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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1997
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 0-9900
HBO & COMPANY
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 37-0986839
(State or other jurisdiction (IRS Employer
of incorporation or Identification
organization) No.)
301 PERIMETER CENTER NORTH
ATLANTA, GEORGIA 30346
(Address of principal (Zip Code)
executive office)
</TABLE>
Registrant's telephone number, including area code: (770) 393-6000
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.05 PAR VALUE
(Title of Class)
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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 the 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. / /
Aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed using the closing price as reported by The Nasdaq Stock
Market's National Market for the Company's common stock on February 28, 1998:
$11,551,179,807.
Indicate the number of shares outstanding of the registrant's common stock
as of the latest practicable date:
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OUTSTANDING AT
FEBRUARY 28,
CLASS 1998
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Common Stock, $.05 par value...... 213,416,717
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1997, are incorporated by reference into Parts I, II and IV of this Form
10-K.
Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1998, are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
GENERAL
OVERVIEW. HBO & Company (HBOC or the Company), incorporated in 1974,
provides integrated patient care, clinical, financial, managed care and
strategic management software solutions for the healthcare industry. These open
systems applications facilitate the integration of clinical, financial and
administrative data from a wide range of customer systems and software. HBOC's
broad product portfolio can be implemented in a variety of combinations from
stand-alone to enterprisewide, enabling healthcare organizations to add
incremental capabilities to their existing information systems without making
prior capital investments obsolete. HBOC also provides a full complement of
network communications technologies, including wireless capabilities, as well as
outsourcing services that are offered under contract management agreements
whereby its staff manages and operates data centers, information systems,
medical call centers, organizations and business offices of healthcare
institutions of various sizes and structures. In addition, the Company offers a
wide range of electronic commerce services, including electronic medical claims
and remittance advice services as well as statement processing.
HBOC markets its products and services to integrated health delivery
networks, hospitals, physicians' offices, home health providers, pharmacies,
reference laboratories, managed care providers and payors. HBOC also sells its
products and services internationally through subsidiaries and/or distribution
agreements in the United Kingdom, Canada, Ireland, Saudi Arabia, Kuwait,
Australia, Puerto Rico and New Zealand.
As of December 31, 1997, HBOC had 6,286 employees worldwide.
INDUSTRY. The healthcare industry continues to undergo significant and
rapid change. Healthcare delivery costs have increased dramatically in recent
years compared to the overall rate of inflation, while the growing influence of
managed care has resulted in increased pressure on participants in healthcare
systems to contain costs. Accordingly, healthcare systems are migrating toward
more managed care reimbursement, including discounted fee-for-service and
capitation. Under capitation, providers are paid a predetermined fee per
individual to provide all healthcare services, thereby assuming the potential
financial risks of escalating healthcare costs.
To deliver care in a more cost-effective manner, providers are forming
integrated health delivery networks that may include acute-care hospitals,
physicians' offices, outpatient clinics, homecare, long-term care facilities and
payor entities. The success of these comprehensive delivery networks is
dependent on effectively managing and delivering information to caregivers and
managers across multiple points of care.
Traditionally, the acute-care hospital market has been the largest segment
of healthcare information services. Industry analysts anticipate that the
healthcare industry spent approximately $12 billion in 1997 for products and
services to support automated information systems. Analysts also expect that
information systems expenditures in healthcare will grow to $18 billion by the
year 2000 as hospitals and other providers spend a larger percentage of their
operating budgets on systems that will enable them to provide caregivers and
managers with access to the information needed to quantify and control costs, a
key mandate of managed care.
In the 1997 Annual HIMSS/Hewlett-Packard Leadership Survey, an industry
survey conducted by Hewlett-Packard at the Healthcare Information and Management
Systems Society conference, 51 percent of the respondents stated that their
information system investments will increase at a rate of 20 percent or more
over the next two years. Fifty-six percent of respondents indicated that the
need to control costs as the result of managed care pressures is a key
business/operating imperative driving computerization in their organizations. In
addition, 28 percent of the respondents noted that their most important
information system priority was upgrading information technology infrastructure.
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With the increasing prevalence of managed care and capitation, healthcare
information systems are evolving to meet new and more complex information
requirements. Initially, these systems were financially oriented, focusing on
the ability to capture charges and generate patient bills. However, as
reimbursement has shifted more toward risk sharing and capitation, providers and
payors alike need to better manage risk by controlling costs, demonstrating
quality, measuring outcomes and influencing utilization. Because this requires
integration of clinical and financial information, systems have evolved from
processing billing information to include enterprisewide systems capable of
capturing, storing and analyzing both clinical and financial data across the
continuum of care.
While the availability of a complete, timely and cost-effective
patient-focused information system is essential to providing quality care and
controlling costs, the source of patient information usually covers a number of
different sites. Therefore, current and historical paper records must be made
available by computer at all points of care. All players in the delivery network
need information systems that can capture data at the point of care, communicate
data across the continuum of care, and process and store large volumes of data
necessary for the development of a lifelong computer-based patient record.
STRATEGY
HBOC's strategy is to provide a comprehensive range of computer-based
information systems and services designed to meet the evolving needs of health
enterprises, thereby enabling healthcare organizations to add incremental
capabilities to their existing information systems without making prior capital
investments obsolete. The key elements of this strategy are as follows:
LEVERAGE THE EXISTING CUSTOMER BASE. With one or more of its products
installed in approximately 52 percent of the community hospitals (over 100 beds)
in the United States, HBOC is a leader in the healthcare information systems
marketplace. HBOC expands its customer base through sales and marketing efforts
and through strategic acquisitions such as the 1997 acquisitions of Enterprise
Systems, Inc. and HPR Inc., which had 1,000 hospital customers and 300 payor
customers, respectively (see "Recent Acquisitions" below.) This expanded
customer base offers HBOC significant opportunities to sell both additional
applications of its product lines, including its Pathways
2000-Registered Trademark- enterprise solutions and its Payor Solutions Group
medical management and business systems. In addition, HBOC believes its
relationships with customers and its familiarity with their existing systems
give HBOC an advantage over many of its competitors in marketing applications to
meet the evolving needs of these customers. HBOC also seeks to further leverage
its relationships with existing customers to access additional providers and
payors throughout newly formed health delivery networks.
PROVIDE ENTERPRISEWIDE SOLUTIONS TO THE EVOLVING HEALTHCARE MARKET. HBOC
offers one of the broadest product lines in the healthcare information systems
industry to serve the patient care, clinical, financial and strategic management
needs of providers and payors. Through its Pathways 2000 family of
enterprisewide information systems, HBOC facilitates the more efficient
integration of delivery networks. HBOC's Pathways 2000 client/server
applications are designed to provide a common information infrastructure that
enables organizations to collect, manage and disseminate clinically oriented
information organized on the basis of a patient's entire history of care
regardless of the setting where care is delivered. Pathways 2000 provides the
capability to create longitudinal computerized patient records as well as
connectivity along the entire continuum of care, enabling users to access
patient data from any point within an integrated delivery system.
PROVIDE SUPERIOR INTEGRATION OF PRODUCTS AND DATA. HBOC's products offer
healthcare organizations open system solutions with the flexibility to add
incremental capabilities, which enables them to protect their capital
investments. In addition, HBOC's client/server architecture facilitates the
integration of clinical data with financial and administrative data from both
HBOC and non-HBOC applications for efficient resource allocation, allowing
organizations to benefit from price/performance advances. HBOC
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believes that these features will be of key significance to its customers as
they face industry consolidation and evolve as part of integrated delivery
systems.
EXPAND INTO NEW MARKETS. HBOC strives to provide premier business-critical
applications to every essential care setting as well as to the payor market.
HBOC believes that as healthcare organizations expand and decentralize,
management information requirements at the point of care will increase. HBOC is
developing or has acquired client/server applications to meet these needs in the
physician's office, home health market, reference laboratory and the payor
market. The Company constantly reviews opportunities to develop or acquire
applications for other components of the care delivery network, such as
long-term care.
CONTINUE PRODUCT DEVELOPMENT. HBOC believes that a key to its growth is an
ongoing focus on research and development to ensure its product offerings will
continue to strive to meet the evolving needs of its existing and potential
customer base. HBOC's research efforts focus on enhancements to existing product
offerings as well as new product development. In developing products, HBOC's
goal is to ensure its information systems are highly flexible and quickly
adaptable and can serve the information access needs of an increasingly broad
range of users. HBOC's product developers use state-of-the-art application
development tools such as program generators, artificial intelligence and expert
systems, which decrease development time and lower the cost of new products.
While HBOC's efforts focus primarily on the internal research and development of
new products, HBOC has made and continues to explore strategic acquisitions of
developers of niche product software to complement and diversify its product
portfolio.
RECENT ACQUISITIONS
A substantial portion of HBOC's recent growth has resulted from acquisitions
of companies that have expanded its product lines and enhanced its installed
customer base. The following table outlines acquisitions since 1993:
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DATE ACQUIRED COMPANY PRIMARY SIGNIFICANCE
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June 1993 Biven Software, Inc. Managed care applications
December 1993 Data-Med Computer Services Installed base of 100 hospitals in the United Kingdom
Limited
May 1994 IBAX Healthcare Systems Presence in the IBM AS/400 market, installed base of
475 hospitals
September 1994 Serving Software, Inc. Enterprisewide patient and resource scheduling software
December 1994 Care 2000, Inc. Case management methodologies
February 1995 Advanced Laboratory Systems, Laboratory software for the healthcare and commercial
Inc. markets
June 1995 First Data Health Systems Installed base of 500 hospitals
Corporation
July 1995 Pegasus Medical Ltd. Electronic patient record built by physicians, for
physicians
September 1995 CliniCom Incorporated Multidisciplinary point-of-care clinical information
systems
August 1996 CyCare Systems, Inc. Physician group practice management solutions and
electronic data interchange services
September 1996 Management Software, Inc. Homecare information solutions
</TABLE>
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DATE ACQUIRED COMPANY PRIMARY SIGNIFICANCE
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December 1996 GMIS Inc. Data quality tools and decision support for payors
December 1996 Gemini Ltd. Remote processing services in the United Kingdom
June 1997 AMISYS Managed Care Systems, Managed care information systems for the payor market
Inc.
June 1997 Enterprise Systems, Inc. Resource management solutions including materials
management, general ledger, accounts payable, O.R.
and staff scheduling
October 1997 AT&T's UK Specialist Healthcare Software and remote processing services, including the
Services Division ClearNET electronic commerce offering
December 1997 HPR Inc. Medical management solutions for payors
December 1997 National Health Enhancement Medical call centers, computer telephony and disease
Systems, Inc. management
</TABLE>
PRODUCT SUMMARY
HBOC's products and services are designed to serve the information needs of
all participants in the integrated health delivery system: the caregiver, in
whatever discipline or capacity; the institution or enterprise, in whatever
aspect of its business; and the patient (increasingly referred to by healthcare
organizations as the "customer" or "member"), in whatever setting of care.
Today, the health services delivery network through which these participants
relate can include acute-care hospitals, outpatient clinics, physicians'
offices, reference laboratories, commercial pharmacies, long-term care
facilities, patients' homes and wellness centers. In addition, employers, payors
and governmental agencies play a major role in directing how healthcare
resources are deployed, which impacts capital spending by healthcare
enterprises. (See "Factors Affecting Forward-Looking Statements.")
To serve this wide-ranging and diverse network of health delivery, HBOC
bases its offerings on a strategic mix of applications and technologies backed
by implementation, support and other services. HBOC's product portfolio is
organized into eight components: acute-care or HIS (hospital information
systems), infrastructure, community health management, clinical management,
practice management, access management, resource management and enterprise
management. In addition, HBOC offers an extensive suite of services that allows
healthcare organizations the flexibility to select the level of resources that
most effectively serves their needs.
HIS -- HIS applications automate the operation of individual departments and
their respective functions within the inpatient environment. These
hospital-based transaction and decision support systems form the core of systems
that, in conjunction with other tools designed to directly support clinical
decision-making, help streamline the care process over the continuum of care.
HBOC's HIS systems include applications for patient care, laboratory, pharmacy,
radiology, financials and management decision-making.
INFRASTRUCTURE -- Infrastructure applications are not limited to a single
department or function; rather, they form the foundation of the emerging
information structures of health enterprises. HBOC's wide array of networking
and database applications provide the key elements for integrating and uniting
providers across the continuum of care. Components include local, wide area and
value-added networks, as well as wireless technology and electronic data
interchange (EDI) capabilities. An interface manager coordinates the flow of
information, often from disparate sources, throughout the entire system, and a
data repository
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stores patient information for access throughout the enterprise. In bringing the
enterprise together, these solutions establish the physical basis for a lifelong
patient record.
COMMUNITY HEALTH MANAGEMENT -- These applications focus on managing the
demand for healthcare services by predicting what care may be required,
preventing illness and managing the care required as cost effectively as
possible. Under a community health management strategy, the consumer is
encouraged to partner with the health enterprise as his or her own care manager.
Components of HBOC's community health management strategy include medical call
center management to provide nurse triage and give consumers information on
self-care, enabling and encouraging personal health management. Data analysis
provides early identification of members with high-risk/high-cost diseases and
health conditions, while guidelines and standards enable enterprises to improve
care management processes. Finally, sophisticated computer telephony and
"branded" Internet access provide electronic links between providers and
consumers.
CLINICAL MANAGEMENT -- Clinical applications facilitate and improve the
actual practice of medicine in a variety of care settings, whether they be
hospitals, physician office, home or clinic. Drawing from a common database of
patient information, computer technology gives professionals immediate access to
the critical information necessary to provide better quality care wherever they
are in the delivery system. HBOC's point-of-care applications allow physicians
and other clinicians to document patient information, establish and manage
guidelines or standards of care, enter and manage orders, and view all results
and clinical information. These clinical solutions support the need for
collaboration among multiple disciplines and for integration with other
information systems in the health delivery network.
PRACTICE MANAGEMENT -- Practice management applications provide a
comprehensive solution for medical groups and physician enterprises, whether
they are independent or part of an integrated health network. With business
office management as its cornerstone, HBOC's practice management solution gives
physician groups or enterprises the flexibility to manage their business under
many different organizational and reimbursement models. Also included are risk
management and managed care capabilities, clinical systems for managing patient
care, and scheduling that can handle multiple providers, facilities, and
equipment within the enterprise. Additional capabilities to help accelerate cash
flow, reduce costs and increase productivity include decision support, data
quality analysis and electronic commerce.
ACCESS MANAGEMENT -- Access management solutions allow the healthcare
organization's "customers" to access health services more easily and
cost-effectively. Indexing applications organize the vast information collected
about a person throughout the enterprise, allowing patients to be tracked and
information about them to be accessed wherever they go for care. Scheduling
systems instantly register and schedule patients anywhere in the enterprise, as
well as the resources needed to serve them. Other system capabilities allow for
information tied to specific episodes of care to be collected and managed.
Besides increasing accuracy, these applications help alleviate patient
frustration with having to provide duplicate information from one setting of
care to another thereby enhancing "customer satisfaction."
RESOURCE MANAGEMENT -- Resource management applications help healthcare
organizations maximize the efficiency of healthcare delivery through better
management of people, facilities, supplies, services and equipment. By
integrating materials management, accounts payable/general ledger, surgical
services management and staff scheduling functions, health enterprises can
control and reduce the costs associated with various healthcare procedures.
Besides the ability to link costs to clinical management for continuous quality
improvement, organizations can better monitor and manage the supply chain from
point-of-entry to point-of-use, eliminating nonproductive steps throughout the
materials and financial management process. The result is more efficient care
and a strong return on investment.
ENTERPRISE MANAGEMENT -- Enterprise management applications facilitate and
improve the management and operation of all aspects of the health enterprise --
for payors as well as providers. These applications focus on providing managers
with the clinical, financial and other information necessary to
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contain costs while ensuring high-quality care. Examples include utilization
management and accounts receivable management, as well as managed care
contracting and member management applications.
The following table outlines the principal products in each area:
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PRODUCT DESCRIPTION
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HIS:
STAR 2000, Precision 2000, Paragon(SM) RISC-based patient care, clinical and financial systems
HealthQuest-Registered Trademark- 2000, Plus 2000 IBM mainframe-based patient care, clinical and financial
systems
Series 2000, OR Series IBM AS/400-based patient care, clinical, financial,
scheduling and management systems
Surgi-Server 2000, Omni-Server 2000, DME 2000 PC-based scheduling, management and equipment tracking
systems
Host 2000 Tandem-based patient care management systems and remote
processing systems for patient financials
INFRASTRUCTURE:
Pathways Interface Manager Interface engine that manages network traffic and
performs protocol conversion and translation
Pathways Health Network Server Relational database and repository for all patient
information
Pathways Health Network Expert Enterprisewide expert person matching solution that
generates unique universal identifiers
Pathways Image Manager Electronic imaging and storage solution
Connect Technology Group Local and wide area networks and wireless technologies
Value Added Network EDI capabilities that support the movement of
information among various sources
COMMUNITY HEALTH MANAGEMENT:
HBOC Call Center Medical call center management, including self-care and
referral information, nurse triage, telephonic case
management and compliance management
Intelligent Voice Response Computer telephony, including health and referral
information, automation of patient test results
reporting and appointment confirmation
Clinical Care Management System Integrated system of applications and clinical knowledge
bases that supports the entire medical management
process, including focused case management,
authorization and referral management, disease
management, early identification of high-cost cases and
population-based health strategies.
</TABLE>
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PRODUCT DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
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CLINICAL MANAGEMENT:
Pathways Coordinated Care Enterprisewide solution for longitudinal health record
spanning all settings, includes results and profile
viewing, orders, guidelines, and alerts and reminders
Pathways Smart Medical Record-Registered Trademark- Clinical information system for physician offices
Pathways Care Manager Multidisciplinary point-of-care system for hospitals and
affiliated clinics
Pathways Homecare Office clinical, personnel scheduling, point of care,
reimbursement, homecare pharmacy and home medical
equipment
Pathways Laboratory Laboratory system that includes commercial, reference
and hybrid laboratory capabilities
PRACTICE MANAGEMENT:
Practice 2000 Application suite for the medical group enterprise that
includes the following products:
Pathways Practice Manager Physician practice system with master patient index,
billing and registration capabilities
Pathways Smart Medical Record Clinical information system for physician offices
Pathways Managed Care Risk management tool for the physician enterprise with
full-function management of contractual agreements for
providers, payors, HMOs, PPOs, PHOs and others
Practice Schedule Manager Scheduling tool for the physician enterprise
Pathways Healthcare Scheduling Enterprisewide patient and resource scheduling
Pathways Decision Support Enterprisewide decision support system
Physician Office Manager Full-featured practice management system for smaller
physician practices
ACCESS MANAGEMENT:
Pathways Health Network Management Enterprisewide system for managing information about an
enrolled population
Pathways Authorization Management Authorization and referral tracking
Pathways Healthcare Scheduling Enterprisewide patient and resource scheduling system
Pathways Encounter Management Enterprisewide system for managing information about
patients' episodes of care
RESOURCE MANAGEMENT:
Nova.IDN-TM- Client/server enterprisewide materials management system
Titan.IDN-TM- Enterprisewide accounts payable/general ledger solution
Pathways Healthcare Scheduling Enterprisewide patient and resource scheduling system
Pathways Surgical Manager Surgical services management, including scheduling,
perioperative charting, staff assignments, credentialing
and supplies
ESP-TM- For Windows Enterprisewide staff scheduling
</TABLE>
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PRODUCT DESCRIPTION
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ENTERPRISE MANAGEMENT:
Pathways Contract Management Monitoring and management of multiple varied contracts
for providers with managed care focus
Pathways Managed Care Full-function management of contractual agreements for
providers and smaller IDNs
AMISYS-Registered Trademark- Whole-system managed care solution for large,
at-risk organizations
TRENDSTAR-Registered Trademark- Decision support system, including cost accounting,
budgeting and forecasting
QUANTUM-Registered Trademark- Enterprise information system
Pathways Decision Support Enterprisewide decision support system
Autocoder-Registered Trademark-, Data quality/claims auditing tools for the payor market
ClaimCheck-Registered Trademark-, ClaimCheck Dental,
Clinical Payment Management System-TM- (includes
CodeReview, ProMatch and Patterns Review)
Credentialing Management System Physician credentialing check system
Clinical Resource Management System-TM-, Comprehensive medical management system for payors
ICAS-Registered Trademark-
EC2000 Electronic commerce solutions, including claims
processing, eligibility, remittances and laser statement
printing
</TABLE>
In addition to the above applications, HBOC offers software applications
provided by a host of industry-leading business partners. These partnerships
also include value-added reseller agreements with computer hardware
manufacturers such as Data General Corp., Digital Equipment Corp., Hewlett-
Packard Co. and IBM Corp. In 1997, HBOC selected IBM as its exclusive Microsoft
NT-Registered Trademark- platform development partner.
INTERNATIONAL OFFERINGS
Most of the Pathways 2000 and HIS products in HBOC's product portfolio are
offered internationally. In addition, products added to the HBOC product line
with the acquisition of Data-Med Computer Services Limited in December 1993 are
available in the United Kingdom, as are products added by the 1997 acquisition
of AT&T UK Specialist Healthcare Services Division, including the TotalCARE
offering that includes software solutions and remote processing services for
financial and payroll areas. In most cases, the applications offered
internationally have been customized or developed to meet the particular needs
of the country in which they are implemented.
SERVICES
Installation and implementation services are provided for purchasers of all
HBOC software products to assist with the smooth introduction of or transition
to those products. HBOC also provides software maintenance and enhancement
services, as well as custom programming and system modifications to meet special
customer requirements. Equipment maintenance services are provided by HBOC or
through its various hardware partners.
ENTERPRISE SERVICES. HBOC provides a suite of specially developed services
to serve the needs of enterprises whose dependence on information systems is
growing. Those services include UNIX processing support, remote system
monitoring and single-point issue resolution. In addition, the Company's service
track implementation methodology provides a flexible suite of implementation
services that can include an
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enterprise project manager to assist in planning, installing and supporting
Pathways 2000 products. Other service areas include education, enterprise
consulting, application-specific services, computer telephony and software
product support, and services that assist customers in achieving year 2000
compliance.
CONNECT TECHNOLOGY GROUP. To support the connectivity needs of healthcare
organizations, medical group practices and their affiliates, the Connect
Technology Group (CTG) provides total network installation and support. In
addition, CTG offers a comprehensive Value Added Network, a suite of information
services that extend local area networks outside of the hospital to include
payors, vendors, financial institutions and the Internet. All together, HBOC's
networking solutions provide customers with a complete network solution for
electronic access throughout a provider enterprise.
OUTSOURCING SERVICES GROUP. HBOC has been in the outsourcing business in
the United States for more than 20 years and offers outsourcing services in the
United Kingdom as well. With the change and uncertainty engendered by healthcare
reform and resulting economic pressures, information systems outsourcing is
becoming increasingly popular in the United States. Outsourcing services go
beyond managing hospital data processing operations (traditionally known as
facilities management) to encompass strategic management services in information
systems planning, receivables management, business office administration and
major system conversions.
ELECTRONIC COMMERCE GROUP. With the 1996 acquisition of CyCare Systems,
Inc., and its CyData subsidiary, HBOC acquired significant capabilities in EDI
services, including claims processing, eligibility verification, remittance
advice as well as statement printing. HBOC's Electronic Commerce Group operates
the nation's 12th largest electronic clearinghouse and serves approximately 35
percent of the medical group practices in the United States.
FIRST STRATEGIC GROUP. With the 1997 acquisition of National Health
Enhancement Systems, Inc., HBOC added strategic marketing capabilities and sales
consultation services related to medical call centers and general payor and
provider market positioning needs. Services provided include the development of
strategic marketing and marketing communications plans, managed care marketing,
advertising campaigns and creative services for TV, radio, print, collateral and
outdoor advertising, positioning and branding development, market research and
syndicated marketing programs.
SOURCES OF REVENUE
Information regarding sources of revenue is included in the table "Revenue
by Business Region" on page 10 of the Company's Annual Report to Stockholders
for the year ended December 31, 1997 (the Annual Report), and under the caption
"Revenue Recognition" in Note 1 of "Notes to Consolidated Financial Statements"
on pages 16 and 17 of the Annual Report, a copy of which is included as an
exhibit to this Form 10-K and is incorporated herein by reference.
BACKLOG
Information regarding backlog as of December 31, 1997, is included in the
"Financial Review" section under the caption "General" on page 6 of the Annual
Report, a copy of which is included as an exhibit to this Form 10-K and is
incorporated herein by reference.
RESEARCH AND DEVELOPMENT
The Company's product development effort applies advanced computer
technology and installation methodologies to specific information processing
needs of hospitals. The Company believes a substantial and sustained commitment
to such research and development (R&D) is important to the long-term success of
the business.
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Investment in software development, including both R&D expense as well as
capitalized software, has increased as the Company has addressed new software
applications and enhanced existing products for installed systems. The Company
expensed $124 million (10% of revenue) for R&D activities during 1997, as
compared to $112 million (12% of revenue) and $95 million (13% of revenue)
during 1996 and 1995, respectively. The Company capitalized 28%, 25% and 28% of
its R&D expenditures in 1997, 1996 and 1995, respectively.
Information regarding R&D is included in the schedule "Five-Year Selected
Financial Information" on page 5 of the Annual Report and under the captions
"Capitalized Software" and "Nonrecurring Charges" in Note 1 of "Notes to
Consolidated Financial Statements" on pages 16 and 17 of the Annual Report, a
copy of which is included as an exhibit to this Form 10-K and is incorporated
herein by reference.
The substantial majority of technical concepts and codes embodied in the
Company's computer programs and program documentation are not protected by
patents or copyrights but constitute trade secrets that are proprietary to the
Company. The Company and its subsidiaries are the owners of various trademarks
and service marks, including the federally registered trademarks or service
marks "MEDPRO," "IFAS," "CLINPRO," "MEDIPAC," "CML," "COSTREP," "TRENDSTAR,"
"TRENDSERVE," "TRENDPAC I," "BUDGET+," "CLINIPAC," "CLINSTAR," "HOSTS," "HSL,"
"PARAGON," "PARS," "GIVING DATA A VOICE," "LET YOUR DATA SPEAK FOR ITSELF,"
"QUANTUM," "ERS," "HEALTHQUEST," "PATHWAYS 2000," "PATIENT VIEW," "SAINT,"
"SAINT PLUS," "THE PRECISION ALTERNATIVE," "WIN," "CHARISMA," "CYCARE SYSTEMS,"
"CYCARE," "SPECTRAMED," "CYDATA," "DOCUMENTATION PLUS," "CLAIMCHECK," "PROVIDER
INSIGHT," "AUTOCODER," "TITAN," "TOUCHSCAN," "TS-2000," "NOVA," "ENTERPRISE
SCHEDULING," "ENTERPRISE SYSTEMS," "AMISYS," "PATTERNS REVIEW," "EPISODE
PROFILER," "PATTERNS OF TREATMENT," "THE PROFESSIONALS," "REFERRAL ONE,"
"HEALTHFONE--YOUR CONFIDENTIAL SOURCE," "CENTRAMAX," and the triangular design
that forms the Company logo, but such registration provides limited protection
as to the trademark or service mark. "First Inform" is used under license from
First Data Corporation. "SMR" and "Smart Medical Record" are used under license
from HBOC Medical, Ltd.
COMPETITION
HBOC experiences substantial competition from many firms, including other
computer services firms, consulting firms, shared service vendors, certain
hospitals and hospital groups, and hardware vendors. Competition varies in size
from small to large companies, in geographical coverage, and in scope and
breadth of products and services offered.
Although some of the Company's competitors are comparable in size to the
Company, the Company believes that few, if any, competitors offer a comparable
range of healthcare information systems and services that compare favorably with
respect to all of the competitive criteria, mainly price and service.
YEAR 2000
Software applications that use only two digits to identify a year may fail
or create errors in the year 2000 (the "Year 2000 issue.") HBOC began evaluating
the Year 2000 issue in 1994 and is currently continuing such efforts. The
Company has implemented upgrades to a substantial portion of its products to
address the Year 2000 issue. HBOC is currently evaluating the status of each of
its products which is not, at present, Year 2000 compliant and anticipates that
it will be able to substantially quantify its costs and required actions later
in 1998. Although to date the expense of upgrading product applications to make
them Year 2000 compliant has not been material, there can be no assurance that
HBOC will not incur material costs with respect to such issues in the future. In
addition, the Company has plans in place to make all critical internal systems
Year 2000 compliant by the end of 1998 and will incur non-material costs to do
so.
10
<PAGE>
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements made by representatives of the Company,
may contain forward-looking statements with respect to, among other things, the
Company's future revenues, operating income and earnings per share, as well as
plans and objectives of management. The following are some, but not necessarily
all, of the factors that may cause the Company's actual results to vary
materially from those which are the subject of any such forward-looking
statements.
An important element of HBOC's business strategy has been and will continue
to be expansion through acquisitions, both to extend its customer base and to
acquire strategic technology. The Company's ability to expand successfully
through acquisitions depends on many factors including the identification of
appropriate acquisition opportunities, negotiation of suitable terms and
management's ability to effectively integrate and operate the acquired
businesses. The Company competes for acquisitions with other companies, certain
of which have significantly greater financial and management resources. HBOC's
financial performance will be subject to the risks of the performance of the
acquired businesses as well as the financial effects associated with integration
of such businesses.
The healthcare industry is subject to changing political, economic and
regulatory influences, many of which relate to control of healthcare costs. Such
changes may affect operational aspects of the healthcare industry, including
procurement practices and the availability and/or allocation of capital funds,
which could result in greater selectivity, thus adversely affecting HBOC's
ability to sell its products. HBOC cannot predict with any certainty what
impact, if any, future regulation or healthcare reform might have on its results
of operations, financial condition or business.
While HBOC maintains insurance protecting against certain asserted claims,
there can be no assurance that its insurance coverage would adequately cover any
such claims asserted against HBOC.
Competition in the Company's industry is subject to continual change in not
only the products and services offered but also in the manner in which vendors
are selected by customers. Accordingly, HBOC's continued success will be
dependent on its ability to develop new products and services on a timely basis
and at competitive prices.
The Company must anticipate and adapt to evolving industry standards and new
technological developments. The market for the Company's products is
characterized by continued and rapid technological advances. HBOC's future
success will depend in part on its ability to be responsive to these
technological developments and challenges, which could also lower the cost of
products and services or otherwise result in competitive pricing pressures.
HBOC relies on a combination of trade secret, copyright and trademark laws,
together with nondisclosure, other contractual provisions and technical measures
to protect its proprietary rights in its products. There can be no assurance
that these protections will be adequate or that HBOC competitors will not
independently develop technologies that are equivalent or superior to HBOC's
technology. Although the Company believes that its products and other
proprietary rights do not infringe upon the proprietary rights of third parties,
there can be no assurance that third parties will not assert infringement claims
against the Company in the future.
The stock market has, from time to time, experienced extreme price and
volume fluctuations, particularly in the high technology sector, which have
often been unrelated to the operating performance of particular companies. HBOC
experiences fluctuations in its stock price related to these general market
swings as well as announcements of technological innovations, new product
introductions by HBOC or its competitors, market conditions in the computer
software or hardware industries and healthcare reform measures. These
fluctuations may adversely affect the Company's ability to make acquisitions
utilizing its stock.
11
<PAGE>
ITEM 2: PROPERTIES
The Company's principal administrative and research offices are located at
301 and 303 Perimeter Center North, Atlanta, Georgia. The offices consist of
approximately 226,000 square feet of space under a lease that expires in 1999.
The rental expense for these offices totaled approximately $3.9 million for
1997.
The Company also owns two buildings and leases space in approximately 45
buildings throughout the United States, Canada, the United Kingdom and Israel.
Information regarding the Company's leases is included in Note 2 of "Notes to
Consolidated Financial Statements" on page 18 of the Annual Report, a copy of
which is included as an exhibit to this Form 10-K and is incorporated herein by
reference.
Information regarding the Company's principal offices is included on the
back cover of the Annual Report, a copy of which is included as an exhibit to
this Form 10-K and is incorporated herein by reference.
ITEM 3: LEGAL PROCEEDINGS
Information regarding Legal Proceedings is included in Note 9 of "Notes to
Consolidated Financial Statements" on page 22 of the Annual Report, a copy of
which is included as an exhibit to this Form 10-K and is incorporated herein by
reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1997, there were no matters submitted
to a vote of security holders.
12
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on The Nasdaq Stock Market's National
Market under the symbol HBOC. Information regarding the high and low sales
prices, the number of holders of the Company's common stock and dividends is
presented under the caption "Common Stock Data" on page 22 of the Annual Report,
a copy of which is included as an exhibit to this Form 10-K and is incorporated
herein by reference.
ITEM 6: SELECTED FINANCIAL DATA
The following is the Company's Five-Year Selected Financial Data:
<TABLE>
<CAPTION>
(000 OMITTED EXCEPT PER SHARE DATA) 1997 1996 1995 1994 1993
- --------------------------------------- ------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenue................................ $ 1,203,204 $ 950,911 $ 715,902 $ 525,490 $ 409,354
Net Income (Loss)...................... $ 143,537 $ 82,333 $ (7,895) $ 34,500 $ 19,893
Earnings (Loss) Per Share.............. $ .67 $ .39 $ (.04) $ .19 $ .11
Total Assets........................... $ 1,312,586 $ 1,012,749 $ 771,550 $ 425,093 $ 296,781
Long-Term Debt......................... $ 1,022 $ 769 $ 4,054 $ 15,067 $ 6,700
Dividends Declared Per Share........... $ .06 $ .04 $ .04 $ .04 $ .038
</TABLE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information included in the "Financial Review" section on pages 6
through 9 of the Annual Report, a copy of which is included as an exhibit to
this Form 10-K, is incorporated herein by reference.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not invest in derivative financial instruments.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information included on pages 11 through 22 of the Annual Report, a copy
of which is included as an exhibit to this Form 10-K, under the captions
"Condensed Consolidated Quarterly Statements of Income," "Consolidated
Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements
of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" is incorporated herein by reference.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The Company has neither changed its independent public accountants nor had
any disagreements on accounting and financial disclosures with such accountants.
13
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of February 28, 1998. Additional information
regarding the Board of Directors is included in the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 12, 1998,
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," which is incorporated herein by reference.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---------------------------- --- ----------------------------------------------------
<S> <C> <C>
Charles W. McCall 53 Chairman of the Board of Directors, President and
Chief Executive Officer
Albert J. Bergonzi 48 President and Co-Chief Operating Officer
Jay P. Gilbertson 37 President, Co-Chief Operating Officer, Chief
Financial Officer, Treasurer, Principal Accounting
Officer and Secretary
Jay M. Lapine 46 Senior Vice President, General Counsel and Assistant
Secretary
Russell G. Overton 50 Senior Vice President-Business Development
</TABLE>
Charles W. McCall has served as the Chairman of the Board of Directors since
February 1998 and as a Director, President and Chief Executive Officer of the
Company since 1991. Mr. McCall is also a Director of EIS International, Inc.,
WestPoint Stevens Inc. and AMERIGROUP INC.
Albert J. Bergonzi has served as President and Co-Chief Operating Officer
since December 1997, and served as President, Enterprise Solutions since 1996.
He served as Executive Vice President-Sales from 1995 to 1996. From 1985 through
1995 he served as the Vice President and General Manager of HBOC's Amherst
Product Group.
Jay P. Gilbertson has served as President and Co-Chief Operating Officer
since December 1997. He served as Executive Vice President and Secretary since
1996 and Senior Vice President since 1995. Since 1993 he has served as Vice
President-Finance, Chief Financial Officer, Treasurer and Assistant Secretary.
Mr. Gilbertson is also a Director of Anacomp, Inc.
Jay M. Lapine has served as Senior Vice President since December 1997 and as
Vice President, General Counsel and Assistant Secretary since 1996. From 1994 to
1996, he served as Associate General Counsel. From 1992 to 1994, prior to
joining the Company, Mr. Lapine was Executive Vice President and General Counsel
of Premier Anesthesia, a publicly held contract management firm providing
physician services to hospitals.
Russell G. Overton has served as Senior Vice President-Business Development
since 1992.
14
<PAGE>
ITEM 11: EXECUTIVE COMPENSATION
The Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1998, contains under the captions
"Compensation of Directors" and "Executive Compensation," information relating
to director and executive compensation for the year ended December 31, 1997,
which is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 1998, contains under the captions "Security
Ownership of Certain Beneficial Owners and Management" information relating to
security ownership of beneficial owners and management, which is incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on May 12, 1998, under the caption
"Certain Relationships and Related Transactions" is incorporated herein by
reference.
15
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a)1. Financial Statements
The Annual Report contains the following information on pages 11 through 22:
"Condensed Consolidated Quarterly Statements of Income," "Consolidated
Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements
of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements." The report of Arthur Andersen LLP on these
financial statements is on page 23 of the Annual Report. These financial
statements and the report of Arthur Andersen LLP are incorporated herein by
reference.
(a)2. Financial Statement Schedules
- Report of Independent Public Accountants as to Schedules
Supporting Financial Statements
- Schedules Supporting Financial Statements
<TABLE>
<CAPTION>
SCHEDULE
NUMBER
---------
<S> <C>
II Valuation and Qualifying Accounts for the Three Years Ended
December 31, 1997.
</TABLE>
Schedules not listed have been omitted because they are not applicable or
the required information is included in the consolidated financial statements or
notes thereto.
(a)3. Exhibits
The following exhibits filed with the Securities and Exchange Commission are
incorporated by reference as shown below. Items marked with an asterisk, "*,"
relate to management contracts or compensatory plans or arrangements.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
ON MAY 13, 1981, AS PART OF ITS REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NUMBER 2-72275):
4(a) --Specimen forms of certificates for Common Stock of Registrant.
10(e) --Standard Form of EPLA Agreement.
ON MARCH 21, 1989, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1988:
10(a) --Standard Form of Software License Agreement.
10(b) --Standard Form of Hardware Purchase Agreement.
ON FEBRUARY 15, 1991, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 2-75987):
*4 --HBO & Company 1981 Incentive Stock Option Plan, as amended.
ON FEBRUARY 22, 1991, AS PART OF ITS FORM 8-K:
4 --HBO & Company Rights Agreement.
ON MARCH 27, 1991, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-12051):
*4 -- HBO & Company 1986 Employee Nonqualified Stock Option Plan, as amended.
ON MARCH 27, 1991, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1990:
10(c) -- Standard Form of HealthQuest Ltd. Software License and Maintenance Agreement.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
ON MARCH 27, 1992, AS A PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1991:
10(a) -- Standard Form of Credit Agreement with recourse between the Company and Sanwa Business Credit
Corporation.
10(b) -- Standard Form of Credit Agreement without recourse between the Company and Sanwa Business Credit
Corporation.
ON AUGUST 12, 1993, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-67300):
*4 -- HBO & Company 1993 Stock Option Plan for Nonemployee Directors.
ON JULY 20, 1994 AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED JULY 19, 1994, AS AMENDED BY
AMENDMENT NO. 1 TO FORM S-4 DATED AUGUST 10, 1994, AND FILED WITH THE COMMISSION ON AUGUST 11, 1994,
AND FURTHER AMENDED BY AMENDMENT NO. 2 TO FORM S-4 DATED AUGUST 10, 1994, AND FILED AUGUST 11, 1994:
3 --Amended Bylaws of Registrant.
10(b) -- Credit Agreement, dated June 13, 1994, between the Company and Wachovia Bank of Georgia, N.A.
ON AUGUST 17, 1994, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-82962):
*4 --HBO & Company 1990 Executive Incentive Plan, as amended.
ON SEPTEMBER 15, 1994, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-84034):
*4 -- 1986 Incentive Stock Option Plan of Serving Software, Inc.
ON MARCH 17, 1995, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994:
*4 --Chief Executive Officer Incentive Plan.
ON MAY 9, 1995, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-59173):
*4 -- HBO & Company 1986 Nonqualified Stock Option Agreement, HBO & Company 1991 Nonqualified Stock Option
Agreement 1 and HBO & Company 1991 Nonqualified Stock Option Agreement 2.
ON OCTOBER 5, 1995, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-63213):
*4 --1985 Employee Stock Option Plan of CliniCom Incorporated.
ON MAY 21, 1996, AS PART OF ITS FORM 8-K DATED MAY 21, 1996:
3(i) -- HBO & Company Certificate of Incorporation, as amended.
ON JUNE 11, 1996, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED JUNE 11, 1996, AS AMENDED BY
AMENDMENT NO. 1 TO FORM S-4 DATED JULY 18, 1996, AND FILED WITH THE COMMISSION ON JULY 18, 1996:
2 -- Agreement of Merger dated May 18, 1996, by and among HBO & Company, HBO & Company of Georgia and
CyCare Systems, Inc.
ON AUGUST 22, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-10603):
*4 -- CyCare Systems, Inc. 1995 Long-term Incentive Plan (Including the predecessor CyCare Systems, Inc.
Stock Option Plan).
ON OCTOBER 18, 1996, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED OCTOBER 18, 1996, AS AMENDED
BY AMENDMENT NO. 1 TO FORM S-4 DATED NOVEMBER 6, 1996, AND FILED WITH THE COMMISSION ON NOVEMBER 6,
1996:
2 -- Agreement of Merger dated September 23, 1996, as amended, by and among HBO & Company, HBO & Company
of Georgia and GMIS Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17583):
*4(a) -- GMIS Inc. Non-Qualified Stock Option Agreement Between GMIS Inc. and Josephine G. Kaple.
*4(b) -- GMIS Inc. Non-Qualified Stock Option Agreement Between GMIS Inc. and Lawrence Koenig.
ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17551):
*4 --GMIS Inc. 1991 Stock Option Plan.
ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17579):
*4 -- Gabrieli Medical Information Systems, Inc. 1984 Stock Option Plan.
ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17555):
*4 --GMIS Inc. 1995 Stock Option Plan.
ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-10479):
*4 -- Gabrieli Medical Information Systems, Inc. 1985 Non-Qualified Common Stock Option Plan.
ON MARCH 7, 1997, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED MARCH 7, 1997 (REGISTRATION
NUMBER 333-22929), AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED AND FILED ON APRIL 22, 1997, AS
FURTHER AMENDED BY AMENDMENT NO. 2 TO FORM S-4 DATED AND FILED ON MAY 5, 1997, AS FURTHER AMENDED BY
AMENDMENT NO. 3 TO FORM S-4 DATED AND FILED ON MAY 13, 1997:
2 -- Agreement of Merger dated February 10, 1997, by and among HBO & Company, HBO & Company of Georgia,
and AMISYS Managed Care Systems, Inc.
ON MAY 14, 1997, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED MAY 14, 1997 (REGISTRATION NUMBER
333-27045), AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED AND FILED ON MAY 29, 1997:
2 -- Agreement of Merger dated March 13, 1997, by and among HBO & Company, HBO & Company of Georgia, and
Enterprise Systems, Inc.
ON JUNE 17, 1997, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-29365):
*4 -- AMISYS Managed Care Systems, Inc. Directors' Stock Option Plan.
ON JUNE 17, 1997, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-29367):
*4 -- AMISYS Managed Care Systems, Inc. 1994 Equity Incentive Plan.
ON JUNE 30, 1997, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-30373):
*4 --Enterprise Systems, Inc. Long Term Incentive Plan.
ON AUGUST 6, 1997, AS PART OF ITS FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997:
10 -- Second Amended and Restated Revolving Credit Agreement dated June 30, 1997 among HBO & Company, HBO &
Company of Georgia, BankBoston, N.A., NationsBank of Texas, N.A. and other lending institutions, and
BankBoston, N.A. as Agent.
ON NOVEMBER 5, 1997, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED NOVEMBER 5, 1997 (REGISTRATION
NUMBER 333-39525), AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED AND FILED ON NOVEMBER 24, 1997:
2 -- Agreement of Merger dated September 27, 1997, by and among HBO & Company, HBO & Company of Georgia,
and National Health Enhancement Systems, Inc.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
ON NOVEMBER 13, 1997, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED NOVEMBER 13, 1997
(REGISTRATION NUMBER 333-40087), AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED AND FILED ON NOVEMBER
21, 1997:
2 -- Agreement of Merger dated September 27, 1997, by and among HBO & Company, HBO & Company of Georgia,
and HPR Inc.
ON DECEMBER 22, 1997 AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-42871):
*4 -- HBO & Company 1998 Employee Discount Stock Purchase Plan.
ON DECEMBER 29, 1997 AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-43375):
*4 --HPR Inc. HPR 1995 Eligible Directors Stock Plan.
ON DECEMBER 29, 1997 AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-43377):
*4 -- HPR Inc. Amended and Restated HPR 1995 Stock Plan, HPR Inc. Amended and Restated HPR 1991 Stock Plan.
ON JANUARY 2, 1998 AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-43673):
*4 -- National Health Enhancement Systems, Inc. Amended 1988 Stock Option Plan.
ON JANUARY 2, 1998 AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-43679):
*4 --Expert Systems, Inc. 1993 Stock Option Plan.
THE FOLLOWING EXHIBITS ARE INCLUDED IN THIS FORM 10-K:
11 -- Computation of Earnings (Loss) Per Share of Common Stock for the Years Ended December 31, 1997, 1996
and 1995.
13 --Annual Report to Stockholders for the year ended December 31, 1997.
21 --Subsidiaries of Registrant.
23 --Consent of Arthur Andersen LLP.
27 --Financial Data Schedule.
27a --Financial Data Schedule restated for September 30, 1997.
27b --Financial Data Schedule restated for June 30, 1997.
27c --Financial Data Schedule restated for March 31, 1997.
27d --Financial Data Schedule restated for December 31, 1996.
27e --Financial Data Schedule restated for September 30, 1996.
27f --Financial Data Schedule restated for June 30, 1996.
27g --Financial Data Schedule restated for March 31, 1996.
27h --Financial Data Schedule restated for December 31, 1995.
</TABLE>
(b) Reports on Form 8-K during the quarter ended December 31, 1997, or
subsequent to that date but prior to the filing date of this Form 10-K:
FORM 8-K DATED FEBRUARY 10, 1998:
Reporting under Item 5 that on February 10, 1998, the Board of Directors of
HBO & Company declared a quarterly cash dividend of $.02 per share payable on
April 22, 1998, to stockholders of record on March 31, 1998.
Reporting under Item 5 of the unaudited combined operations for the first
full month subsequent to the December 23, 1997, pooling acquisition of HPR Inc.
and the December 29, 1997, pooling acquisition of National Health Enhancement
Systems, Inc., as follows: revenue and net income for January 1998 was $100.0
million and $10.5 million, respectively; revenue and net income for January 1997
was $65.4 million and $5.5 million, respectively.
19
<PAGE>
FORM 8-K DATED FEBRUARY 12, 1998:
Reporting under Item 5 that on February 10, 1998, the Board of Directors of
HBO & Company elected Charles W. McCall, HBOC president and chief executive
officer, to replace Holcombe T. Green, Jr., as chairman of the board.
Reporting under Item 5, the Company announced the formation of HBOC
Ventures, Inc., an organization designed to provide venture capital to small
companies with promising healthcare technologies. In conjunction with this, HBOC
has entered into a letter agreement with The Ohio Partners, LLC, an Ohio based
venture capital fund, whereby the companies plan to initially invest up to $30
million in several companies over the next three years. The funds will be
jointly managed by The Ohio Partners, LLC and HBOC.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of HBO & Company:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in HBO & Company's annual report
to stockholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 6, 1998. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
item 14(a)2 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 6, 1998
21
<PAGE>
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.
<TABLE>
<S> <C> <C>
HBO & COMPANY
By: /s/ CHARLES W. MCCALL
-----------------------------------------
Charles W. McCall
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: February 28, 1998
</TABLE>
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ CHARLES W. MCCALL Chairman of the Board of
- ------------------------------ Directors, President and February 28, 1998
(Charles W. McCall) Chief Executive Officer
President, Co-Chief
Operating Officer, Chief
/s/ JAY P. GILBERTSON Financial Officer,
- ------------------------------ Treasurer, Principal February 28, 1998
(Jay P. Gilbertson) Accounting Officer and
Secretary
/s/ ALFRED C. ECKERT III
- ------------------------------ Director February 28, 1998
(Alfred C. Eckert III)
/s/ HOLCOMBE T. GREEN, JR.
- ------------------------------ Director February 28, 1998
(Holcombe T. Green, Jr.)
/s/ PHILIP A. INCARNATI
- ------------------------------ Director February 28, 1998
(Philip A. Incarnati)
/s/ ALTON F. IRBY III
- ------------------------------ Director February 28, 1998
(Alton F. Irby III)
/s/ GERALD E. MAYO
- ------------------------------ Director February 28, 1998
(Gerald E. Mayo)
/s/ JAMES V. NAPIER
- ------------------------------ Director February 28, 1998
(James V. Napier)
/s/ DONALD C. WEGMILLER
- ------------------------------ Director February 28, 1998
(Donald C. Wegmiller)
</TABLE>
22
<PAGE>
SCHEDULE II
HBO & COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 OMITTED)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND DEDUCTIONS END OF
PERIOD EXPENSES USE OF RESERVE ADJUSTMENTS PERIOD
------------ ----------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for Doubtful Accounts............... $ 4,399 $ 3,262 $ 1,206 $ 5,246 $ 11,701
Inventory Reserves............................ $ 870 $ 2,075 $ 233 $ -- $ 2,712
YEAR ENDED DECEMBER 31, 1996:
Allowance for Doubtful Accounts............... $ 11,701 $ 2,895 $ 2,697 $ -- $ 11,899
Inventory Reserves............................ $ 2,712 $ -- $ 2,217 $ -- $ 495
YEAR ENDED DECEMBER 31, 1997:
Allowance for Doubtful Accounts............... $ 11,899 $ 4,188 $ 324 $ 5,000 $ 20,763
Inventory Reserves............................ $ 495 $ -- $ 495 $ -- $ --
</TABLE>
23
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------- -----------------------------------------------------------------------------------------------
<C> <S> <C>
11 -- Computation of Earnings (Loss) Per Share of Common Stock for years ended December 31, 1997,
1996 and 1995...............................................................................
13 -- Annual Report to Stockholders for the year ended December 31, 1997..........................
21 -- Subsidiaries of Registrant..................................................................
23 -- Consent of Arthur Andersen LLP..............................................................
</TABLE>
<PAGE>
EXHIBIT 11
HBO & COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(000 OMITTED EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted Average Number of Common Shares Outstanding......................... 208,511 202,400 185,030
ADD -- Shares of common stock assumed issued upon exercise of stock options
using the "treasury stock" method as it applies to the computation of
diluted earnings per share *............................................... 5,951 8,484 --
---------- ---------- ----------
Number of Common and Common Equivalent Shares Outstanding.................... 214,462 210,884 185,030
Net Earnings (Loss) for Basic and Diluted Earnings (Loss)
Per Share.................................................................. $ 143,537 $ 82,333 $ (7,895)
---------- ---------- ----------
---------- ---------- ----------
Earnings (Loss) Per Share:
Basic...................................................................... $ .69 $ .41 $ (.04)
---------- ---------- ----------
---------- ---------- ----------
Diluted.................................................................... $ .67 $ .39 $ (.04)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------------
* Common Equivalent Shares are not presented for 1995 because the effect is
anti-dilutive.
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
<PAGE>
EXHIBIT 13
HBOC
ANNUAL REPORT
1997
[LOGO]
IMPROVING HEALTHCARE PERFORMANCE
<PAGE>
Contents
<TABLE>
<S> <C>
Financial Highlights 2
Letter to Stockholders 3
Five-Year Selected Financial Information 5
Financial Review 6
Revenue by Business Region 10
Condensed Consolidated Quarterly Statements of Income 11
Consolidated Financial Statements 12
Notes to Consolidated Financial Statements 16
Common Stock Data 22
Report of Independent Public Accountants 23
Stockholder Information 23
Board of Directors and Corporate Officers 24
HBOC Offices Back
</TABLE>
At HBOC, our people products and services have a primary goal: To serve
health enterprises by putting the right information in the right hands at the
right time. In all that we do, we are committed to a continuous pursuit of
quality in fact and quality in perception, so that every product and service
we offer is known as the best in the industry. From the HBOC Mission
Statement.
<PAGE>
Company Profile
For more than 20 years, HBOC has served the information systems needs of the
health enterprise by providing leading-edge software solutions, technological
innovation and comprehensive services. The Company's customers include
integrated delivery networks, managed care organizations, physician practices
and clinics, payors (insurance companies, HMOs, PPOs, etc.), home health
agencies and hospitals. HBOC's products and services address virtually every
need the enterprise has for integrated information, whether for patient
care, financial, clinical, homecare, managed care or strategic management.
Because the Company maintains a strong commitment to open systems
architecture, its solutions can be implemented in a variety of combinations
from stand-alone to enterprisewide, allowing customers to choose their own
paths for reaching their information management goals.
HBOC also provides a full complement of networking technologies and
electronic commerce services as well as outsourcing services for managing
business offices and information systems operations. HBOC's sole focus is
the healthcare market. It is an industry leader in revenue and market share
with products and services that serve more than 9,000 customers worldwide.
Organizational Highlights
- - Acquired Enterprise Systems, Inc., giving HBOC best-of-class solutions for
enterprisewide materials management and resource management.
- - Introduced Connect 2000-TM-, a network-based "thin-client" solution that
significantly improves management of healthcare information technology
resources.
- - Announced the general availability of Pathways Decision Support, a
decision-making tool for the enterprise and specialty settings.
- - Launched EC2000, HBOC's electronic commerce service offering.
- - Acquired AT&T's UK Specialist Healthcare Services Division, strengthening
HBOC's leadership position in the United Kingdom.
- - Took the lead position in the payor market with the acquisitions of HPR
Inc. and AMISYS Managed Care Systems, Inc. By year-end, HBOC had more than
600 payor customers.
- - Entered the community health management market with the acquisition of
National Health Enhancement Systems, Inc., and a partnership with
HealthDesk Corporation.
<PAGE>
Financial
HIGHLIGHTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(Operating Income, Net Income and Diluted Earnings Per Share Exclude Nonrecurring Charges)
(000 Omitted Except Per Share Data and Employees)
<S> <C> <C> <C> <C> <C>
Revenue $1,203,204 $ 950,911 $ 715,902 $ 525,490 $ 409,354
Operating Income $ 318,058 $ 199,439 $ 113,718 $ 61,596 $ 33,967
Net Income $ 200,664 $ 124,456 $ 70,321 $ 38,650 $ 19,893
Diluted Earnings Per Share $ .94 $ .59 $ .36 $ .21 $ .11
Total Assets $1,312,586 $1,012,749 $ 771,550 $ 425,093 $ 296,781
Long-Term Debt $ 1,022 $ 769 $ 4,054 $ 15,067 $ 6,700
Stockholders' Equity $ 900,582 $ 650,646 $ 500,787 $ 215,848 $ 176,242
Employees at Year-End 6,286 5,417 5,030 4,019 3,306
Revenue Per Average
Number of Employees $ 204 $ 182 $ 158 $ 143 $ 120
</TABLE>
- ----------------
All prior period amounts have been restated to reflect the 1997 acquisitions
of AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR
Inc., and National Health Enhancement Systems, Inc., in pooling
transactions.
[GRAPHIC]
All prior period amounts have been restated to reflect the 1997 acquisitions
of AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR
Inc., and National Health Enhancement Systems, Inc., in pooling
transactions.
<PAGE>
EXTENDING THE LEAD
TO OUR STOCKHOLDERS
How do you top a winning performance? You set the bar higher. That's what
HBOC did in 1997, using past successes as a springboard to set new financial
performance records, make strategic moves in new and existing markets, and
deliver solutions that are helping healthcare organizations of all sizes and
shapes improve their performance.
The results speak for themselves. HBOC finished 1997 as a billion-dollar
company, with revenue topping $1.2 billion. Earnings per share was $0.94
excluding acquisition-related charges, an increase of 59 percent over 1996.
The Board of Directors declared a two-for-one stock split and kept the
quarterly dividend at $0.02 per share, in effect doubling the dividend
payout. Standard & Poor's added the Company to its S&P 500 stock index,
putting HBOC in the company of other highly regarded corporations. Strong
demand for enterprise solutions fueled quarterly software sales of $100
million or more for three consecutive quarters. And to ensure that the
Company has the proper infrastructure and leadership to support ongoing rapid
growth into the 21st century, HBOC established an Office of the President
that includes myself, Albert J. Bergonzi and Jay P. Gilbertson.
The foundation of HBOC's success continues to be its ability to provide
software solutions that span multiple care settings and help healthcare
organizations improve quality while they reduce costs. With the increasing
complexities created by managed care, more health enterprises than ever are
looking to HBOC for "one-stop shopping" so obtain integrated, best-of-class
solutions and the expertise to deploy them enterprisewide -- from hospitals and
outpatient facilities to physician offices, home health agencies and payor
entities. This is especially important as organizations seek ways to
eliminate redundancy, automate manual processes, streamline access and move
from a paradigm of healing sickness to managing health.
Using an HBOC solution, the return on investment from such efforts can be
substantial. For example, HBOC's Pathways Care Manager software, which allows
caregivers to document care at the point of service, can help improve the
speed and accuracy of clinical documentation. Organizations using HBOC's
enterprisewide scheduling software report an increase in patient volume and
caregiver productivity through more efficient, centralized scheduling of
services. HBOC's materials management software often pays for itself within
18 to 24 months of deployment. And customers using the Company's decision
support software have achieved multimillion-dollar annual savings through the
use of clinical paths and other system capabilities.
<PAGE>
HBOC continues to take these efforts forward by expanding its product line to
address strategic areas of the health enterprise, both through internal
development of products such as Pathways Health Network Expert and Pathways
Decision Support and by integrating acquired groups into the Company. For
example, the 1997 addition of Enterprise Systems, Inc. not only brought new
customers but provided HBOC with integrated, best-of-class resource
management software that enables more efficient management of people,
facilities, services, supplies and equipment across multiple care settings.
The addition of National Health Enhancement Systems, Inc., placed HBOC
squarely in the community health market, bringing solutions that include
medical call centers, computer telephony, and demand and disease management
software. Combined with Internet access to healthcare resources through a
business partnership with HealthDesk Corporation, HBOC now offers health
enterprises and "at-risk" organizations a powerful means to promote consumer
health, ensure appropriate care and better manage the demand for high-cost,
acute-care services.
With the interests of providers and payors converging in at-risk
environments, HBOC has also positioned itself to provide healthcare payors
with the same breadth and depth of software solutions that it now offers
provider organizations. Over the past two years through stock-based
acquisitions valued at more than $700 million, HBOC has acquired leaders in
the payor industry such as GMIS Inc., HPR Inc., and AMISYS Managed Care
Systems, Inc. As a result, today HBOC is the only vendor with solutions that
span the entire continuum of payor needs, from traditional financial and
administrative systems to highly sophisticated, clinically oriented decision
support. The Company's Payor Solutions Group has the largest customer base in
the payor sector, with more than 600 customers representing approximately 150
million covered lives.
In addition to broadening HBOC's market reach and expanding its portfolio,
the Company continues to deliver on its integration commitment. Some 1997
successes include companywide use of a standard user desktop, the ability of
home health professionals to view information collected in the hospital, and
productive use of the enterprise repository to view laboratory results and
other clinical data collected from feeder systems, enabling more informed
clinical and business decisions. From a service perspective, HBOC is
integrating its implementation groups through the adoption of best practices
and companywide standard methodology, providing customers with a common "look
and feel" regardless of products line.
What can you expect in 1998? More of the same as HBOC moves forward on these
and other initiatives to provide greater value to customers and stockholders.
The market potential remains strong in both the provider and payor segments
as organizations seek to improve their clinical and financial performance by
automating and integrating the health enterprise. With leading-edge,
integrated solutions and the backing of more than 6,200 employees committed to
excellence, we believe we have what it takes to extend our lead in '98.
/s/ Charles W. McCall
- ---------------------
Charles W. McCall
Chairman, President & CEO
February 6, 1998
<PAGE>
FIVE-YEAR SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------
1997(1) 1996(2) 1995(3) 1994(4) 1993
---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(000 OMITTED EXCEPT FOR %S,
PER SHARE DATA, RATIOS, STOCKHOLDERS AND EMPLOYEES)
OPERATIONS
(EXCLUDING NONRECURRING CHARGES)
Revenue................................................... $1,203,204 $ 950,911 $715,902 $525,490 $409,354
Operating Income.......................................... $ 318,058 $ 199,439 $113,718 $ 61,596 $ 33,967
Income Before Income Taxes................................ $ 334,440 $ 206,661 $114,323 $ 62,410 $ 37,837
Net Income................................................ $ 200,664 $ 124,456 $ 70,321 $ 38,650 $ 19,893
AS A PERCENT OF REVENUE
(EXCLUDING NONRECURRING CHARGES)
Operating Income.......................................... 26% 21% 16% 12% 8%
Income Before Income Taxes................................ 28% 22% 16% 12% 9%
Net Income................................................ 17% 13% 10% 7% 5%
PERCENT CHANGE FROM PRIOR YEAR
(EXCLUDING NONRECURRING CHARGES)
Revenue................................................... 27% 33% 36% 28% 14%
Operating Income.......................................... 59% 75% 85% 81% 1%
Income Before Income Taxes................................ 62% 81% 83% 65% 13%
Net Income................................................ 61% 77% 82% 94% (10)%
SHARE INFORMATION
(EXCLUDING NONRECURRING CHARGES)
Stockholders of Record.................................... 3,231 2,993 3,056 3,124 3,170
Weighted Average Shares Outstanding (Diluted)............. 214,462 210,884 195,561 182,274 174,685
Diluted Earnings Per Share................................ $ .94 $ .59 $ .36 $ .21 $ .11
Cash Dividends Per Share.................................. $ .06 $ .04 $ .04 $ .04 $ .038
Book Value at Year-End Per Share.......................... $ 4.26 $ 3.18 $ 2.56 $ 1.28 $ 1.08
Stock Sale Price Per Share--High.......................... $ 48.63 $ 36.25 $ 21.63 $ 9.19 $ 5.78
--Low........................... $ 21.25 $ 16.38 $ 8.22 $ 4.69 $ 2.09
CAPITALIZED SOFTWARE
Research and Development Expenditures..................... $ 123,729 $ 112,465 $ 94,921 $ 77,556 $ 62,726
Capitalized Software Expenditures......................... $ 34,670 $ 28,481 $ 26,628 $ 21,436 $ 19,007
Research and Development Capitalization Rate.............. 28% 25% 28% 28% 30%
FINANCIAL RATIOS
Return (excluding nonrecurring charges)
on Average Stockholders' Equity......................... 26% 22% 20% 20% 12%
Current Ratio............................................. 2.28:1 1.83:1 1.61:1 1.29:1 1.86:1
Long-Term Debt to Stockholders' Equity.................... -- -- .01:1 .07:1 .04:1
FINANCIAL POSITION AT YEAR-END
Cash and Short-Term Investments........................... $ 437,458 $ 247,484 $154,622 $ 58,293 $ 91,833
Working Capital........................................... $ 519,140 $ 295,240 $156,488 $ 53,330 $ 89,723
Total Assets.............................................. $1,312,586 $1,012,749 $771,550 $425,093 $296,781
Long-Term Debt............................................ $ 1,022 $ 769 $ 4,054 $ 15,067 $ 6,700
Stockholders' Equity...................................... $ 900,582 $ 650,646 $500,787 $215,848 $176,242
---------- ---------- -------- -------- --------
---------- ---------- -------- -------- --------
OTHER FINANCIAL INFORMATION
Employees at Year-End..................................... 6,286 5,417 5,030 4,019 3,306
Revenue Per Average Number of Employees................... $ 204 $ 182 $ 158 $ 143 $ 120
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions. Periods
prior to October 1997 do not include the purchase acquisition of AT&T's UK
Specialist Healthcare Services Division. Periods prior to January 1997 do not
include the purchase acquisition of Gemini, Ltd. Periods prior to June 1995 do
not include the purchase acquisition of First Data Health Systems Corporation.
Periods prior to May 1994 do not include the purchase acquisition of IBAX
Healthcare Systems.
All share and per share amounts have been restated to reflect the 1997 stock
split effected in the form of a stock dividend.
(1) 1997 Income Statement related items exclude the nonrecurring charge of
$95,250. The Net Income is $143,537 and Diluted Earnings Per Share is $.67
including the nonrecurring charge.
(2) 1996 Income Statement related items exclude the nonrecurring charge of
$70,203. The Net Income is $82,333 and Diluted Earnings Per Share is $.39
including the nonrecurring charge.
(3) 1995 Income Statement related items exclude the nonrecurring charge of
$130,270. The Net Loss is ($7,895) and Diluted Loss Per Share is ($.04)
including the nonrecurring charge.
(4) 1994 Income Statement related items exclude the nonrecurring charge of
$6,927. The Net Income is $34,500 and Diluted Earnings Per Share is $.19
including the nonrecurring charge.
<PAGE>
FINANCIAL REVIEW
GENERAL
Unless stated otherwise, all expense, income and per share amounts exclude
the following nonrecurring charges and include the dilutive effect of stock
options where appropriate: $95.3 million in 1997, $70.2 million in 1996, and
$130.3 million in 1995. All prior period financial information has been restated
for acquisitions accounted for as poolings of interests. Unless otherwise noted,
management's discussion of financial results is based on restated figures
excluding nonrecurring charges.
Once again in 1997, HBO & Company ("the Company" or "HBOC") achieved record
revenue and earnings. For 1997, the Company posted earnings per share of $.94, a
59% increase over earnings per share of $.59 for 1996. The significant increase
in earnings per share resulted from strong revenue growth, to $1.2 billion in
1997 from $951 million in 1996, an increase of 27%, and an increase in operating
income as a percent of revenue to 26% in 1997 compared to 21% in 1996. Including
nonrecurring charges, net income was $143.5 million in 1997 and $82.3 million in
1996, and net loss was $7.9 million in 1995. Including nonrecurring charges (and
excluding the dilutive effect of stock options for 1995), earnings per share for
1997 was $.67 compared to $.39 in 1996 and a loss per share of $(.04) in 1995.
The Company's operating expense continued to grow at a slower rate than
revenue due to increased software sales, successful cost-control programs and
productivity enhancements. The Company continues to improve employee
productivity, with 1997 revenue per average number of employees of $203,700, an
increase from $181,600 for 1996 and $158,200 for 1995.
RESULTS OF OPERATIONS
The following table presents annual comparative income statements excluding
acquisition-related nonrecurring charges.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF PERCENT OF
1997 REVENUE 1996 REVENUE 1995 REVENUE
------------ ------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
(000 OMITTED EXCEPT FOR PER SHARE DATA)
Revenue.......................................... $ 1,203,204 100% $ 950,911 100% $ 715,902 100%
Cost of Operations............................... 511,082 43% 413,471 43% 329,684 46%
Marketing........................................ 176,194 15% 146,207 16% 114,994 16%
Research and Development......................... 89,059 7% 83,984 9% 68,293 10%
General and Administrative....................... 108,811 9% 107,810 11% 89,213 12%
------------ --- ---------- --- ---------- ---
Total Operating Expense...................... 885,146 74% 751,472 79% 602,184 84%
------------ --- ---------- --- ---------- ---
Operating Income................................. 318,058 26% 199,439 21% 113,718 16%
Other Income, Net................................ 16,382 2% 7,222 1% 605 0%
------------ --- ---------- --- ---------- ---
Income Before Income Taxes....................... 334,440 28% 206,661 22% 114,323 16%
Provision for Income Taxes....................... 133,776 11% 82,205 9% 44,002 6%
------------ --- ---------- --- ---------- ---
Net Income....................................... $ 200,664 17% $ 124,456 13% $ 70,321 10%
------------ --- ---------- --- ---------- ---
------------ --- ---------- --- ---------- ---
Earnings Per Share:
Basic.......................................... $ .96 $ .61 $ .38
Diluted........................................ $ .94 $ .59 $ .36
Weighted Average Shares Outstanding:
Basic.......................................... 208,511 202,400 185,030
Diluted........................................ 214,462 210,884 195,561
</TABLE>
In 1997, the Company completed the pooling acquisitions of AMISYS Managed
Care Systems, Inc. (AMISYS), Enterprise Systems, Inc. (ESi), HPR Inc. (HPR), and
National Health Enhancement Systems,
<PAGE>
Inc. (NHES). The Company also acquired AT&T's UK Specialist Healthcare Services
Division (AT&T Healthcare) in a purchase transaction. These strategic
acquisitions have expanded the Company's product and customer base into markets
that had previously been largely untapped by the Company. The non-dilutive
effect of these acquisitions demonstrates HBOC's ability to leverage its strong
sales and distribution network and quickly introduce new products into its broad
portfolio of product and service offerings.
The Company ended 1997 with a strong backlog. At December 31, 1997, system
sales not yet delivered and installed totaled $207 million in revenue. Future
contracted outsourcing fees totaled $194 million, and future payments under
monthly service fee agreements totaled more than $2 million. In addition, the
Company derives significant revenue from maintenance and support contracts that
automatically renew unless canceled, as well as recurring revenue from multiyear
remote and electronic processing contracts.
The Company continues to maintain a healthy liquidity position. Cash and
short-term investments grew to $437 million at December 31, 1997, from $247
million at December 31, 1996. Cash flow from operations was $263 million for
1997, an increase of 86% over 1996; $90 million of cash was utilized in
investing activities, and $54 million of cash was provided by net financing
activities. HBOC financed all 1997 acquisitions through equity or with cash from
operations and had no bank debt at year-end.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue increased 27% to $1.2 billion in 1997 from $951 million in 1996.
This growth was mainly due to significant increases in sales of enterprise
client/server software, hardware and services.
Software revenue grew 35% to $439 million in 1997, compared to $325 million
in 1996. Software revenue as a percent of total revenue increased to 37% in 1997
compared to 34% in 1996. These increases were primarily due to the continuing
strong demand for the Pathways 2000-Registered Trademark- line of enterprise
solutions, including strong homecare product sales and increased sales of HBOC's
materials management products. The Company also experienced strong growth in
software revenue for payor solutions due to the integration of the existing
payor solutions applications and the 1997 acquisition of HPR. The growth in
sales of products from acquired companies demonstrates not only the Company's
ability to transition and quickly integrate products into its portfolio, but
also the desire for customers to partner with a single vendor for solutions that
span the continuum of care.
Hardware revenue increased 22% to $180 million in 1997 compared to $147
million in 1996. This increase resulted primarily from strong sales of
RISC-based processors sold in conjunction with enterprise solutions software.
The Company continues to support an open systems approach with the ability to
support multiple networking options as well as the leading hardware platforms.
Systems revenue, which represents all software and hardware revenue,
increased slightly to 51% of total revenue in 1997 from 50% in 1996.
Implementation and other one-time services revenue increased 34% in 1997
over 1996 and represented 16% of total revenue in 1997 compared to 15% in 1996.
The revenue increase primarily reflects the increase in implementations
resulting from strong system sales. Installation and implementation services are
provided for purchasers of all HBOC software products to assist with the smooth
deployment and integration of the Company's solutions.
Maintenance and support revenue increased 14% in 1997 from 1996 and
represented 20% of total revenue in 1997 compared to 22% in 1996. The increase
for 1997 was primarily due to growth in existing product lines and the expansion
of the maintenance customer base to include newly acquired product lines. To
manage this growth, the Company is now using a single support system that allows
faster resolution of issues that cross product lines and presents users with a
common "look and feel" for all HBOC support processes.
Outsourcing services revenue increased 53% in 1997, due primarily to a full
year of revenue from HBOC's new UK data center that performs computer processing
operations for healthcare providers in
<PAGE>
the South Thames region of the United Kingdom. The Company also experienced
growth in revenue from its claims and remote processing operations.
In 1997, the AICPA issued SOP 97-2, Software Revenue Recognition. Although
SOP 97-2 is not effective until 1998, HBOC has been reviewing the exposure
drafts for over a year to ensure that the adoption of the SOP would not have an
adverse effect on the Company's revenue. See the Notes to Financial Statements
for an explanation of the Company's revenue recognition policy.
Cost of operations as a percent of revenue remained constant at 43% in 1997
and 1996. Hardware margins improved slightly in 1997 compared to 1996. Cost of
operations expense increased 24% in 1997 primarily due to increased hardware
costs associated with the growth in hardware sales, increased software royalties
expense due to increases in software sales and increased implementation, support
and outsourcing personnel expense due to the overall growth of the Company.
Marketing expense as a percent of revenue decreased to 15% for 1997 from 16%
for 1996. Actual marketing expense increased 21% in 1997 over 1996, primarily
due to higher personnel and travel expense directly related to the growth in
size and revenue of the Company.
Research and development (R&D) expense as a percent of revenue decreased to
7% in 1997 compared to 9% in 1996. The R&D capitalization rate increased to 28%
in 1997 from 25% in 1996. The R&D capitalization rate increased due to the
combination of a lower rate in 1996 from restatements of prior periods due to
acquisitions (the 1995 rate was 28%) and increased capitalization in newly
acquired groups due to HBOC's integration strategy. Actual R&D expense increased
6% from 1996, mainly due to additional personnel for new product development.
General and administrative (G&A) expense as a percent of revenue decreased
to 9% for 1997 compared to 11% for 1996 as the Company continued to leverage its
fixed costs against its growing revenue. The Company also continues to reduce
costs as newly acquired groups are quickly integrated. Actual G&A expense
increased less than 1% in 1997 primarily due to increased facilities costs and
increased personnel expense due to growth of the Company.
Operating expense grew at a slower rate than revenue in 1997 compared to
1996 due to strong high-margin software sales, successful cost-control programs
and productivity enhancements. Total operating income increased 59% compared to
1996. In addition, operating income as a percent of revenue increased to 26% in
1997 from 21% in 1996. These increases represent a significant growth in volume
and increased efficiency in operations.
Including nonrecurring charges, total operating income increased 72% in 1997
from 1996, and operating income as a percent of revenue increased to 19% in 1997
from 14% in 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue in 1996 increased 33% over 1995 due to increased sales of enterprise
systems, hardware and services. For 1996, cost of operations expense as a
percent of revenue decreased to 43% from 46% in 1995. This decrease was mostly
in the area of personnel expense resulting from employee productivity
enhancements. Total cost of operations expense increased over 1995 primarily due
to higher personnel expense, higher hardware costs and software royalty fees,
and increased facilities expense. Cost of operations expense also increased due
to costs associated with 1995 purchase acquisitions such as the cost of the
Charlotte Product Group (CPG) data center, and hardware and software maintenance
expense.
Marketing expense as a percent of revenue remained constant at 16% for 1996
and 1995. Actual marketing expense increased in 1996 over 1995 primarily due to
higher personnel and commission expense directly related to the growth in size
and revenue of the Company.
R&D expense as a percent of revenue decreased to 9% in 1996 from 10% in
1995. The R&D capitalization rate decreased to 25% for 1996 from 28% in 1995.
Actual R&D expense increased in 1996 mainly due to additional personnel expense
for product development.
<PAGE>
G&A expense as a percent of revenue decreased to 11% in 1996 compared to 12%
in 1995 as the Company continued to realize synergies from acquisitions. Actual
G&A expense increased in 1996 primarily due to increased facilities costs and
increased personnel expense resulting from acquisitions and growth of the
Company. Total operating income as a percent of revenue increased significantly
to 21% in 1996 from 16% in 1995. This was the result of increased sales of
high-margin software and a continuing effort to increase the efficiency of
operations and personnel.
Including nonrecurring charges, operating income as a percent of revenue
increased to 14% in 1996 from (2%) in 1995.
NONRECURRING CHARGES
HBOC recorded nonrecurring charges of $95.3 million in 1997 related to the
pooling acquisitions of AMISYS, ESi, HPR and NHES, and the purchase acquisition
of AT&T Healthcare. These charges consisted of the write-down of long-lived
assets of $33.6 million, severance and employee-related costs of $19.6 million,
transaction costs of $13.2 million, product-related costs of $21.2 million and
purchased research and development costs of $7.7 million.
In 1996, the Company recorded nonrecurring charges totaling $70.2 million
primarily related to the pooling acquisitions of CyCare Systems, Inc. (CyCare),
Management Software, Inc. (MSI), GMIS, and ESi's acquisition of the materials
management division of Continental Healthcare Systems, Inc. These charges
consisted of transaction costs of $11.4 million, a write-down of long-lived
assets of $38.5 million, severance and employee-related costs of $7.1 million
and other product-related costs of $13.2 million.
In 1995, the Company recorded nonrecurring charges totaling $130 million
primarily related to the purchase acquisition of First Data Health Systems
Corporation (now known as CPG) and the pooling acquisition of CliniCom
Incorporated. These charges consisted mainly of purchased research and
development costs related to the purchase of CPG, severance and other
acquisition-related costs.
TAXES
Including the nonrecurring charges, the effective tax rate for 1997 and 1996
was 40%, and for 1995, 50%. A comparison of the 1996 and 1995 effective rates is
affected by the pooling acquisition of MSI, which was a Subchapter S corporation
and therefore did not provide for corporate taxes on a historical basis.
SHARES
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128, Earnings Per Share. The Company has adopted the new guidelines for the
calculation and presentation of earnings per share. All prior period per share
amounts have been restated to conform to the new guidelines.
Basic and diluted weighted average shares outstanding both increased in 1997
from 1996 mainly due to shares issued under employee stock option and purchase
programs. Diluted average shares outstanding increased in 1996 from 1995 due to
the issuance of shares in connection with the employee stock option and purchase
programs and the dilutive effect of stock options (a net loss was realized in
1995).
YEAR 2000
Software applications that use only two digits to identify a year may fail
or create errors in the year 2000 (the "Year 2000 issue"). HBOC began evaluating
the Year 2000 issue in 1994 and is currently continuing such efforts. The
Company has implemented upgrades to a substantial portion of its products to
address the Year 2000 issue. HBOC is currently evaluating the status of each of
its products which is not, at present, Year 2000 compliant and anticipates that
it will be able to substantially quantify its costs and required actions later
in 1998. Although to date the expense of upgrading product applications to make
them Year 2000 compliant has not been material, there can be no assurance that
HBOC will not incur
<PAGE>
material costs with respect to such issues in the future. In addition, the
Company has plans in place to make all critical internal systems Year 2000
compliant by the end of 1998 and anticipates that it will incur non-material
costs to do so.
INFLATION
HBOC is affected by inflation through increased salaries, benefits and other
operating and administrative expenses. To the extent permitted by the
marketplace, the Company attempts to pass on increasing costs by periodically
increasing prices of products and services. Standard software maintenance and
support agreements contain clauses allowing the Company to increase fees
annually to reflect changes in costs. Other products and services are generally
contracted for short periods and are therefore not exposed to inflationary
pressure.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to improve the strength and quality of its balance
sheet. At December 31, 1997, HBOC had $437 million in cash and short-term
investments compared to $247 million at December 31, 1996. During 1997, the
Company declared a stock split effected in the form of a stock dividend and
because of strong liquidity, maintained a $0.02 per share post-split quarterly
dividend, effectively doubling the dividend payout. With strong cash and liquid
assets, no bank debt and an improving current ratio, the Company remains well
positioned for continued growth.
During 1997, the Company generated $263 million in cash flow from
operations, used $90 million in investing activities and provided $54 million
from net financing activities. As a result of this cash activity, the Company's
cash balance increased 111% to $432 million at December 31, 1997, from $205
million at December 31, 1996.
The Company's current ratio increased to 2.3:1 at December 31, 1997, from
1.8:1 at December 31, 1996. Current assets increased $274 million, mainly
reflecting increases in receivables and cash. The Company's management places a
high priority on the area of receivables, and the Company continues to maintain
a low delinquency rate. Current liabilities increased $50 million due to an
increase in acquisition-related accruals, deferred revenue and income taxes
payable.
The Company is planning to use cash on hand to finance the building of its
new headquarters scheduled to be completed during 1999. The Company has also
formed HBOC Ventures, Inc., an organization designed to provide venture capital
to small companies with promising healthcare technologies.
The Company has access to several financing sources, including a $5 million
line of credit and a $50 million revolving credit agreement. As of December 31,
1997, there were no outstanding balances on either. The Company has the ability
to and does occasionally sell customer receivables. Management believes that the
Company's existing cash and short-term investment balances, anticipated cash
flow from operations and amounts available under existing credit arrangements
are sufficient to meet ongoing operational and capital expenditure requirements,
fund R&D efforts and cover costs associated with future equity acquisitions and
small acquisitions for cash.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements, which are qualified
by the risks and uncertainties described from time to time in HBOC's reports
filed with the Securities and Exchange Commission, including the 1997 Annual
Report on Form 10-K.
<PAGE>
REVENUE BY BUSINESS REGION
<TABLE>
<CAPTION>
1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH AMERICA INTERNATIONAL TOTAL REVENUE PERCENT
-------------- ------------ ------------- -----------
<CAPTION>
(000 OMITTED EXCEPT FOR %S)
<S> <C> <C> <C> <C>
SYSTEMS REVENUE
Software................................................. $ 436,903 $ 2,477 $ 439,380 37%
Hardware................................................. 176,493 3,096 179,589 14%
-------------- ------------ ------------- ---
Total Systems Revenue.................................. 613,396 5,573 618,969 51%
-------------- ------------ ------------- ---
SERVICES REVENUE
One-Time Services........................................ 182,255 11,029 193,284 16%
Recurring Services....................................... 356,814 34,137 390,951 33%
-------------- ------------ ------------- ---
Total Services Revenue................................. 539,069 45,166 584,235 49%
-------------- ------------ ------------- ---
TOTAL REVENUE.............................................. $ 1,152,465 $ 50,739 $ 1,203,204 100%
-------------- ------------ ------------- ---
-------------- ------------ ------------- ---
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH AMERICA INTERNATIONAL TOTAL REVENUE PERCENT
-------------- ------------ ------------- -----------
<CAPTION>
(000 OMITTED EXCEPT FOR %S)
<S> <C> <C> <C> <C>
SYSTEMS REVENUE
Software................................................. $ 320,331 $ 4,797 $ 325,128 34%
Hardware................................................. 144,957 1,944 146,901 16%
-------------- ------------ ------------- ---
Total Systems Revenue.................................. 465,288 6,741 472,029 50%
-------------- ------------ ------------- ---
SERVICES REVENUE
One-Time Services........................................ 137,095 7,310 144,405 15%
Recurring Services....................................... 320,397 14,080 334,477 35%
-------------- ------------ ------------- ---
Total Services Revenue................................. 457,492 21,390 478,882 50%
-------------- ------------ ------------- ---
TOTAL REVENUE.............................................. $ 922,780 $ 28,131 $ 950,911 100%
-------------- ------------ ------------- ---
-------------- ------------ ------------- ---
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
<PAGE>
CONDENSED CONSOLIDATED QUARTERLY STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
QUARTER
----------------------------------------------
1ST 2ND 3RD 4TH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(000 OMITTED EXCEPT FOR PER SHARE DATA)
REVENUE............................................ $ 263,292 $ 291,494 $ 307,176 $ 341,242 $ 1,203,204
Operating Expense.................................. 201,894 216,963 223,302 242,987 885,146
Nonrecurring Charge................................ -- 35,420 -- 59,830 95,250
---------- ---------- ---------- ---------- ------------
OPERATING INCOME................................... 61,398 39,111 83,874 38,425 222,808
Other Income, Net.................................. 2,610 4,525 4,471 4,776 16,382
---------- ---------- ---------- ---------- ------------
Income Before Income Taxes......................... 64,008 43,636 88,345 43,201 239,190
Provision for Income Taxes......................... 25,632 17,524 35,137 17,360 95,653
---------- ---------- ---------- ---------- ------------
NET INCOME......................................... $ 38,376 $ 26,112 $ 53,208 $ 25,841 $ 143,537
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
EARNINGS PER SHARE:
Basic............................................ $ .19 $ .13 $ .25 $ .12 $ .69
Diluted.......................................... $ .18 $ .12 $ .25 $ .12 $ .67
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 205,584 207,942 209,541 210,932 208,511
Diluted.......................................... 213,509 214,387 216,587 218,094 214,462
CASH DIVIDENDS DECLARED PER SHARE.................. $ .01 $ .01 $ .02 $ .02 $ .06
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
QUARTER
----------------------------------------------
1ST 2ND 3RD 4TH TOTAL
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
(000 OMITTED EXCEPT FOR PER SHARE DATA)
REVENUE............................................ $ 203,706 $ 231,481 $ 246,869 $ 268,855 $ 950,911
Operating Expense.................................. 166,586 185,070 192,586 207,230 751,472
Nonrecurring Charge................................ -- 8,789 26,214 35,200 70,203
---------- ---------- ---------- ---------- ------------
OPERATING INCOME................................... 37,120 37,622 28,069 26,425 129,236
Other Income, Net.................................. 1,705 1,652 1,590 2,275 7,222
---------- ---------- ---------- ---------- ------------
Income Before Income Taxes......................... 38,825 39,274 29,659 28,700 136,458
Provision for Income Taxes......................... 15,211 15,488 11,889 11,537 54,125
---------- ---------- ---------- ---------- ------------
NET INCOME......................................... $ 23,614 $ 23,786 $ 17,770 $ 17,163 $ 82,333
---------- ---------- ---------- ---------- ------------
---------- ---------- ---------- ---------- ------------
EARNINGS PER SHARE:
Basic............................................ $ .12 $ .12 $ .09 $ .08 $ .41
Diluted.......................................... $ .11 $ .11 $ .08 $ .08 $ .39
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................ 200,677 201,541 202,382 204,284 202,400
Diluted.......................................... 209,554 211,379 211,368 212,788 210,884
CASH DIVIDENDS DECLARED PER SHARE.................. $ .01 $ .01 $ .01 $ .01 $ .04
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C>
(000 OMITTED
EXCEPT FOR PER SHARE DATA)
REVENUE:
Systems.................................................................. $ 618,969 $ 472,029 $ 330,933
Services................................................................. 584,235 478,882 384,969
------------ ---------- ----------
Total Revenue.......................................................... 1,203,204 950,911 715,902
OPERATING EXPENSE:
Cost of Operations....................................................... 511,082 413,471 329,684
Marketing................................................................ 176,194 146,207 114,994
Research and Development................................................. 89,059 83,984 68,293
General and Administrative............................................... 108,811 107,810 89,213
Nonrecurring Charge*..................................................... 95,250 70,203 130,270
------------ ---------- ----------
Total Operating Expense................................................ 980,396 821,675 732,454
------------ ---------- ----------
OPERATING INCOME (LOSS).................................................... 222,808 129,236 (16,552)
Other Income, Net.......................................................... 16,382 7,222 605
------------ ---------- ----------
Income (Loss) Before Income Taxes.......................................... 239,190 136,458 (15,947)
Provision (Credit) for Income Taxes........................................ 95,653 54,125 (8,052)
------------ ---------- ----------
NET INCOME (LOSS).......................................................... $ 143,537 $ 82,333 $ (7,895)
------------ ---------- ----------
------------ ---------- ----------
EARNINGS (LOSS) PER SHARE:
Basic.................................................................... $ .69 $ .41 $ (.04)
Diluted.................................................................. $ .67 $ .39 $ (.04)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.................................................................... 208,511 202,400 185,030
Diluted.................................................................. 214,462 210,884 185,030
</TABLE>
- ------------------------
* The Nonrecurring Charges consist of costs associated with the Company's
acquisitions.
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1997 1996
----------- -----------
<CAPTION>
(000 OMITTED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................................ $ 432,477 $ 204,952
Short-Term Investments................................................... 4,981 42,532
Receivables, Net of Allowance For Doubtful Accounts of $20,763 and
$11,899 in 1997 and 1996............................................... 421,876 351,458
Current Deferred Income Taxes............................................ 36,311 25,020
Inventories.............................................................. 6,513 7,406
Prepaids and Other Current Assets........................................ 21,515 18,152
----------- -----------
Total Current Assets................................................... 923,673 649,520
INTANGIBLES
Net of Accumulated Amortization of $48,559 and $32,974 in 1997 and
1996................................................................... 174,233 181,927
CAPITALIZED SOFTWARE
Net of Accumulated Amortization of $50,618 and $43,290 in 1997 and
1996................................................................... 69,535 65,368
PROPERTY AND EQUIPMENT
Net of Accumulated Depreciation of $102,295 and $113,635 in 1997 and
1996................................................................... 101,409 59,903
DEFERRED INCOME TAXES...................................................... 36,600 39,899
OTHER NONCURRENT ASSETS, NET............................................... 7,136 16,132
----------- -----------
TOTAL ASSETS............................................................... $ 1,312,586 $ 1,012,749
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred Revenue......................................................... $ 125,399 $ 104,817
Other Current Liabilities................................................ 279,134 249,463
----------- -----------
Total Current Liabilities.............................................. 404,533 354,280
LONG-TERM DEBT............................................................. 1,022 769
OTHER LONG-TERM LIABILITIES................................................ 6,449 7,054
----------- -----------
Total Liabilities...................................................... 412,004 362,103
----------- -----------
COMMITMENTS AND CONTINGENCIES
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, 1,000 Shares Authorized and No Shares Issued in 1997 and
1996................................................................... -- --
Common Stock, $.05 Par Value, 250,000 Shares Authorized; 211,380 and
140,794 Shares Issued in 1997 and 1996................................. 10,569 7,040
Additional Paid-in Capital............................................... 574,863 536,328
Retained Earnings........................................................ 315,150 187,012
----------- -----------
900,582 730,380
Treasury Stock, at Cost (0 and 33,283 Shares in 1997 and 1996)........... -- (79,734)
----------- -----------
Total Stockholders' Equity............................................. 900,582 650,646
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 1,312,586 $ 1,012,749
----------- -----------
----------- -----------
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
-----------------------------------------------------------------------------------------
COMMON STOCK SHARES ADDITIONAL
------------------------------------- COMMON PAID-IN RETAINED TREASURY
ISSUED TREASURY OUTSTANDING STOCK CAPITAL EARNINGS STOCK
--------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(000 OMITTED)
BALANCE, DECEMBER 31, 1994....... 71,772 20,174 51,598 $ 3,588 $ 181,926 $ 128,772 $ (98,714)
Common Stock Issued:
Business Combination......... 4,000 (19) 4,019 200 199,906 -- 490
Conversion of Class A
Stock...................... 1,680 -- 1,680 84 2,316 -- --
Public Offering.............. 1,783 -- 1,783 87 60,828 -- --
Stock Options Exercised--
Including Related Tax
Benefits................... 325 (1,018) 1,343 17 31,931 (928) 6,791
Employee Stock Purchase
Plan....................... 22 (114) 136 -- 1,374 -- 727
Purchase of Treasury Stock..... (26) 69 (95) -- (530) -- (1,997)
Other.......................... (26) (7) (19) -- (115) (108) 72
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... -- -- -- -- -- 8 --
Cash Dividends Declared
($.04 Per Share)............. -- -- -- -- -- (8,043) --
Net Loss for the Year.......... -- -- -- -- -- (7,895) --
--------- ----------- ------------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995....... 79,530 19,085 60,445 3,976 477,636 111,806 (92,631)
Common Stock Issued:
Conversion of Preferred
Stock........................ 3,315 -- 3,315 166 -- -- --
Public Offering.............. 1,145 -- 1,145 58 17,920 -- --
Stock Options Exercised--
Including Related Tax
Benefits................... 1,067 (1,222) 2,289 53 33,458 -- 3,292
Employee Stock Purchase
Plan....................... 14 (198) 212 1 3,251 -- 481
Purchase of Treasury Stock..... 4 42 (38) -- -- -- (1,031)
Retirement of Treasury Stock... (885) (885) -- (44) (10,111) -- 10,155
Other.......................... 7 (17) 24 -- 336 955 --
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... -- -- -- -- -- 900 --
Tax Adjustment for MSI
Acquisition.................. -- -- -- -- 16,668 -- --
Cash Dividends Declared
($.04 Per Share)............. -- -- -- -- -- (8,982) --
Effect of Two-for-One Stock
Split........................ 56,597 16,478 40,119 2,830 (2,830) -- --
Net Income for the Year........ -- -- -- -- -- 82,333 --
--------- ----------- ------------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996....... 140,794 33,283 107,511 7,040 536,328 187,012 (79,734)
Common Stock Issued:
Conversion of Preferred Stock.... 154 -- 154 8 (8) -- --
Stock Offering............... 114 -- 114 6 2,494 -- --
Stock Options Exercised--
Including Related Tax
Benefits................... 1,661 (2,220) 3,881 24 101,124 -- 5,431
Employee Stock Purchase
Plan....................... 21 (151) 172 1 6,253 -- 368
Purchase of Treasury Stock..... (8) 18 (26) -- -- -- (572)
Retirement of Treasury Stock... (30,930) (30,930) -- (1,489) (71,181) (1,837) 74,507
Other.......................... 38 -- 38 2 4,830 (654) --
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... -- -- -- -- -- (900) --
Cash Dividends Declared
($.06 Per Share)............. -- -- -- -- -- (12,008) --
Effect of Two-for-One Stock
Split........................ 99,536 -- 99,536 4,977 (4,977) -- --
Net Income for the Year........ -- -- -- -- -- 143,537 --
--------- ----------- ------------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997....... 211,380 -- 211,380 $ 10,569 $ 574,863 $ 315,150 $ --
--------- ----------- ------------- ----------- ----------- ----------- -----------
--------- ----------- ------------- ----------- ----------- ----------- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, DECEMBER 31, 1994....... $ 215,572
Common Stock Issued:
Business Combination......... 200,596
Conversion of Class A
Stock...................... 2,400
Public Offering.............. 60,915
Stock Options Exercised--
Including Related Tax
Benefits................... 37,811
Employee Stock Purchase
Plan....................... 2,101
Purchase of Treasury Stock..... (2,527)
Other.......................... (151)
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... 8
Cash Dividends Declared
($.04 Per Share)............. (8,043)
Net Loss for the Year.......... (7,895)
-------------
BALANCE, DECEMBER 31, 1995....... 500,787
Common Stock Issued:
Conversion of Preferred
Stock........................ 166
Public Offering.............. 17,978
Stock Options Exercised--
Including Related Tax
Benefits................... 36,803
Employee Stock Purchase
Plan....................... 3,733
Purchase of Treasury Stock..... (1,031)
Retirement of Treasury Stock... --
Other.......................... 1,291
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... 900
Tax Adjustment for MSI
Acquisition.................. 16,668
Cash Dividends Declared
($.04 Per Share)............. (8,982)
Effect of Two-for-One Stock
Split........................ --
Net Income for the Year........ 82,333
-------------
BALANCE, DECEMBER 31, 1996....... 650,646
Common Stock Issued:
Conversion of Preferred Stock.... --
Stock Offering............... 2,500
Stock Options Exercised--
Including Related Tax
Benefits................... 106,579
Employee Stock Purchase
Plan....................... 6,622
Purchase of Treasury Stock..... (572)
Retirement of Treasury Stock... --
Other.......................... 4,178
Net Change in Unrealized
Gain/Loss on Investments
Available-for-Sale........... (900)
Cash Dividends Declared
($.06 Per Share)............. (12,008)
Effect of Two-for-One Stock
Split........................ --
Net Income for the Year........ 143,537
-------------
BALANCE, DECEMBER 31, 1997....... $ 900,582
-------------
-------------
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(000 OMITTED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) for the Year................................................. $ 143,537 $ 82,333 $ (7,895)
--------- --------- ---------
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by Operating Activities:
Nonrecurring Charges......................................................... 95,250 70,203 130,270
Depreciation and Amortization................................................ 62,367 55,497 46,795
Loss on Sale of Assets....................................................... 2,009 -- --
Provision (Credit) for Noncurrent Deferred Income Taxes...................... 2,952 2,982 (1,461)
Changes in Assets and Liabilities, Net of Acquisitions:
Receivables, Net........................................................... (65,837) (132,109) (28,079)
Current Deferred Income Taxes.............................................. (5,069) (6,367) (12,643)
Inventories................................................................ 441 500 (5,220)
Prepaids and Other Current Assets.......................................... (10,624) 7,890 5,085
Noncurrent Deferred Income Tax............................................. (2,413) (2,639) (24,330)
Other Noncurrent Assets.................................................... 2,800 (796) (74)
Deferred Revenue........................................................... 16,186 17,055 21,204
Other Current Liabilities.................................................. 21,982 46,640 (13,126)
Other, Net................................................................... (376) 179 (27)
--------- --------- ---------
Total Adjustments........................................................ 119,668 59,035 118,394
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................ 263,205 141,368 110,499
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of Property and Equipment................................................. 3,755 1,278 823
Capital Expenditures........................................................... (63,068) (27,868) (20,750)
Capitalized Software........................................................... (34,670) (28,481) (26,628)
Purchases of Businesses, Net of Cash Acquired.................................. (39,964) (21,862) (12,694)
Proceeds from Sale or Maturity of Investments.................................. 106,065 90,717 5,622
Purchase of Investments........................................................ (61,371) (96,559) (50,717)
Other.......................................................................... (490) 1,890 (1,274)
--------- --------- ---------
Net Cash Used in Investing Activities.................................... (89,743) (80,885) (105,618)
--------- --------- ---------
NET CASH PROVIDED BEFORE FINANCING ACTIVITIES............................ 173,462 60,483 4,881
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt................................................... -- -- 70,500
Repayment of Long-Term Debt and Capital Leases................................. (1,626) (6,149) (82,729)
Net Repayment of Short-Term Debt............................................... -- -- (12,139)
Proceeds from Issuance of Common Stock......................................... 65,856 47,983 85,617
Purchase of Treasury Stock..................................................... (572) (1,031) (2,527)
Payment of Dividends........................................................... (9,595) (8,774) (7,710)
--------- --------- ---------
Net Cash Provided by Financing Activities................................ 54,063 32,029 51,012
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS............................................ 227,525 92,512 55,893
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 204,952 112,440 56,547
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $ 432,477 $ 204,952 $ 112,440
--------- --------- ---------
--------- --------- ---------
CASH PAID DURING THE YEAR FOR:
Interest....................................................................... $ 131 $ 1,001 $ 4,972
Income Taxes................................................................... $ 39,766 $ 32,878 $ 15,643
</TABLE>
- ------------------------
All prior period amounts have been restated to reflect the 1997 acquisitions of
AMISYS Managed Care Systems, Inc., Enterprise Systems, Inc., HPR Inc., and
National Health Enhancement Systems, Inc., in pooling transactions.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of HBO & Company
and its wholly owned subsidiaries, collectively referred to as "the Company" or
"HBOC." All significant intercompany transactions and balances have been
eliminated in consolidation. Certain previously reported amounts have been
reclassified to conform to current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
HBOC delivers enterprisewide patient care, clinical, financial, managed
care, payor and strategic management software solutions, as well as networking
technologies, electronic commerce, outsourcing and other services to healthcare
organizations throughout the U.S. and certain foreign countries.
The American Institute of Certified Public Accountants has issued Statement
of Position (SOP) 97-2, Software Revenue Recognition, effective for fiscal years
beginning after December 15, 1997. The Company has reviewed the SOP and does not
anticipate any material change to its revenue recognition policy as a result of
the adoption of the SOP.
SYSTEMS--Information systems are marketed under equipment purchase and
software license agreements as well as service agreements. One-time software and
hardware revenue is generally recognized at the time of delivery. HBOC ensures
that in addition to delivery, there is persuasive evidence that an arrangement
exists, the fee is fixed and determinable, and collectibility is probable before
software revenue is recognized. HBOC's contracts generally allow separate
accounting treatment for the systems and services components of the agreement.
The Company also licenses software using multiyear agreements under which
revenue is recognized on an annual basis.
SERVICES--Implementation fees are recognized as the work is performed or on
a percentage-of-completion basis. Maintenance and support agreements are
marketed under annual and multiyear agreements and are recognized ratably over
the period covered by the agreements. Electronic commerce and remote processing
services are recognized monthly as the work is performed. Outsourcing services
are recognized as the work is performed or on a percentage-of-completion basis.
NONRECURRING CHARGES
During 1997, the Company recorded a $95.3 million nonrecurring charge
related to the acquisitions of AMISYS Managed Care Systems, Inc. (AMISYS),
Enterprise Systems, Inc. (ESi), HPR Inc. (HPR), National Health Enhancement
Systems, Inc. (NHES), and AT&T's UK Specialist Healthcare Services Division
(AT&T Healthcare). The charge consisted of transaction costs of $13.2 million,
write-downs of long-lived assets of $33.6 million, severance and
employee-related costs of $19.6 million, other product-related costs of $21.2
million, and purchased research and development costs of $7.7 million.
During 1996, the Company recorded a nonrecurring charge of $70.2 million
primarily related to the acquisitions of CyCare Systems, Inc. (CyCare),
Management Software, Inc. (MSI), GMIS Inc. (GMIS), and ESi's acquisition of the
materials management division of Continental Healthcare Systems, Inc. This
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
charge consisted of transaction costs of $11.4 million, a write-down of long-
lived assets of $38.5 million, severance and employee-related costs of $7.1
million and other product-related costs of $13.2 million.
During 1995, the Company recorded a $130 million nonrecurring charge
primarily consisting of $115 million of purchased research and development
related to the acquisition of First Data Health Systems Corporation (now known
as CPG), $8 million of severance and other acquisition-related costs, and a $3
million mainframe capitalized research and development net book value
adjustment. Also in 1995, the Company recorded a nonrecurring charge of $11
million related to the acquisition of CliniCom Incorporated, primarily
consisting of severance and transaction costs. These charges were partially
offset by a gain on litigation settlement.
OTHER INCOME, NET
Other income, net, consists primarily of interest income on cash, cash
equivalents, investments and notes receivable; interest expense on long-term
debt and short-term line of credit borrowings, and miscellaneous expense related
primarily to foreign exchange transaction gains and losses.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share, effective for fiscal years ending after December 15, 1997.
The Company has adopted the new guidelines for the calculation and presentation
of earnings per share, and all prior periods have been restated. Basic earnings
per share is based upon the weighted average number of shares outstanding.
Diluted earnings per share is based upon the weighted average number of shares
outstanding and the dilutive effect of stock options outstanding using the
treasury stock method. Loss per share is based only upon the weighted average
number of shares outstanding, since the effect of stock options is
anti-dilutive.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less from the date of purchase to be cash
equivalents.
INVESTMENTS
Investments at December 31, 1997, and 1996, consist of marketable equity
securities. Pursuant to the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company has classified its investment portfolio as
available-for-sale. Such securities are recorded at fair value, and unrealized
gains and losses net of the related tax effect are recorded as a component of
retained earnings until realized. Realized gains and losses are determined on
the specific identification method and are reflected in the income statement.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
either by the specific identification or first-in, first-out valuation methods.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTANGIBLES
Intangibles consist of certain items related to the Company's acquisitions
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
GROSS NET GROSS NET
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(000 OMITTED)
Series Customer Lists........................ $ 53,789 $ 40,403 $ 53,815 $ 44,264
CPG Customer Lists........................... 101,982 84,610 101,812 91,223
Goodwill..................................... 59,878 47,258 48,447 40,838
Other........................................ 7,143 1,962 10,827 5,602
---------- ---------- ---------- ----------
Total.................................. $ 222,792 $ 174,233 $ 214,901 $ 181,927
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Series and CPG customer lists are being amortized over 15 years
beginning in June 1994 and June 1995, respectively. Goodwill relates to 11
acquisitions and is being amortized over periods ranging from five to 15 years
from the various acquisition dates.
CAPITALIZED SOFTWARE
The Company capitalizes costs to develop software products once the project
has reached the point of technological feasibility. Management monitors the net
realizable value of all software development investments to ensure that the
investment will be recovered through future sales. Completed projects are
amortized after reaching the point of general availability using the
straight-line method based on an estimated useful life of three years.
HBOC capitalized software development costs of $34.7 million, $28.5 million
and $26.6 million in 1997, 1996 and 1995, respectively. The Company's
nonrecurring charges include capitalized software net realizable value
adjustments of $11.6 million in 1997, $13.8 million in 1996 and $4.7 million in
1995. Amortization of capitalized software costs totaled $18.2 million, $14.9
million and $17.2 million in 1997, 1996 and 1995, respectively.
Royalty fees of $47.2 million, $36.5 million and $19.5 million were expensed
in 1997, 1996 and 1995, respectively, for software provided by third-party
business partners.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Computer equipment is depreciated
over useful lives of three to five years using the straight-line method. Office
furniture and equipment is depreciated over useful lives of two to 10 years
using the straight-line method. Real property is depreciated using the
straight-line method over various lives of up to 39 years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
useful life or remaining lease term.
OTHER NONCURRENT ASSETS
Other noncurrent assets consist primarily of the long-term portion of notes
receivable and the long-term balance in a compensation trust.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments classified as current assets or
liabilities, including cash and cash equivalents, receivables and accounts
payable, approximate carrying value due to the short-term maturity of the
instruments. The fair value of short-term and long-term debt approximate
carrying value based on their effective interest rates compared to current
market rates.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived assets,
such as intangibles, capitalized software and property and equipment, to
determine if any impairments are other than temporary. Management believes
long-lived assets in the accompanying balance sheets are appropriately valued.
2. INDEBTEDNESS AND COMMITMENTS:
The Company entered into a long-term revolving credit agreement in June
1994. In the second quarter of 1997, the Company amended and restated its $50
million long-term revolving credit agreement. As of December 31, 1997, there was
no outstanding balance. Interest is payable at the Company's option of prime or
LIBOR plus 0.5% (6.4375% as of December 31, 1997). A commitment fee of 0.25% per
annum is payable quarterly on the unused portion of the commitment. The
agreement, which expires June 30, 1999, contains certain net worth, cash flow
and financial ratio covenants. The Company is in compliance with these covenants
at December 31, 1997.
The Company has a $5 million uncommitted, unsecured line of credit
available. No facility fees or compensating balances are associated with this
line.
On April 7, 1997, the Company canceled its agreement with a financial
institution whereby the Company could sell on an ongoing basis, with partial
recourse, an undivided interest in a pool of customer receivables. The Company
occasionally sells customer receivables on a non-recourse basis to financial
institutions while retaining administrative responsibility for collection of the
receivables. In compliance with Statement of Financial Accounting Standards No.
125, receivables are shown net of the amount sold.
The Company occupies leased facilities and leases customer and other
equipment under noncancelable leases that expire through 2007. Most of the
leases contain certain options to renew. The future minimum lease commitments
under the terms of the Company's noncancelable leases with terms in excess of
one year, as of December 31, 1997, were as follows:
<TABLE>
<CAPTION>
(000 OMITTED)
-------------
<S> <C>
1998........................................................................... $ 27,804
1999........................................................................... 21,753
2000........................................................................... 11,814
2001........................................................................... 5,989
2002 and thereafter............................................................ 21,413
-------------
Total.................................................................... $ 88,773
-------------
-------------
</TABLE>
3. CAPITAL STOCK:
In August 1997, the Company declared a two-for-one stock split of all common
stock outstanding effected in the form of a stock dividend, which was paid on
September 9, 1997, to all stockholders of record
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CAPITAL STOCK: (CONTINUED)
on August 25, 1997. All share and per share amounts (except for stockholders'
equity) have been restated for this stock split. In addition, the Company
retired all treasury stock on September 9, 1997.
In May 1996, the Company declared a two-for-one stock split of all common
stock outstanding and in the treasury, effected in the form of a stock dividend
that was paid on June 10, 1996, to all stockholders of record on May 27, 1996.
All share and per share amounts (except for stockholders' equity) have been
restated for this stock split. In addition, stockholders approved an increase in
the number of shares of authorized common stock from 60 million to 250 million,
effective May 15, 1996.
On February 12, 1991, the Company designated 20,000 shares of its 1,000,000
shares of authorized preferred stock with no par value as Series A Junior
Participating Preferred Stock with no par value and declared a dividend
distribution of one Preferred Share Purchase Right on each outstanding share of
the Company's common stock. Due to the 1994, 1996 and 1997 stock splits, each
such outstanding share is entitled to one-eighth of a Right. Each Right, when
exercisable, entitles its holder to buy one-thousandth of a share of the newly
authorized preferred stock at an exercise price of $35, subject to adjustment.
The Rights initially will trade together with the Company's common stock and
will not be exercisable unless certain triggering events occur. Until
exercisable, the Rights will not have a dilutive effect on earnings per share.
Following certain events, including the acquisition of 15% of the Company's
common stock, the Board of Directors may elect to exchange each outstanding
whole Right for eight shares of the Company's common stock, subject to
adjustment. In certain other circumstances, including the acquisition of 20% or
more of the Company's common stock, the Rights may become exercisable for common
stock of the Company having a market value of two times the Right's exercise
price. The Company will be entitled to redeem the Rights at one cent per Right
at any time prior to the time the Rights become exercisable. If the Company is
acquired in a merger or other business combination transaction and the Rights
have not been redeemed, each Right will entitle its holder to purchase, at the
Right's then current exercise price, a number of the acquiring company's common
shares having a market value at the time of twice the Right's exercise price.
The Rights will expire on February 22, 2001.
4. EMPLOYEE BENEFIT PLANS:
STOCK PURCHASE PLAN
The Company has an employee discount stock purchase plan for all eligible
employees of HBOC and designated subsidiaries. Participants may use up to 10% of
their annual compensation or $21,250, whichever is higher, to purchase, through
payroll deductions, the Company's common stock at the end of each plan year for
85% of the lower of the beginning or ending stock price for the plan year. The
weighted average fair value of shares sold under the plan in 1997 was $20.24. At
December 31, 1997, there were 3,668,086 shares of stock reserved for issuance
under this plan.
STOCK OPTION PLANS
The Company has nonqualified and incentive stock option plans to provide key
employees and directors with an increased incentive to work for the success of
the Company. The option price for all stock options is the market value at the
date of grant and thus the plans are non-compensatory. The options expire 10
years after the dates of their respective grants.
The Company accounts for the stock purchase and stock option plans under APB
Opinion No. 25, which requires compensation costs to be recognized only when the
option price differs from the market price at the grant date. FASB Statement No.
123 allows a company to follow APB Opinion No. 25 with the
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EMPLOYEE BENEFIT PLANS: (CONTINUED)
following additional disclosure that shows what the Company's net income (loss)
and earnings (loss) per share would have been using the compensation model under
FASB Statement No. 123:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
(000 OMITTED)
Net Income (Loss) As Reported.............................. $ 143,537 $ 82,333 $ (7,895)
Pro Forma................................. $ 117,500 $ 66,744 $ (15,161)
Earnings (Loss) per Share:
Basic As Reported............................... $ .69 $ .41 $ (.04)
Pro Forma................................. $ .56 $ .33 $ (.08)
Diluted As Reported............................... $ .67 $ .39 $ (.04)
Pro Forma................................. $ .55 $ .32 $ (.08)
</TABLE>
Because the Statement 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: risk-free
interest rate of 6.32%, 6.25% and 6.65%; expected dividend yield of 0.19%, 0.18%
and 0.36%; expected term of 8.5, 8.8 and 7.3 years; expected forfeiture of 1.5%,
4.5% and 7.8%; and volatility of 49% for 1997 and 36% for both 1996 and 1995.
The total value of options granted for 1997, 1996 and 1995 were computed as
$90.2 million, $70.5 million and $25.0 million, respectively.
The following table presents a summary of the status of the Company's stock
option plans at December 31, 1997, 1996 and 1995, as well as changes during the
years then ended.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ -----------------
<S> <C> <C>
BALANCE--DECEMBER 31, 1994.................................... 15,288,940 $ 4.11
------------
Granted..................................................... 6,301,311 $ 11.90
Exercised................................................... 4,756,021 $ 3.12
Forfeited................................................... 1,720,978 $ 7.43
------------
BALANCE--DECEMBER 31, 1995.................................... 15,113,252 $ 7.30
------------
Granted..................................................... 6,006,844 $ 25.61
Exercised................................................... 3,571,264 $ 4.53
Forfeited................................................... 1,052,548 $ 15.53
------------
BALANCE--DECEMBER 31, 1996.................................... 16,496,284 $ 13.71
------------
Granted..................................................... 4,409,853 $ 32.89
Exercised................................................... 6,041,780 $ 9.17
Forfeited................................................... 1,025,668 $ 20.76
------------
BALANCE--DECEMBER 31, 1997.................................... 13,838,689 $ 21.28
------------ ------
------------ ------
EXERCISABLE AT DECEMBER 31, 1997.............................. 4,457,742 $ 12.46
------------ ------
------------ ------
RESERVED FOR FUTURE OPTIONS................................... 4,748,701
------------
------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EMPLOYEE BENEFIT PLANS: (CONTINUED)
The following table summarizes information about the Company's outstanding
stock options at December 31, 1997.
OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF WEIGHTED AVERAGE REMAINING
EXERCISE PRICES SHARES EXERCISE PRICE CONTRACTUAL LIFE
- --------------- ------------ ----------------- -------------------
<S> <C> <C> <C>
$ 0.00-$10.00 4,216,352 $ 4.87 5.35
$ 10.01-$20.00 1,561,320 $ 16.50 7.05
$ 20.01-$30.00 5,672,435 $ 26.95 8.47
$ 30.01-$40.00 978,068 $ 34.28 9.15
$ 40.01-$50.00 1,410,514 $ 42.02 9.80
------------ ------ ---
Total 13,838,689 $ 21.28 7.54
------------ ------ ---
------------ ------ ---
</TABLE>
OPTIONS EXERCISABLE
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE
- --------------- ---------- -----------------
<S> <C> <C>
$ 0.00-$10.00 2,513,311 $ 3.69
$ 10.01-$20.00 493,353 $ 15.47
$ 20.01-$30.00 1,224,388 $ 25.50
$ 30.01-$40.00 216,176 $ 32.44
$ 40.01-$50.00 10,514 $ 44.27
---------- ------
Total 4,457,742 $ 12.46
---------- ------
---------- ------
</TABLE>
PROFIT SHARING AND SAVINGS PLAN
The Company has a qualified profit sharing and savings plan covering all
employees with more than six months of service. Participants, except for certain
highly paid employees who are subject to certain limitations, may contribute up
to 15% of their compensation to the plan. The Company matches these
contributions at a rate determined annually by its Board of Directors (75% of
the first 4% of compensation contributed in 1997, 1996 and 1995). In addition,
the Company's Board may, at its discretion, authorize within prescribed limits a
profit sharing contribution to all eligible participants. Total plan expense was
$5.8 million in 1997, $4.1 million in 1996 and $3.1 million in 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES:
The provision (benefit) for income taxes consists of the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(000 OMITTED)
Current Portion--
Federal.................................................... $ 85,549 $ 49,581 $ 28,436
State...................................................... 12,221 7,083 4,062
--------- --------- ---------
97,770 56,664 32,498
--------- --------- ---------
Deferred Portion............................................. (2,117) (2,539) (40,550)
--------- --------- ---------
Total Provision (Benefit) for Income Taxes................... $ 95,653 $ 54,125 $ (8,052)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation from the federal statutory rate to the total provision
(benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(000 OMITTED)
Tax at Statutory Rate........................................ $ 83,717 $ 47,760 $ (5,581)
State Income Taxes, Net of Federal Taxes..................... 11,936 6,910 (888)
Non-Taxable S Corp Earnings.................................. -- (545) (1,583)
--------- --------- ---------
Provision (Benefit) for Income Taxes......................... $ 95,653 $ 54,125 $ (8,052)
--------- --------- ---------
--------- --------- ---------
</TABLE>
--------------------------------------
NOTE: MSI qualified as an S Corporation prior to acquisition, and
the tax impact was borne by the former stockholders of MSI.
Due to the taxable nature of the acquisition, deferred tax
assets of $16.7 million were recorded reflecting the excess
of acquired tax basis over book basis.
The components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(000 OMITTED)
DEFERRED TAX LIABILITIES:
Capitalized Software................................................ $ (25,563) $ (18,024)
Deferred Revenue.................................................... -- (4,040)
---------- ----------
Total Deferred Tax Liabilities.................................. (25,563) (22,064)
---------- ----------
DEFERRED TAX ASSETS:
Intangibles......................................................... 57,273 54,735
Accruals............................................................ 24,768 19,709
Bad Debt............................................................ 6,547 2,742
Tax Credit Carryforward............................................. 2,339 2,339
Other............................................................... 7,547 7,458
---------- ----------
Total Deferred Tax Assets....................................... 98,474 86,983
---------- ----------
NET DEFERRED TAX ASSET................................................ $ 72,911 $ 64,919
---------- ----------
---------- ----------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS:
Short-term investments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
COST FAIR VALUE COST FAIR VALUE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
(000 OMITTED)
Marketable Equity Securities...................... $ 4,981 $ 4,981 $ 41,032 $ 42,532
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
Unrealized gain on investments available-for-sale was $0 and $900,000, net
of tax, at December 31, 1997 and 1996, respectively.
7. OTHER CURRENT LIABILITIES:
The following significant items are included in other current liabilities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
(000 OMITTED)
Accounts Payable...................................................... $ 57,065 $ 46,454
Acquisition Product Reserves.......................................... 21,051 22,584
Accrued Commissions and Incentives.................................... 32,552 37,954
Income Taxes Payable.................................................. 32,074 16,668
Customer Deposits..................................................... 29,433 38,368
Accrued Royalties..................................................... 24,065 18,370
Payroll and Employee Benefits......................................... 20,472 14,355
Other Accrued Expenses................................................ 62,422 54,710
---------- ----------
$ 279,134 $ 249,463
---------- ----------
---------- ----------
</TABLE>
The following table presents a roll forward of the Company's severance and
product-related acquisition reserves:
<TABLE>
<CAPTION>
BALANCE BALANCE BALANCE
12/31/95 ADDITIONS USAGE 12/31/96 ADDITIONS USAGE 12/31/97
--------- ----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(000 OMITTED)
Severance.................. $ 3,756 $ 7,084 $ 5,953 $ 4,887 $ 19,545 $ 10,615 $ 13,817
Product-Related............ 20,504 13,213 11,133 22,584 21,172 22,705 $ 21,051
--------- ----------- --------- --------- ----------- --------- ---------
Total................ $ 24,260 $ 20,297 $ 17,086 $ 27,471 $ 40,717 $ 33,320 $ 34,868
--------- ----------- --------- --------- ----------- --------- ---------
--------- ----------- --------- --------- ----------- --------- ---------
</TABLE>
8. ACQUISITIONS:
On June 13, 1997, the Company completed the acquisition of AMISYS, a leading
provider of information systems for managed care entities and other parties that
assume financial risk for healthcare populations. AMISYS stockholders received
0.175 of a share of HBOC common stock for each share of AMISYS common stock, or
approximately 5.4 million HBOC shares.
On June 26, 1997, the Company completed the acquisition of ESi, a leading
developer of resource management solutions including materials management,
operating room logistics, scheduling and financial management. The stockholders
of ESi received 0.22895 of a share of HBOC common stock for each share of ESi
common stock, or approximately 7.6 million HBOC shares.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACQUISITIONS: (CONTINUED)
On December 23, 1997, the Company completed the acquisition of HPR, a
leading provider of clinical information systems for the managed care industry.
The stockholders of HPR received 0.6 of a share of HBOC common stock for each
share of HPR common stock, or approximately 9.2 million HBOC shares.
On December 29, 1997, the Company completed the acquisition of NHES, a
leading provider of health information technology solutions specializing in
demand and disease management products. The stockholders of NHES received 0.3084
of a share of HBOC common stock for each share of NHES common stock, or
approximately 1.8 million HBOC shares.
On August 21, 1996, the Company completed the acquisition of CyCare, a
provider of physician practice management software systems and electronic
commerce services for medical group practices, faculty practice plans and
medical enterprises. CyCare stockholders received 0.43 of a share of HBOC Common
Stock for each share of outstanding CyCare Common Stock, or an aggregate of
approximately 8.8 million shares.
On September 19, 1996, the Company completed the acquisition of MSI, a
privately held provider of software solutions for the homecare industry. MSI
stockholders received approximately 1.7 million shares of HBOC Common Stock in
the transaction.
On December 9, 1996, the Company completed the acquisition of GMIS, a
developer of data quality and decision support software for the payor
marketplace. GMIS stockholders received 0.21 of a share of HBOC Common Stock for
each share of GMIS Common Stock, or an aggregate of approximately 7.4 million
shares.
All of the above acquisitions were accounted for as poolings of interests,
therefore, all prior period amounts have been restated. A reconciliation between
revenue and net income as previously reported and as restated follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------
1996 1995
---------- ----------
<S> <C> <C>
(000 OMITTED)
REVENUE:
As Previously Reported.............................................. $ 796,578 $ 607,242
AMISYS, ESi, HPR & NHES............................................. 154,212 108,661
Adjustments......................................................... 121 (1)
---------- ----------
As Restated......................................................... $ 950,911 $ 715,902
---------- ----------
---------- ----------
NET INCOME (LOSS):
As Previously Reported.............................................. $ 73,954 $ (17,569)
AMISYS, ESi, HPR & NHES............................................. 8,306 10,254
Adjustments......................................................... 73 (580)
---------- ----------
As Restated......................................................... $ 82,333 $ (7,895)
---------- ----------
---------- ----------
</TABLE>
The following acquisitions have been accounted for under the purchase method
of accounting. The results of operations for each acquisition have been included
in the accompanying financial statements since each date of acquisition.
On October 31, 1997, the Company completed the acquisition, for
approximately $30 million in cash, of AT&T Healthcare, a provider of software
solutions and remote processing services for financial and payroll needs of
healthcare providers in the United Kingdom. In connection with the acquisition,
the Company allocated $7.7 million of the purchase price to incomplete research
and development projects as determined by independent appraisal. Accordingly,
these costs were expensed as of the acquisition date.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ACQUISITIONS: (CONTINUED)
On December 31, 1996, the Company completed the acquisition of Gemini, Ltd.,
the National Health Service (NHS) business unit of Cap Gemini UK PLC, for
approximately $3.5 million. Gemini Ltd. runs remote processing operations in the
South Thames region of the NHS organization in the United Kingdom.
In June, 1995, the Company acquired CPG in exchange for HBOC Common Stock
valued at approximately $200 million. The following unaudited pro forma
information was prepared assuming the transaction was consummated on January 1,
1995, and excludes the effect of the 1995 nonrecurring charge.
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31 1995
-----------------
<S> <C>
(000 OMITTED)
Revenue.................................................................... $ 784,097
Net Income................................................................. $ 74,256
Earnings per Share......................................................... $ .38
</TABLE>
This pro forma information is not necessarily indicative of the results of
operations that would have been attained had the acquisition been consummated on
January 1, 1995, or that may be attained in the future.
9. LEGAL PROCEEDINGS:
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
Company's financial position or results of operations.
<PAGE>
COMMON STOCK DATA (UNAUDITED)
The tables below present the quarterly high and low sales prices and
dividend information for the Company's Common Stock as furnished by The Nasdaq
Stock Market's National Market. There were 3,231 holders of record of the
Company's Common Stock as of December 31, 1997.
<TABLE>
<CAPTION>
1997
-----------------------------------
DIVIDENDS
DECLARED
QUARTER HIGH LOW PER SHARE
- --------------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
First.......................................................... $ 36.13 $ 23.75 $ .01
Second......................................................... $ 36.06 $ 21.25 $ .01
Third.......................................................... $ 42.25 $ 34.25 $ .02
Fourth......................................................... $ 46.83 $ 37.00 $ .02
---
Total.......................................................................... $ .06
---
---
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------
DIVIDENDS
DECLARED
QUARTER HIGH LOW PER SHARE
- --------------------------------------------------------------- --------- --------- -------------
<S> <C> <C> <C>
First.......................................................... $ 25.48 $ 16.38 $ .01
Second......................................................... $ 35.38 $ 23.88 $ .01
Third.......................................................... $ 35.00 $ 25.25 $ .01
Fourth......................................................... $ 36.25 $ 25.00 $ .01
---
Total.......................................................................... $ .04
---
---
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of HBO & Company:
We have audited the accompanying consolidated balance sheets of HBO &
Company (a Delaware Corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HBO & Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Atlanta, Georgia Arthur Andersen LLP
February 6, 1998
<PAGE>
STOCKHOLDER INFORMATION
<TABLE>
<S> <C>
CORPORATE HEADQUARTERS INVESTOR INFORMATION
HBO & Company The Company routinely sends its annual and
301 Perimeter Center North quarterly reports to interested investors. To
Atlanta, Georgia 30346 receive information, please write the Company
(770) 393-6000 or call:
FAX: (770) 393-6092 (800) HBOC-411
http://www.hboc.com [(800) 426-2411]
STOCK LISTING INVESTOR RELATIONS
HBO & Company's common stock is traded on The Security analysts and other investor
Nasdaq Stock Market's National Market inquiries should be directed to:
(symbol: HBOC). Put and call options on HBO & Monika Brown
Company are traded on the Pacific Stock Investor Relations
Exchange. HBO & Company
(800) HBOC-411
[(800) 426-2411]
ANNUAL MEETING SEC FORM 10-K
HBO & Company's annual meeting will be held Copies of the 10-K report filed with the
on Tuesday, May 12, 1998, at 9:00 a.m. Securities and Exchange Commission are
Eastern time at its Corporate Headquarters. available without charge, except for
You are cordially invited to attend. exhibits.
To request a copy, please write the Company
or call:
(800) HBOC-411
[(800) 426-2411]
TRANSFER AGENT AND REGISTRAR AUDITORS
SunTrust Bank, Atlanta Arthur Andersen LLP
Corporate Trust Department 133 Peachtree Street, N.E.
P.O. Box 4625 Atlanta, Georgia 30303
Atlanta, Georgia 30302 (404) 658-1776
(800) 568-3476
(404) 588-7815
Communications regarding transfers, lost CORPORATE COUNSEL
certificates, dividends or change of address Jones, Day, Reavis & Pogue
should be directed to SunTrust Bank at the 3500 SunTrust Plaza
above address. 303 Peachtree Street, N.E.
Atlanta, Georgia 30308-3242
(404) 521-3939
</TABLE>
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<S> <C>
CHARLES W. MCCALL--CHAIRMAN ALTON F. IRBY III
President and Chief Executive Officer Deputy Chairman and Chief Executive
HBO & Company NatWest Markets Global Corporate Advisory
ALFRED C. ECKERT III Limited
President GERALD E. MAYO
Greenwich Street Capital Partners, Inc. Chairman
HOLCOMBE T. GREEN, JR. Midland Financial Services, Inc.
Chairman and Chief Executive Officer JAMES V. NAPIER
WestPoint Stevens Inc. Chairman
PHILIP A. INCARNATI Scientific-Atlanta, Inc.
President and Chief Executive Officer DONALD C. WEGMILLER
McLaren Health Care Corporation President and Chief Executive Officer
Management Compensation Group/HealthCare
Compensation
</TABLE>
CORPORATE OFFICERS
<TABLE>
<S> <C>
CHARLES W. MCCALL* DOMINICK A. DEROSA
Chairman of the Board, Senior Vice President--Enterprise Sales
President and Chief Executive Officer TIMOTHY S. HEYERDAHL
ALBERT J. BERGONZI* Senior Vice President--Finance and Treasury,
President and Co-Chief Operating Officer and Accounting Officer
JAY P. GILBERTSON* CHARLES W. MILLER
President, Co-Chief Operating Officer, Chief Senior Vice President--Operations
Financial Officer, Treasurer, Principal GLENN N. ROSENKOETTER
Accounting Officer and Secretary Senior Vice President--Payor Solutions Group
JAY M. LAPINE* and HBOC UK Ltd.
Senior Vice President, General Counsel and E. CHRISTINE RUMSEY
Assistant Secretary Senior Vice President--Human Resources
RUSSELL G. OVERTON*
Senior Vice President--Business Development
</TABLE>
- ------------------------
* Executive Officer
<PAGE>
HBOC OFFICES
Corporate Headquarters
301 Perimeter Center North
Atlanta, GA 30346
(770) 393-6000
http://www.hboc.com
United States Canada
Amherst, MA London, Ontario
Boulder, CO Hamilton, Ontario
Cambridge, MA
Charlotte, NC Puerto Rico
Chicago, IL
Dallas, TX Hato Ray
Dubuque, IA
Eugene, OR United Kingdom
Hauppauge, NY
Lexington, MA Buckinghamshire
Longwood, FL Newcastle
Malvern, PA Nottingham
Minneapolis, MN Redditch
Mt. Laurel, NJ Romford
Phoenix, AZ Sheffield
Pittsburgh, PA South Bank
Rockville, MD
Salt Lake City, UT Ireland
San Diego, CA
San Francisco, CA Dublin
Scottsdale, AZ
Springfield, MO Israel
Tampa, FL
Wheeling, IL Jerusalem
Copyright-COPYRIGHT-1998 HBO & Company. All rights reserved. Pathways 2000 is a
registered trademark of HBO & Company. Connect 2000 is a trademark of HBO &
Company. Improving Healthcare Performance is a service mark of HBO & Company.
AR3/98
<PAGE>
EXHIBIT 21
HBO & COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Company are as follows:
<TABLE>
<CAPTION>
JURISDICTION
OF INCORPORATION
-------------------------
<S> <C> <C>
HBO & Company of Georgia 100% Delaware, USA
HBO & Company (UK) Limited 100% United Kingdom
HBO & Company (VI), Inc. 100% U.S. Virgin Islands
HBO & Company Canada Ltd. 100% Canada
Data-Med Computer Services Limited 100% owned by HBO & Company (UK) United Kingdom
Limited
HBOC Medical, Ltd. 100% owned by HBO & Company of Georgia Israel
First Data Health Systems (Ireland), 100% owned by HBO & Company of Georgia Ireland
Ltd.
HBO & Company (ST & SW), Ltd. 100% owned by HBO & Company (UK) United Kingdom
(formerly Gemini Ltd.) Limited
Health Enhancement International, Inc. 90% owned by HBO & Company of Georgia Arizona, USA
HBOC Ventures, Inc. 100% Delaware, USA
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports incorporated by reference in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8, which are listed in Part
IV, Item 14(a)3 of this Form 10-K.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 9, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HBO &
Company Consolidated Statement of Income for the Year ended 12/31/97 and HBO &
Company Consolidated Balance Sheet at 12/31/97 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 432,477
<SECURITIES> 4,981
<RECEIVABLES> 442,639
<ALLOWANCES> 20,763
<INVENTORY> 6,513
<CURRENT-ASSETS> 923,673
<PP&E> 203,704
<DEPRECIATION> 102,295
<TOTAL-ASSETS> 1,312,586
<CURRENT-LIABILITIES> 404,533
<BONDS> 1,022
0
0
<COMMON> 10,569
<OTHER-SE> 890,013
<TOTAL-LIABILITY-AND-EQUITY> 1,312,586
<SALES> 618,969
<TOTAL-REVENUES> 1,203,204
<CGS> 205,379
<TOTAL-COSTS> 885,146
<OTHER-EXPENSES> 78,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 239,190
<INCOME-TAX> 95,653
<INCOME-CONTINUING> 143,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 143,537
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.67
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/97 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 353,631
<SECURITIES> 26,062
<RECEIVABLES> 384,471
<ALLOWANCES> 14,709
<INVENTORY> 6,821
<CURRENT-ASSETS> 800,885
<PP&E> 210,561
<DEPRECIATION> 130,650
<TOTAL-ASSETS> 1,177,016
<CURRENT-LIABILITIES> 311,093
<BONDS> 368
0
0
<COMMON> 10,521
<OTHER-SE> 846,518
<TOTAL-LIABILITY-AND-EQUITY> 1,177,016
<SALES> 436,871
<TOTAL-REVENUES> 861,962
<CGS> 150,124
<TOTAL-COSTS> 642,159
<OTHER-EXPENSES> 23,814
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 195,989
<INCOME-TAX> 78,293
<INCOME-CONTINUING> 117,696
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,696
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.55
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED 6/30/97 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 6/30/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 277,106
<SECURITIES> 44,668
<RECEIVABLES> 361,973
<ALLOWANCES> 15,256
<INVENTORY> 8,245
<CURRENT-ASSETS> 726,262
<PP&E> 200,537
<DEPRECIATION> 124,175
<TOTAL-ASSETS> 1,097,286
<CURRENT-LIABILITIES> 323,595
<BONDS> 448
0
0
<COMMON> 6,979
<OTHER-SE> 758,064
<TOTAL-LIABILITY-AND-EQUITY> 1,097,286
<SALES> 273,661
<TOTAL-REVENUES> 554,786
<CGS> 97,273
<TOTAL-COSTS> 418,857
<OTHER-EXPENSES> 28,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 107,644
<INCOME-TAX> 43,156
<INCOME-CONTINUING> 64,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,488
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HBO &
Company Consolidated Statement of Income for the Three Months Ended 3/31/97
and HBO & Company Consolidated Balance Sheet at 3/31/97 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 249,308
<SECURITIES> 37,661
<RECEIVABLES> 349,497
<ALLOWANCES> 14,541
<INVENTORY> 10,108
<CURRENT-ASSETS> 677,577
<PP&E> 177,645
<DEPRECIATION> 117,474
<TOTAL-ASSETS> 1,040,699
<CURRENT-LIABILITIES> 315,620
<BONDS> 579
0
0
<COMMON> 7,062
<OTHER-SE> 709,331
<TOTAL-LIABILITY-AND-EQUITY> 1,040,699
<SALES> 124,493
<TOTAL-REVENUES> 263,292
<CGS> 45,186
<TOTAL-COSTS> 201,894
<OTHER-EXPENSES> (2,610)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 64,008
<INCOME-TAX> 25,632
<INCOME-CONTINUING> 38,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,376
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HBO &
Company Consolidated Statement of Income for the Twelve Months Ended 12/31/96
and HBO & Company Consolidated Balance Sheet at 12/31/96 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 204,952
<SECURITIES> 42,532
<RECEIVABLES> 363,357
<ALLOWANCES> 11,899
<INVENTORY> 7,406
<CURRENT-ASSETS> 649,520
<PP&E> 173,538
<DEPRECIATION> 113,635
<TOTAL-ASSETS> 1,012,749
<CURRENT-LIABILITIES> 354,280
<BONDS> 769
0
0
<COMMON> 7,040
<OTHER-SE> 643,606
<TOTAL-LIABILITY-AND-EQUITY> 1,012,749
<SALES> 472,029
<TOTAL-REVENUES> 950,911
<CGS> 165,575
<TOTAL-COSTS> 751,472
<OTHER-EXPENSES> 62,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 136,458
<INCOME-TAX> 54,125
<INCOME-CONTINUING> 82,333
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 82,333
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.39
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/96 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 125,497
<SECURITIES> 63,906
<RECEIVABLES> 288,287
<ALLOWANCES> 11,284
<INVENTORY> 7,327
<CURRENT-ASSETS> 507,617
<PP&E> 177,948
<DEPRECIATION> 120,935
<TOTAL-ASSETS> 881,203
<CURRENT-LIABILITIES> 267,025
<BONDS> 521
0
0
<COMMON> 7,017
<OTHER-SE> 596,684
<TOTAL-LIABILITY-AND-EQUITY> 881,203
<SALES> 328,900
<TOTAL-REVENUES> 682,056
<CGS> 114,680
<TOTAL-COSTS> 544,242
<OTHER-EXPENSES> 30,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 107,758
<INCOME-TAX> 42,588
<INCOME-CONTINUING> 65,170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,170
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.31
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from HBO & Company
Consolidated Statement of Income for the Six Months Ended 6/30/96 and HBO &
Company Consolidated Balance Sheet at 6/30/96 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 128,936
<SECURITIES> 39,335
<RECEIVABLES> 261,515
<ALLOWANCES> 11,410
<INVENTORY> 6,705
<CURRENT-ASSETS> 457,861
<PP&E> 171,013
<DEPRECIATION> 115,126
<TOTAL-ASSETS> 824,364
<CURRENT-LIABILITIES> 249,174
<BONDS> 3,127
0
0
<COMMON> 7,051
<OTHER-SE> 557,531
<TOTAL-LIABILITY-AND-EQUITY> 824,364
<SALES> 203,326
<TOTAL-REVENUES> 435,187
<CGS> 71,922
<TOTAL-COSTS> 351,656
<OTHER-EXPENSES> 5,432
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 78,099
<INCOME-TAX> 30,699
<INCOME-CONTINUING> 47,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,400
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO &
COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED 3/31/96 AND
HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 3/31/96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 122,056
<SECURITIES> 41,677
<RECEIVABLES> 235,050
<ALLOWANCES> 11,358
<INVENTORY> 9,711
<CURRENT-ASSETS> 425,960
<PP&E> 165,824
<DEPRECIATION> 109,932
<TOTAL-ASSETS> 786,913
<CURRENT-LIABILITIES> 240,997
<BONDS> 3,622
0
0
<COMMON> 3,992
<OTHER-SE> 530,993
<TOTAL-LIABILITY-AND-EQUITY> 786,913
<SALES> 88,667
<TOTAL-REVENUES> 203,706
<CGS> 30,776
<TOTAL-COSTS> 166,586
<OTHER-EXPENSES> (1,705)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 38,825
<INCOME-TAX> 15,211
<INCOME-CONTINUING> 23,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,614
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from HBO &
Comopany Consolidated Statement of Income for the Twelve Months Ended 12/31/95
and HBO & Company Consolidated Balance Sheet at 12/31/95 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 112,440
<SECURITIES> 42,182
<RECEIVABLES> 229,246
<ALLOWANCES> 11,701
<INVENTORY> 8,185
<CURRENT-ASSETS> 412,479
<PP&E> 161,963
<DEPRECIATION> 105,360
<TOTAL-ASSETS> 771,550
<CURRENT-LIABILITIES> 255,991
<BONDS> 4,054
0
0
<COMMON> 3,976
<OTHER-SE> 496,811
<TOTAL-LIABILITY-AND-EQUITY> 771,550
<SALES> 330,933
<TOTAL-REVENUES> 715,902
<CGS> 112,995
<TOTAL-COSTS> 602,184
<OTHER-EXPENSES> 129,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,947)
<INCOME-TAX> (8,052)
<INCOME-CONTINUING> (7,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,895)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
