstanding at December 31, 1996 2,941 $0.23 - $5.88 $2.24 Granted 1,242 $0.25 - $5.88 $2.74 Exercised (193) $0.23 - $1.50 $0.93 Canceled or expired (499) $1.31 - $5.88 $3.81 ------- Options outstanding at December 31, 1997 3,491 $0.23 - $5.88 $2.21 Granted 1,240 $2.00 - $3.95 $2.60 Exercised (1,092) $0.23 - $4.47 $1.38 Canceled or expired (1,167) $1.50 - $5.50 $3.20 ------- Options outstanding at December 31, 1998 2,472 $0.23 - $5.88 $2.27 ======= Options exercisable at December 31, 1996 1,334 $0.23 - $3.16 $1.09 ======= Options exercisable at December 31, 1997 1,511 $0.23 - $5.88 $1.57 ======= Options exercisable at December 31, 1998 1,303 $0.23 - $5.88 $1.85 =======
F-20 61 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) The following table summarizes information about stock options outstanding and exercisable at December 31, 1998:
Options outstanding Options exercisable ------------------- --------------------- Weighted average Weighted Weighted Number remaining average Number average outstanding contractual exercise exercisable exercise Classification at 12/31/98 life (months) price at 12/31/98 price -------------- ----------- ------------- ----- ----------- ----- Healthdyne-related 219 28 $0.50 219 $0.50 Directors 198 43 $2.33 132 $1.84 Others 2,055 55 $2.46 952 $2.17 ----- --- 2,472 52 $2.27 1,303 $1.85 ===== =====
Non-Employee Directors Stock Plan On October 20, 1995, the Company established a stock plan for non-employee directors whereby such directors may elect to receive all or a portion of their annual retainer fee in unrestricted shares of the Company's common stock. As of December 31, 1998, none of the 250 shares reserved for this plan have been issued. Stock Purchase Plan On July 1, 1996, the Company commenced an employee stock purchase plan for all eligible employees of HIE and designated subsidiaries. Participants may use up to 10% of their compensation to purchase the Company's common stock through payroll deductions for 85% of the lower of the beginning or ending stock price on a quarterly basis. Of the 200 shares of the Company's common stock reserved for issuance under this plan, 92 shares, 82 shares and 14 shares were issued during the years ended December 31, 1998, 1997 and 1996, respectively. Shareholder Rights Plan On October 20, 1995, the Company's Board of Directors declared a dividend distribution of one purchase right for each share of the Company's common stock outstanding as of October 30, 1995. If a person or group acquires beneficial ownership of 15% or more of the Company's outstanding common stock or announces a tender offer or exchange that would result in the acquisition of a beneficial ownership right of 20% or more of the Company's outstanding common stock, the rights detach from the common stock and are distributed to shareholders as separate securities. Each right entitles its holder to purchase F-21 62 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) one one-hundredth of a share (a unit) of Series A Cumulative Preferred Stock, at a purchase price of $50 per unit. The rights, which do not have voting power, expire on October 23, 2005 unless previously distributed and may be redeemed by the Company in whole at a price of $0.01 per right at any time before and within 10 days after their distribution. If the Company is acquired in a merger or other business combination transaction, or 50% of its assets or earnings power are sold at any time after the rights become exercisable, the rights entitle a holder to buy a number of common shares of the acquiring company having a market value of twice the exercise price of the right. If a person acquires 20% of the Company's common stock or if a 15% or larger holder merges with the Company and the common stock is not changed or exchanged in such merger, or engages in self-dealing transactions with the Company, each right not owned by such holder becomes exercisable for the number of common shares of the Company having a market value of twice the exercise price of the right. (9) Employee Benefit Plans The Company and its subsidiaries, Healthcare Communications, Inc. ("HCI") and HUBLink, each previously maintained a 401(k) defined contribution plan for the benefit of their employees. Prior to June 1, 1996, the Company's obligation for contributions under its 401(k) plan was limited to the lesser of (i) one-half of each participant's contribution but not more than 2.5% of the participant's compensation or (ii) 20% of the Company's pretax earnings before consideration of this contribution. Subsequent to June 1, 1996, Company contributions are discretionary. The HCI plan provided for HCI contributions equal to one-half of each participant's contributions up to 3% of the participant's base salary. The HUBLink plan provided for discretionary matching contributions. During 1998, the Company merged the HCI 401(k) plan and the HUBLink 401(k) plan into HIE's 401(k) plan. Contributions to the plans included in the consolidated statements of operations were $212, $72, and $79 in 1998, 1997 and 1996, respectively. (10) Fair Value of Financial Instruments The Company uses financial instruments in the normal course of its business. The carrying values of cash equivalents, accounts receivable, accounts payable, and deferred revenue approximate fair value due to the short-term maturities of these assets and liabilities. The Company estimates that the carrying amounts of the Company's long-term debt approximates the fair value based on the current rates offered to the Company for debt of the same remaining maturities. F-22 63 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) (11) Commitments The Company is committed under non-cancelable operating lease and capital lease agreements for facilities and equipment which expire at various dates through 2003. The future minimum annual lease payments under these leases are summarized as follows:
Operating Capital Year ending December 31, Leases Leases ------------------------ --------- ---------- 1999 $ 725 $ 529 2000 477 451 2001 243 211 2002 193 32 2003 32 18 Thereafter - - ------ ------ $1,670 1,241 ====== Less interest 180 ------ Present value of future minimum capital lease payments $1,061 ======
Rental expense for operating leases (excluding those with lease terms of a month or less that were not renewed) was $962, $918 and $770 in 1998, 1997 and 1996, respectively. (12) Major Customers One distributor accounted for 18% of the Company's total revenue and 40% of its software revenue in 1998. No single distributor accounted for more than 10% of the Company's revenue in either 1997 or 1996. No single customer accounted for more than 10% of the Company's revenue in either 1998 or 1997. One customer accounted for approximately 20% of the Company's revenue in 1996. Revenue from international sales was less than 10% of the Company's revenue in each of 1998, 1997 and 1996. (13) Segment Information The Company's reportable segments are strategic business units that offer different products and services. During 1998, the Company operated in two segments: (i) the licensing of integration software products and performance of related integration services ("Software") and (ii) the providing of consulting services related to information systems integration for healthcare organizations ("Consulting"). Prior to 1998, the Consulting F-23 64 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (In thousands, except per share amounts) business did not separately exist. On December 31, 1998, the Consulting business was sold (see note 3). The accounting policies of the segments are the same as those described in note 1. The Company evaluates performance of the segments based on revenues and operating earnings (loss) of the segments. Segment information for the year ended December 31, 1998 is as follows:
1998 -------- Revenue: Software $ 23,830 Consulting 3,354 -------- Total revenue $ 27,184 ======== Operating earnings (loss): Software $ 2,059 Consulting (460) -------- Operating earnings (loss) $ 1,599 ========
F-24 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The section of the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") captioned "Proposal 1. Election of Directors" identifies members of the Board of Directors of the Company and nominees, and is incorporated in this Item 10 by reference. See also "Executive Officers of the Company" appearing in Part I hereof. The section of the 1999 Proxy Statement captioned "Other Matters -- Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated in this Item 10 by reference. ITEM 11. EXECUTIVE COMPENSATION The information in the section of the 1999 Proxy Statement captioned "Executive Compensation and Other Information" is incorporated in this Item 11 by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the section of the 1999 Proxy Statement captioned "Security Ownership of Certain Beneficial Owners and Management" is incorporated in this Item 12 by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the section of the 1999 Proxy Statement captioned "Certain Relationships and Related Transactions" is incorporated in this Item 13 by reference. 41 66 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the Company and its subsidiaries and report of independent auditors thereon are included as Pages F-1 through F-24 of this Annual Report on Form 10-K: Independent Auditors' Report Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements (a)(2) The following supporting financial statement schedule and report of independent auditors thereon are included as part of this Annual Report on Form 10-K: Independent Auditors' Report Schedule II - Valuation and Qualifying Accounts All other Schedules are omitted because the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. (a)(3) Exhibits: Periodic reports, proxy statements and other information filed by HIE with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and the public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site (http://www.sec.gov) that makes available reports, proxy statements and other information regarding HIE. HIE's SEC file number reference is Commission File No. 0-27056.
Exhibit Number Description - ------ ----------- 2.1 Distribution Agreement between Healthdyne and HIE (filed as Exhibit 2.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 3.1 Amended and Restated Articles of Incorporation of HIE.
42 67
3.2 By-Laws of HIE, as amended (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 4 Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank (filed as Exhibit 4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.1 Tax Indemnity Agreement between Healthdyne and HIE (filed as Exhibit 10.2 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.2 Tax Disaffiliation Agreement between Healthdyne and HIE (filed as Exhibit 10.3 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.3 License Agreement between Healthdyne and HIE (filed as Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.4 Option Agreement dated December 18, 1996 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-27056), and incorporated herein by reference). 10.5 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. and Brenton L. Teveit (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 13, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.6 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. and J. Edward Pearson, Jr. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 13, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.7 First Amendment to Option Agreement dated December 31, 1997 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.8 Amended and Restated Stock Purchase Warrant dated December 31, 1997 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.9 Agreement and Plan of Merger dated May 12, 1998 by and among HIE, HIE Acquisition Corporation, HUBLink, Inc. and Mark D. Shary (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated May 12, 1998 (Commission File No. 0-27056), and incorporated herein by reference).
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10.10 Private Placement and Registration Rights Agreement dated as of May 12, 1998 among HIE and each of the HUBLink Parties (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 12, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.11 Loan and Security Agreement dated August 3, 1998 between HIE and Silicon Valley Bank. 10.12 Loan Modification Agreement dated November 13, 1998 between HIE and Silicon Valley Bank. 10.13 Value Added Marketing Agreement dated September 8, 1998 between HIE and HBO & Company of Georgia (Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary of the Commission pursuant to Rule 24b-2 under the Exchange Act. The redacted material was filed separately with the Commission.). 10.14 First Amendment to Value Added Marketing Agreement dated March 3, 1999 between HIE and HBO & Company of Georgia. 10.15* HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.16* Form of Director Agreement under HIE Adjustment Stock Option Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.17* HIE Stock Option Plan I (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.18* Form of Agreement under HIE Stock Option Plan I (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.19* HIE Restated Stock Option Plan Two (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.20* Form of Agreement under HIE Restated Stock Option Plan Two (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.21* Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.22* Form of Agreement under Non-employee Director Stock Option Plan (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.23* Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference).
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10.24 Nonqualified Stock Option Plan (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 11 Statement of Computation of Per Share Earnings (Loss). 21 Subsidiaries of the Company. 23 Consent of KPMG LLP. 27 Financial Data Schedule (for purposes of the Commission only).
- ------------ * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (b) Reports on Form 8-K: During the quarter ended December 31, 1998, the Company did not file a Current Report on Form 8-K. 45 70 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HIE, INC. By:/s/ Robert I. Murrie --------------------------------- Robert I. Murrie President and Chief Executive Officer (Principal Executive Officer) March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Parker H. Petit Chairman of the Board of Directors March 31, 1999 - --------------------------------- Parker H. Petit /s/ Robert I. Murrie Director, President and Chief Executive Officer March 31, 1999 - --------------------------------- (Principal Executive Officer) Robert I. Murrie /s/ J. Edward Pearson, Jr. Senior Vice President - Finance, Chief Financial March 31, 1999 - --------------------------------- Officer, Treasurer and Secretary (Principal J. Edward Pearson, Jr. Financial Officer) /s/ Joseph A. Blankenship Vice President - Controller, Chief Accounting March 31, 1999 - --------------------------------- Officer, Assistant Treasurer and Assistant Joseph A. Blankenship Secretary (Principal Accounting Officer)
46 71 /s/ Joseph G. Bleser Director March 31, 1999 - --------------------------------- Joseph G. Bleser /s/ J. Terry Dewberry Director March 31, 1999 - --------------------------------- J. Terry Dewberry /s/ William J. Gresham, Jr. Director March 31, 1999 - --------------------------------- William J. Gresham, Jr. /s/ Charles R. Hatcher, Jr. Director March 31, 1999 - --------------------------------- Charles R. Hatcher, Jr. /s/ Scott A. Jones Director March 26, 1999 - --------------------------------- Scott A. Jones /s/ John W. Lawless Director March 24, 1999 - --------------------------------- John W. Lawless /s/ Carl E. Sanders Director March 31, 1999 - --------------------------------- Carl E. Sanders /s/ Mark D. Shary Director March 23, 1999 - --------------------------------- Mark D. Shary /s/ Donald W. Weber Director March 31, 1999 - --------------------------------- Donald W. Weber
47 72 Independent Auditors' Report The Board of Directors and Shareholders HIE, Inc. Under date of January 26, 1999, we reported on the consolidated balance sheets of HIE, Inc. (formerly Healthdyne Information Enterprises, Inc.) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, as contained in the annual report on Form 10-K for the year 1998. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Atlanta, Georgia January 26, 1999 73 SCHEDULE II HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands)
Balance Balance at Charged to at Beginning Costs and Other End of of Period Expenses Additions Deductions Period ------------ ------------ ------------ ------------ ------------- Allowance for Doubtful Accounts: Year Ended December 31, 1996 $ 85 $ 383 $ -- $ 143 $ 325 Year Ended December 31, 1997 $ 325 $ 445 $ -- $ 144 $ 626 Year Ended December 31, 1998 $ 626 $ 270 $ -- $ 176 $ 720
74 Index to Exhibits Periodic reports, proxy statements and other information filed by HIE with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and the public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site (http://www.sec.gov) that makes available reports, proxy statements and other information regarding HIE. HIE's SEC file number reference is Commission File No. 0-27056. Exhibit Number Description - ------ ----------- 2.1 Distribution Agreement between Healthdyne and HIE (filed as Exhibit 2.1 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 3.1 Amended and Restated Articles of Incorporation of HIE. 3.2 By-Laws of HIE, as amended (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 4 Rights Agreement dated October 23, 1995 between HIE and SunTrust Bank (filed as Exhibit 4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.1 Tax Indemnity Agreement between Healthdyne and HIE (filed as Exhibit 10.2 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.2 Tax Disaffiliation Agreement between Healthdyne and HIE (filed as Exhibit 10.3 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.3 License Agreement between Healthdyne and HIE (filed as Exhibit 10.4 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.4 Option Agreement dated December 18, 1996 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 0-27056), and incorporated herein by reference). 10.5 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. and Brenton L. Teveit (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 13, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.6 Agreement dated June 13, 1997 between HIE, Criterion Health Strategies, Inc. and J. Edward Pearson, Jr. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated June 13, 1997 (Commission File No. 0-27056), and incorporated herein by reference).
75 10.7 First Amendment to Option Agreement dated December 31, 1997 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.8 Amended and Restated Stock Purchase Warrant dated December 31, 1997 between HIE and The Southern Venture Fund II, L.P. (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.9 Agreement and Plan of Merger dated May 12, 1998 by and among HIE, HIE Acquisition Corporation, HUBLink, Inc. and Mark D. Shary (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated May 12, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.10 Private Placement and Registration Rights Agreement dated as of May 12, 1998 among HIE and each of the HUBLink Parties (filed as Exhibit 2.2 to the Company's Current Report on Form 8-K dated May 12, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.11 Loan and Security Agreement dated August 3, 1998 between HIE and Silicon Valley Bank. 10.12 Loan Modification Agreement dated November 13, 1998 between HIE and Silicon Valley Bank. 10.13 Value Added Marketing Agreement dated September 8, 1998 between HIE and HBO & Company of Georgia (Portions of this exhibit have been redacted and are subject to a confidential treatment request filed with the Secretary of the Commission pursuant to Rule 24b-2 under the Exchange Act. The redacted material was filed separately with the Commission.). 10.14 First Amendment to Value Added Marketing Agreement dated March 3, 1999 between HIE and HBO & Company of Georgia. 10.15* HIE Adjustment Stock Option Plan (filed as Exhibit 10.5 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.16* Form of Director Agreement under HIE Adjustment Stock Option Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.17* HIE Stock Option Plan I (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 10.18* Form of Agreement under HIE Stock Option Plan I (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.19* HIE Restated Stock Option Plan Two (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference).
76 10.20* Form of Agreement under HIE Restated Stock Option Plan Two (filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.21* Non-employee Director Stock Option Plan (filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.22* Form of Agreement under Non-employee Director Stock Option Plan (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 0-27056), and incorporated herein by reference). 10.23* Non-employee Directors Stock Plan (filed as Exhibit 10.9 to the Company's Registration Statement on Form S-1 (Registration No. 33-96478), and incorporated herein by reference). 10.24 Nonqualified Stock Option Plan (filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (Commission File No. 0-27056), and incorporated herein by reference). 11 Statement of Computation of Per Share Earnings (Loss). 21 Subsidiaries of the Company. 23 Consent of KPMG LLP. 27 Financial Data Schedule (for purposes of the Commission only).
- ------------ * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. EX-3.1 2 AMENDED & RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HEALTHDYNE INFORMATION ENTERPRISES, INC. The original Articles of Incorporation of Healthdyne Information Enterprises, Inc., a Georgia corporation, as filed with the Secretary of State of Georgia on June 15, 1994 and as amended from time to time, are being hereby restated and amended as permitted by Section 14-2-1006 and 14-2-1007 of the Georgia Business Corporation Code by deleting said original Articles of Incorporation in their entirety and restating and amending said Articles of Incorporation. The Restated and Amended Articles of Incorporation were approved by a sufficient vote of the Board of Directors as permitted by Section 14-2-1002 of the Georgia Business Corporation Code. Shareholder approval was not required. The original Articles of Incorporation are restated and amended as follows: AMENDED AND RESTATED ARTICLES OF INCORPORATION OF HIE, INC. 1. The name of the Corporation is HIE, INC. and its control number is K415299. 2. The aggregate number of shares which the Corporation shall have the authority to issue is seventy million (70,000,000) shares, of which fifty million (50,000,000) shall be shares of common stock, par value $.01 per share; and twenty million (20,000,000) shall be shares of preferred stock, without par value, the board of directors being hereby authorized to divide such shares of preferred stock into classes and into shares within any class or classes to determine the designation and the number of shares of any class or series and the relative voting, dividend, liquidation and other rights, preferences and limitations of the shares of any class or series, including, but not limited to, classes or series of preferred stock: (a) entitling the holders thereof to cumulative, noncumulative or partially cumulative dividends, or to no dividends; (b) entitling the holders thereof to receive dividends payable on a parity with, or in preference to, the dividends payable on any other class or series of capital stock of the Corporation; 2 (c) entitling the holders thereof to preferential rights upon the liquidation of, or upon any distribution of the assets of, the Corporation; (d) convertible, at the option of the holder or of the Corporation or both, into shares of any other class or classes of capital stock of the Corporation or of any series of the same or any other class or classes; (e) redeemable, in whole or in part, at the option of the Corporation, in cash, bonds or other property, at such price or prices, within such period or periods, and under such conditions as the board of directors shall so provide, including provision for the creation of a sinking fund for the redemption thereof; (f) lacking voting rights or having limited voting rights or enjoying special or multiple voting rights; and (g) Series A Cumulative Preferred Stock. Of the authorized preferred stock of the corporation, 500,000 of such shares shall be designated "Series A Cumulative Preferred Stock" and shall have the following designations, preferences, limitations and relative rights: (A) Certain Definitions. Unless the context otherwise requires, the terms defined in this subparagraph (A) shall have, for all purposes of this Paragraph (g), the meanings herein specified: (i) "Board of Directors" shall mean the Board of Directors of the Corporation and, to the extent permitted by law, any committee of the Board of Directors authorized to exercise the powers of the Board of Directors. (ii) "Common Stock" shall mean the common stock, par value $.01 per share, of the Corporation, which term shall include, where appropriate, in the case of a reclassification, recapitalization or other changes in such Common Stock, or in the case of a consolidation or merger of this Corporation with or into another corporation, such consideration to which a holder of a share of Common Stock would have been entitled upon the occurrence of such event. (iii) "Series A Preferred Stock" shall mean the five hundred thousand (500,000) shares of Series A Cumulative Preferred Stock, without par value, of the Corporation. (iv) "Junior Stock" shall mean the Common Stock and any other class or series of stock of the Corporation not entitled to receive any dividends unless all dividends required to have been paid or declared and set apart for payment on the Series A Preferred Stock and any Parity Stock shall have been so paid or declared and set apart for payment and, for purposes of subparagraph (C) below, shall mean any class or series of stock of the Corporation not entitled to receive any assets upon liquidation, dissolution or winding up of the affairs of -2- 3 the Corporation until the Series A Preferred Stock and any Parity Stock shall have received the entire amount to which such stock is entitled upon such liquidation, dissolution or winding up. (v) "Parity Stock" shall mean any class or series of stock of the Corporation entitled to receive payment of dividends on a parity with the Series A Preferred Stock or entitled to receive assets upon liquidation, dissolution or winding up of the affairs of the Corporation on a parity with the Series A Preferred Stock. (vi) "Rights Declaration Date" shall mean October 30, 1995. (vii) "Semiannual Dividend Payment Date" shall mean the first day of March and September in each year. (vi) "Senior Stock" shall mean any class or series of stock of the Corporation ranking senior to the Series A Preferred Stock and to any Parity Stock in respect of the right to receive dividends or in respect of the right to participate in any distribution upon liquidation, dissolution or winding up of the affairs of the Corporation. (B) Dividend and Distributions. (i) Subject to the prior preferences and other rights of any Senior Stock, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, semiannual dividends payable in cash at the rate hereinafter fixed in this subparagraph (B) on each Semiannual Dividend Payment Date, commencing on the first Semiannual Dividend Payment Date after the first issuance of any shares or fractions of a share of Series A Preferred Stock. Semiannual dividends on the Series A Preferred Stock shall be payable to holders of record of the Series A Preferred Stock on the respective date not exceeding 50 days preceding such Semiannual Dividend Payment Date as shall be fixed for this purpose by the Board of Directors, in an amount per share (rounded to the nearest cent) equal to the greater of (V) $.05 or (W) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Semiannual Dividend Payment Date, or, with respect to the first Semiannual Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after the Rights Declaration Date (X) declare any dividend on Common Stock payable in shares of Common Stock, (Y) subdivide the outstanding Common Stock, or (Z) combine the outstanding Common Stock into a smaller number of shares, then in each such case the -3- 4 amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (W) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (ii) No dividend or other distribution may be declared or paid on the Common Stock (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock) unless, coincidentally with the declaration of such dividend or such other distribution, the dividend payable on the Series A Preferred Stock pursuant to clause (W) of subsection (i) above is declared and the consideration sufficient for the payment thereof set apart from funds legally available therefor so as to be available then and on the next Semiannual Dividend Payment Date for the payment in full thereof and for no other purpose. In the event no dividend or distribution shall have been declared on the Common Stock during the period between any Semiannual Dividend Payment Date and the next subsequent Semiannual Dividend Payment Date, a dividend of $.05 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Semiannual Dividend Payment Date. (iii) Dividends on each outstanding share of Series A Preferred Stock shall begin to accrue and be cumulative from the Semiannual Dividend Payment Date next following the respective date of issuance of such share unless the date of such issuance is a Semiannual Dividend Payment Date, in which case dividends shall accrue and be cumulative from the date of issuance. (iv) The holders of shares of the Series A Preferred Stock shall not be entitled to receive any dividends thereon other than the cash dividends specified in this subparagraph (B). Unpaid dividends shall be cumulative and shall accrue, whether or not declared by the Board of Directors, until the date such dividends are paid. Accrued but unpaid dividends on the Series A Preferred Stock shall not bear interest. Dividends on account of arrears for any past dividend periods may be declared and paid at any time, without reference to any Semiannual Dividend Payment Date, to holders of record of the Series A Preferred Stock on such date, not more than 50 days preceding the payment date thereof, as may be fixed by the Board of Directors. (v) So long as any shares of Series A Preferred Stock shall be outstanding, the Corporation shall not declare or pay on any Junior Stock any dividend in cash or property of any sort, nor shall the Corporation make any distribution on any Junior Stock, or set aside any assets for any such purposes, nor shall any Junior Stock be purchased, redeemed or otherwise acquired by the Corporation or any of its subsidiaries, nor shall any monies be paid, set aside for payment or made available for a sinking fund for the purchase or redemption of -4- 5 any Junior Stock, unless and until all dividends to which the holders of the Series A Preferred Stock and any Parity Stock shall have been entitled for all current and all previous dividend periods shall have been paid or declared and the consideration sufficient for the payment thereof set apart so as to be available for the payment thereof and for no other purpose; provided, however, that nothing contained in this subsection (v) shall prevent the payment of dividends solely in Junior Stock or the repurchase, redemption or other acquisition solely through the issuance of Junior Stock. (C) Distributions Upon Liquidation, Dissolution or Winding Up. Subject to the prior payment in full of the preferential amounts to which any Senior Stock is entitled, in the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of shares of the Series A Preferred Stock shall be entitled to receive from the assets of the Corporation available for distribution to the shareholders the sum of $50 per share, together with the amount of all cumulative dividends accrued and unpaid thereon to and including the date of such liquidation, dissolution or winding up, before any payment or distribution shall be made to the holders of any Junior Stock of the Corporation, which payment shall be made pari passu to any such payment made to the holders, if any, of any Parity Stock. The holders of the Series A Preferred Stock shall be entitled to no other or further distribution of or participation in any remaining assets of the Corporation after receiving the liquidation price described above. If, upon distribution of the Corporation's assets in liquidation, dissolution or winding up, the assets of the Corporation to be distributed among the holders of the Series A Preferred Stock and to all holders of any Parity Stock shall be insufficient to permit payment in full to such holders of the preferential amounts to which they are entitled, then the entire assets of the Corporation to be distributed to holders of the Series A Preferred Stock and such Parity Stock shall be distributed pro rata to such holders based upon the aggregate of the full preferential amounts to which the shares of Series A Preferred Stock and such Parity Stock would otherwise respectively be entitled. Neither the consolidation or merger of the Corporation with or into any other corporation or corporations nor the sale, transfer, or lease of all or substantially all the assets of the Corporation shall itself be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this subparagraph (C). (D) Voting Rights. (i) Except as otherwise expressly provided in this subparagraph (D) or as otherwise required by law, the holders of shares of Series A Preferred Stock shall vote together with the holders of the Common Stock (and the holders of any other class or series of the Corporation's stock entitled to vote with the holders of the Common Stock) as a single class for the election of directors and on all other matters coming before any meeting of the shareholders of the Corporation or otherwise to be acted upon by the shareholders of the Corporation, subject to any voting rights granted or which may be granted to -5- 6 holders of any other class or series of the preferred stock of the Corporation. Each share of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the shareholders of the Corporation. (ii) In addition to the voting rights set forth above, if and when dividends payable on the Series A Preferred Stock shall be in arrears in an amount equivalent to or exceeding three (3) full semiannual dividends thereon, whether or not consecutive, the holders of shares of the Series A Preferred Stock, voting separately as a class, shall be entitled to elect two directors to the Board of Directors. Directors so elected shall thereupon become additional directors of the Corporation and the authorized number of directors of the Corporation shall thereupon be automatically increased by such number. During such times that the holders of the Series A Preferred Stock, voting as a class, shall be entitled to elect such additional directors as provided herein, the holders of the Series A Preferred Stock shall not be entitled to participate in the election of any other directors with the holders of shares of the Common Stock or any other class or classes of stock who are entitled to vote for the election of directors. Such right of the holders of shares of the Series A Preferred Stock who are entitled to vote in such manner to elect such additional directors may be exercised until all dividends in default on the Series A Preferred Stock shall have been paid or declared and the consideration sufficient for the payment in full thereof set apart so as to be available for the payment thereof and for no other purpose; when said dividends shall have been so paid or declared and set apart, such right to elect two directors shall terminate, subject to the vesting of such voting rights in the event of any such future default or defaults in the payment of dividends. Whenever the holders of shares of the Series A Preferred Stock who are entitled to vote in such manner shall be divested of such voting rights by reason of the payment or the declaration and setting apart of consideration sufficient for the payment in full of the dividends then in default, the terms of office of the directors elected as such by the holders of shares of the Series A Preferred Stock shall forthwith terminate and the number of the directors of the Corporation shall be reduced correspondingly. At any time after such voting rights shall so have vested in the holders of shares of the Series A Preferred Stock who are entitled to vote in such manner, the Secretary of the Corporation may, and upon the written request of the holders of record of not less than 75% of the outstanding shares of Series A Preferred Stock, addressed to him at the principal office of the Corporation, shall, call a special meeting of the holders of shares of the Series A Preferred Stock who are entitled to vote in such manner for the election of the directors to be elected by them, such meeting to be held within 10 days after the earlier of such call or the delivery of such request and at the place and upon the notice provided by the By-laws of the Corporation for the holding of meetings of shareholders, except that the Secretary of the Corporation shall not be required to call such a special meeting if the -6- 7 request for such call is received less than 45 days prior to the date fixed for the next annual meeting of shareholders. (E) Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount (as such amount may have been previously adjusted by reason of the prior occurrence(s) of any such events)) by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (F) Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock to be created by amendment of the Articles of Incorporation of the Corporation adopted by resolution of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. (G) Preemptive Rights. The holders of shares of the Series A Preferred Stock shall not have any preemptive right to subscribe for or purchase any shares of stock or any other securities which may be issued by the Corporation. (H) No Redemption. The shares of Series A Preferred Stock shall not be redeemable. (I) Amendment. Without the consent of the holders of at least 75% of the shares of Series A Preferred Stock at the time outstanding, either in writing or by vote at a meeting called for that purpose at which the holders of the Series A Preferred Stock shall vote as a class, neither the Articles of Incorporation of the Corporation nor any resolution of the Board of Directors establishing and -7- 8 designating a series of preferred stock and determining the relative rights and preferences thereof shall be changed so as to alter in an adverse manner the designations, preferences, limitations and rights of holders of the Series A Preferred Stock. (J) Fractional Shares. The Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. (K) Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any designations, preferences, limitations or relative rights, other than those specifically set forth in the Articles of Incorporation of this Corporation. (L) Severability of Provisions. If any right, preference or limitation of the Series A Preferred Stock set forth in this Paragraph (g) (as such Paragraph may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other rights, preferences and limitations set forth in this Paragraph (as so amended) which can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall, nevertheless, remain in full force and effect, and no right, preference or limitation herein set forth shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein. 3. The address of the initial registered office of the Corporation shall be 1850 Parkway Place, 12th Floor, Marietta, Cobb County, Georgia 30067 and its initial registered agent at such address shall be J. Brent Burkey. 4. The name and address of the incorporator is J. Brent Burkey, 1850 Parkway Place, 12th Floor, Marietta, Georgia 30067. 5. The mailing address of the initial principal office of the Corporation is 1850 Parkway Place, 12th Floor, Marietta, Georgia 30067. -8- 9 6. (A) Beginning with the election of directors in 1998, the Board of Directors of the Corporation shall consist of nine (9) natural persons of the age of eighteen years or over and shall be divided into three classes, Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of directors and any remaining directors shall be included within such class or classes as the Board of Directors shall designate, provided that the difference in the number of directors in any two classes shall not exceed one (1). At the annual meeting of shareholders in 1998, Class I Directors shall be elected for a one-year term, Class II Directors for a two-year term and Class III Directors for a three-year term. At each succeeding annual meeting of shareholders beginning in 1999, successors to the class of directors whose term expires at the annual meeting shall be elected for a three-year term. (B) Any director of the Corporation, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least two-thirds of the shares entitled to vote for the election of directors, voting together as a single class. No director may be removed without cause. (C) The number of directors constituting the Board of Directors may be increased or decreased from time to time by the affirmative vote of a number of directors equal to at least a majority of the then authorized number of directors (regardless of any vacancies then existing). If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible. No decrease in the number of directors shall affect the term of any director. (D) Any vacancy on the Board of Directors, including any vacancy occurring by reason of any increase in the number of directors, shall be filled only by the Board of Directors acting by the affirmative vote of a majority of the directors then remaining in office. If the directors remaining in office constitute fewer than a quorum of the Board, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. (E) The provisions of this Article 6 are subject in all respects to the rights, privileges and preferences of the holders of any class of capital stock of the Corporation other than Common Stock. (F) This Article 6 may be modified, amended or repealed only by the affirmative vote of the holders of at least two-thirds of the shares entitled to vote on such modification, amendment or repeal; any provision in the Articles of Incorporation inconsistent with this Article 6, or any provision in the Articles of Incorporation or the By-laws of the Corporation purporting to interpret or define the terms contained in this Article 6, may be adopted only by the affirmative vote of the holders of at least two-thirds of the shares entitled to vote on such provision; provided that, the Board of Directors may adopt By-laws implementing or interpreting this Article 6. -9- 10 7. No director shall have any personal liability to the Corporation or its shareholders for monetary damages for breach of duty of care or other duty as a director, by reason of any act or omission occurring subsequent to the date when this provision becomes effective, except that this provision shall not eliminate or limit the liability of a director for (a) any appropriation, in violation of his duties, of any business opportunity of the Corporation; (b) acts or omissions which involve intentional misconduct or a knowing violation of law; (c) liabilities of a director imposed by Section 14-2-832 of the Georgia Business Corporation Code; or (d) any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director or officer of the Corporation for or with respect to any acts or omissions of such director or officer occurring prior to such amendment or repeal; provided, however, that if further elimination or limitation of the liability of directors is provided for or permitted by the Georgia Business Corporation Code or other applicable law at any time, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent then so provided for or permitted by the Georgia Business Corporation Code or other applicable law this Article 7 shall be deemed to include and have incorporated herein provision for such further elimination or limitation of liability of a director effective upon the enabling provision therefor in the Georgia Business Corporation Code or other applicable law becoming effective. Without limiting the foregoing, if the Georgia Business Corporation Code is amended to permit the limitation of a director's liability under clause (d) above to the amount of the financial benefit received by a director to which he is not entitled, then any liability of a director of the Corporation not eliminated because of said clause (d) shall be limited to the amount of any financial benefit received by the director to which he is not entitled. -10- 11 IN WITNESS WHEREOF, HEALTHDYNE INFORMATION ENTERPRISES, INC. has caused its duly authorized officer to execute these Articles of Amendment as of this 24th day of February, 1999. HEALTHDYNE INFORMATION ENTERPRISES, INC. By: /s/ J. Edward Pearson, Jr. ------------------------------------------------ Title: Senior Vice President - Finance, Chief Financial Officer, Secretary and Treasurer -11- EX-10.11 3 LOAN & SECURITY AGREEMENT 1 EXHIBIT 10.11 LOAN AND SECURITY AGREEMENT BETWEEN SILICON VALLEY BANK AND HEALTHDYNE INFORMATION ENTERPRISES, INC. 2 TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION................................................................................. 1 ---------------------------- 1.1. Definitions........................................................................................ 1 ----------- 1.2. Accounting and Other Terms......................................................................... 8 -------------------------- 2. LOAN AND TERMS OF PAYMENT.................................................................................... 8 ------------------------- 2.1. Credit Extensions.................................................................................. 8 ----------------- 2.1.1. Revolving Line.......................................................................... 9 -------------- 2.1.2. Letters of Credit....................................................................... 9 ----------------- 2.2. Overadvances....................................................................................... 10 ------------ 2.3. Interest Rates, Payments, and Calculations......................................................... 10 ------------------------------------------ 2.4. Crediting Payments................................................................................. 11 ------------------ 2.5. Fees............................................................................................... 11 ---- 2.6. Additional Costs................................................................................... 11 ---------------- 2.7. Term............................................................................................... 12 ---- 3. CONDITIONS OF LOANS.......................................................................................... 12 ------------------- 3.1. Conditions Precedent to Initial Credit Extension................................................... 12 ------------------------------------------------ 3.2. Conditions Precedent to all Credit Extensions...................................................... 13 --------------------------------------------- 4. CREATION OF SECURITY INTEREST................................................................................ 13 ----------------------------- 4.1. Grant of Security Interest......................................................................... 13 -------------------------- 4.2. Delivery of Additional Documentation Required...................................................... 14 --------------------------------------------- 4.3. Right to Inspect................................................................................... 14 ---------------- 5. REPRESENTATIONS AND WARRANTIES............................................................................... 14 ------------------------------ 5.1. Due Organization and Qualification................................................................. 14 ---------------------------------- 5.2. Due Authorization; No Conflict..................................................................... 14 ------------------------------
-i- 3 5.3. No Prior Encumbrances.............................................................................. 15 --------------------- 5.4. Bona Fide Eligible Accounts........................................................................ 15 --------------------------- 5.5. Merchantable Inventory............................................................................. 15 ---------------------- 5.6. Intellectual Property.............................................................................. 15 --------------------- 5.7. Name; Location of Chief Executive Office........................................................... 15 ---------------------------------------- 5.8. Litigation......................................................................................... 15 ---------- 5.9. No Material Adverse Change in Financial Statements................................................. 16 -------------------------------------------------- 5.10. Solvency.......................................................................................... 16 -------- 5.11. Regulatory Compliance............................................................................. 16 --------------------- 5.12. Environmental Condition........................................................................... 16 ----------------------- 5.13. Taxes............................................................................................. 17 ----- 5.14. Subsidiaries...................................................................................... 17 ------------ 5.15. Government Consents............................................................................... 17 ------------------- 5.16. Full Disclosure................................................................................... 17 --------------- 6. AFFIRMATIVE COVENANTS........................................................................................ 17 --------------------- 6.1. Good Standing...................................................................................... 17 ------------- 6.2. Government Compliance.............................................................................. 18 --------------------- 6.3. Financial Statements, Reports, Certificates........................................................ 18 ------------------------------------------- 6.4. Inventory; Returns................................................................................. 19 ------------------ 6.5. Taxes.............................................................................................. 19 ----- 6.6. Insurance.......................................................................................... 19 --------- 6.7. Principal Depository............................................................................... 19 -------------------- 6.8. Adjusted Quick Ratio............................................................................... 20 -------------------- 6.9. Profitability...................................................................................... 20 ------------- 6.10. Registration of Intellectual Property Rights...................................................... 20 --------------------------------------------
-ii- 4 6.11. Further Assurances................................................................................ 20 ------------------ 6.12. Merger of Subsidiaries............................................................................ 21 ---------------------- 7. NEGATIVE COVENANTS........................................................................................... 21 ------------------ 7.1. Dispositions....................................................................................... 21 ------------ 7.2. Changes in Business, Ownership, or Management, Business Locations.................................. 21 ----------------------------------------------------------------- 7.3. Mergers or Acquisitions............................................................................ 21 ----------------------- 7.4. Indebtedness....................................................................................... 22 ------------ 7.5. Encumbrances....................................................................................... 22 ------------ 7.6. Distributions...................................................................................... 22 ------------- 7.7. Investments........................................................................................ 22 ----------- 7.8. Transactions with Affiliates....................................................................... 22 ---------------------------- 7.9. Intellectual Property Agreements................................................................... 22 -------------------------------- 7.10. Inventory......................................................................................... 22 --------- 7.11. Compliance........................................................................................ 22 ---------- 8. EVENTS OF DEFAULT............................................................................................ 23 ----------------- 8.1. Payment Default.................................................................................... 23 --------------- 8.2. Covenant Default................................................................................... 23 ---------------- 8.3. Material Adverse Change............................................................................ 23 ----------------------- 8.4. Attachment......................................................................................... 23 ---------- 8.5. Insolvency......................................................................................... 24 ---------- 8.6. Other Agreements................................................................................... 24 ---------------- 8.7. Subordinated Debt.................................................................................. 24 ----------------- 8.8. Judgments.......................................................................................... 24 --------- 8.9. Misrepresentations................................................................................. 24 ------------------
-iii- 5 9. BANK'S RIGHTS AND REMEDIES................................................................................... 25 -------------------------- 9.1. Rights and Remedies................................................................................ 25 ------------------- 9.2. Power of Attorney.................................................................................. 26 ----------------- 9.3. Accounts Collection................................................................................ 27 ------------------- 9.4. Bank Expenses...................................................................................... 27 ------------- 9.5. Bank's Liability for Collateral.................................................................... 27 ------------------------------- 9.6. Remedies Cumulative................................................................................ 28 ------------------- 9.7. Demand; Protest.................................................................................... 28 --------------- 10. NOTICES..................................................................................................... 28 ------- 11. CHOICE OF LAW AND VENUE..................................................................................... 28 ----------------------- 12. GENERAL PROVISIONS.......................................................................................... 29 ------------------ 12.1. Successors and Assigns............................................................................ 29 ---------------------- 12.2. Indemnification................................................................................... 29 --------------- 12.3. Time of Essence................................................................................... 30 --------------- 12.4. Severability of Provisions........................................................................ 30 -------------------------- 12.5. Amendments in Writing, Integration................................................................ 30 ---------------------------------- 12.6. Counterparts...................................................................................... 30 ------------ 12.7. Survival.......................................................................................... 30 --------
Exhibits - -------- Exhibit A Collateral Exhibit B Loan Payment/Advance Telephone Request Form Exhibit C Borrowing Base Certificate Exhibit D Compliance Certificate Schedules - --------- Schedule 5.7 Subsidiary Locations
-iv- 6 This LOAN AND SECURITY AGREEMENT is entered into as of August 3, 1998, by and between SILICON VALLEY BANK, a California chartered bank ("Bank") and HEALTHDYNE INFORMATION ENTERPRISES, INC., a Georgia corporation ("Borrower"), with its principal place of business and chief executive office at 1850 Parkway Place, Suite 1100, Marietta, Georgia 30067. RECITALS Borrower wishes to obtain credit from time to time from Bank, and Bank desires to extend credit to Borrower. This Agreement sets forth the terms on which Bank will advance credit to Borrower, and Borrower will repay the amounts owing to Bank. AGREEMENT The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1. Definitions. As used in this Agreement, the following terms shall have the following definitions: "ACCOUNTS" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower or a Subsidiary arising out of the sale or lease of goods (including, without limitation, the licensing of software and other technology) or the rendering of services by Borrower or a Subsidiary, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower or a Subsidiary and Borrower's and its Subsidiaries' books relating to any of the foregoing. "ADVANCE" OR "ADVANCES" means a loan advance under the Committed Revolving Line. "AFFILIATE" means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, such Persons, managers and members. "BANK EXPENSES" means all reasonable costs or expenses (including reasonable attorneys' fees and expenses) incurred in connection with the preparation, negotiation, administration, and enforcement of the Loan Documents; and Bank's reasonable attorneys' fees and expenses incurred in amending, enforcing or defending the Loan Documents, (including fees and expenses of appeal or review, or those incurred in any Insolvency Proceeding) whether or not suit is brought. "BORROWER'S BOOKS" means all of Borrower's books and records including, without limitation: ledgers; records concerning Borrower's assets or liabilities, the Collateral, 7 business operations or financial condition; and all computer programs, or tape files, and the equipment, containing such information. "BORROWING BASE" means an amount equal to eighty percent (80%) of Eligible Accounts, as determined by Bank with reference to the most recent Borrowing Base Certificate delivered by Borrower, subject to change based upon the initial audit of Borrower's accounts receivables. "BUSINESS DAY" means any day that is not a Saturday, Sunday, or other day on which banks in the State of Georgia are authorized or required to close. "CLOSING DATE" means the date of this Agreement. "CODE" means the Georgia Uniform Commercial Code. "COLLATERAL" means the property described on Exhibit A attached hereto. "COMMITTED REVOLVING LINE" means a credit extension of up to Five Million Dollars ($5,000,000). "CONTINGENT OBLIGATION" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another, including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit issued for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term "Contingent Obligation" shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement. "COPYRIGHTS" means any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held. "CREDIT EXTENSION" means each Advance, Letter of Credit, or any other extension of credit by Bank for the benefit of Borrower hereunder. -2- 8 "CURRENT ASSETS" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current assets on the consolidated balance sheet of Borrower and its Subsidiaries as at such date. "CURRENT LIABILITIES" means, as of any applicable date, all amounts that should, in accordance with GAAP, be included as current liabilities on the consolidated balance sheet of Borrower and its Subsidiaries, as at such date, plus, to the extent not already included therein, all outstanding Credit Extensions made under this Agreement, including all Indebtedness that is payable upon demand or within one year from the date of determination thereof unless such Indebtedness is renewable or extendable at the option of Borrower or any Subsidiary to a date more than one year from the date of determination, but excluding Subordinated Debt. "ELIGIBLE ACCOUNTS" means those Accounts that arise in the ordinary course of the business of Borrower and its Subsidiaries that comply with all of Borrower's representations and warranties to Bank set forth in Section 5.4; provided, that standards of eligibility may be fixed and revised from time to time by Bank in Bank's reasonable judgment and upon thirty (30) days prior notification thereof to Borrower in accordance with the provisions hereof. Unless otherwise agreed to by Bank in writing, Eligible Accounts shall not include the following: (a) Accounts that the account debtor has failed to pay within ninety (90) days of invoice date; (b) Accounts with respect to an account debtor, fifty percent (50%) of whose Accounts the account debtor has failed to pay within ninety (90) days of invoice date; (c) Accounts with respect to an account debtor, including Affiliates, whose total obligations to Borrower and its Subsidiaries exceed twenty-five percent (25%) of all Accounts, to the extent such obligations exceed the aforementioned percentage, except as approved in writing by Bank; (d) Accounts with respect to which the account debtors do not have their principal place of business in the United States, to the extent such foreign Accounts exceed twenty-five percent (25%) of the lesser of the: (i) Borrowing Base; or (ii) the Committed Revolving Line; (e) Accounts with respect to which the account debtor is a federal, state, or local governmental entity or any department, agency, or instrumentality thereof; (f) Accounts with respect to which Borrower or a Subsidiary is liable to the account debtor, but only to the extent of any amounts owing to the account debtor (sometimes referred to as "contra" accounts, e.g. accounts payable, customer deposits, credit accounts etc.); (g) Accounts generated by demonstration or promotional equipment, or with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the account debtor may be conditional; -3- 9 (h) Accounts with respect to which the account debtor is an Affiliate, officer, employee, or agent of Borrower or a Subsidiary; (i) Accounts with respect to which the account debtor disputes liability or makes any claim with respect thereto as to which Bank believes, in its sole discretion, that there may be a basis for dispute (but only to the extent of the amount subject to such dispute or claim), or is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; and (j) Accounts the collection of which Bank reasonably determines to be doubtful. "EQUIPMENT" means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" means the Employment Retirement Income Security Act of 1974, as amended, and the regulations thereunder. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "INDEBTEDNESS" means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations. "INSOLVENCY PROCEEDING" means any proceeding commenced by or against any person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. "INTELLECTUAL PROPERTY" means (a) Copyrights, Trademarks, Patents, and Mask Works; (b) Any and all trade secrets, and any and all intellectual property rights in computer software and computer software products now or hereafter existing, created, acquired or held; (c) Any and all design rights which may be available to Borrower now or hereafter existing, created, acquired or held; (d) Any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for -4- 10 and collect such damages for said use or infringement of the intellectual property rights identified above; (e) All licenses or other rights to use any of the Copyrights, Patents, Trademarks, or Mask Works, and all license fees and royalties arising from such use to the extent permitted by such license or rights; (f) All amendments, renewals and extensions of any of the Copyrights, Trademarks, Patents, or Mask Works; and (g) All proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing. "INVENTORY" means all present and future inventory in which Borrower or a Subsidiary has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or at any time hereafter owned by or in the custody or possession, actual or constructive, of Borrower or a Subsidiary, including such inventory as is temporarily out of its custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above. "INVESTMENT" means any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "LETTER OF CREDIT" means a letter of credit or similar undertaking issued by Bank pursuant to Section 2.1.2. "LETTER OF CREDIT RESERVE" has the meaning set forth in Section 2.1.2. "LIEN" means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" means, collectively, this Agreement, any note or notes executed by Borrower, that certain Unconditional Guaranty of even date from HUBLink, Inc. in favor of Bank, that certain Security Agreement of even date by and between Bank and HUBLink, that certain Stock Pledge Agreement of even date by and between Bank and HUBLink, Inc. and any other present or future agreement entered into by Borrower or HUBLink for the benefit of Bank in connection with this Agreement, all as amended, extended or restated from time to time. -5- 11 "MASK WORKS" means all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; "MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the business operations or condition (financial or otherwise) of Borrower and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the Obligations or otherwise perform its obligations under the Loan Documents. "MATURITY DATE" means the Revolving Maturity Date. "NEGOTIABLE COLLATERAL" means all of Borrower's present and future letters of credit of which it is a beneficiary, notes, drafts, instruments, securities, documents of title, and chattel paper. "NET INCOME (LOSS)" shall mean, for any fiscal period of Borrower, the net income (or loss) of Borrower on a consolidated basis for such period (taken as a single accounting period) determined in conformity with GAAP, but excluding therefrom (to the extent otherwise included therein and without duplication); (i) any gains or losses, together with any related provisions for taxes, realized by Borrower upon any sale of its assets other than in the ordinary course of business, (ii) any other non-recurring gains or losses, including, but not limited to, one-time write-offs from acquisitions, and (iii) any income or loss of any other Person acquired prior to the date such other Person becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or all or substantially all of such other Person's assets are acquired by the Borrower. "OBLIGATIONS" means all debt, principal, interest, Bank Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement or any other agreement, whether absolute or contingent, due or to become due, now existing or hereafter arising, including any interest that accrues after the commencement of an Insolvency Proceeding and including any debt, liability, or obligation owing from Borrower to others that Bank may have obtained by assignment or otherwise. "PATENTS" means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "PAYMENT DATE" means the last calendar day of each month commencing on the first such date after the Closing Date and ending on the Revolving Maturity Date. "PERMITTED INDEBTEDNESS" means: (a) Indebtedness of Borrower in favor of Bank arising under this Agreement or any other Loan Document; (b) Indebtedness existing on the Closing Date and disclosed in the Schedule; (c) Subordinated Debt; -6- 12 (d) Indebtedness to trade creditors incurred in the ordinary course of business; and (e) Indebtedness secured by Permitted Liens, so long as no Event of Default exists and as long as the incurrence of any such Indebtedness does not cause an Event of Default. "PERMITTED INVESTMENT" means: (a) Investments existing on the Closing Date disclosed in the Schedule; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (ii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) certificates of deposit maturing no more than one (1) year from the date of investment therein issued by Bank. "PERMITTED LIENS" means the following: (a) Any Liens existing on the Closing Date and disclosed in the Schedule or arising under this Agreement or the other Loan Documents; (b) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and as to which adequate reserves are maintained on Borrower's Books in accordance with GAAP, provided the same have no priority over any of Bank's security interests; (c) Liens (i) upon or in any Equipment acquired or held by Borrower or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition of such Equipment, or (ii) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment; and (d) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (a) through (c) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase. "PERSON" means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency. "PRIME RATE" means the variable rate of interest, per annum, most recently announced by Bank, as its "prime rate," whether or not such announced rate is the lowest rate available from Bank. -7- 13 "QUICK ASSETS" means, as of any applicable date, the consolidated cash, cash equivalents, accounts receivable and investments with maturities of fewer than 90 days of Borrower determined in accordance with GAAP. "RESPONSIBLE OFFICER" means each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE" means August 2, 1999. "SCHEDULE" means the schedule of exceptions attached hereto, if any. "SUBORDINATED DEBT" means any debt incurred by Borrower that is subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank (and identified as being such by Borrower and Bank). "SUBSIDIARY" means with respect to any Person, corporation, partnership, company association, joint venture, or any other business entity of which more than fifty percent (50%) of the voting stock or other equity interests is owned or controlled, directly or indirectly, by such Person or one or more Affiliates of such Person. "TOTAL LIABILITIES" means as of any applicable date, any date as of which the amount thereof shall be determined, all obligations that should, in accordance with GAAP be classified as liabilities on the consolidated balance sheet of Borrower, including in any event all Indebtedness, but specifically excluding Subordinated Debt. "TRADEMARKS" means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Assignor connected with and symbolized by such trademarks. 1.2. Accounting and Other Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP and all calculations and determinations made hereunder shall be made in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. The terms "including"/ "includes" shall always be read as meaning "including (or includes) without limitation", when used herein or in any other Loan Document. 2. LOAN AND TERMS OF PAYMENT 2.1. Credit Extensions. Borrower promises to pay to the order of Bank, in lawful money of the United States of America, the aggregate unpaid principal amount of all Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay interest on the unpaid principal amount of such Advances at rates in accordance with the terms hereof. 2.1.1. Revolving Line. (a) Subject to and upon the terms and conditions of this Agreement, Bank agrees to make Advances to Borrower in an aggregate outstanding amount not to exceed (i) the -8- 14 Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the face amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit). Subject to the terms and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and reborrowed at any time during the term of this Agreement. (b) Whenever Borrower desires an Advance, Borrower will notify Bank by facsimile transmission or telephone no later than 3:00 p.m. Atlanta, Georgia time, on the Business Day that the Advance is to be made. Each such notification shall be promptly confirmed by a Payment/Advance Form in substantially the form of Exhibit B hereto. Bank is authorized to make Advances under this Agreement, based upon instructions received from a Responsible Officer or a designee of a Responsible Officer, or without instructions if in Bank's discretion such Advances are necessary to meet Obligations which have become due and remain unpaid. Bank shall be entitled to rely on any telephonic notice given by a person who Bank reasonably believes to be a Responsible Officer or a designee thereof, and Borrower shall indemnify and hold Bank harmless for any damages or loss suffered by Bank as a result of such reliance. Bank will credit the amount of Advances made under this Section 2.1 to Borrower's deposit account. (c) The Committed Revolving Line shall terminate on the Revolving Maturity Date, at which time all Advances under this Section 2.1 and other amounts due under this Agreement (except as otherwise expressly specified herein) shall be immediately due and payable. 2.1.2. Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for the account of Borrower in an aggregate outstanding face amount not to exceed (i) the lesser of the Committed Revolving Line or the Borrowing Base, whichever is less, minus (ii) the then outstanding principal balance of the Advances; provided that the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit and any Letter of Credit Reserve) shall not in any case exceed Five Million Dollars ($5,000,000). Each Letter of Credit shall have an expire date no later than the Revolving Maturity Date. All Letters of Credit shall be, in form and substance, acceptable to Bank in its sole discretion and shall be subject to the terms and conditions of Bank's form of standard Application and Letter of Credit Agreement. (b) The obligation of Borrower to immediately reimburse Bank for drawings made under Letters of Credit shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement and such Letters of Credit, under all circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss, cost, expense or liability, including, without limitation, reasonable attorneys' fees, arising out of or in connection with any Letters of Credit. (c) Borrower may request that Bank issue a Letter of Credit payable in a currency other than United States Dollars. If a demand for payment is made under any such Letter of Credit, Bank shall treat such demand as an Advance to Borrower of the equivalent of -9- 15 the amount thereof (plus cable charges) in United States currency at the then prevailing rate of exchange in San Francisco, California, for sales of that other currency for cable transfer to the country of which it is the currency. (d) Upon the issuance of any letter of credit payable in a currency other than United States Dollars, Bank shall create a reserve under the Committed Revolving Line for letters of credit against fluctuations in currency exchange rates, in an amount equal to ten percent (10%) of the face amount of such letter of credit. The amount of such reserve may be amended by Bank from time to time to account for fluctuations in the exchange rate. The availability of funds under the Committed Revolving Line shall be reduced by the amount of such reserve for so long as such letter of credit remains outstanding. 2.2. Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Bank pursuant to Section 2.1.1 and 2.1.2 of this Agreement is greater than the lesser of (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of such excess. 2.3. Interest Rates, Payments, and Calculations. (a) Interest Rate. Except as set forth in Section 2.3(b), any Advances shall bear interest, on the average daily balance thereof, at a per annum rate equal to one (1.0) percentage point above the Prime Rate. (b) Default Rate. All Obligations shall bear interest, from and after the occurrence of an Event of Default, at a rate equal to five (5) percentage points above the interest rate applicable immediately prior to the occurrence of the Event of Default. (c) Payments. Interest hereunder shall be due and payable on each Payment Date. Borrower hereby authorizes Bank to debit any accounts with Bank, including, without limitation, Account Number _____________________ for payments of principal and interest due on the Obligations and any other amounts owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank has made against Borrower's accounts. Any such debits against Borrower's accounts in no way shall be deemed a set-off. (d) Computation. In the event the Prime Rate is changed from time to time hereafter, the applicable rate of interest hereunder shall be increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is changed, by an amount equal to such change in the Prime Rate. All interest chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year for the actual number of days elapsed. 2.4. Crediting Payments. Prior to the occurrence of an Event of Default, Bank shall credit a wire transfer of funds, check or other item of payment to such deposit account or Obligation as Borrower specifies. After the occurrence of an Event of Default, the receipt by Bank of any wire transfer of funds, check, or other item of payment, whether directed to Borrower's deposit account with Bank or to the Obligations or otherwise, shall be immediately applied to conditionally reduce Obligations, but shall not be considered a payment in respect of the Obligations unless such payment is of immediately available federal funds or unless and until -10- 16 such check or other item of payment is honored when presented for payment. Notwithstanding anything to the contrary contained herein, any wire transfer or payment received by Bank after 12:00 noon Pacific time shall be deemed to have been received by Bank as of the opening of business on the immediately following Business Day. Whenever any payment to Bank under the Loan Documents would otherwise be due (except by reason of acceleration) on a date that is not a Business Day, such payment shall instead be due on the next Business Day, and additional fees or interest, as the case may be, shall accrue and be payable for the period of such extension. 2.5. Fees. Borrower shall pay to Bank the following: (a) Facility Fee. A Facility Fee equal to one-half of one percent (.5%) of $3,000,000 of the Committed Revolving Line ($15,000) shall be due on the Closing Date and an additional Facility Fee of one-half of one percent (.5%) on the remaining $2,000,000 of the Committed Revolving Line ($10,000) if the aggregate Credit Extensions ever exceed $3,000,000, to be paid on the date such aggregate Credit Extensions exceed $3,000,000. All such Facility Fees shall be fully earned and non-refundable when paid. (b) Financial Examination and Appraisal Fees. Bank's customary fees and out-of-pocket expenses for Bank's audits of Borrower's or its Subsidiaries' Accounts, and for each appraisal of Collateral and financial analysis and examination of Borrower or a Subsidiary performed from time to time by Bank or its agents. (c) Bank Expenses. Upon demand from Bank, including, without limitation, upon the date hereof, all Bank Expenses incurred through the date hereof, including reasonable attorneys' fees and expenses and, after the date hereof, all Bank Expenses, including reasonable attorneys' fees and expenses, as and when they become due. 2.6. Additional Costs. In case any law, regulation, treaty or official directive or the interpretation or application thereof by any court or any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (a) subjects Bank to any tax with respect to payments of principal or interest or any other amounts payable hereunder by Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of Bank imposed by the United States of America or any political subdivision thereof); (b) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, Bank; or (c) imposes upon Bank any other condition with respect to its performance under this Agreement, and the result of any of the foregoing is to increase the cost to Bank, reduce the income receivable by Bank or impose any expense upon Bank with respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by Bank of a statement of the amount and -11- 17 setting forth Bank's calculation thereof, all in reasonable detail, which statement shall be deemed true and correct absent manifest error. 2.7. Term. (a) Except as otherwise set forth herein, this Agreement shall become effective on the Closing Date and, subject to Section 12.7, shall continue in full force and effect for a term ending on the Revolving Maturity Date. Notwithstanding the foregoing, Bank shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default. Notwithstanding termination of this Agreement, Bank's lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. (b) At such time as (i) the Bank is no longer obligated under this Agreement (whether by the terms hereof or as a result of a release of such obligations by Borrower) to make any further Credit Extensions, and (ii) all obligations have been indefeasibly paid and satisfied in full, this Agreement and the Loan Documents shall terminate and Bank shall release or cause to be released, at the Borrower's cost and expense, all Liens granted by Borrower to Bank under the Loan Documents as security for any of the Obligations; provided, however, that any and all indemnity obligations of Borrower arising under this Agreement or any other Loan Documents shall survive the termination of this Agreement or such other Loan Documents. 3. CONDITIONS OF LOANS 3.1. Conditions Precedent to Initial Credit Extension. The obligation of Bank to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, the following: (a) this Agreement; (b) a certificate of the Secretary of Borrower with respect to articles, bylaws, incumbency and resolutions authorizing the execution and delivery of this Agreement; (c) negative pledge agreement covering Intellectual Property; (d) financing statements (Forms UCC-1); (e) insurance certificate; (f) payment of the fees and Bank Expenses then due specified in Section 2.5 hereof; (g) Certificate of Foreign Qualification (if applicable); (h) such other documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate; -12- 18 (i) execution and delivery of each Loan Document by Borrower or HUBLink, Inc.; (j) delivery of a legal opinion from Borrower's legal counsel in form and substance acceptable to Bank; (k) Bank shall have completed to its satisfaction an audit of Borrower's or its Subsidiaries' Accounts or Borrower's financial status; and (l) release of all UCC financing statements in favor of Commerica, N.A. as secured party. 3.2. Conditions Precedent to all Credit Extensions. The obligation of Bank to make each Credit Extension, including the initial Credit Extension, is further subject to the following conditions: (a) timely receipt by Bank of the Payment/Advance Form as provided in Section 2.1; and (b) the representations and warranties contained in Section 5 shall be true and correct in all material respects on and as of the date of such Payment/Advance Form and on the effective date of each Credit Extension as though made at and as of each such date, and no Event of Default shall have occurred and be continuing, or would result from such Credit Extension. The making of each Credit Extension shall be deemed to be a representation and warranty by Borrower on the date of such Credit Extension as to the accuracy of the facts referred to in this Section 3.2(b). 4. CREATION OF SECURITY INTEREST 4.1. Grant of Security Interest. Borrower grants and pledges to Bank a continuing security interest in all presently existing and hereafter acquired or arising Collateral in order to secure prompt payment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Except as set forth in the Schedule, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in Collateral acquired after the date hereof. Borrower acknowledges that Bank may place a "hold" on any Deposit Account pledged as Collateral to secure the Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding. 4.2. Delivery of Additional Documentation Required. Borrower shall from time to time execute and deliver to Bank, at the request of Bank, all Negotiable Collateral, all financing statements and other documents that Bank may reasonably request, in form satisfactory to Bank, to perfect and continue perfected Bank's security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. -13- 19 4.3. Right to Inspect. Bank (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice, from time to time during Borrower's usual business hours, to inspect Borrower's and its Subsidiaries' books and to make copies thereof and to check, test, and appraise the Collateral in order to verify Borrower's and its Subsidiaries' financial condition or the amount, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 5.1. Due Organization and Qualification. Borrower and each Subsidiary is a corporation duly existing and in good standing under the laws of its state of incorporation and qualified and licensed to do business in, and is in good standing in, any state in which the conduct of its business or its ownership of property requires that it be so qualified. 5.2. Due Authorization; No Conflict. The execution, delivery, and performance of the Loan Documents are within the powers of Borrower and any Subsidiary that is a party thereto, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in the Articles/Certificate of Incorporation or Bylaws of Borrower or any Subsidiary, nor will they constitute an event of default under any material agreement to which either Borrower or any Subsidiary is a party or by which either Borrower or any Subsidiary is bound. Neither Borrower nor any Subsidiary is in default under any agreement to which they are a party or by which they are bound, which default could have a Material Adverse Effect. 5.3. No Prior Encumbrances. Borrower and its Subsidiaries have good and indefeasible title to the Collateral, free and clear of Liens, except for Permitted Liens. 5.4. Bona Fide Eligible Accounts. The Eligible Accounts are bona fide existing obligations. The service or property giving rise to such Eligible Accounts has been performed or delivered to the account debtor or to the account debtor's agent for immediate shipment to and unconditional acceptance by the account debtor. Neither Borrower nor any Subsidiary has received notice of actual or imminent Insolvency Proceeding of any account debtor whose accounts are included in any Borrowing Base Certificate as an Eligible Account. 5.5. Merchantable Inventory. All Inventory is in all material respects of good and marketable quality, free from all material defects. 5.6. Intellectual Property. Borrower and its Subsidiaries are the sole owners of the Intellectual Property, except for non-exclusive licenses granted by Borrower or a Subsidiary to its customers in the ordinary course of business. Each of the Patents is valid and enforceable, and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and no claim has been made that any part of the Intellectual Property violates the rights of any third party. Except for and upon the filing with the United States Patent and Trademark Office with respect to the Patents and Trademarks and the Register of Copyrights with respect to the Copyrights and Mask Works necessary to perfect the security interests created hereunder, and except as has been already made or obtained, no authorization, approval or other action by, and no notice to or filing with, any United States governmental authority or United States regulatory -14- 20 body is required either (i) for the grant by Borrower or its Subsidiaries of the security interests granted hereby and by the Loan Documents or for the execution, delivery or performance of Loan Documents by Borrower and its Subsidiaries in the United States or (ii) for the perfection in the United States or the exercise by Bank of its rights and remedies hereunder. 5.7. Name; Location of Chief Executive Office. Except as disclosed in the Schedule, neither Borrower nor any Subsidiary has done business and will without at least thirty (30) days prior written notice to Bank do business under any name other than that specified on the signature page hereof. The chief executive office of Borrower is located at the address indicated in Section 10 hereof. The principal business addresses of each of the Subsidiaries are located in the Schedule 5.7 hereof. 5.8. Litigation. Except as set forth in the Schedule, there are no actions or proceedings pending, or, to Borrower's knowledge, threatened by or against Borrower or any Subsidiary before any court or administrative agency in which an adverse decision could have a Material Adverse Effect or a material adverse effect on the interest of Borrower or any Subsidiary or Bank's security interest in the Collateral 5.9. No Material Adverse Change in Financial Statements. All consolidated financial statements related to Borrower and any Subsidiary that have been delivered by Borrower to Bank, fairly present in all material respects Borrower's consolidated financial condition as of the date thereof and Borrower's consolidated results of operations for the period then ended. There has not been a material adverse change in the consolidated financial condition of Borrower since the date of the most recent of such financial statements submitted to Bank on or about the Closing Date. 5.10. Solvency. The fair saleable value (including goodwill minus disposition costs) of the assets of Borrower and its Subsidiaries exceeds the fair value of their liabilities; the Borrower is not left with unreasonably small capital after the transactions contemplated by this Agreement; and Borrower and each Subsidiary are able to pay their debts (including trade debts) as they mature. 5.11. Regulatory Compliance. Borrower and each Subsidiary has met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from the failure of Borrower or any Subsidiary to comply with ERISA that is reasonably likely to result in their incurring any liability that could have a Material Adverse Effect. Neither Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940. Neither Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T and U of the Board of Governors of the Federal Reserve System). Borrower and each Subsidiary have complied with all the provisions of the Federal Fair Labor Standards Act. Borrower and each Subsidiary have not violated any statutes, laws, ordinances or rules applicable to it, violation of which could have a Material Adverse Effect. -15- 21 5.12. Environmental Condition. None of Borrower's or any Subsidiary's properties or assets has ever been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous owners or operators, in the disposal of, or to produce, store, handle, treat, release, or transport, any hazardous waste or hazardous substance other than in accordance with applicable law; to the best of Borrower's knowledge, none of the properties or assets of Borrower or any Subsidiary have ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute; no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal, state or other governmental agency concerning any action or omission by Borrower or any Subsidiary resulting in the release, or other disposition of hazardous waste or hazardous substances into the environment. 5.13. Taxes. Borrower and each Subsidiary have filed or caused to be filed all tax returns required to be filed on a timely basis, and have paid, or have made adequate provision for the payment of, all taxes reflected therein. 5.14. Subsidiaries. Neither Borrower nor any Subsidiary owns any stock, partnership interest or other equity securities of any Person, except for Permitted Investments. 5.15. Government Consents. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all governmental authorities that are necessary for the continued operation of the business of Borrower and its Subsidiaries as currently conducted. 5.16. Full Disclosure. No representation, warranty or other statement made by Borrower or any Subsidiary in any certificate or written statement furnished to Bank contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained in such certificates or statements not misleading. 6. AFFIRMATIVE COVENANTS Borrower covenants and agrees that, until payment in full of all outstanding Obligations, and for so long as Bank may have any commitment to make a Credit Extension hereunder, Borrower shall do all of the following: 6.1. Good Standing. Borrower shall maintain its and each of its Subsidiaries' corporate existence and good standing in their jurisdiction of incorporation and maintain qualification in each jurisdiction in which the failure to so qualify could have a Material Adverse Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to maintain, to the extent consistent with prudent management of Borrower's business, in force all licenses, approvals and agreements, the loss of which could have a Material Adverse Effect. 6.2. Government Compliance. Borrower shall meet, and shall cause each Subsidiary to meet, the minimum funding requirements of ERISA with respect to any employee benefit -16- 22 plans subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, noncompliance with which could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral. 6.3. Financial Statements, Reports, Certificates. Borrower shall deliver to Bank: (a) as soon as available, but in any event within forty-five (45) days after the end of each fiscal quarter, a company prepared consolidated and consolidating balance sheet and income statement covering Borrower's consolidated operations during such period, in a form and certified by an officer of Borrower reasonably acceptable to Bank; (b) as soon as available, but in any event within ninety (90) days after the end of Borrower's fiscal year, audited consolidated and consolidating financial statements of Borrower prepared in accordance with GAAP, consistently applied, together with an unqualified opinion on such financial statements of an independent certified public accounting firm reasonably acceptable to Bank; (c) within five (5) days of filing, copies of all statements, reports and notices sent or made available generally by Borrower to its security holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (d) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand Dollars ($100,000) or more; (e) prompt notice of any material change in the composition of the Intellectual Property, including, but not limited to, any subsequent ownership right of the Borrower or any Subsidiary in or to any Copyright, Patent or Trademark not specified in any intellectual property security agreement between Borrower or any Subsidiary and Bank or knowledge of an event that materially adversely effects the value of the Intellectual Property; and (f) such budgets, sales projections, operating plans or other financial information as Bank may reasonably request from time to time. Within thirty (30) days after the last day of each month, Borrower shall deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in substantially the form of Exhibit C hereto, together with aged listings of accounts receivable. Within forty-five (45) days after the last day of each quarter, Borrower shall deliver to Bank with the quarterly financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Within ninety (90) days after the last day of each fiscal year, Borrower shall deliver to Bank with the annual financial statements a Compliance Certificate signed by a Responsible Officer in substantially the form of Exhibit D hereto. Bank shall have a right from time to time hereafter to audit Borrower's Accounts at Borrower's expense, provided that such audits will be conducted no more often than every twelve (12) months unless an Event of Default has occurred and is continuing. 6.4. Inventory; Returns. Borrower and its Subsidiaries shall keep all Inventory in good and marketable condition, free from all material defects. Returns and allowances, if any, as between Borrower (or a Subsidiary) and its account debtors shall be on the same basis and in accordance with the usual customary practices of Borrower and its Subsidiaries, as they exist at -17- 23 the time of the execution and delivery of this Agreement. Borrower shall promptly notify Bank of all returns and recoveries and of all disputes and claims, where the return, recovery, dispute or claim involves more than Ten Thousand Dollars ($10,000). 6.5. Taxes. Borrower shall make, and shall cause each Subsidiary to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof; and Borrower will make, and will cause each Subsidiary to make, timely payment or deposit of all material tax payments and withholding taxes required of it by applicable laws, including, but not limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower or a Subsidiary has made such payments or deposits; provided that Borrower or a Subsidiary need not make any payment if the amount or validity of such payment is (i) contested in good faith by appropriate proceedings , (ii) is reserved against (to the extent required by GAAP) by Borrower and (iii) no lien other than a Permitted Lien results. 6.6. Insurance. (a) Borrower and each Subsidiary, at Borrower's expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where the business of Borrower or a Subsidiary is conducted on the date hereof. Borrower and its Subsidiaries shall also maintain insurance relating to Borrower's ownership and use of the Collateral in amounts and of a type that are customary to businesses similar to the business of Borrower and its Subsidiaries. (b) All such policies of insurance shall be in such form, with such companies, and in such amounts as are reasonably satisfactory to Bank. All such policies of property insurance shall contain a lender's loss payable endorsement, in a form satisfactory to Bank, showing Bank as an additional loss payee thereof and all liability insurance policies shall show the Bank as an additional insured, and shall specify that the insurer must give at least twenty (20) days notice to Bank before canceling its policy for any reason. At Bank's request, Borrower shall deliver to Bank certified copies of such policies of insurance and evidence of the payments of all premiums therefor. All proceeds payable under any such policy shall, at the option of Bank, be payable to Bank to be applied on account of the Obligations. 6.7. Principal Depository. Borrower and each Subsidiary shall maintain its principal depository and operating accounts with Bank. 6.8. Adjusted Quick Ratio. Borrower shall maintain, as of the last day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities, less current deferred maintenance revenue of at least 1.75 to 1.0. -18- 24 6.9. Profitability. Borrower shall maintain, as of the last day of each fiscal quarter, for each period identified below, a minimum Net Income, less the increase in capitalized software, of at least $1.00. 6.10. Registration of Intellectual Property Rights. (a) Borrower shall register or cause to be registered with the United States Patent and Trademark Office or the United States Copyright Office, as applicable, those additional intellectual property rights developed or acquired by Borrower and any of its Subsidiaries from time to time in connection with any product prior to the sale or licensing of such product to any third party. (b) Borrower and any Subsidiary shall execute and deliver such additional instruments and documents from time to time as Bank shall reasonably request to perfect Bank's security interest in the Intellectual Property. (c) Borrower and its Subsidiaries shall (i) protect, defend and maintain the validity and enforceability of the Trademarks, Patents, Copyrights, and Mask Works, (ii) use its best efforts to detect infringements of the Trademarks, Patents, Copyrights and Mask Works and promptly advise Bank in writing of material infringements detected and (iii) not allow any Trademarks, Patents, Copyrights, or Mask Works to be abandoned, forfeited or dedicated to the public without the written consent of Bank, which shall not be unreasonably withheld, unless Bank determines that reasonable business practices suggest that abandonment is appropriate. (d) Bank shall have the right, but not the obligation, to take, at Borrower's sole expense, any actions that Borrower or a Subsidiary is required under this Section 6.10 to take but which Borrower or a Subsidiary fails to take, after fifteen (15) days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all reasonable costs and reasonable expenses incurred in the reasonable exercise of its rights under this Section 6.10. 6.11. Further Assurances. At any time and from time to time Borrower or a Subsidiary shall execute and deliver such further instruments and take such further action as may reasonably be requested by Bank to effect the purposes of this Agreement. 6.12. Merger of Subsidiaries. (a) On or before August 1, 1998 Borrower shall make and cause each of its Subsidiaries (other than HUBLink, Inc.) to merge into and with the Borrower with the Borrower being the surviving corporation. Borrower represents and warrants that its Subsidiaries (other than HUBLink, Inc.) are Healthcare Communications, Inc., a Texas corporation, Integrated Healthcare Solutions, Inc. (formerly known as Clinical Assessment Support System, Inc.), a Georgia corporation and Criterion Health Strategies, Inc., a Tennessee corporation. (b) On or before September 30, 1999, Borrower shall make and cause HUBLink, Inc. to merge into and with the Borrower with the Borrower being the surviving corporation. -19- 25 7. NEGATIVE COVENANTS Borrower covenants and agrees that, so long as any Credit Extension hereunder shall be available and until payment in full of the outstanding Obligations or for so long as Bank may have any commitment to make any Advances, neither Borrower nor any of its Subsidiaries will do any of the following, without prior written Bank approval: 7.1. Dispositions. Convey, sell, lease, transfer or otherwise dispose of (collectively, a "Transfer"), all or any part of its business or property, other than Transfers: (i) of inventory in the ordinary course of business, (ii) of non-exclusive licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (iii) that constitute payment of normal and usual operating expenses in the ordinary course of business; (iv) of worn-out or obsolete Equipment; or (v) of immaterial assets which do not have a fair market value, in the aggregate in excess of $300,000 in any calendar year. 7.2. Changes in Business, Ownership, or Management, Business Locations. Engage in any business other than the businesses currently engaged in by Borrower or a Subsidiary and any business substantially similar or related thereto (or incidental thereto). Borrower will not, without at least thirty (30) days prior written notification to Bank, relocate its chief executive office or add any new offices or business locations, other than remote offices for employees which do not include any material assets. 7.3. Mergers or Acquisitions. Merge or consolidate with or into any other business organization, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person; except such mergers or acquisitions that do not at all times while the Obligations are outstanding, involve an amount that, in the aggregate for all mergers or acquisitions, exceeds Six Hundred Thousand Dollars ($600,000) in cash, and, further, provided that the Company or its Subsidiary must be the surviving entity in the merger. 7.4. Indebtedness. Create, incur, assume or be or remain liable with respect to any Indebtedness, or permit any Subsidiary so to do, other than Permitted Indebtedness. 7.5. Encumbrances. Create, incur, assume or suffer to exist any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens. 7.6. Distributions. Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any capital stock. 7.7. Investments. Directly or indirectly acquire or own,or make any Investment in or to any Person other than Permitted Investments. 7.8. Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of the business of Borrower or a Subsidiary, upon fair and reasonable terms that are no less favorable to Borrower or a Subsidiary than would be obtained in an arm's length transaction with a non-affiliated Person. -20- 26 7.9. Intellectual Property Agreements. Permit the inclusion in any material contract to which it becomes a party of any provisions that could or might in any way prevent the creation of a security interest in the rights and interests of Borrower or any Subsidiary in any property included within the definition of the Intellectual Property acquired under such contracts. 7.10. Inventory. Store the Inventory with a bailee, warehouseman,or similar party unless Bank has received a pledge of any warehouse receipt covering such Inventory. Except for Inventory sold in the ordinary course of business and except for such other locations as Bank may approve in writing, Borrower and its Subsidiaries shall keep the Inventory only at the locations set forth in Section 10 hereof and such other locations of which Borrower gives Bank prior written notice and as to which Borrower and its Subsidiaries, as the case may be, signs and files a financing statement where needed to perfect Bank's security interest. 7.11. Compliance. Become an "investment company" or a company controlled by an "investment company," within the meaning of the Investment Company Act of 1940, or become principally engaged in, or undertake as one of its important activities, the business of extending credit for the purpose of purchasing or carrying margin stock, or use the proceeds of any Advance for such purpose; fail to meet the minimum funding requirements of ERISA; permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, which violation could have a Material Adverse Effect or a material adverse effect on the Collateral or the priority of Bank's Lien on the Collateral; or permit any of its Subsidiaries to do any of the foregoing. 8. EVENTS OF DEFAULT Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement: 8.1. Payment Default. If Borrower fails to pay, when due, any of the Obligations. 8.2. Covenant Default. (a) If Borrower or any Subsidiary fails to perform any obligation under Sections 6.3, 6.6, 6.7, 6.8 or 6.9 or violates any of the covenants contained in Article 7 of this Agreement, or (b) If Borrower or any Subsidiary fails or neglects to perform, keep, or observe any other material term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower or any Subsidiary and Bank and as to any default under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure such default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the -21- 27 failure to have cured such default shall not be deemed an Event of Default (provided that no Advances will be required to be made during such cure period); 8.3. Material Adverse Change. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower or any Subsidiary, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral; 8.4. Attachment. If any material portion of Borrower's or any Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within ten (10) days, or if Borrower or any Subsidiary is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of Borrower's or any Subsidiaries' assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of Borrower's or any Subsidiaries' assets by the United States Government, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within ten (10) days after Borrower or any Subsidiary receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by Borrower or any Subsidiary (provided that no Credit Extensions will be required to be made during such cure period); 8.5. Insolvency. If Borrower or any Subsidiary becomes insolvent, or if an Insolvency Proceeding is commenced by Borrower or any Subsidiary, or if an Insolvency Proceeding is commenced against Borrower or any Subsidiary and is not dismissed or stayed within 30 days (provided that no Advances will be made prior to the dismissal of such Insolvency Proceeding); 8.6. Other Agreements. If there is a default in any agreement to which Borrower or any Subsidiary is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Fifty Thousand Dollars ($50,000) or that could have a Material Adverse Effect; 8.7. Subordinated Debt. If Borrower or any Subsidiary makes any payment on account of Subordinated Debt, except to the extent such payment is allowed under any subordination agreement entered into with Bank; 8.8. Judgments. If a judgment or judgments for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000) shall be rendered against Borrower or any Subsidiary and shall remain unsatisfied and unstayed for a period of ten (10) days (provided that no Credit Extensions will be made prior to the satisfaction or stay of such judgment); or 8.9. Misrepresentations. If any material misrepresentation or material misstatement exists now or hereafter in any warranty or representation set forth herein or in any certificate or -22- 28 writing delivered to Bank by Borrower or any Subsidiary or any Person acting on Borrower's or any Subsidiaries' behalf pursuant to this Agreement or to induce Bank to enter into this Agreement or any other Loan Document. 9. BANK'S RIGHTS AND REMEDIES 9.1. Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable (provided that upon the occurrence of an Event of Default described in Section 8.5 all Obligations shall become immediately due and payable without any action by Bank); (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Bank; (c) Demand that Borrower (i) deposit cash with Bank in an amount equal to the amount of any Letters of Credit remaining undrawn, as collateral security for the repayment of any future drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all Letters of Credit fees scheduled to be paid or payable over the remaining term of the Letters of Credit; (d) Liquidate any Exchange Contracts not yet settled and demand that Borrower immediately deposit cash with Bank in an amount sufficient to cover any losses incurred by Bank due to liquidation of the Exchange Contracts at the then prevailing market price; (e) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Bank reasonably considers advisable; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Bank considers necessary or reasonable to protect its security interest in the Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and to make the Collateral available to Bank as Bank may designate. Borrower authorizes Bank to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Bank's determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to any of Borrower's premises, Borrower hereby grants Bank a license to enter such premises and to occupy the same, without charge; (g) Without notice to Borrower set off and apply to the Obligations any and all (i) balances and deposits of Borrower or any Subsidiary held by Bank, or (ii) indebtedness at any time owing to or for the credit or the account of Borrower or any Subsidiary held by Bank; -23- 29 (h) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, Borrower's labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section 9.1, Borrower's rights under all licenses and all franchise agreements shall inure to Bank's benefit; (i) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Bank determines is commercially reasonable, and apply the proceeds thereof to the Obligations in whatever manner or order it deems appropriate; (j) Bank may credit bid and purchase at any public sale, or at any private sale as permitted by law; (k) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower; and (l) Bank shall have a non-exclusive, royalty-free license to use the Intellectual Property to the extent reasonably necessary to permit Bank to exercise its rights and remedies upon the occurrence of an Event of Default. 9.2. Power of Attorney. Effective only upon the occurrence and during the continuance of an Event of Default, Borrower hereby irrevocably appoints Bank (and any of Bank's designated officers, or employees) as Borrower's true and lawful attorney to: (a) send requests for verification of Accounts or notify account debtors of Bank's security interest in the Accounts; (b) endorse Borrower's or any Subsidiaries' name on any checks or other forms of payment or security that may come into Bank's possession; (c) sign Borrower's or any Subsidiaries' name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) make, settle, and adjust all claims under and decisions with respect to Borrower's or any Subsidiaries' policies of insurance; and (e) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Bank determines to be reasonable; (f) to modify, in its sole discretion, any intellectual property security agreement entered into between Borrower and Bank without first obtaining Borrower's approval of or signature to such modification by amending Exhibit A, Exhibit B, Exhibit C, and Exhibit D, thereof, as appropriate, to include reference to any right, title or interest in any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower after the execution hereof or to delete any reference to any right, title or interest in any Copyrights, Patents, Trademarks, or Mask Works in which Borrower no longer has or claims any right, title or interest; (g) to file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of Borrower where permitted by law; and (h) to transfer the Intellectual Property into the name of Bank or a third party to the extent -24- 30 permitted under the California Uniform Commercial Code provided Bank may exercise such power of attorney to sign the name of Borrower on any of the documents described in Section 4.2 regardless of whether an Event of Default has occurred. The appointment of Bank as Borrower's attorney in fact, and each and every one of Bank's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Bank's obligation to provide advances hereunder is terminated. 9.3. Accounts Collection. Upon the occurrence and during the continuance of an Event of Default, Bank may notify any Person owing funds to Borrower or any Subsidiary of Bank's security interest in such funds and verify the amount of such Account. Borrower shall collect all amounts owing to Borrower or nay Subsidiary for Bank, receive in trust all payments as Bank's trustee, and if requested or required by Bank, immediately deliver such payments to Bank in their original form as received from the account debtor, with proper endorsements for deposit. 9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Bank may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves under the Committed Revolving Line as Bank deems necessary to protect Bank from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type discussed in Section 6.6 of this Agreement, and take any action with respect to such policies as Bank deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Bank shall not constitute an agreement by Bank to make similar payments in the future or a waiver by Bank of any Event of Default under this Agreement. 9.5. Bank's Liability for Collateral. So long as Bank complies with reasonable banking practices, Bank shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower. 9.6. Remedies Cumulative. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Bank shall have all other rights and remedies not expressly set forth herein as provided under the Code, by law, or in equity. No exercise by Bank of one right or remedy shall be deemed an election, and no waiver by Bank of any Event of Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank shall constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be effective unless made in a written document signed on behalf of Bank and then shall be effective only in the specific instance and for the specific purpose for which it was given. 9.7. Demand; Protest. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, -25- 31 instruments, chattel paper, and guarantees at any time held by Bank on which Borrower may in any way be liable. 10. NOTICES Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses set forth below: If to Borrower: Healthdyne Information Enterprises, Inc. 1850 Parkway Place, Suite 1100 Marietta, Georgia 30067 Attn: Robert Murrie FAX: (770) 423-8440 If to Bank Silicon Valley Bank 3343 Peachtree Road, N.E. East Tower, Suite 312 Atlanta, Georgia 30326 Attn.: Mr. Tom Vertin FAX: (404) 261-2202 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. 11. CHOICE OF LAW AND VENUE The Loan Documents shall be governed by, and construed in accordance with, the internal laws of the State of Georgia, without regard to principles of conflicts of law. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THE BORROWER AND THE BANK ALSO AGREE THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ENFORCE ANY JUDGMENT OBTAINED AGAINST THE -26- 32 BORROWER IN CONNECTION WITH THIS AGREEMENT OR SUCH OTHER LOAN DOCUMENT, MAY BE BROUGHT BY THE BANK OR BORROWER IN ANY STATE OR FEDERAL COURT SITTING IN THE COUNTY OF THE STATE IN WHICH BANK'S ADDRESS SHOWN IN SECTION 10 ABOVE IS LOCATED, OR IN ANY OTHER COURT TO THE JURISDICTION OF WHICH SUCH BORROWER OR ANY OF ITS PROPERTY IS OR MAY BE SUBJECT. EACH OF THE BORROWER AND THE BANK IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE AFORESAID STATE AND FEDERAL COURTS, AND IRREVOCABLY WAIVES ANY PRESENT OR FUTURE OBJECTION TO VENUE IN ANY SUCH COURT, AND ANY PRESENT OR FUTURE CLAIM THAT ANY SUCH COURT IS AN INCONVENIENT FORUM, IN CONNECTION WITH ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. 12. GENERAL PROVISIONS 12.1. Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Bank's prior written consent, which consent may be granted or withheld in Bank's sole discretion. Bank shall have the right without the consent of or notice to Borrower to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits hereunder. 12.2. Indemnification. Borrower shall , indemnify ,defend, protect and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to transactions between Bank and Borrower whether under the Loan Documents, or otherwise (including without limitation reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3. Time of Essence. Time is of the essence for the performance of all obligations set forth in this Agreement. 12.4. Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 12.5. Amendments in Writing, Integration. This Agreement cannot be amended or terminated except by a writing signed by Borrower and Bank. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement, if any, are merged into this Agreement and the Loan Documents. -27- 33 12.6. Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. 12.7. Survival. All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding. The obligations of Borrower to indemnify Bank with respect to the expenses, damages, losses, costs and liabilities described in Section 12.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Bank have run. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. HEALTHDYNE INFORMATION ENTERPRISES, INC. By: /s/Cheryl Blanco -------------------------------------- Title: VP - Controller -------------------------------- [CORPORATE SEAL] SILICON VALLEY BANK By: /s/Tom Vertin -------------------------------------- Title: SVP -------------------------------- -28- 34 EXHIBIT A The Collateral shall consist of all right, title and interest of Borrower in and to the following: (a) All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; (b) All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; (c) All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind; (d) All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; (e) All documents, cash, deposit accounts, securities, investment property, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; (f) All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and (g) All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. 35 EXHIBIT B LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., E.S.T. TO: CENTRAL CLIENT SERVICE DIVISION DATE: -------------------- FAX#: ( ) TIME: --- ---------------- -------------------- FROM: HEALTHDYNE INFORMATION ENTERPRISES, INC. ----------------------------------------------------------------- BORROWER'S NAME FROM: ----------------------------------------------------------------- AUTHORIZED SIGNER'S NAME ----------------------------------------------------------------- AUTHORIZED SIGNATURE PHONE: ---------------------------------------------------------------- FROM ACCOUNT # --------------------------------------- TO ACCOUNT# ------------------------------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT -------------------------- --------------------- PRINCIPAL INCREASE (ADVANCE) $ ------------------------------ PRINCIPAL PAYMENT (ONLY) $ ------------------------------ INTEREST PAYMENT (ONLY) $ ------------------------------ PRINCIPAL AND INTEREST (PAYMENT) $ ------------------------------ OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and Security Agreement are true, correct and complete in all material respects as of the date of the telephone request for and Advance confirmed by this Advance Request; provided, however, that those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of such date. BANK USE ONLY: TELEPHONE REQUEST: The following person is authorized to request the loan payment transfer/loan advance on the advance designated account and is known to me. Authorized Requester ----------------------------------- Authorized Signature (Bank) Phone # ---------------------------- 36 EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Healthdyne Information Enterprises, Inc. Bank: Silicon Valley Bank Commitment Amount: $5,000,000
ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of ______ $ ---------- 2. Additions (please explain on reverse) $ ---------- 3. TOTAL ACCOUNTS RECEIVABLE $ ---------- ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $ ----------- 5. Balance of 50% over 90 day accounts $ ----------- 6. Concentration Limits $ ----------- 7. Foreign Accounts exceeding 25% of Borrowing Base or Credit Limit $ ----------- 8. Governmental Accounts $ ----------- 9. Contra Accounts $ ----------- 10. Promotion or Demo Accounts $ ----------- 11. Intercompany/Employee Accounts $ ----------- 12. Other (please explain on reverse) $ ----------- 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ ----------- 14. Eligible Accounts (#3 minus #13) $ ----------- 15. LOAN VALUE OF ACCOUNTS (75% of #14) $ ----------- BALANCES 16. Maximum Loan Amount $ ----------- 17. Total Funds Available [Lesser of #16 or #15] $ ----------- 18. Present balance owing on Line of Credit $ ----------- 19. Outstanding under Sublimits ( ) $ ---------- 20. RESERVE POSITION (#17 minus #18 and #19) $ -----------
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS: BANK USE ONLY ---- --- ---- HEALTHDYNE INFORMATION ENTERPRISES, INC. REC'D BY: ------------ AUTH. SIGNER BY: DATE: ------------------------------- ---------------- Authorized Signer VERIFIED: ------------ AUTH. SIGNER DATE: ---------------- ---------------------
37 EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK FROM: HEALTHDYNE INFORMATION ENTERPRISES, INC. The undersigned authorized officer of Healthdyne Information Enterprises, Inc. hereby certifies that in accordance with the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending ________________ with all required covenants except as noted below and (ii) all representations and warranties of Borrower stated in the Agreement are true and correct in all material respects as of the date hereof. Attached herewith are the required documents supporting the above certification. The Officer further certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer expressly acknowledges that h no borrowings may be requested by the Borrower at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that such compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- --------- Quarterly financial statements Quarterly within 45 days Yes No Annual (CPA Audited) FYE within 90 days Yes No 10Q and 10K Within 5 days after filing with the SEC Yes No A/R Agings Monthly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Maintain on a Quarterly Basis: Minimum Adjusted Quick Ratio* 1.75:1.0 _____:1.0 Yes No Profitability $1.00 $ Yes No --------
* "Quick Ratio" means, as of an applicable date, the ratio of (i) Quick Assets to (ii) Current Liabilities less current deferred maintenance revenue. BANK USE ONLY RECEIVED BY: -------------------- DATE: ---------------- REVIEWED BY: -------------------- COMPLIANCE STATUS: YES / NO COMMENTS REGARDING EXCEPTIONS: Sincerely, Date: - ------------------------------ --------------- SIGNATURE - ------------------------------ TITLE 38 SCHEDULE Chief Executive Office Healthdyne Information Enterprises, Inc. 1850 Parkway Place, Suite 1100 Marietta, Georgia 30067 HUBLink, Inc. 100 E. Campus View Boulevard Suite 150 Columbus, Ohio 43235 EX-10.12 4 LOAN MODIFICATION AGREEMENT 1 EXHIBIT 10.12 LOAN MODIFICATION AGREEMENT This Loan Modification Agreement is entered into as of November 13, 1998 by and between Healthdyne Information Enterprises, Inc., a Georgia corporation ("Borrower") whose address is 1850 Parkway Place, Suite 1100, Marietta, Georgia 30067 and Silicon Valley Bank, a California-chartered bank ("Lender") with a loan production office located at 3343 Peachtree Road, N.E., Suite 312, Atlanta, Georgia 30326. 1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other documents, a Loan and Security Agreement, dated August 3, 1998, as may be further amended from time to time (the "Loan Agreement") and Promissory Note in the principal amount of $5,000,000 dated August 3, 1998 (the "Note"). The Loan Agreement and Note provide for, among other things, a line of credit in the original principal amount of Five Million Dollars ($5,000,000). Defined terms used herein without definition shall have the same meaning ascribed thereto in the Loan Agreement and Note. 2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the obligations is secured by the Collateral as described in the Loan Agreement and is guaranteed by HubLink, Inc. ("HubLink") a subsidiary of Borrower. The obligations are also secured by all the assets of HubLink pursuant to a Security Agreement dated August 3, 1998 between HubLink and Bank and a pledge of the stock of HubLink pursuant to a Stock Pledge Agreement dated August 3, 1998 between Borrower and Bank. Hereinafter, the above-described security documents, together with all other documents securing repayment of the Note shall be referred to as the "Security Documents". Hereinafter, the Loan Agreement, the Security Documents, together with all other documents evidencing or securing the Committed Revolving Line, shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. A. Modification to Loan Agreement. 1. In Section 1.1 of the Loan Agreement the definition of a 'Borrowing Base" is amended by deleting all references to "eighty percent (80%)" and replacing such references with "seventy-five percent (75%)." 2. Exhibit C to the Loan Agreement is deleted and replaced with the new Exhibit C attached hereto as Schedule 1. 4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants to Bank as follows: -1- 2 (a) Borrower has adequate corporate power and authority to execute and deliver this Loan Modification Agreement and the other documents executed and/or delivered in connection herewith (collectively, the "Modification Documents") and to perform its respective obligations hereunder and thereunder, and under the Existing Loan Documents, as amended hereby. Each of this Loan Modification Agreement and the other Modification Documents has been duly authorized, executed and delivered by Borrower, and does not contravene any law, rule or regulation applicable to Borrower or any of the terms of its Certificate of Incorporation or bylaws, or any other indenture, agreement or undertaking to which Borrower is a party. This Loan Modification Agreement and the other Modification Documents effectively amend the Existing Loan Documents in accordance with the terms hereof and thereof. Borrower's obligations hereunder and under the other Modification Documents, and under the Loan Agreement and the other Existing Loan Documents, each as amended hereby and thereby, constitute legally valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the rights of creditors generally and by equitable principles. (b) All of the representations and warranties made by Borrower in the Loan Agreement and the other Existing Loan Documents are true and correct on the date hereof as if made on and as of the date hereof and are so repeated herein, except that representations and warranties of financial statements or conditions as of an earlier date relate solely to such earlier date. (c) Upon the execution and delivery of this Loan Modification Agreement and the satisfaction of the conditions precedent set forth in Section 6 hereof, no Event of Default shall exist and be continuing. 6. CONDITIONS PRECEDENT. The agreements contained herein and the amendments contemplated hereby shall not be effective unless each of the following conditions precedent is satisfied: (1) All of the representations and warranties made by Borrower in Section 6 hereof shall be true and correct; and (2) Bank shall have received, in form and substance satisfactory to Bank, such other documents as Bank shall deem necessary and/or appropriate. Upon satisfaction of each of the conditions precedent set forth in this Section 6, the agreements contained herein and the amendments contemplated hereby shall be deemed effective as of the date hereof. 7. NO DEFENSES OF BORROWER. Borrower agrees that it has no defenses against the obligations to pay any amounts under the Loan Agreement or Note. 8. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the Existing Loan Documents, Bank is relying upon Borrower's representations, warranties, -2- 3 and agreements, as set forth in the Existing Loan Documents and herein, and Borrower hereby ratifies and affirms all such representations and warranties as if fully restated herein. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modification of the Existing Loan Documents pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future amendments or modifications to the Existing Loan Documents. Nothing in this Loan Modification Agreement shall constitute a novation or satisfaction of the Borrower's Obligations to Bank. It is the intention of Bank and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker, endorser, or guarantor will be released by virtue of this Loan Modification Agreement. The terms of this paragraph apply not only to this Loan Modification Agreement, but also to all subsequent loan modification agreements. 9. MISCELLANEOUS. This Loan Modification Agreement shall be considered a "Loan Document" under and as defined in the Loan Agreement. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OR ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THE BORROWER AND THE BANK ALSO AGREE THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ENFORCE ANY JUDGMENT OBTAINED AGAINST THE BORROWER IN CONNECTION WITH THIS AGREEMENT OR SUCH OTHER LOAN DOCUMENT, MAY BE BROUGHT BY THE BANK OR BORROWER IN ANY STATE OR FEDERAL COURT SITTING IN THE COUNTY OF THE STATE IN WHICH BANK'S ADDRESS SHOWN IN SECTION 10 ABOVE IS LOCATED, OR IN ANY OTHER COURT TO THE JURISDICTION OF WHICH SUCH BORROWER OR ANY OF ITS PROPERTY IS OR MAY BE SUBJECT. EACH OF THE BORROWER AND THE BANK IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE AFORESAID STATE AND FEDERAL COURTS, AND IRREVOCABLY WAIVES ANY PRESENT OR FUTURE OBJECTION TO VENUE IN ANY SUCH COURT, AND ANY PRESENT OR FUTURE CLAIM THAT ANY SUCH COURT IS AN INCONVENIENT FORUM, IN CONNECTION WITH ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. -3- 4 This Loan Modification Agreement is executed as of the date first written above.
BORROWER: BANK: HEALTHDYNE INFORMATION SILICON VALLEY BANK ENTERPRISES, INC. By: /s/ Cheryl Blanco By: /s/ T. Vertin ------------------------------- ------------------------------- Its: VP - Controller Its: SVP ------------------------------ ------------------------------ [CORPORATE SEAL] Agreed and consented to as guarantor: HUBLINK, INC. By: /s/ Robert Murrie ------------------------------- Its: President ------------------------------ [CORPORATE SEAL]
-4- 5 SCHEDULE 1 EXHIBIT C BORROWING BASE CERTIFICATE Borrower: Healthdyne Information Enterprises, Inc. Bank: Silicon Valley Bank Commitment Amount: $5,000,000
ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of _________ $ --------------- 2. Additions (please explain on reverse) $ --------------- 3. TOTAL ACCOUNTS RECEIVABLE $ --------------- ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due $ --------------- 5. Balance of 50% over 90 day accounts $ --------------- 6. Concentration Limits $ --------------- 7. Foreign Accounts exceeding 25% of Borrowing Base or Credit Limit $ --------------- 8. Governmental Accounts $ --------------- 9. Contra Accounts $ --------------- 10. Promotion or Demo Accounts $ --------------- 11. Intercompany/Employee Accounts $ --------------- 12. Other (please explain on reverse) $ --------------- 13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $ --------------- 14. Eligible Accounts (#3 minus #13) $ --------------- 15. LOAN VALUE OF ACCOUNTS (75% of #14) $ --------------- BALANCES 16. Maximum Loan Amount $ --------------- 17. Total Funds Available [Lesser of #16 or #15] $ --------------- 18. Present balance owing on Line of Credit $ --------------- 19. Outstanding under Sublimits ( ) $ --------------- 20. RESERVE POSITION (#17 minus #18 and #19) $ ---------------
The undersigned represents and warrants that the foregoing is true, complete and correct, and that the information reflected in this Borrowing Base Certificate complies with the representations and warranties set forth in the Loan and Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS: BANK USE ONLY ---- --- ---- HEALTHDYNE INFORMATION ENTERPRISES, INC. REC'D BY: ------------ AUTH. SIGNER BY: DATE: ------------------------------- ---------------- Authorized Signer VERIFIED: ------------ AUTH. SIGNER DATE: ---------------- ---------------------
-5- EX-10.13 5 VALUE ADDED MARKETING AGREEMENT 1 EXHIBIT 10.13 [PORTIONS OF THIS EXHIBIT HAVE BEEN REDACTED AND ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST FILED WITH THE SECRETARY OF THE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE REDACTED MATERIAL IS INDICATED BY AN "{*}" AND WAS FILED SEPARATELY WITH THE COMMISSION.] HBO & COMPANY AND HEALTHDYNE INFORMATION ENTERPRISES, INC. VALUE ADDED MARKETING AGREEMENT This Value-Added Marketing Agreement ("Agreement") is made and entered into as of this 8th day of September, 1998, ("Effective Date") by and between Healthdyne Information Enterprises, Inc. ("Business Partner"), a Georgia corporation with its principal place of business at 1850 Parkway Place, Suite 1100, Marietta, Georgia, 30067 , and HBO & Company of Georgia ("HBOC"), a Delaware corporation with its principal place of business at 301 Perimeter Center North, Atlanta, Georgia 30346. STATEMENT OF PURPOSE A. HBOC is in the business of developing proprietary computer software applications, integrating them with software developed by others and distributing the integrated software product together with associated hardware and services in order to provide comprehensive information solutions desired by healthcare providers. B. Business Partner owns, distributes and supports certain computer software known and marketed as the Cloverleaf(R) Integration Engine Tool -- which transports data among disparate information systems. C. HBOC desires to acquire and Business Partner desires to grant to HBOC a license to integrate the Cloverleaf Integration Engine Tool with HBOC proprietary software and software developed by third parties and to market and distribute the Integrated Software (as defined below) together with other HBOC products and services to HBOC customers and prospects under the terms and conditions of this Agreement. AGREEMENT In consideration for the mutual promises set forth below, and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows: 1. DEFINITIONS. The following capitalized terms used in this Agreement shall have the following meanings: 1.1 "Affiliates" means any entity controlling, controlled by, or under common control with, either party to this Agreement. 1.2 "BP Software" means the operating system software, application software or other software products which are proprietary to Business Partner or for which Business Partner has the right to distribute and which comprise the software set forth on Exhibit A, including: (a) the machine-executable object code version of the user-loadable programs which Business Partner makes generally available to its customers including all options, database interfaces, operating system and hardware versions, now or hereinafter developed; (b) Documentation; (c) any modifications, revisions, Corrections, Enhancements, New Releases or replacements for all of the foregoing items; and (d) authorized copies of all of the foregoing items. 1.3 "Consumer Price Index" means, as of any date, the Consumer Price Index for All Urban Consumers, U.S. City Average, published by the U.S. Bureau of Labor Statistics (base year 1982-84=100, except that, if the base for the Index is so changed that 1982-84 prices no longer represent 100, an appropriate adjustment will be applied to the published indices so as to relate them to the aforesaid base in which 1982-84 prices represent 100), as published by the Bureau of Labor Statistics of the U.S. Department of Labor as of the most recent calendar Page 1 2 month for which the Index is published prior to such date. In the event that the Consumer Price Index is discontinued, the parties shall agree to a substantially similar government index or publication as a reasonable replacement. 1.4 "Correction(s)" means a modification, revision or supplement to the BP Software which makes such software perform functions it was designed to perform or corrects defects or "bugs". 1.5 "Distributor(s)" means HBOC and those entities which (at the time in question) are authorized by HBOC either as distributor or agent to distribute software marketed by HBOC. Additional Distributors may be added by HBOC during the term of this Agreement. HBOC shall require all such entities to execute a written agreement with HBOC containing terms and conditions substantially similar to those contained in this Agreement for the protection of Proprietary Information. 1.6 "Documentation" means the documentation in any media and form (CD, hard copy, electronic, etc.) for BP Software, including all documents and manuals relating to an end-user's installation, training, and use of the BP Software and those documents and manuals necessary for HBOC to integrate, test, and support the Integrated Software, together with all revisions, updates and other modifications thereto as Business Partner may make from time to time. 1.7 "Enhancement(s)" means modifications, revisions, additions or supplements to the BP Software which enables such software to provide or perform services or functions it could not previously perform or materially improves the manner in which the BP Software performs existing functions. 1.8 "HBOC Customer(s)" means the (i) current customers of HBOC which have licensed HBOC Software or purchased from HBOC services or hardware, and (ii) prospective customers to whom HBOC is marketing or with whom HBOC is negotiating for the license of HBOC Software or the sale of hardware or HBOC services. The term "HBOC Customer" shall include Affiliates of any HBOC Customer. 1.9 "HBOC Software" means the computer software now or hereafter marketed and licensed by HBOC (whether developed by HBOC or licensed to HBOC with a right to sublicense to HBOC Customers, excluding BP Software) for use by HBOC Customers. 1.10 "Integrated Software" means HBOC Software which operates in conjunction with BP Software and which accomplishes a business application extending the features and functions of the HBOC Software. 1.11 "List Price(s)" means Business Partner's lowest, non-discounted, standard charges to third parties for BP Software, as contained in the price list, a current copy of which is attached hereto as Exhibit B, and which may be updated from time to time during the term of this Agreement. 1.12 "New Release(s)" means all modifications, revisions, Enhancements, Corrections or replacements for BP Software and related Documentation which Business Partner has agreed to provide pursuant to this Agreement or which Business Partner makes available to its customers in general from time to time at no additional license fee. 1.13 "Proprietary Information" means any data or information, including but not limited to any and all confidential information and trade secrets, pertaining to (i) the business operations of a party which is not generally known to the public and affords such party a competitive advantage, including but not limited to, information regarding its products and product development, suppliers, marketing strategies, finance, operations, customers, sales, and internal performance results; (ii) the proprietary software, including but not limited to: concepts, designs, documentation, reports, data, specifications, source code, object code, flow charts, file record layouts, databases, inventions, know-how, and show-how, whether or not patentable or copyrightable; and (iii) the terms and conditions of this Agreement. 1.14 "Royalty(ies)" means an amount, calculated in U.S. Dollars, equal to a percentage of Business Partner's List Price or a fixed fee for BP Software, as set forth on Exhibit C, which is due Business Partner for each Sublicense. Page 2 3 1.15 "Source Code" means the statements which define the BP Software functions which, when assembled or compiled become the executable code of the BP Software and includes both the human readable and machine readable forms; however, it shall not include the source code for any third party software contained in the BP Software. 1.16 "Sublicense(s)" means a non-exclusive, non-transferable (except as set forth in Section 15.11) right granted by HBOC to a HBOC Customer under a Sublicense Agreement to use an object code copy of the BP Software in connection with the license and use of the Integrated Software. 1.17 "Sublicense Agreement" means the terms and conditions pursuant to which HBOC Customer will be licensed to use Integrated Software, such terms and conditions to include at a minimum the terms and conditions set forth in Exhibit D. 1.18 "Territory" means the geographical area and territories listed in Exhibit E. The Territory may be extended pursuant to the mutual written agreement of the parties. 2. TERM. 2.1 Term. This Agreement shall commence on the Effective Date and shall continue in full force and effect for a period of {*} years ("Initial Term"), unless earlier terminated as provided for below in Article 14. Thereafter, this Agreement will automatically renew for successive terms of one (1) year each ("Renewal Terms"). Either party may terminate this Agreement without cause at the end of the Initial Term or any Renewal Term by providing at least twelve (12) months prior written notice to the other party. 3. LICENSE. 3.1 License Grant. Subject to the terms and conditions of this Agreement, Business Partner hereby grants HBOC, its Affiliates and Distributors, a non-exclusive, non-transferable (except as set forth in Section 15.11), license to use BP Software in the Territory on any computer system operated by HBOC for the purposes of testing, developing, interfacing and integrating the BP Software with HBOC Software and for marketing, demonstrating, educating, installing and supporting and maintaining Integrated Software. Additionally, HBOC shall have the right to incorporate all or portions of the Documentation pertaining to an end-user's installation, training, and use of the BP Software or pertaining to HBOC's integration, testing, and support of the BP Software into documentation created by HBOC for the Integrated Software, provided that HBOC identifies such Documentation or portions thereof as being proprietary to Business Partner. HBOC shall not attempt to reverse engineer the BP Software in any way, including but not limited to disassembly of the BP Software, to derive an equivalent of the BP Software. Ownership of all copyrights, trade secrets, patents, patents pending, trademarks and other intellectual and property rights in the BP Software and all other items licensed to HBOC hereunder is and remains in Business Partner. Nothing in this Agreement shall be construed as conveying or transferring ownership or title of the BP Software or the other items licensed hereunder to HBOC. 3.2 Sublicenses. Business Partner further grants HBOC, its Affiliates and Distributors, a non-exclusive, non-transferable (except as set forth in Section 15.11), license to (a) distribute the Integrated Software in the Territory to HBOC Customers, provided HBOC first obtains a written Sublicense Agreement (the license term of which may be perpetual); and (b) provide data processing and facility management or outsourcing services to HBOC Customers. HBOC, its Affiliates and Distributors may also grant Sublicenses which permit HBOC Customers to access their data within the Integrated Software by means of remote access (e.g., electronic transfer, remote dial-in, etc.) for the purposes of supplementing, modifying, deleting, reporting or reviewing data. HBOC Customers shall be prohibited from using Integrated Software to process data for unrelated third parties; however, this restriction, with respect to the processing of data, shall not apply to local or remote access by Affiliates of HBOC Customers, such as physicians and outpatient facilities or any agent of an HBOC Customer which is operating, supporting or using Integrated Software for or on behalf of HBOC Customers, which access and use is expressly permitted. HBOC shall be solely responsible for negotiating the terms of the Sublicense Agreements. Page 3 4 3.3 Copies. HBOC and its Affiliates and Distributors may make copies of BP Software for the functions required or permitted in this Article 3 and may also make a reasonable number of copies of BP Software for purposes for archival, backup and disaster recovery. HBOC shall reproduce, on each copy of BP Software, all Business Partner patent, patent pending, trademark, copyright, confidentiality and proprietary notices, or legends, as may be established, revised, and provided in guidelines to HBOC from time to time by Business Partner. 3.4 Trademarks. 3.4.1 Business Partner grants HBOC a non-exclusive, non-transferable (except as set forth in Section 15.11) right to use and display, at HBOC's discretion, Business Partner's trademarks to advertise and promote the Integrated Software. HBOC shall use such trademarks in accordance with Business Partner's published guidelines, a copy of which shall be delivered to HBOC promptly following execution of this Agreement. HBOC shall not receive any ownership in or to Business Partner's trademarks as a result of such use. HBOC shall not use any of Business Partner's trademarks, service marks, logos, or slogans in any manner likely to confuse, mislead, or deceive the public, or to be adverse to the best interests of Business Partner. 3.4.2 HBOC grants to Business Partner limited permission to use the HBOC's trademarks solely to identify itself as a partner of HBOC. Business Partner shall use such trademarks in accordance with the guidelines established by HBOC (from time to time), a current copy of which is attached to this Agreement as Exhibit F. Business Partner shall submit all such materials to HBOC for prior review and approval. Business Partner shall not use any of HBOC's trademarks, service marks, logos, or slogans in any manner likely to confuse, mislead, or deceive the public, or to be adverse to the best interests of HBOC. 3.5 Private-Label Option. Notwithstanding anything to the contrary in this Agreement, HBOC shall have the right, exercisable at its option, to market and sublicense the Integrated Software (and the BP Software, if HBOC exercises the option granted in Section 3.5) under HBOC's private label Should HBOC desire to exercise this right, it will provide written notice to Business Partner and submit to Business Partner for approval, a private-label marketing plan. HBOC shall reproduce, on each copy of the BP Software or the Integrated Software, all Business Partner patent, patent pending, trademark, copyright, confidentiality and proprietary notices, or legends, as may be established, revised, and provided in guidelines to HBOC from time to time by Business Partner. 4. SOURCE CODE ESCROW. 4.1 Escrow Account. Within thirty (30) days following the execution of this Agreement, Business Partner shall place the Source Code into an escrow account with a reputable, financially sound, industry recognized third party consented to by HBOC to act as the escrow agent ("Escrow Agent") under the terms of a mutually acceptable escrow agreement (the "Escrow Agreement"). A fully executed copy of the Escrow Agreement, together with a receipt from the Escrow Agent acknowledging receipt of the Source Code, shall be delivered to HBOC within five (5) days after execution of the Escrow Agreement. In addition to the initial delivery of Source Code, Business Partner shall deliver to the Escrow Agent, within thirty (30) days following general availability, copies of all New Releases of the BP Software, and shall provide HBOC with receipts of such additional deposits, executed by the Escrow Agent. Business Partner shall be responsible for all costs incurred in connection with the Escrow Agreement. 4.2 Release of Source Code from Escrow Account. In the event that Business Partner (a) becomes insolvent or ceases to carry on business, and the business of Business Partner is not carried on by a receiver or trustee or assignee; or (b) Business Partner discontinues or fails to provide the BP Software or support or maintenance of the BP Software in accordance with the terms of this Agreement for any reason whatsoever, then HBOC shall have the right to receive, possess, and use (but not own) a copy of the Source Code released from the Escrow Account for the purpose of developing, maintaining, modifying and marketing the Integrated Software in accordance with the terms of this Agreement so long as HBOC continues to pay the appropriate fees due to Business Partner hereunder times a factor of {*}. Page 4 5 5. DELIVERY. 5.1 Initial Delivery. Business Partner shall deliver to HBOC, at no charge, a reasonable number of copies of the most recent version (unless HBOC specifies a different available version) of BP Software and Documentation for use by HBOC in accordance with Section 3.1 within fifteen (15) days after the Effective Date. 5.2 New Releases. Business Partner shall deliver to HBOC, at no additional charge and within thirty (30) days after general availability by Business Partner a reasonable number of copies of New Releases and Documentation related to such New Releases for use by HBOC in accordance with Section 3.1. 5.3 Customer Delivery. HBOC shall deliver the Integrated Software to HBOC Customers subject to a Sublicense Agreement. HBOC shall be responsible for installation and implementation at HBOC Customer sites. HBOC may copy BP Software to electronic media for delivery or may deliver BP Software and Documentation via electronic interchange. 5.4 Development and Delivery of Enhancements. Business Partner shall use its best efforts to deliver the Enhancements described on Exhibit G within ninety (90) days (but in any case no later one hundred eighty (180) days) from the Effective Date. 6. MARKETING. 6.1 Generally. HBOC will use reasonable efforts to market the Integrated Software. It is the parties' intention that HBOC, or its Affiliates or Distributors, be the single channel through which HBOC Customers procure Integrated Software; and that all agreements, licenses, orders and invoices for the Integrated Software shall be by and between HBOC (or its Affiliate or Distributor) and an HBOC Customer. Notwithstanding the foregoing, if requested by the customer Business Partner shall not be prohibited from fulfilling orders for add-on sales to an HBOC Customer that is one of Business Partner's existing customers listed on Exhibit J. Business Partner shall at all times during the term of this Agreement maintain policies and procedures with regard to its sales force such that Business Partner's sales representatives are given incentive and compensation for sales made by HBOC to HBOC Customers. 6.2 HBOC and Business Partner are both currently in the process of developing and marketing solutions that, generally, may be described as "enterprise master patient index" (EMPI) solutions. By execution of this Agreement, the parties agree to reduce the potential for channel conflict and further the business relationship by exploring additional avenues to work together. As such, the parties intend to reach agreement to reduce the potential for conflicts within a period of ninety (90) days following the Effective Date. The parties will use reasonable efforts to share the necessary and appropriate information about their respective EMPI products and strategies in order to enter into a mutually acceptable agreement. In the event the parties are unable to reach a mutual agreement within the time period specified above, Business Partner shall immediately cease marketing of its EMPI product and shall enter into an agreement (the "EMPI Agreement") containing terms and conditions substantially similar to the terms and conditions set forth in this Agreement, pursuant to which Business Partner shall remarket and sublicense HBOC's EMPI product. Unless otherwise expressly agreed, the EMPI Agreement shall include the following provisions: (a) Business Partner shall be permitted to support its own EMPI product indefinitely for its existing customers, (b) Business Partner shall remit to HBOC a royalty equal to {*}% of the list price for sublicenses of HBOC's EMPI, except that the first twenty-four (24) such sublicenses by Business Partner shall be royalty-free, (c) Business Partner shall provide first level support for its customers and shall be entitled to retain {*}% of the maintenance fees associated with those sublicenses, and (d) for a period of twenty four (24) months from the effective date of the EMPI Agreement, Business Partner shall have a royalty-free license to convert any of its existing EMPI customers to HBOC's EMPI. Page 5 6 6.3 Marketing Activities. HBOC and Business Partner, as appropriate, may perform some or all of the following marketing activities: 6.3.1 Press Releases. Subject to each party's prior written approval, issue a press release announcing the creation of the marketing relationship and additional press releases from time to time to publicize other significant events regarding joint business developments. 6.3.2 Marketing Collateral. Work together to develop articles or entries regarding Integrated Software for the HBOC marketing publications, including without limitation: Fact Sheets, Business Partner Solutions Directory, HBOC Sales Manual and For Your Arsenal, and any other marketing publications released by HBOC from time to time during the term of this Agreement. HBOC shall include references to the BP Software in presentations, as appropriate, and shall be responsible for the design and development of marketing collateral for the Integrated Software. 6.3.3 RFP Responses. Recommend Integrated Software as a solution in responses to requests for proposals ("RFP's") from HBOC Customers, provided Business Partner cooperates with HBOC in the preparation of such responses, such cooperation to include, without limitation, ensuring the accuracy of HBOC's responses to questions regarding BP Software contained in RFP's, the development and update of standard information required to support HBOC responses to RFP's, and support to HBOC's RFP Specialists as required in connection with clarifications to RFP responses. 6.3.4 Demonstrations. Business Partner shall provide HBOC a reasonable amount of sales support which may include demonstrations of the BP Software, either at an HBOC or HBOC Customer site, and attendance at sales presentations by HBOC. 6.3.5 Representatives. Each party shall assign a representative who shall serve as that party's point-of-contact or facilitator between the parties on all matters arising under this Agreement. The representatives shall meet on a mutually agreed upon basis to review and coordinate all activities under this Agreement, including development, support, marketing, and sales, and to amicably resolve any disputes which may arise under this Agreement. 6.3.6 Sales Training and Assistance. From time to time and at no charge to HBOC, upon mutually agreeable terms and conditions, HBOC and Business Partner may organize and hold sales training workshops for the BP Software and/or the Integrated Software. Business Partner agrees to respond timely and effectively to reasonable requests for assistance from HBOC in order to promote the license of the Integrated Software by HBOC. 6.3.7 Business Partner Database. HBOC will include information about Business Partner, BP Software and Integrated Software in HBOC's Business Partner Database for use by HBOC sales representatives, Affiliates, Distributors and others. 6.3.8 Trade Show Attendance. Upon HBOC's reasonable request, Business Partner shall participate with HBOC at vendor fairs and healthcare informatics industry trade shows, seminars and selected user group events. 6.3.9. Web Page References. It is the intent of the parties to establish a web page link on each party's home page to the home page of the other party within a reasonable period of time following execution of this Agreement. 7. BUSINESS PARTNER RESPONSIBILITIES. During the term of this Agreement, Business Partner shall provide the following support and resources to HBOC: 7.1. Technical Support for HBOC. Business Partner shall provide to HBOC, at no additional charge, reasonable technical support and consultation from Business Partner's designated offices by way of telephone, bulletin boards or other electronic means, to assist HBOC in the resolution of problems encountered by HBOC or HBOC Customers in the operation, configuration, implementation and support of BP Software seven (7) days per week, Page 6 7 twenty-four (24) hours each day. Such support shall include commercially reasonable efforts by Business Partner to verify, diagnose and correct errors and defects in the BP Software in accordance with the support and escalation procedures set forth at Exhibit H. Business Partner agrees to support the release immediately prior to the New Release of the BP Software for a minimum of twelve (12) months after the general availability of a New Release. 7.1.1 Initial Staffing for HBOC Support Desk. Within forty-five (45) days of the Effective Date and for a period of one (1) year thereafter, Business Partner shall provide to HBOC, at no additional charge, two (2) qualified full-time personnel to reside at HBOC's facilities in Atlanta, Georgia (Windward office) to augment HBOC's staff in providing support to HBOC's Customers regarding the BP Software. These Business Partner personnel shall be available for emergency after hours support twenty-four (24) hours per day, seven (7) days per week as required. HBOC shall be responsible for reasonable travel and lodging expenses incurred by Business Partner under this Section 7.1.1, which in any case shall not exceed one thousand dollars ($1,000) per person per month. 7.2 Pre-releases. Upon HBOC's reasonable request, Business Partner shall provide newly developed or beta versions ("Pre-releases") of BP Software for review, evaluation, training and planning purposes, provided that HBOC makes available to Business Partner a written critique of such Pre-release software after completing its evaluation. Business Partner shall make Pre-releases available to HBOC no later than when Business Partner makes the same available to other value added resellers of the BP Software. ANY PRE-RELEASE SOFTWARE IS PROVIDED TO HBOC "AS IS" AND BUSINESS PARTNER MAKES NO WARRANTIES AND SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES REGARDING THE PRE-RELEASE SOFTWARE. 7.3 Participation in Development. HBOC may participate in any development councils or other customer steering committees which Business Partner may establish to gather input for the future direction and ongoing development of BP Software. Business Partner shall also provide HBOC with frequent communication regarding contemplated New Releases, Enhancements, and other product directions, including providing HBOC with copies of BP Software under development in order that HBOC may fully utilize all the features of the BP Software as early as is technically feasible, all of which shall be provided to HBOC no later than provided to any third party. 7.4 HBOC Training. Business Partner shall provide to HBOC, at no additional charge, adequate initial training and re-training as reasonably necessary and requested by HBOC on the use, operation and installation of BP Software. All training shall be conducted by qualified personnel at such facilities and at such times mutually agreed to by the parties, it being contemplated that initially Business Partner's personnel shall provide such training in one or more sessions at HBOC's offices. Unless otherwise expressly agreed, travel and living expenses incurred by each party in connection with the training shall be the responsibility of the party incurring the expenses. 7.5 Professional Services. Business Partner shall make professional services available to HBOC beyond the scope of those provided in this Article 7 as set forth in Exhibit I. 7.6 Continued Development of BP Software. Recognizing that a significant portion of a customer's perceived value in any software is the developer's continued investment in improved and enhanced versions thereof, Business Partner shall devote appropriate resources to developing improved and enhanced versions of the BP Software (including versions designed to be compatible with new hardware, database, presentation/windowing, and operating system features and versions with improved and additional features). 7.7 Sale of Line of Business. In the event that HBOC should transfer any line of business whose software products are dependent on the BP Software, Business Partner shall not unreasonably refuse to enter into a distributorship agreement with the buyer of such product line on terms comparable to Business Partner's then current terms for such a relationship. 8. HBOC RESPONSIBILITIES. During the term of this Agreement, HBOC shall provide the following resources: 8.1 Customer Support. HBOC shall provide HBOC Customer with their sole contact point for maintenance and support, and may either perform the installation of the Integrated Software and the training of HBOC Customer personnel in Page 7 8 the use of the Integrated Software or sub-contract with Business Partner for such services. Business Partner shall provide appropriate levels (both in quantities and experience) of staff to support HBOC in answering technical questions, as specifically set forth in Section 7.1 of this Agreement, identifying and resolving errors in the BP Software, and providing temporary solutions to BP Software errors which are not immediately resolvable. In accordance with procedures established by the parties, Business Partner shall prioritize work on error corrections and shall from time to time provide HBOC with New Releases incorporating such error corrections. 8.2 New Releases. HBOC shall use reasonable efforts to incorporate New Releases into the Integrated Software for distribution to HBOC Customers which have purchased software support services for the Integrated Software from HBOC. While it is the parties' desire that the Integrated Software contain the New Releases, they acknowledge that the Integrated Software is complex and that such changes may require substantial development efforts on behalf of HBOC, third parties and HBOC Customers, and that whether the New Releases are incorporated into the Integrated Software is in the sole discretion of HBOC. 8.3 Sublicense Agreement Enforcement. In the event HBOC becomes aware of a breach of a Sublicense Agreement by an HBOC Customer which affects Business Partner's rights it shall use commercially reasonable efforts to enforce the terms of the Sublicense Agreement, using no less efforts that HBOC would use to protect its own rights under similar circumstances. 9. PRICES AND PAYMENT. 9.1 Customer Fees. HBOC shall unilaterally determine the fees to be charged to HBOC Customers for the Integrated Software, including without limitation, software license, implementation, customization and support fees. There will be no additional fees payable by HBOC for any Corrections delivered to HBOC or HBOC Customers during the term of this Agreement and for so long as support fees are paid to Business Partner by or on behalf of HBOC Customers. 9.2 Royalty and Royalty Reports. For each Sublicense granted pursuant to this Agreement, Business Partner shall be entitled to the applicable Royalty, as set forth in Exhibit C. HBOC shall report Royalties due Business Partner for each calendar quarter within thirty (30) days following the last day of the quarter (e.g., a royalty report for the calendar quarter beginning January 1 and ending March 31 would be due on April 30). Such royalty report shall include the following information for each Sublicense: HBOC Customer name and address, BP Software and Integrated Software licensed, effective date of the Sublicense Agreement, Royalty and software support fees due Business Partner, and an estimated effective date for the commencement of software support services. Upon receipt of a royalty report, Business Partner shall issue an invoice to HBOC for the total Royalties and for that portion of the software support fees which are due and payable. Payments shall be made within thirty (30) days following HBOC's receipt of the invoice. The identities of HBOC Customers disclosed in the royalty report shall be deemed Proprietary Information for purposes of this Agreement. 9.3 Software Support Fee. In consideration for the technical support provided by Business Partner pursuant to Section 7.1, HBOC shall pay Business Partner a software support fee as set forth in Exhibit C. No software support fee shall be due to Business Partner for Sublicenses which are not supported by HBOC. The software support fees shall be paid by HBOC on an annual basis beginning March 1 of each year during the term of this Agreement. 9.4 Business Partner Prices; Discounts. Current Agreement List Prices for BP Software and support and maintenance for the BP Software are set forth on Exhibit B. Business Partner reserves the right to increase these Agreement List Prices no more than once in any consecutive twelve (12) month period, upon at least 120 days prior written notice to HBOC; however, there will be no increase during the first twelve months of the term of this Agreement. No annual increase for any prices shall exceed the lesser of (i) an amount no greater than the percentage of any increase over the preceding 12-month period in the Consumer Price Index or (ii) five percent (5%), and during the Initial Term of this Agreement, the cumulative increases will not exceed {*}. The List Price in effect when the HBOC Customer enters into the Sublicense Agreement shall control, except that where HBOC (or its Affiliate or Distributor) has quoted a price and the HBOC Customer enters into a Sublicense Agreement within 120 days of such quotation and a price increase would otherwise go into effect, the List Price in effect as of the date of such quote shall be used. In the event Business Partner provides discounts Page 8 9 greater than the discounts provided herein to any similarly situated so-called reseller or distributor, HBOC shall be entitled to receive the benefit of such discount for as long as such discount is in effect. Business Partner shall notify HBOC of all such transactions for which HBOC either qualifies or which it might qualify for if it agreed to the conditions of such other transaction. 9.5 Payment Terms; Conversion Methods. 9.5.1 HBOC shall collect all fees directly from HBOC Customers and distribute Business Partner's portion of such fees to Business Partner. Except as otherwise permitted herein, HBOC shall pay all invoices submitted by Business Partner within thirty (30) days of receipt. In addition, HBOC reserves the right to withhold payment to Business Partner for other invoices, in whole or in part, which HBOC disputes in good faith and in writing to Business Partner. The parties agree to use reasonable efforts to settle such payment disputes. If HBOC, in its reasonable discretion, must refund all or a portion of the fees collected for BP Software to an HBOC Customer and Business Partner has been paid by HBOC in accordance with this section, then HBOC shall deduct from the next payment to Business Partner the amounts refunded to the HBOC Customer. 9.5.2 For the purposes of calculating currency conversions in the event Business Partner establishes different prices in different countries HBOC shall either use the method it uses for its own internal accounting, which must conform to Generally Accepted Accounting Principles (GAAP), or an exchange rate for each calendar month based upon the exchange rates printed in The Wall Street Journal (Eastern Edition) on the last day in each calendar quarter. Business Partner's List Prices outside of the United States for countries in which Business Partner does not have a distributor shall not exceed the ratio established by HBOC for its products in such country compared to its United States charges. Business Partner may from time to time obtain such ratios from HBOC which shall be binding on the parties until a new ratio is established by notice from HBOC or upon Business Partner's request. 9.6 Taxes. HBOC shall be responsible for payment of any sales or use or similar taxes (except those based on income to Business Partner) relating to the Sublicenses. 9.7 Expenses. Except as otherwise specified in this Agreement or agreed to by the parties, each party shall be solely responsible for its own travel and out-of-pocket expenses incurred in the performance of its obligations under this Agreement. 10. PROPRIETARY RIGHTS AND CONFIDENTIALITY. 10.1 Ownership and Protection. Each party agrees that it has no interest in or right to use the Proprietary Information of the other except in accordance with the terms of this Agreement. Each party acknowledges that it may disclose Proprietary Information to the other in the performance of this Agreement. The party receiving the Proprietary Information shall: (i) maintain it in strict confidence and take all reasonable steps to prevent its disclosure to third parties, except to the extent necessary to carry out the purposes of this Agreement, in which case these confidentiality restrictions shall be imposed upon the third parties, through written agreement with said third parties, to whom the disclosures are made, (ii) use at least the same degree of care as it uses in maintaining the secrecy of its own Proprietary Information (but no less than a reasonable degree of care) and (iii) prevent the removal of any proprietary, confidential, copyright, patent, patent pending, or trademark notices placed on the Proprietary Information. Proprietary Information shall be maintained as confidential during the term of this Agreement and for a period of two (2) years after expiration or earlier termination of this Agreement, except that any and all Proprietary Information which constitutes a trade secret shall be maintained as confidential for as long as such Proprietary Information remains a trade secret. 10.2 Limitation. Neither party shall have any obligation concerning any portion of the Proprietary Information of the other which: (i) is publicly known prior to or after disclosure hereunder other than through acts or omissions attributable to the recipient or its employees or representatives; (ii) as demonstrated by prior written records, is already known to the recipient at the time of disclosure hereunder; (iii) is disclosed in good faith to the recipient Page 9 10 by a third party having a lawful right to do so; or (iv) is the subject of written consent of the party which supplied such information authorizing disclosure; or (v) is required to be disclosed by the receiving party by applicable law or legal process, provided that the receiving party shall immediately notify the other party so that it can take steps to prevent its disclosure. 10.3 Remedies for Breach. In the event of a breach of this Article 10, the parties agree that the non-breaching party may suffer irreparable harm and the total amount of monetary damages for any injury to the non-breaching party may be impossible to calculate and may therefore be an inadequate remedy. Accordingly, the parties agree that the non-breaching party may be entitled to temporary, preliminary and permanent injunctive relief against the breaching party, its officers or employees, in addition to such other rights and remedies to which it may be entitled at law or in equity. 10.4 Rights to Additional Applications. Business Partner acknowledges that HBOC shall have the right (without obligation to Business Partner) to develop and market software which operates in conjunction with the BP Software (but does not include the BP Software) which performs other applications, interfaces the BP Software to other software, or improves the ease of use of the BP Software (such as front-end software); even though such software requires the BP Software to operate. Nothing in this Agreement shall be construed as restraining the either party or its Affiliates from developing or otherwise acquiring for its own purposes or for marketing computer software similar or identical in function to that of the other party, except that such development shall not make use of any Proprietary Information disclosed pursuant to this Agreement and that such computer software shall not violate any intellectual property rights of the other party. 11. WARRANTIES. 11.1 Business Partner Warranties. 11.1.1 Warranties of Authority and Title. Business Partner hereby warrants and represents that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the state in which it was organized and has full power and authority to enter into and consummate the transactions contemplated in this Agreement; (ii) the execution, delivery and performance of this Agreement does not violate the terms of any security agreement, license, or any other contract or written instrument to which Business Partner is bound; (iii) the BP Software does not infringe any patent, trademark, copyright or trade secret of a third party; and (iv) it is not aware of any third party infringing on the rights of Business Partner with respect to the BP Software. 11.1.2 Product Warranties. Business Partner hereby warrants and represents that BP Software, including all modifications, Corrections, Enhancements and New Releases will have the functions and features and perform in material respects as described in the Documentation and other marketing material provided to HBOC or to HBOC Customers by Business Partner during the term of this Agreement. Business Partner further warrants that prior to delivery, the BP Software has been audited and tested in accordance with Business Partner's internal quality control processes and will be free from any virus, worm, trap door, back door, timer, clock, counter or other limiting routine, instruction or design that would erase data or programming or otherwise cause the BP Software or HBOC Software to become inoperable or incapable of being used in accordance with its documentation, and that the BP Software contains no third party software which would require HBOC to agree to any terms and conditions in addition to those set forth in this Agreement. In the event that the BP Software fails to conform to such warranties, Business Partner shall promptly and continuously provide such software support as necessary to cause the BP Software to perform as warranted. Business Partner warrants that the BP Software shall meet all Federal, state and local laws regulations and policies. HBOC agrees not to make any representations or warranties with respect to the BP Software other than the limited warranties made by Business Partner herein. 11.1.3 Pass-Through Warranty. HBOC may assign to HBOC Customers to whom it has granted Sublicenses, its rights in, to and under the warranties and infringement indemnification set forth in this Article 11, and upon such assignment, such HBOC Customers shall have the benefit of the warranties and be subject to the limitations thereon. Page 10 11 11.1.4 Business Partner Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 11 OR OTHERWISE UNDER THIS AGREEMENT (OR ANY OTHER AGREEMENT BETWEEN THE PARTIES) OR IN ANY OTHER BUSINESS PARTNER MATERIALS OR DOCUMENTATION PROVIDED TO LICENSEES OF BP SOFTWARE, BUSINESS PARTNER DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARISING BY LAW OR CUSTOM, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 11.1.5 Year 2000 Warranty: Both parties warrant that the occurrence in or use by any of its software included in the Integrated Software of dates on or after January 1, 2000 (the "Millennial Dates") will not adversely affect the performance of its Software with respect to date-dependent data, computations, output or other functions (including, without limitation, calculating, computing or sequencing), and its Software will create, store and generate output data related to or including the Millennial Dates without errors or omissions. In the event that BP Software fails to conform to such warranty, Business Partner shall provide software support as necessary to cause BP Software to conform to such warranty. In the event that HBOC's software fails to conform to such warranty, HBOC shall indemnify, defend, and hold harmless Business Partner from any claims, demands, liabilities, losses, damages, judgments, or settlements, including all reasonable costs and expenses related thereto including attorney's fees, directly or indirectly resulting from any claimed breach of such warranty. 11.2 HBOC Warranties. 11.2.1 Warranties of Authority. HBOC hereby warrants and represents that (i) it is a corporation duly organized, validly existing and in good standing under the laws of the state in which it was organized and has full power and authority to enter into and consummate the transactions contemplated in this Agreement; and (ii) the execution and performance of this Agreement does not violate the terms of any security agreement, license, or any other contract or written instrument and that it possesses or will possess, prior to granting the first Sublicense, the appropriate licenses and agreements with third parties necessary for the development and distribution of the Integrated Software. 11.2.2 HBOC Disclaimer. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 11.2 OR OTHERWISE UNDER THIS AGREEMENT (OR ANY OTHER AGREEMENT BETWEEN THE PARTIES) HBOC DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, ARISING BY LAW OR CUSTOM, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 12. INTELLECTUAL PROPERTY INDEMNIFICATION. Business Partner shall indemnify, defend and hold harmless HBOC, its Affiliates and Distributors, and HBOC Customers and their officers, directors, employees agents and affiliates (collectively, for purposes of this Section 12, "HBOC Persons") from all damages, liabilities and expenses (and all legal costs including attorneys' fees, court costs, expenses and settlements resulting from any action or claim) arising out of, connected with or resulting in any way from: (i) any allegation that the possession, distribution or use (by HBOC, its Affiliates, Distributors or HBOC Customers) of BP Software infringes a patent, trademark, copyright, trade secret or other intellectual property right of a third party and (ii) the performance or use of BP Software (by HBOC, its Affiliates, Distributors or HBOC Customers). If any such claim or proceeding arises, HBOC Persons seeking indemnification hereunder shall give timely notice of the claim to Business Partner after it receives actual notice of the existence of the claim. Business Partner shall have the option, at its expense, to employ counsel reasonably acceptable to HBOC Persons to defend against such claim and to compromise, settle or otherwise dispose of the claim; provided, however, that no compromise or settlement of any claim admitting liability of or imposing any obligations upon HBOC Persons may be affected without the prior written consent of HBOC Persons. In addition, and at the option and expense of Business Partner, Business Partner may, at any time after any such claim has been asserted, and shall, in the event any BP Software is held to constitute an infringement, either procure for HBOC Persons the right to continue using that the BP Software, or replace or modify the BP Software so that it becomes non-infringing, provided that such replacement or modified BP Software has the same functional characteristics as the infringing BP Software, or, if the prior two remedies are Page 11 12 commercially impractical, refund to HBOC all fees, costs, and charges paid by HBOC to Business Partner for that BP Software and any other BP Software reasonably rendered ineffective as the result of said infringement. HBOC shall cooperate fully in such actions, making available books or records reasonably necessary for the defense of such claim. If Business Partner refuses to defend or does not make known to HBOC Persons its willingness to defend against such claim within ten (10) days after it receives notice thereof, then HBOC Persons shall be free to investigate, defend, compromise, settle or otherwise dispose of such claim in its best interest and incur other costs in connection therewith, all at the expense of Business Partner. 13. LIMITATION OF LIABILITY. 13.1. Exclusion of Consequential Damages. NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY CONSEQUENTIAL, INDIRECT OR SPECIAL DAMAGES, WHETHER FORESEEABLE OR UNFORESEEABLE, BASED ON CLAIMS OF THE OTHER PARTY OR ITS CLIENTS OR CUSTOMERS (INCLUDING WITHOUT LIMITATION CLAIMS FOR GOODWILL, LOST PROFITS OR USE OF MONEY) ARISING OUT OF BREACH OF EXPRESS OR IMPLIED WARRANTIES, BREACH OF CONTRACT, MISREPRESENTATION, NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT, EXCEPT ONLY IN THE CASE OF PERSONAL INJURY WHERE AND TO THE EXTENT THAT APPLICABLE LAW REQUIRES SUCH LIABILITY; PROVIDED, HOWEVER, THAT NOTHING CONTAINED HEREIN SHALL IMPAIR OR LIMIT BUSINESS PARTNER'S INDEMNIFICATION OBLIGATIONS UNDER SECTION 12. 13.2. Limitation of HBOC's Obligations. HBOC reserves the right to withhold service or otherwise cease performance of its development, marketing, maintenance and support obligations hereunder with respect to any HBOC Customer which is found by HBOC to be in default or breach of any agreement with HBOC. Upon such cessation of services to an HBOC Customer, HBOC shall be relieved of its performance obligations contained in this Agreement with respect to such HBOC Customer, and shall not be found to be in breach of this Agreement by Business Partner. HBOC's aggregate liability to Business Partner for damages concerning performance or nonperformance by HBOC or in any way related to the subject matter of this Agreement, regardless of whether the claim for such damages is based on contract or tort, shall not exceed the amount received by Business Partner from HBOC during the previous twelve months for the BP Software giving rise to such claim. 13.3 Limitation of Business Partner Obligations. Business Partner reserves the right to withhold performance hereunder with respect to any HBOC Customer which is found by HBOC to be in default or breach of any agreement with HBOC. HBOC shall promptly notify Business Partner of any such HBOC Customer. Upon cessation of services by HBOC pursuant to Section 13.2, Business Partner shall be relieved of its obligations contained in this Agreement with respect to said HBOC Customer. Business Partner's aggregate liability to HBOC for damages concerning performance or nonperformance by Business Partner or in any way related to the subject matter of this Agreement, regardless of whether the claim for such damages is based on contract or tort, shall not exceed, with respect to each HBOC Customer, the amount received by Business Partner from HBOC for BP Software sublicensed to each said respective HBOC Customer. 14. TERMINATION; DISPUTE RESOLUTION. 14.1 Early Termination. Either party may terminate this Agreement immediately by notice to the other party upon the occurrence of any of the following events of default by the other party: (i) The other party fails to observe, perform or fulfill any of its obligations or warranties (other than confidentiality obligations) under the Agreement and fails to cure such default within thirty (30) days after the non-defaulting party gives notice of such failure; (ii) The other party fails to observe, perform or fulfill any confidentiality obligation imposed hereunder and fails to cure such default within ten (10) days after the non-defaulting party gives notice of such failure; (iii) The other party's business is liquidated, dissolved or suspended; Page 12 13 (iv) The other party is prevented from performing any of its material obligations hereunder for more than ninety (90) days due to an event beyond its reasonable control as described in Section 15.12; or (v) Any representation or warranty made herein by the other party is false or misleading in any material respect as of the date on which it was made or becomes false or misleading in any material respect at any time thereafter. 14.1.1 Termination By Either Party. Either party may terminate this Agreement without cause at the halfway point {*} years of the Initial Term by providing at least six (6) months written notice to the other party. 14.2 Termination by HBOC. HBOC may, in its reasonable discretion, terminate this Agreement immediately by providing notice to Business Partner upon the occurrence of a change in the direct or indirect ownership or control of Business Partner which in HBOC's opinion may adversely affect HBOC's rights, goodwill, HBOC Customer relationships or competitive position. 14.3 Obligations After Expiration or Termination. Upon the expiration or termination of this Agreement for any reason: (i) Except as otherwise specified below in clause (ii), each party will promptly cease using and destroy or return to the other party all advertisements and promotional materials that bear a trademark of the other party and all Proprietary Information of such other party. (ii) HBOC may retain the BP Software and other Proprietary Information provided by Business Partner during the term of this Agreement solely for the purpose of performing the functions permitted under this Agreement as necessary to fulfill the provisions of Sublicense Agreements existing on the date of expiration or termination until such time as the last Sublicense Agreement expires or terminates. (iii) Business Partner shall continue to perform all applicable warranty and technical support and other obligations regarding that BP Software in accordance with the provisions of this Agreement for the fees negotiated in this Agreement as necessary to enable HBOC to fulfill the provisions of Sublicense Agreements existing on the date of expiration or termination of this Agreement until such time as the last Sublicense Agreement expires or terminates. (iv) HBOC Customers may continue to use the BP Software provided to them pursuant to this Agreement, so long as such HBOC Customers have in effect a Sublicense Agreement on the effective date of expiration or termination of this Agreement. 14.4 Survival. The following provisions of the Agreement shall survive expiration or termination of this Agreement: Articles 4, 10, 12 and 14 and Sections 9.1, 9.3, 9.6, 9.7, and 15.4. 14.5 Dispute Resolution. Except when seeking equitable relief, in the event of a dispute between the parties and for which dispute the parties are unable to reach a mutually agreeable resolution, the dispute shall be submitted to arbitration under the commercial arbitration rules of the American Arbitration Association then in effect. There shall be one arbitrator mutually agreed to by both parties; such arbitrator shall have experience in the area of controversy. After the hearing, the arbitrator shall decide the controversy and render a written decision setting forth the issues adjudicated, the resolution thereof and the reasons for the award. The award of the arbitrator shall be conclusive. Each party shall be responsible for its own attorney's fees in connection with the arbitration. Payment of the expenses of arbitration, including the fee of the arbitrator and exclusive of the attorney's fees of the parties, shall be borne equally by the parties. 15. MISCELLANEOUS PROVISIONS. 15.1 Independent Contractors. It is expressly agreed that Business Partner and HBOC are acting under this Agreement as independent contractors, and the relationship established under this Agreement shall not be construed as a partnership, joint venture or other form of joint enterprise, nor shall one party be considered an Page 13 14 agent of the other. Neither party is authorized to make any representations or create any obligation or liability, expressed or implied, on behalf of the other party, except as may be expressly provided for in this Agreement. 15.2 Comparable Terms. The List Prices and Royalties of this Agreement shall not at any time be less favorable than any price terms offered by Business Partner to any similarly-situated third party which distributes BP Software in comparable volumes. In the event that Business Partner offers any third party more favorable price or non-price terms than those offered hereunder to HBOC, the Business Partner shall so notify HBOC, and the more favorable terms shall be immediately extended to HBOC. 15.3 Non-Exclusive. The parties reserve the right to enter into similar agreements with third parties for the purpose of marketing and distributing their respective products which are the subject of this Agreement or any other products providing the same or similar functions. 15.4 Access to Books and Records. The parties shall keep complete, accurate, and up-to-date books and records in accordance with generally accepted accounting principles and sound business practices covering all transactions relating to this Agreement. Either party and/or its qualified authorized representatives shall upon reasonable notice have the right (not more than once annually) to inspect, audit, and/or copy appropriate records in order to determine whether all provisions of this Agreement have been met. The parties agree that all information and records obtained in such audit shall be considered Proprietary Information and that individuals performing such audits shall be required to execute confidentiality agreements pertaining to the Proprietary Information (and including provisions substantially similar to the provisions herein relating to the Proprietary Information) prior to the performance of any such audits. This right to audit shall be available to either party for up to two (2) years following the termination or expiration of this Agreement. 15.5 Omnibus Reconciliation Act of 1980. If the provisions of Section 952 of the Omnibus Reconciliation Act of 1980, as amended (currently codified at 42 U.S.C. 1395x(v)1(I)), are or become applicable to this Agreement, then, until the expiration of four (4) years after the furnishing of services pursuant to this Agreement, Business Partner shall, upon written request, make available to the Secretary of Health and Human Services, the U. S. Comptroller General, or any other duly authorized representative of the federal government, the contracts and books, documents and records of Business Partner that are necessary to certify the nature and extent of costs related to this Agreement. 15.6 Compliance with Laws. Both parties, their employees and agents shall comply with applicable federal, state and local laws, ordinances, regulations and codes, including the identification and procurement of required permits, certificates, approvals and inspections, in the performance of this Agreement. 15.7 Export Assurance. HBOC hereby acknowledges and agrees that it will first obtain any export license or approval required by the United States Department of Commerce pursuant to the Export Administrative Regulation prior to exporting the Integrated Software. HBOC shall indemnify, defend and hold harmless Business Partner from all damages, liabilities, and expenses (and all legal costs including attorneys' fees, court costs, expenses and settlements resulting from any action or claim) arising out of, connected with or resulting in any way from HBOC's failure to comply with any export laws or regulations. 15.8 Headings/Days. The headings of the paragraphs of this Agreement are for convenience only and shall not be a part of or affect the meaning or interpretation of this Agreement. All references to "days" within this Agreement shall mean days during the standard business work week, excluding Saturdays and Sundays and including holidays of any kind. 15.9 Exhibits. This Agreement incorporates the attached Exhibits A, B, C, D, E, F, G, H, and I and any subsequent Exhibits or schedules referencing this Agreement. 15.10 Non-Solicitation of Employees. During the term of this Agreement and for a period of one (1) year thereafter, each party agrees that without the other party's prior written consent neither it nor its Affiliates shall solicit, hire or otherwise retain as an employee or independent contractor any person who during the previous twelve (12) months was an employee of the other party. Page 14 15 15.11 Assignment. This Agreement and any interest hereunder shall inure to the benefit of and be binding upon the parties and their respective successors, legal representatives and permitted assigns. Upon prior notice to the other party, either party may assign this Agreement: (i) to any legal entity in connection with the merger or consolidation of the assigning Party into such entity or the sale of all or substantially all of the assets of the assigning Party to such entity or (ii) to any direct or indirect subsidiary of the assigning party in connection with any corporate reorganization. Except as stated in the previous sentence, neither party may assign or delegate this Agreement without the other party's prior written consent, which consent shall not be unreasonably withheld. Any attempt to assign, delegate or otherwise transfer the Agreement in violation of this Section 15.11 is voidable by the other party. 15.12 Force Majeure. Neither party shall be responsible or considered in breach of this Agreement for any delay or failure in the performance of any obligation of this Agreement to the extent that such failure or delay is caused by acts of God, fires, explosions, labor disputes, accidents, civil disturbances, material shortages or other similar causes beyond its reasonable control, even if such delay or failure is foreseeable. Provided, however, that the non-performing party provides notice of such cause preventing or delaying performance and resumes its performance as soon as practicable and provided further that the other party may terminate this Agreement upon notice if such non-performance continues for a period of ninety (90) days. 15.13 Governing Law; Statute of Limitations. The validity and construction of this Agreement shall be governed by, subject to and construed in accordance with the laws of the state of Georgia, excluding its conflicts of law rules. Subject to Section 14.5, in the event either party employs attorneys to enforce any right arising out of or relating to this Agreement each party shall be responsible for its own attorney's fees and costs. Any claim arising out of or relating to this Agreement shall be commenced within one year of the date upon which the cause of action accrued (or, if one year is shorter than the maximum allowed by law, then the maximum period allowed by law shall apply). 15.14 Notices. All notices, requests, demands and other communications (collectively, "Notices") required or permitted by this Agreement shall be in writing and shall be delivered by hand, telex, telegraph, facsimile or like method of transmission or mailed by registered or certified mail, return receipt requested, first class postage prepaid, addressed as follows: Page 15 16 A. If to HBOC: HBO & Company of Georgia 301 Perimeter Center North Atlanta, Georgia 30346 Attn: General Counsel FAX: 404/393-6092 with a copy to: Vice President, Business Development B. If to Business Partner: Healthdyne Information Enterprises, Inc. 1850 Parkway Place, Suite 1100 Marietta, Georgia 30067 Attn: President and Chief Executive Officer FAX: 770/423-8580 If delivered by hand, telex, telegraph, facsimile or like method of transmission, the date on which a Notice is actually delivered shall be deemed the date of receipt and if delivered by mail, the date on which a Notice is actually received shall be deemed the date of receipt. Either party may change the address or designated person for receiving Notices by providing notice in accordance with this Section 15.14. 15.15 Severability. If any term of this Agreement is held as invalid or unenforceable, the remainder of this Agreement shall not be affected, and each term and provision shall be valid and enforced to the fullest extent permitted by law. 15.16 Entire Agreement/Amendments. This Agreement, including all Exhibits attached hereto, contains the entire agreement between the parties and supersedes all prior and contemporaneous proposals, discussions and writings by and between the parties and relating to the subject matter hereof. None of the terms of this Agreement shall be deemed to be waived by either party or amended or supplemented unless such waiver, amendment or supplement is written and signed by both parties. The invalidity or unenforceability of any particular provision of this Agreement, as determined by any court of competent jurisdiction or any appropriate legislature, shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted. No usage of trade or industry course of dealing shall be relevant to explain or supplement any term expressed in this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. HBO & COMPANY OF GEORGIA HEALTHDYNE INFORMATION ENTERPRISES, INC. Signature: /s/ Albert J. Bergonzi Signature: /s/ Robert I. Murrie -------------------------- ----------------------------- By: By: --------------------------------- ------------------------------------ Title: President Title: President Date: 9/8/98 Date: 9/8/98 Page 16 17 EXHIBIT A BP SOFTWARE
BP SOFTWARE ID DESCRIPTION PLATFORM AVAILABILITY* - --------------------------------------------------------------------------------------------------------------- HIE-001 Cloverleaf(R) Integration Engine Tool 1,2,3,4,5 HIE-001-HA Cloverleaf(R) HACMP (High Availability) 1,2,3 HIE-001DV Cloverleaf(R)_Testing & Development License 1,2,3,4,5 HIE-006 Cloverleaf(R) 6-Server pack (single customer) 1,2,3,4,5 HIE-012 Cloverleaf(R)_12-Server pack (single customer) 1,2,3,4,5 HIE-001DB Cloverleaf(R)_ODBC Single Client Driver 1,2,5 HIE-002 Cloverleaf(R)_Gateway (runtime) 1,2,3,4,5 HIE-003 Cloverleaf(R)_Gateway 10-Server pack (single customer) 1,2,3,4,5 HIE-001-LTD* Cloverleaf(R) Integration Engine Tool Limited Use 1,2,3,4,5 HIE-001-LTD-RMG** Cloverleaf(R) Integration Engine Tool Limited Use for RMG 1,2,3,4,5
PLATFORMS:
VENDOR O/S --------------------------------- 1. Hewlett Packard HP-UX 2. IBM AIX 3. Digital Digital UNIX 4. Data General DG-UX (Intel)*** 5. (Intel) Windows NT
* Limited Use version restricts to ten (10) the number of connections to non-HBOC software applications ** Limited Use version for RMG restricts the customer to interfaces only between HBOC's Resource Management Group (RMG) Products and other software products or applications. RMG Products means, collectively, the following HBOC software applications (which list may be modified or added to from time to time upon mutual written agreement of HBOC and Business Partner): 1. ESi Enterprise Scheduling (ES) 2. Pathways Materials Management 3. Pathways Financial Management 4. Nova 5. Titan 6. Orbit 7. Pathways Staff Scheduling (formerly ESP) 8. CCS (group reporting module) 9. TS2000 (TouchScan 2000 floor issuing) 10. Matkon *** Business Partner is to port Cloverleaf to Data General platform as per terms and conditions of this Agreement Page 17 18 EXHIBIT B AGREEMENT LIST PRICES {*} THE NEXT FOUR PAGES HAVE BEEN REDACTED IN ACCORDANCE WITH THE COMPANY'S REQUEST FOR CONFIDENTIAL TREATMENT. Page 18 19 EXHIBIT C ROYALTIES & MAINTENANCE FEES {*} THIS PAGE HAS BEEN REDACTED IN ACCORDANCE WITH THE COMPANY'S REQUEST FOR CONFIDENTIAL TREATMENT. Page 19 20 EXHIBIT D REQUIRED SUBLICENSE TERMS The provisions of HBOC's form of Information Systems Agreement in use in the country in which the Integrated Software will be licensed shall be used by HBOC or its Affiliates or distributors. Those provisions shall include terms providing, at minimum, protection for Business Partner's rights and interests, including but not limited to terms related to intellectual property, Proprietary Information, warranties, disclaimers, limitations of liability, statutes of limitation, and indemnification, that are substantially similar to and not inconsistent with similar terms included herein. Page 20 21 EXHIBIT E TERRITORY Worldwide Page 21 22 EXHIBIT F BUSINESS PARTNER TRADEMARK/LOGO REQUIREMENTS (TO BE SUPPLIED BY BUSINESS PARTNER TO HBOC) Page 22 23 EXHIBIT G ENHANCEMENTS TO BE DEVELOPED (THIS EXHIBIT G REFERENCES AND INCLUDES THE ATTACHED EIGHT (8) PAGES) Business Partner shall port the Cloverleaf(R) Integration Engine to the Intel-based Data General UNIX platform and shall make this version of the BP Software available to HBOC under the terms and conditions of this Agreement. As with other versions of the BP Software, the Data General UNIX version shall be tested and certified in accordance with Business Partner's standard policies and procedures. In addition, Business Partner shall develop the interfaces described on the attached seven (7) pages and shall make them available to HBOC in conjunction with the BP Software being provided under the terms and conditions of this Agreement. HBOC shall provide reasonable assistance to Business Partner in this effort which shall include (a) providing specifications for the applicable HBOC Software, (b) providing other product specifications known to HBOC (c) providing a development environment at HBOC's facilities to accommodate Business Partner. Although these interfaces shall be developed and provided to HBOC free of charge, HBOC shall pay any travel and lodging expenses incurred by Business Partner in this effort. Page 23 24 PRIORITIZED INTERFACE MAPPINGS FOR HNS
FORMAT TYPE DIRECTION INTERIM DIRECTION TYPE FORMAT DATA CHGS SEQ NOTES - ---------------------------------------------------------------------------------------------------------- STAR 17.1 ADT > HBOCHI 2.2b 1 sales STAR 17.1 Orders > HBOCHI 2.2b 1 sales STAR 17.1 Results > HBOCHI 2.2b 1 sales HBOCHI 2.2b > ADT HNS 4.0 4.0.0 2 sales HBOCHI 2.2b > Orders HNS 4.0 4.0.0 2 sales HBOCHI 2.2b > Pharmacy HNS 4.0 4.0.0 2 sales HBOCHI 2.2b > Results HNS 4.0 4.0.0 2 sales HBOCHI 2.2b > Transcription HNS 4.0 4.0.0 2 sales PCM 6.2 Orders > HBOCHI 2.2b 3 sales PCM 6.2 Results > HBOCHI 2.2b 3 sales PHC 1.0 ADT > HBOCHI 2.2b 4 sales - cert (12/31/97) SMR 4.0 Results > HBOCHI 2.2b 5 sales SMR 4.0 Transcription > HBOCHI 2.2b 5 sales Series 6.1 ADT > HBOCHI 2.2b 6 sales - cert (12/31/97) Series 6.1 Orders > HBOCHI 2.2b 6 sales - cert ( 3/01/98) Series 6.1 Pharmacy > HBOCHI 2.2b 6 sales - 47% mappings Series 6.1 Results > HBOCHI 2.2b 6 sales - cert ( 3/01/98) PPM 3.2 ADT > HBOCHI 2.2b 7 sales PMC 5.0 ADT Mship > HBOCHI 2.2b 8 sales - cert ( 3/31/98) HBOCHI 2.2b > ADT HNS 3.0 3.0.3 9 HBOCHI 2.2b > Orders HNS 3.0 3.0.3 9 HBOCHI 2.2b > Pharmacy HNS 3.0 3.0.3 9 HBOCHI 2.2b > Results HNS 3.0 3.0.3 9 HBOCHI 2.2b > Transcription HNS 3.0 3.0.3 9 HBOCHI 2.2b < ADT HNS 3.0 10 HBOCHI 2.2b < ADT HNS 4.0 10 HQ 3.0 ADT > HBOCHI 2.2b 11 21-Aug PWLab ER4.0 Orders > HBOCHI 2.2b 12 11-Sep PWLab ER4.0 Results > HBOCHI 2.2b 12 11-Sep PHS 7.0 ADT > HBOCHI 2.2b 13 9-Oct ? TPA 7.0 ADT > HBOCHI 2.2b 14 4-Dec PCM 5.1.6 Orders > HBOCHI 2.2b 15 31-Dec PCM 5.1.6 Results > HBOCHI 2.2b 15 31-Dec AdV 4.3 Orders > HBOCHI 2.2b 16 21-Jul AdV 4.3 Results > HBOCHI 2.2b 16 21-Jul STAR 16.1 ADT > HBOCHI 2.2b 17 98% STAR 16.1 Orders > HBOCHI 2.2b 17 95% STAR 16.1 Results > HBOCHI 2.2b 17 95% STAR 15.1 ADT > HBOCHI 2.2b 18 12/31/97
Page 1 of 2 25 Prioritized Interface Mappings for HNS
FORMAT TYPE DIRECTION INTERIM DIRECTION TYPE FORMAT DATA CHGS SEQ NOTES - ---------------------------------------------------------------------------------------------------------- STAR 15.1 Orders > HBOCHI 2.2b 18 95% STAR 15.1 Results > HBOCHI 2.2b 18 95% SMR 3.5 Results > HBOCHI 2.2b 18 98% SMR 3.5 Transcription > HBOCHI 2.2b 18 98% SMR 3.51 Results > HBOCHI 2.2b 19 SMR 3.51 Transcription > HBOCHI 2.2b 19 PWLab 6.0 Orders > HBOCHI 2.2b 20 PWLab 6.0 Results > HBOCHI 2.2b 20 HBOCHI 2.2b > ADT HNS 3.0 3.0.2 21 STAR 15.1 Pharmacy > HBOCHI 2.2b 23 STAR 16.1 Pharmacy > HBOCHI 2.2b 24
Page 2 of 2 26 HBOC TO HBOC Interfaces
SENDING MSG. TYPE RECEIVING CORE HIS* Core HIS ADT HNS Orders Results Core HIS ADT Caremanager Orders Results Core HIS ADT PHS Core HIS ADT Pathways Matl. Mgmt. Pat Refunds Core HIS ADT Image Mgr Core HIS ADT Pathways Lab Orders Results Core HIS ADT Advantage Lab Orders Results Core HIS ADT Pathways Surg. Mgr. Core HIS ADT SMR Core HIS ADT Core HIS II Orders Results Charges CARE MANAGER (CM) 6.2 Care Manager Orders Core HIS Results Care Manager Orders HNS Results PHS PHS ADT Core HIS ADT HNS ADT Pathways Lab ADT Advantage Lab ADT SMR ADT Pathways Matl. Mgmt. ADT Pathways Surg. Mgr. ADT Caremanager ADT Image Mgr PATHWAYS FIN MGMT. Pathway Fin. Mgmt. GL Issues Core HIS Journal Entry PATHWAYS MATL. MGMT. Pathways Matl. Mgmt. Accrued Receipts Core HIS Charges
27 HBOC TO HBOC Interfaces
SENDING MSG. TYPE RECEIVING Matched Invoices PATHWAYS HOMECARE 4.1 Pathways HomeCare ADT Core HIS ADT Pathways Lab ADT ALG ADT Caremanager ADT HNS ADT Image Mgr ADT Pathways Matl. Mgmt. ADT PHS ADT Pathways Surg. Mgr. ADT SMR PATHWAYS SURG. MGR. 3.0 Pathways Surg. Mgr. Charges Core HIS SMR 4.0 SMR Orders ALG Orders Caremanager Orders Core HIS Orders HNS PPM 3.2, 3.3 PPM ADT ALG ADT Caremanager ADT Core HIS ADT HNS ADT Image Mgr ADT Pathways Matl. Mgmt. ADT PHS ADT SMR ADT Pathways Surg. Mgr. ALG 4.3 AdVantage Lab Lab Results Core HIS Orders Charges Status Changes Orders Caremanager Results Orders HNS Charges Pathways HomeCare *CORE HIS: Series 6.1, STAR 15.1, 16.1, 17.1, Saint Express**, Paragon 1.0 Precision 2000 7.0, Healthquest 3.0 **SAINT EXPRESS:
28 HBOC TO HBOC Interfaces
SENDING MSG. TYPE RECEIVING PF 3.4 PC 3.3 GF 3.1 RadCom 7.0 Payroll 7.0 Payroll/HR 1.1
29 HBOC TO Foreign System Interfaces
SENDING MSG. TYPE RECEIVING STAR 15.1, 16.1, 17.1 Pt. Care ADT Foreign Systems* Pt. Care Orders Foreign Systems* Pt. Care MFN Foreign Systems* Pharmacy Orders Foreign Systems* Pharmacy Disp. Msg. Foreign Systems* Pharmacy Charges Foreign Systems* Med. Rec. Transcription Foreign Systems* Lab Orders Foreign Systems* Lab Results Foreign Systems* Lab Charges Foreign Systems* CARE MANAGER (CM) 6.2 CM Orders Foreign Systems* CM Results Foreign Systems* PHS 7.0 PHS ADT Foreign Systems* PATHWAYS MATL. MGMT. 2.0, 3.0 ESI Charges Foreign Systems* ALG LAB 4.3 ALG Lab Orders Foreign Systems* ALG Lab Charges Foreign Systems* ALG Lab Results Foreign Systems* PPM 3.2, 3.3 PPM ADT Foreign Systems* PPM Elig Reply Foreign Systems* MedCare Elig Query Foreign Systems* SERIES 4000 6.1 Pt. Care ADT Foreign Systems* Pt. Care Orders Foreign Systems* Lab Orders Foreign Systems* Lab Results Foreign Systems* Lab Charges Foreign Systems* Pharmacy Order Foreign Systems* Pharmacy Disp. Msg. Foreign Systems* Pharmacy Charges Foreign Systems* Med. Rec. Transcription Foreign Systems* SERIES 5000 6.1 Pt. Care ADT Foreign Systems*
30 HBOC TO Foreign System Interfaces
SENDING MSG. TYPE RECEIVING Pt. Care Orders Foreign Systems* Pharmacy Orders Foreign Systems* Pharmacy Disp. Msg. Foreign Systems* Pharmacy Charges Foreign Systems* Lab Orders Foreign Systems* Lab Results Foreign Systems* Lab Charges Foreign Systems* Med. Rec. Transcription Foreign Systems* HEALTHQUEST 3.0 Pt. Care ADT Foreign Systems* Pt. Care Orders Foreign Systems* Lab Orders Foreign Systems* Lab Results Foreign Systems* Lab Charges Foreign Systems* Pharmacy Orders Foreign Systems* Pharmacy Disp. Msg. Foreign Systems* Pharmacy Charges Foreign Systems* Med. Rec. Transcription Foreign Systems* Med. Rec. Foreign Systems* PRECISION 7.0 Precision ADT Foreign Systems* Precision Orders Foreign Systems* PARAGON 1.0, 2.0/SAINT EXPRESS *** Pt. Care ADT Foreign Systems* Pt. Care Orders Foreign Systems* Lab ADT Foreign Systems* Lab Orders Foreign Systems* Pharmacy ADT Foreign Systems* Pharmacy Orders Foreign Systems* Med. Rec. ADT Foreign Systems* Med. Rec. Orders Foreign Systems* FOREIGN SYSTEMS* ADT HBOC Product List** Orders HBOC Product List** Results HBOC Product List** Charges HBOC Product List** Transcription HBOC Product List** Disp. Msg. HBOC Product List**
31 HBOC TO Foreign System Interfaces
SENDING MSG. TYPE RECEIVING *FOREIGN SYSTEMS: Sunquest Lab, Cerner Lab, Cerner RX, Pyxis RX, Softmed Chart Tracking, Softmed Transcription, Dictaphone Transcription, Citation Lab, Per-Se Scheduling, IDX Rad, IDS RX ** HBOC PRODUCT LIST Star 15.1, 16.1, 17.1, Care Management (CM) 6.2, PHS 7.0, ALG 4.3, Lab 4.3, PPM 3.2, 3.3, Series 4000 6.1, Series 5000 6.1, Healthquest 3.0, Precision 7.0, Paragon 1.0, 2.0, Financial Management 3.4, Matl. Management 2.0, 3.0 *** SAINT EXPRESS: PF 3.4 PC 3.3 GF 3.1 RadCom 7.0 Payroll 7.0 Payroll/HR 1.1
32 EXHIBIT H SOFTWARE SUPPORT AND ESCALATION PROCEDURES Software Support twenty-four (24) hours per day, seven (7) days per week.
- ------------------------------------------------------------------------------------------------------------------------------------ ESCALATION RESPONSE TIMES - ------------------------------------------------------------------------------------------------------------------------------------ PRIORITY DEFINITION INITIAL RESPONSE NEXT FOLLOW-UP - ----------------------------------- --------------------------------- -------------------------------------------------------------- Critical Issue Any issue that directly affects 15 minutes Every hour until resolution. the delivery of care to the patient or significantly affects the financial operations of the institution. - ----------------------------------- --------------------------------- -------------------------------------------------------------- High Issue Any issue that affects the One hour Every 4 hours or next scheduled operations of the customer and contact time until resolution. no acceptable means of "working around" the problem exist. The issue is important due to the frequency of client usage or data integrity, but does not have critical implications. - ----------------------------------- --------------------------------- -------------------------------------------------------------- Standard Issue Any other issue. Same business day Next scheduled contact time until resolution. - ----------------------------------- --------------------------------- --------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ DEFECT RESOLUTION TIMES - ------------------------------------------------------------------------------------------------------------------------------------ PRIORITY DEFINITION EXPECTED RESPONSE - ---------------------------------------------- -------------------------------------------- ---------------------------------------- High Software Issue The issue is important due to the Identification: 2 business days frequency of client usage or data Interim fix: 5 business days integrity, but does not have critical Final fix: Next software release implications. - ---------------------------------------------- -------------------------------------------- ---------------------------------------- Standard Software Issue Identification: 5 business days Interim fix: 15 business days Closure: Next software release - ---------------------------------------------- -------------------------------------------- ----------------------------------------
Page 24 33 EXHIBIT I BUSINESS PARTNER PROFESSIONAL SERVICES Implementation Services for HBOC Customers shall be available from Business Partner at the following rates: FOR EXISTING INSTALLED* HBOC PATHWAYS INTERFACE MANAGER CUSTOMERS CONVERTING TO BP SOFTWARE: Implementation Services for HBOC-to-HBOC interfaces: No hourly charge, only travel & lodging Implementation Services for all other existing interfaces: $46/hour plus travel & lodging FOR EXISTING UNINSTALLED** HBOC PATHWAYS INTERFACE MANAGER CUSTOMERS CONVERTING TO BP SOFTWARE: $125/hour plus travel & lodging for all implementation services FOR NEW SALES OF BP SOFTWARE TO HBOC CUSTOMERS: $125/hour plus travel & lodging for all implementation services * An installed HBOC Pathways Interface Manager Customer has either completed implementation or is in the process of implementing the Pathways Interface Manager software as of the Effective Date. ** An uninstalled HBOC Pathways Interface Manager Customer has licensed Pathways Interface Manager but has not yet begun implementation of the software. Page 25 34 EXHIBIT J BUSINESS PARTNER EXISTING CUSTOMERS REFERENCED IN SECTION 6.1 {*} THE NEXT SEVEN PAGES HAVE BEEN REDACTED IN ACCORDANCE WITH THE COMPANY'S REQUEST FOR CONFIDENTIAL TREATMENT. Page 26 EX-10.14 6 FIRST AMENDMENT TO VALUE ADDED MARKETING AGREEMENT 1 Exhibit 10.14 FIRST AMENDMENT TO VALUE ADDED MARKETING AGREEMENT This AMENDMENT TO VALUE ADDED MARKETING AGREEMENT (the "Amendment"), dated as of March 3, 1999, is entered into by and between HIE, Inc. (formerly Healthdyne Information Enterprises, Inc.) ("HIE"), a Georgia corporation, and HBO & Company of Georgia ("HBOC"), a Delaware corporation. WHEREAS, HIE and HBOC are parties to that certain Value Added Marketing Agreement dated as of __________, 1998 (the "Agreement"), pursuant to which, among other things, HIE has granted to HBOC a license to integrate the Cloverleaf Integration Engine Tool with HBOC proprietary software; and WHEREAS, the parties desire to amend the Agreement in order to modify certain provisions with respect to EMPI products; NOW, THEREFORE, in consideration of the mutual promises set forth below and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows (capitalized terms not otherwise defined to have the meanings ascribed thereto in the Agreement): 1. Section 6.2 of the Agreement be and hereby is deleted in its entirety, and the following be and hereby is substituted in lieu thereof: 6.2 HBOC and Business Partner are both currently in the process of developing and marketing solutions that, generally, may be described as "enterprise master patient index" (EMPI) solutions. By execution of this Agreement, the parties agree to reduce the potential for channel conflict and further the business relationship by exploring additional avenues to work together. The parties will use reasonable efforts to share the necessary and appropriate information about their respective EMPI products and strategies in order to enter into a mutually acceptable agreement. 2. Except as specifically amended herein, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Amendment as of the date first written above. HIE, INC. HBO & COMPANY OF GEORGIA By: /s/Robert Murrie By: /s/Albert J. Bergonzi ---------------------------- ----------------------------- Name: Robert Murrie Name: Albert J. Bergonzi Title: President Title: President Date: 3/3/99 Date: 3/3/99 --------------------------- --------------------------- EX-11 7 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 HIE, INC. AND SUBSIDIARIES (FORMERLY HEALTHDYNE INFORMATION ENTERPRISES, INC.) STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
Years ended December 31, ---------------------------------------- 1998 1997 1996 --------------- --------------- -------- (In thousands, except per share data) Net earnings (loss)............................................. $ 1,498 $(8,596) $ 107 ======= ======= ======= Weighted average number of common shares outstanding............ 24,031 22,587 19,863 ======= ======= ======= Basic net earnings (loss) per common share...................... $ 0.06 $ (0.38) $ 0.01 ======= ======= ======= Shares used in diluted net earnings (loss) per share calculation: Weighted average number of common shares outstanding....... 24,031 22,587 19,863 Additional shares assumed outstanding from dilutive stock options used in diluted earnings (loss) per share calculation............................................ 836 -- * 1,414 ------- ------- ------- 24,867 22,587 21,277 ======= ======= ======= Diluted net earnings (loss) per common share.................... $ 0.06 $ (0.38) $ 0.01 ======= ======= =======
* Since stock options are antidilutive to the loss per common share calculation, stock options are not considered in such loss per share calculation in 1997. EX-21 8 SUBSIDIARIES OF THE COMPANY 1 Exhibit 21 HIE, Inc. Subsidiaries of the Company As of December 31, 1998 Names Under Which Such Subsidiary Does Subsidiary State of Incorporation Business - ----------------------- --------------------------- ------------------------ HUBLink, Inc. Ohio HIE, Inc. EX-23 9 CONSENT OF KPMG LLP 1 Exhibit 23 Accountants' Consent The Board of Directors HIE, Inc. We consent to incorporation by reference in the registration statements (Registration Nos. 33-99034, 333-08295, 333-08293, 333-08287, 333-08283, 333-08279, 333-08271, 333-52165, 333-52155 and 333-52145) on Form S-8 and the registration statement (Registration No. 333-55703) on Form S-3 of HIE, Inc. of our reports dated January 26, 1999, relating to the consolidated balance sheets of HIE, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1998, which reports appear in the December 31, 1998 annual report on Form 10-K of HIE, Inc. KPMG LLP Atlanta, Georgia March 29, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE HIE, INC. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE HIE, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 3,167 0 13,015 720 0 18,017 4,483 2,194 31,535 10,595 0 0 0 250 20,048 31,535 27,184 27,184 7,954 24,525 1,060 270 254 1,498 0 1,498 0 0 0 1,498 0.06 0.06
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