SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission file number 0-25378
HCIA Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1407998
(State or other jurisdiction of
incorporation or organization) (I.R.S. employer identification no.)
300 East Lombard Street, Baltimore, MD 21202
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 895-7470
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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
--- ---
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock, $.01 par value, held by
non-affiliates of the registrant based on the closing sales price of the Common
Stock as quoted on the National Association of Securities Dealers, Inc. National
Market System as of February 28, 1997 was $396,075,220.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 28, 1997 was 11,833,656.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III.
-2-
<PAGE>
PART I
Item 1. Business.
Background
HCIA Inc. ("HCIA" or the "Company") was incorporated in
Maryland in 1985. In 1988, all of the then outstanding capital stock of the
Company was acquired by Citicorp Financial Guaranty Holdings, Inc. which
subsequently transferred the stock to AMBAC Inc. ("AMBAC"). AMBAC is a publicly
held holding company that through its affiliates provides financial guarantee
insurance and financial services to both public and private clients. From 1988
until HCIA's initial public offering, AMBAC provided additional capital and
financing for the growth of the Company. In March 1992, HCIA acquired
substantially all of the assets of the Information Strategies division of
McGraw-Hill, Inc. and certain assets of the commercial products division of the
SysteMetrics subsidiary of McGraw-Hill, Inc. (collectively, "MHI"). The business
of MHI acquired by the Company had revenue for the fiscal year ended December
31, 1991 of approximately $4.8 million. In April 1992, the Company acquired all
of the outstanding capital stock of Healthcare Knowledge Resources, Inc.
("HKR"), a health care information company with revenue for the fiscal year
ended June 30, 1991 of approximately $12.2 million. The acquisition of HKR
provided the Company with a perpetual and exclusive license (subject to certain
conditions) to the International Classification of Clinical Services System (the
"ICCS System"), a proprietary classification system for tracking and measuring
the use of medical resources, and the database developed by the Commission on
Professional and Hospital Activities ("CPHA"). See "-- Decision Support
Systems." During the first quarter of 1995, HCIA completed an initial public
offering of approximately 2.0 million newly issued shares of Common Stock.
Subsequent to the offering, in April 1995, the Company acquired all of the
outstanding capital stock of Datis Corporation, a health care information
company with revenue for the twelve months ended December 31, 1994 of
approximately $6.9 million. In August 1995, HCIA sold 1.5 million newly issued
shares and AMBAC sold approximately 1.1 million shares of Common Stock at $28.50
per share in a combined public offering.
In December 1995, the Company acquired the assets constituting
the CHAMP unit of William M. Mercer, Incorporated ("CHAMP"), which provides a
database service for the analysis of health care costs to employers, for $17.5
million in cash. In May 1996, the Company acquired Response Healthcare
Information Management, Inc. ("Response"), a patient-centered data collection
company, for approximately $6.3 million in cash. In August 1996, the Company
acquired LBA Health Care Management, Inc. ("LBA"), a health care information
company combining data collection, benchmarking and decision support tools with
a clinical implementation management team, for approximately $128.8 million,
$100.1 million of which was paid in cash and $28.7 million of which was paid by
the delivery of Common Stock. In December 1996, the Company acquired all of the
capital stock of HealthChex, Inc. ("HealthChex"), which provides physician
profiling and medical claims review systems to health care providers and payors,
for $11.5 million in cash. In addition to the acquisitions described above, the
Company has also acquired a number of smaller companies and business lines,
including several acquisitions in Europe. During 1996, the Company completed two
additional public offerings. In May 1996, AMBAC sold the remaining shares of
Common Stock it held, and the Company sold an additional 261,951 shares of
Common Stock, at a per share price of $51.00. In August 1996, the Company sold
approximately 2.0 million shares of Common Stock, at a per share price of
$54.125, to repay bank indebtedness incurred in connection with the acquisition
of LBA.
-3-
<PAGE>
General
HCIA is a leading health care information content company that
develops and markets integrated clinical information systems and products. The
Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. HCIA currently sells its
decision support systems to more than 470 customers, including hospitals,
integrated delivery systems, self-insured employers, pharmaceutical companies
and managed care organizations. The Company's syndicated products are sold to
over 7,000 customers. During 1996, revenue from the sale of decision support
systems represented 82% of revenue and syndicated products represented the
remaining 18% of revenue. As a result of its unique ability to integrate health
care data collected from numerous sources and across varied treatment settings,
the Company believes that it is well positioned to offer the information systems
and products necessary to continue to increase average revenue per customer
through the sale of more sophisticated and comprehensive decision support
systems.
By utilizing its core collection of proprietary data
standardization methodologies, value-added clinical measurement tools and
databases, including the ICCS System(TM), HCIA creates clinical information
systems and products from its many large and disparate data streams. The ICCS
System(TM) allows for the standardization and comparison of detailed clinical
data across a broad range of data sources. The Company's proprietary disease
management methodologies link the costs, quality, utilization and outcomes of
medical services delivered to patients in various clinical settings. These
methodologies and technical resources permit the Company to provide a level of
clinical information which is substantially more detailed and useful in
modifying clinical practice patterns than information derived from traditional
health care data sources.
Decision Support Systems
HCIA offers a range of decision support systems, which are
utilized by each of the three major health care market constituencies.
Providers, such as hospitals, physician groups and integrated delivery systems,
use the Company's decision support systems to measure and analyze the cost and
quality of medical interventions. The Company's entry-level systems provide
customers with competitor specific information such as market share by
specialty, local market utilization rates compared with regional and national
norms and customer specific analyses of product line and physician level
resource consumption. High-end decision support systems incorporate benchmarks
for specific medical resource consumption and are designed to help providers
understand the best practice for a medical intervention. Buyers, such as managed
care organizations, indemnity insurers and self-insured employers, utilize the
information and analyses on medical resource usage and outcomes derived from the
Company's decision support systems to select and monitor the performance of
network providers, channel specific types of patients towards the most
clinically effective providers, and negotiate fair prices and appropriate
utilization criteria, as well as to manage the overall health status of a
covered population. Suppliers, such as pharmaceutical, biotechnology and medical
supply and device companies, utilize the Company's decision support systems in
market analysis, product positioning and pharmacoeconomic analysis.
Pharmacoeconomic analysis provides suppliers with information needed to measure
the specific benefit/cost and outcome of an individual product against those of
competing products, alternative therapies or, in the case of a new drug or
product, the status quo therapy.
-4-
<PAGE>
The Company's entry-level systems are generally priced from
$25,000 annually, while high-end systems are generally priced from $250,000 to
more than $1.0 million annually. HCIA has also entered into a number of
strategic relationships with state hospital associations, business partners such
as HBO & Company ("HBOC") and Cerner Corporation ("Cerner"), and large users of
data such as Cigna Healthcare, Amgen Inc. and Columbia/HCA.
Most of HCIA's decision support systems are based on a
combination of the Company's Databridge(TM) collection of databases and data
handling technologies, Solesource(TM) desktop analytical software, and clinical
implementation management team.
Databridge(TM). Databridge(TM) is HCIA's collection of
proprietary databases and data-handling technologies. A typical decision support
system customer submits data in an electronic, computer-readable format. In
creating the interface for the customer's data stream, HCIA enables the transfer
of customer data and the subsequent application of the Company's proprietary
software algorithms and data-standardization technologies to the incoming data,
transforming the data into HCIA's proprietary standardized formats.
Databridge(TM) has several components, including:
Database. A large number of the Company's customers are also
its data suppliers. Most of the Company's decision support system contracts
provide that as the Company extracts data from the customer (as part of the
process of delivering a system to the customer), the data become part of the
Company's database. The Company supplements its database with data it purchases
or licenses from federal and state governments, trade groups and other industry
sources. The Company maintains more than a terabyte of live health care data,
including data from medical records, laboratory, pharmacy, imaging, outpatient
clinics, physician's offices, insurance claims, managed care encounters and
point-of-care member patient surveys. The Company's database resides in a
relational database structure that utilizes a network of large Sun Microsystems
servers. The Company believes that its current software and hardware platforms
are scaleable and provide it with a cost and flexibility advantage. The Company
has made a significant investment in an open-network architecture which links
its several geographical locations and provides customers with leased-line and
dial-up access. The Company supports most of the major relational database
platforms. The Company has personnel drawn from several key health care
disciplines (e.g., pharmacists, clinical nurses and medical technologists) who
are responsible for the auditing, editing and standardizing of its database, as
well as the upgrading and maintaining of its core methodologies. The Company
believes that its database provides more clinical detail and better outcomes
measurement capabilities than competitive systems. Furthermore, the detailed
medical content of the data and HCIA's experience in collecting and
standardizing this information provide additional competitive advantages. The
acquisitions of the CHAMP and Response databases have significantly expanded the
Company's outpatient and episode-of-care capabilities. As a result of
acquisitions and its internal growth, the Company believes that it has built one
of the largest and most sophisticated collections of integrated clinical,
financial and labor/productivity data in the health care industry.
ICCS System(TM). The Company holds a perpetual and exclusive
license to the ICCS System(TM), subject only to the Company's obligation to use
all commercially reasonable efforts to maintain and upgrade the system. The ICCS
System(TM) assigns a discrete and clinically detailed 12-digit code to every
product and service consumed in the treatment of patients. The Company believes
that the ICCS System(TM) is the health care industry's most widely implemented
uniform classification system for tracking and measuring the use of medical
resources (e.g., drugs, devices, laboratory tests, blood units, diagnostic
imaging and clinical services) across health care providers. The ICCS System(TM)
allows for the standardization and comparison of detailed clinical data,
regardless of the original source of the data (e.g., medical records, insurance
claims, laboratory or pharmacy systems). The ICCS System(TM) is used
-5-
<PAGE>
by the Company to create the most clinically detailed portion of its
database. The Company develops a set of proprietary software interfaces with
each customer who is a supplier of such data. The interfaces are built by a
series of proprietary "data-mapping" applications that incorporate the ICCS
System(TM) and a series of algorithms that allow the mapping applications
to "learn" each time a new clinical item is encountered. In doing so,
the applications are able to automatically standardize more data each time
a new interface is created. Set forth below is an illustration of the
application of the ICCS System(TM) to the delivery of a common anti-infective
drug.
ICCS Code ICCS Structure Example
4 Service Type Pharmacy
41 General Therapeutic Category Anti-infective
412 Specific Therapeutic Category Cephalosporin
412020 Generic Drug Type Cefazolin
412020.2 Route of Administration Parenteral
412020.232 Dosage Form IV Piggy Back
412020.23279 Dosage Strength 500
412020.232792 Dosage Unit Milligrams
SoleSource(TM). SoleSource(TM) is the Company's workstation
that provides customers with access to and analyses of information obtained with
a decision support system. SoleSource(TM) utilizes Microsoft Foundation Classes
Software and accesses a variety of database configurations, including Microsoft
SQL Server, Microsoft Access and Informix. As the Company has worked with a
variety of different health care organizations during the last several years
(e.g., hospitals, managed care organizations and pharmaceutical companies), it
has developed an extensive library of proprietary health care database
applications. In addition, as a result of its recent acquisitions, the Company
has expanded, and will continue to expand, the scope of its database
applications. Depending on the customer, the size of the database and the
sophistication of the decision support system, the Company licenses various
SoleSource(TM) applications to customers as part of a decision support system.
Clinical Improvement Methodology and Management. In addition
to providing databases and application software, the Company, utilizing
proprietary methodologies, assists customers with the implementation of clinical
solutions. The Company's knowledge-based clinical improvement methodologies
allow HCIA to leverage its ICCS-level information and enable clients to realize
improved clinical outcomes and lower costs through the modification of medical
and behavioral practice patterns. The Company's methodologies link the costs,
quality, utilization and outcomes of medical services delivered to patients in
various clinical settings and focus on episodes of illness that offer the
greatest opportunity for improving outcomes and reducing costs. The Company
utilizes database analyses, clinical improvement methodologies and an
implementation management team to assist customers in reducing clinical resource
consumption and improving outcomes in major specialties, including:
o invasive cardiovascular o vascular
o orthopaedics o neurosciences
o oncology o pulmonary
o medical cardiology o women's services
-6-
<PAGE>
Syndicated Products
Syndicated products include publications and standardized
databases which are generally priced between $100 to $2,000, with certain
products priced up to $25,000. The products are developed from specific portions
of the Company's database, and feature particular industry niches. Most
syndicated products are sold as annually renewable subscriptions or as
multi-year contracts. Syndicated products range from database directories (e.g.,
health care industry professionals, nursing homes and managed care
organizations) to more complex analyses (e.g., cost and outcome summaries for
each U.S. hospital). HCIA also markets to managed care clients a number of more
sophisticated syndicated products containing national and regional normative
data on length of stay, costs and medical necessity. The Company markets these
products directly to managed care organizations, and through alliances with
information systems vendors, third-party administrators and other entities that
process data streams for managed care organizations and payors. These syndicated
products generally are used for utilization management, claims adjudication and
actuarial forecasting and generally result in annual revenue of $100,000 or more
per customer.
Customers
The Company's customers include numerous health care industry
participants located throughout the United States, United Kingdom and Spain,
including major provider and provider groups, managed care organizations, and
pharmaceutical, biotechnology and medical device companies. As of December 31,
1996, the Company had more than 470 decision support system customers and more
than 7,000 syndicated product customers. In 1995 and 1996, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 36% and 28% of its revenue during 1995 and 1996,
respectively.
Sales and Marketing
HCIA markets its information systems and products through a
variety of means that are designed to enhance its name recognition and
facilitate the marketing of additional systems and products to its customer
base. The Company's marketing personnel are organized into market focused units.
The Company utilizes a direct sales approach with the existing customer base to
market its decision support systems and seeks to present proposals to both
existing and potential clients in face-to-face meetings at the executive level.
The Company's field sales force is highly specialized and frequently draws on
the Company's clinical implementation management team. In addition, HCIA has
entered into agreements with companies such as HBOC, Cerner and Transition
Systems, whereby the Company's systems are marketed through their respective
sales forces. The Company also approaches each of the major market
constituencies through the sale of lower-priced syndicated products. Many of
these products, such as the 100 Top Hospitals study, are specifically designed
to increase the visibility of the Company as an industry-leading source of
health care information. The Company uses both telemarketing and direct-mail
efforts in the sales of its syndicated products. HCIA continually seeks
opportunities to create name recognition as a leading provider of health care
information. As part of this strategy, the Company is widely quoted in the
media, including publications such as The Wall Street Journal and Modern
Healthcare, and its senior officers are frequently asked to speak at industry
conferences and serve on the editorial boards of industry newsletters and
publications.
-7-
<PAGE>
Competition
The market for health care information products and services
is intensely competitive. The Company believes that the principal competitive
factors in the health care information market are the breadth and quality of
system and product offerings, access to proprietary data, proprietary
methodologies and technical resources, price and the effectiveness of marketing
and sales efforts. In addition, the Company believes that the speed with which
information companies can anticipate and respond to the evolving health care
industry structure and identify information needs is an important competitive
factor. The Company believes that it competes favorably with respect to each of
these factors. Competitors vary in size and in the scope and breadth of products
and services offered, and the Company competes for the sale of systems and
products and the resulting access to data with different companies in each of
its target markets. Many of the Company's competitors have significantly greater
financial, technical, product development, marketing and other resources than
the Company. Furthermore, other major information companies not presently
offering clinical health care information services may enter the markets in
which the Company competes. The Company's potential competitors include
specialty health care information companies, health care information system and
software vendors and large data processing and information companies. Many of
these competitors have substantial installed customer bases in the health care
industry and the ability to fund significant product development and acquisition
efforts.
Intellectual Property
HCIA considers its methodologies, computer software and
databases to be proprietary. The Company seeks to protect its proprietary
information through confidentiality agreements with its employees. The Company's
policy is to have employees enter into confidentiality agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring employees to acknowledge, and, if requested,
assist in confirming the Company's ownership of any new ideas, developments,
discoveries or inventions conceived during employment, and requiring assignment
to the Company of proprietary rights to such matters that are related to the
Company's business. The Company also relies on a combination of trade secret,
copyright and trademark laws, contractual provisions in agreements with
customers and technical measures to protect its rights in various methodologies,
systems and products and databases. The Company has only filed one patent
application, and no copyright registration applications, covering its software
technology. Due to the nature of its software applications, the Company believes
that patent, trade secret and copyright protection are generally less
significant than the Company's ability to further develop, enhance and modify
its current systems and products.
Government Regulation
The FDA has promulgated a draft policy for the regulation of
certain computer products as medical devices. Although it is not possible to
anticipate the final form of the FDA's policy with regard to computer software,
the Company expects that, whether or not the draft policy is finalized, the FDA
is likely to become increasingly active in regulating computer software that is
intended for use in health care settings. The Company's products and product
development activities, therefore, could become subject to extensive regulation
by the FDA. The FDA regulates the introduction of new medical devices as well as
activities such as manufacturing, labeling and recordkeeping for such products.
To the extent that computer software is a medical device under FDA regulations
or policy, the Company would be required, depending on the product, to comply
with regulations, to (i) register and list the product with
-8-
<PAGE>
the FDA, (ii) notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products or (iii) obtain FDA
approval by demonstrating safety and effectiveness before marketing a product.
In addition, such products would be subject to the FDA's general controls,
including those relating to good manufacturing practices and adverse experience
reporting.
The process of obtaining clearance from the FDA can be costly and time
consuming, and there can be no assurance that, if required, such clearance would
be granted for the Company's existing and future systems and products on a
timely basis, if at all, or that FDA review will not include delays that would
adversely affect the Company's ability to market new systems and products or to
expand permitted uses of existing systems and products. The FDA could also limit
or prevent the manufacture or distribution of the Company's systems and products
and has the power to require the recall of such systems and products. FDA
regulations depend heavily on administrative and scientific interpretation, and
there can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible prospective and retroactive effects, will not
adversely affect the Company.
The confidentiality of patient records and the circumstances under
which records may be released for inclusion in the Company's databases is
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and use of confidential patient medical
record information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other health care
provider supplying the data to the Company, the Company's databases have been
designed to enable health care providers to comply with the confidentiality
requirements of state law. The Company believes that its procedures comply with
the laws and regulations regarding the collection of patient data in
substantially all jurisdictions. However, additional legislation governing the
dissemination of medical record information has been proposed at both the state
and federal level. This legislation may require holders of such information to
implement security procedures that may result in substantial costs to the
Company. There can be no assurance that changes to state or federal laws will
not materially restrict the ability of health care providers to submit
information from patient records to the Company.
Employees
As of December 31, 1996, the Company had 820 employees, including 100
in sales and marketing, 408 in health care data, 178 in technology and 134 in
finance and administration. None of the Company's employees are represented by a
union or other collective bargaining group. The Company believes its
relationships with its employees to be satisfactory.
Risk Factors; Forward-Looking Statements
CERTAIN STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND BECAUSE SUCH STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW.
Acquisitions. The Company has, in large part, expanded its
systems and products through the acquisition of health care information
companies, product lines and data resources. The Company intends to continue the
acquisition of methodological, analytical and technical resources that will
further enhance and expand the Company's systems and products.
-9-
<PAGE>
Acquisitions involve numerous risks, including difficulties in
the assimilation of operations and products, the ability to manage
geographically remote units, the diversion of management's attention from other
business concerns, the risks of entering markets in which the Company has
limited or no direct expertise and the potential loss of key employees of the
acquired companies. In addition, acquisitions may involve the expenditure of
significant funds and the incurrence of significant charges associated with the
amortization of goodwill or other intangible assets, write-offs of acquired
in-process research and development costs and/or future write-downs of the
recorded values of assets acquired. There can be no assurance that any
acquisition will result in long-term benefits to the Company or that management
will be able to manage effectively the resulting business.
Management of Growth. The Company is currently experiencing a
period of rapid growth and expansion which could place a significant strain on
the Company's personnel and resources. The Company's growth has resulted in an
increase in the level of responsibility for both existing and new management
personnel. Many of the Company's management personnel have had limited or no
experience in managing companies as large as the Company. The Company has sought
to manage its current and anticipated growth through the recruitment of
additional management and technical personnel and the implementation of internal
systems and controls. However, the failure to manage growth effectively could
materially and adversely affect the Company's operating results.
Dependence on Key Personnel. The Company depends to a
significant extent on key management, technical and marketing personnel. The
Company's growth and future success will depend in large part on its ability to
attract, motivate and retain highly qualified personnel, including management
personnel of acquired companies. Except for an agreement with George D. Pillari,
its Chairman of the Board, President and Chief Executive Officer, the Company
does not have employment agreements with any of its executive officers. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company.
Variations in Quarterly Results. The Company has experienced
and expects to continue to experience variations in quarterly results. Recent
quarterly variations are primarily due to the effect of one-time charges related
to acquired in-process research and development costs and the timing of contract
executions. Quarterly results are also influenced by the timing of release of
certain systems and products as a result of the annual release of certain
external data sources. The Company's operating results for any particular
quarterly or annual period may not be indicative of results for future periods.
Dependence on Intellectual Property Rights. The Company has
made significant investments in the development and maintenance of its core
collection of proprietary data standardization methodologies, value-added
clinical measurement tools and technical resources that are used to transform
its many large and disparate data streams into clinically relevant information
products. The Company relies largely on its license agreements with customers
and its own security systems, confidentiality procedures and employee
nondisclosure agreements to maintain the trade secrecy of its proprietary
information. There can be no assurance that the legal protections and
precautions taken by the Company will be adequate to prevent misappropriation of
the Company's proprietary information. In addition, these protections do not
prevent independent third-party development of functionally equivalent or
superior systems, products or methodologies.
Competition. The health care information market is intensely
competitive and rapidly changing. The Company competes for the sale of systems
and products and the resulting access to data with different companies in each
of its target markets. Competitors vary in size and in the scope and breadth of
the products and services offered. Many of the Company's competitors have
significantly
-10-
<PAGE>
greater financial, technical, product development and marketing resources than
the Company. There can be no assurance that future competition, or any
significant loss of access to data resulting therefrom, will not have a
material adverse effect on the Company.
Major Customers. During 1995 and 1996, the Company's ten
largest customers accounted for approximately 36% and 28%, respectively, of the
Company's revenue. Many of the Company's contractual arrangements with its
customers are subject to annual renewal. The loss of one or more of the
Company's largest customers could have a material adverse effect on the Company.
Integrity and Reliability of Data. The Company's success
depends significantly on the integrity of its data. Although the Company tests
data for completeness and consistency, it does not conduct independent audits of
the information provided by its customers. Moreover, while the Company believes
that the benchmarking and other clinical, cost and performance information
contained in its database is representative of the operational aspects of
various types of health care industry participants, there can be no assurance
that such information is appropriate for comparative analysis in all cases or
that the databases accurately reflect general or specific trends in the health
care market. If the information contained in the data were found, or were
perceived, to be inaccurate, or if such information were generally perceived to
be unreliable, the Company's business and operating results could be materially
and adversely affected.
Potential Cost of Performance Guarantees. As part of certain
of its decision support systems, the Company guarantees that a customer will
achieve or identify a certain level of cost savings at least equal to the fees
the customer pays for the system. To the extent such cost savings are not
achieved, the Company may be subject to claims related to such guarantees.
Although the Company has never incurred a claim under these guarantees, there
can be no assurance that this will continue to be the case. Liabilities related
to such claims could have a material adverse effect on the Company's business
and operating results.
Volatility of Stock Price. The stock market historically has
experienced volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies. The trading price of the Common Stock may be subject to
significant fluctuations in response to general market conditions and to factors
specific to the Company, such as variations in quarterly results of operations,
announcements of acquisitions, new systems or products by the Company or its
competitors, governmental regulatory action, other developments or disputes with
respect to proprietary rights, general trends in the industry and overall market
conditions, and other factors.
Changes in the Health Care Industry. The health care industry
is subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care industry
participants generally. During the past several years, the U.S. health care
industry has been subject to an increase in governmental regulation of, among
other things, reimbursement rates and certain capital expenditures. Various
programs have been proposed to reform the U.S. health care system. Many of these
programs contain proposals to increase governmental involvement in health care,
lower reimbursement rates and otherwise change the operating environment for the
Company's customers. Health care industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's systems and products.
The Company cannot predict what impact, if any, such factors might have on its
business, financial condition and results of operations. In addition, many
health care providers are consolidating to create larger health care delivery
enterprises with greater regional market power. As a
-11-
<PAGE>
result, the remaining enterprises could have greater bargaining power, which
may lead to price erosion of the Company's systems and products.
Government Regulation. The U.S. Food and Drug Administration
(the "FDA") has promulgated a draft policy addressing the regulation of certain
computer products as medical devices under the Federal Food, Drug, and Cosmetic
Act. The FDA could determine in the future that certain applications of the
Company's systems and products are clinical decision tools subject to FDA
regulation as medical devices. In addition, the Company could become subject to
future regulation of the manufacture and marketing of medical devices and health
care software systems, or to legislation or regulation regarding the use of
patient records or of access to health care data. Compliance with such
legislation and regulation could be burdensome, time consuming and expensive.
The Company cannot predict the effect of possible future legislation and
regulation.
WHEN USED IN THIS FORM 10-K, IN ANY FUTURE FILINGS BY HCIA WITH THE SECURITIES
AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL STATEMENTS
MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES
"WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS ANTICIPATED,"
"ESTIMATE," "PROJECTED" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY
ANTICIPATED OR PROJECTED. HCIA WISHES TO CAUTION READERS NOT TO PLACE UNDUE
RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
MADE. HCIA UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Item 2. Properties.
The Company's executive offices are located in Baltimore,
Maryland, in approximately 65,000 square feet of leased office space, under a
lease that expires on December 31, 2002, and which includes an option for an
additional term of up to five years. The Company also leases approximately
46,500 square feet of office space in Ann Arbor, Michigan, under leases that
expire on March 31, 2000, and 42,000 square feet of office space in Denver,
Colorado, under a lease that expires on August 31, 2001. The Company also
maintains offices in Fairport, New York, Waltham, Massachusetts, Louisville,
Kentucky, Concord, California, Olympia, Washington, East Greenwich, Rhode
Island, Windsor, Connecticut, Deerfield, Illinois, Alcester, England and
Barcelona, Spain. The Company believes that its facilities are adequate for its
current operations.
Item 3. Legal Proceedings.
The Company is a defendant from time to time in lawsuits
incidental to its business. The Company is not currently a party to, and none of
its properties is subject to, any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-12-
<PAGE>
Item 4A. Executive Officers of the Company.
Executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors. Information
regarding the executive officers of the Company who are not directors is as
follows:
Name Age Position
---- --- --------
Sachi J. Morishige 30 Senior Vice President-Corporate Development
Barry C. Offutt 35 Senior Vice President and Chief Financial
Officer
Jean Chenoweth 50 Senior Vice President-Industry Relations
Charles A. Berardesco 38 Senior Vice President, General Counsel and
Secretary
Donald S. Good, Jr. 34 Senior Vice President-Commercial Markets
EJay Lockwood 34 Senior Vice President-Managed Care Markets
Kevin J. Hicks 37 Senior Vice President-Provider Markets
Ms. Morishige has been employed by the Company in various
capacities since its founding in 1985, and currently serves as Senior Vice
President-Corporate Development.
Mr. Offutt served as a Vice President from April 1992 until
September 1995, when he was appointed a Senior Vice President, and has served as
Chief Financial Officer since October 1992. He is a certified public accountant
and was employed by Arthur Andersen & Co. in various capacities from 1984 to
March 1992.
Ms. Chenoweth served as Vice President - Industry Relations
from April 1992 until her appointment as Senior Vice President in September
1995. She served in various senior management positions, including President,
with HKR and its predecessor from 1989 through April 1992.
Mr. Berardesco served as Vice President, General Counsel and
Secretary from May 1996 until September 1996, when he was appointed a Senior
Vice President. Prior to May 1996, he was a partner with the law firm of
Whiteford, Taylor & Preston L.L.P., counsel to the Company.
Mr. Good served as a Vice President from May 1996 until
September 1996, when he was appointed Senior Vice President-Commercial Markets.
Prior to May 1996, he was a healthcare consultant with Arthur Andersen & Co.
Mr. Lockwood has been employed by the Company since January
1996, having served as Vice President-Commercial Markets until his appointment
as a Senior Vice President in February 1996. Prior to January 1996, he was
employed by CIGNA Healthcare in various capacities.
-13-
<PAGE>
Mr. Hicks has served as Senior Vice President-Provider
Markets, since joining the Company in August 1996. Prior to that time, he served
in various senior management positions, including chief executive officer, with
LBA.
-14-
<PAGE>
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been publicly traded on the
NASDAQ National Market System since February 22, 1995 under the symbol "HCIA."
The following table sets forth, for the quarterly period indicated, the high and
low closing sale price per share of Common Stock as reported by NASDAQ:
1995 1996
High Low High Low
------------------- ----------------------
First Quarter $25 $17-5/8 $55-3/4 $41-7/8
Second Quarter 31-5/8 21 67-7/8 45-5/8
Third Quarter 31-1/4 24-1/2 67-3/8 50-1/16
Fourth Quarter 46-3/4 22-3/4 36-1/8 23-1/4
As of February 28, 1997, there were 72 holders of record of
the Company's Common Stock. The number of record holders is not representative
of the number of beneficial holders since many shares are held by depositories,
brokers or other nominees.
Dividends
The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends on the Common Stock for
the foreseeable future. The Company currently intends to retain future earnings,
if any, to fund the development and growth of its business.
Sales of Unregistered Securities
In connection with the acquisition of LBA, the Company issued
a total of 492,961 shares of Common Stock to the then stockholders of LBA's
parent company. The foregoing issuances were exempt from registration pursuant
to Section 4(2) of the Securities Act as they did not involve a public offering.
In issuing the shares, the Company relied upon the status of the stockholders
(or their representatives) as officers or directors of LBA and that each had
such knowledge and experience in financial and business matters that such
stockholder was capable of evaluating the merits and risks of an investment in
the Company's Common Stock.
Item 6. Selected Financial Data.
<TABLE>
<CAPTION>
Year Ended December 31,
1992 1993 1994 1995(1) 1996(1)
------- ------- ------- -------- --------
(in thousands, except per share data)
<S><C>
STATEMENTS OF OPERATIONS DATA:
Revenue $19,470 $28,111 $30,711 $ 48,015 $ 73,520
Salaries, wages and benefits 9,431 14,168 15,457 21,932 32,688
Other operating expenses 7,499 8,611 8,625 12,055 17,058
Depreciation and amortization 3,204 4,595 4,826 6,864 12,670
Write-off of acquired in-process research and development costs -- -- -- 12,152 48,065
------- ------- ------- -------- --------
Operating income (loss) (664) 737 1,803 (4,988) (36,961)
Interest income -- -- 111 1,290 1,110
Interest expense 625 111 131 187 530
------- ------- ------- -------- --------
Income (loss) before income taxes, minority interest in
loss (income) of consolidated subsidiaries and cumulative
effect of change in accounting for income taxes (1,289) 626 1,783 (3,885) (36,381)
Provision (benefit) for income taxes (330) 362 759 (1,554) 5,886
Minority interest in loss (income) of consolidated subsidiaries (45) 90 (3) (74) --
------- ------- ------- -------- --------
Income (loss) before cumulative effect of change in
accounting for income taxes (1,004) 354 1,021 (2,405) (42,267)
Cumulative effect of change in accounting for income taxes -- (142) -- -- --
------- ------- ------- -------- --------
Net income (loss) $(1,004) $ 212 $ 1,021 $ (2,405) (42,267)
======= ======= ======= ======== ========
Net income (loss) per share $ 0.19 $ (0.31) $ (4.19)
Shares used in per share calculation 5,518 7,733 10,096
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Working capital $ 454 $ 3,852 $ 5,620 $ 35,671 $ 36,996
Total assets 37,643 41,122 40,865 108,401 223,196
Long-term liabilities, excluding current installments 1,298 2,136 1,835 699 2,305
Stockholders' equity 28,907 32,762 34,371 98,044 202,407
</TABLE>
(1) In connection with various acquisitions, the Company has recorded charges
related to acquired in-process research and development costs. Exclusive of such
charges and related income tax effects, net income per share would have been
$0.60 and $0.68 for 1995 and 1996, respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
OVERVIEW
HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations. In 1991, HCIA began a series of
acquisitions of health care information companies, product lines and data
resources. In connection with certain of these acquisitions, the Company has
recorded one-time charges related to acquired in-process research and
development costs. Such charges totaled approximately $12.2 million and $48.1
million during 1995 and 1996, respectively. As a result of these charges, the
Company recorded net losses for each of these years. The Company has accounted
for all of its acquisitions using the purchase method of accounting and,
accordingly, has included the results of the acquired entities since the date of
acquisition. See Note 1 of the Notes to Consolidated Financial Statements.
The Company has made a substantial investment in the acquisition and development
of its core collection of methodologies, clinical measurement tools and
technical resources. The Company's strategy is to leverage these resources
across substantially all of its systems and products, thereby giving it the
ability to increase revenue generated from these resources without a
commensurate increase in expenses. In addition to its internal product
development efforts, the Company seeks to continue the acquisition of other
health care information companies, product lines and data resources, and intends
to integrate and leverage these assets into product-line extensions across its
markets. The Company does not track profitability by product line since many of
the Company's resources are utilized throughout its systems and products.
The Company's internal product development efforts are generally in connection
with customer contracts, and the related costs are included as a component of
operating expenses in the year incurred. The Company capitalizes costs related
to internal product development which is not in connection with a specific
customer contract from the point of technological feasibility to the point of
general availability.
As a result of its acquisitions of health care information companies, product
lines and data resources, the Company has acquired intangible assets, the cost
of which it amortizes over various useful lives. In addition, the Company has
capitalized internal development costs and acquired assets relating to the
development of methodologies, clinical measurement tools and technical
resources, including its database, of $3.4 million, $6.9 million and $14.4
million during 1994, 1995 and 1996, respectively. Consequently, the Company has
recorded amortization expense of $3.9 million, $5.2 million and $10.1 million
during 1994, 1995 and 1996, respectively. See Notes 1, 2, and 4 of the Notes to
Consolidated Financial Statements.
As a result of its unique ability to integrate health care data collected from
numerous sources and across varied treatment settings, the Company believes that
it is well positioned to offer the information systems and products necessary to
continue to increase average revenue per customer through the sale of more
sophisticated and comprehensive systems and products. With respect to
entry-level systems and products, pricing is relatively fixed and is influenced
by competitive systems and products. With respect to high-end systems and
products, pricing is often negotiated with the customer and is based on a number
of factors, including the value attributed by the customer to the system.
8
<PAGE>
The Company's revenue is comprised of both recurring revenue from the Company's
installed customer base as well as from first-time sales. The Company seeks to
generate recurring revenue from decision support systems through multi-year
agreements (typically two to three years) and through renewals of its syndicated
products, which are updated annually. The Company defines its recurring revenue
percentage as revenue recognized during the period from a sale of a system or
product to a customer who purchased a similar system or product in the prior
period, divided by the Company's total revenue in the prior period. In
determining its recurring revenue percentage, the Company includes in its
revenue the revenue of entities acquired during the period as if such
acquisitions had occurred at the beginning of the prior period. The Company does
not classify revenue as recurring to the extent that it exceeds the revenue from
a similar system or product purchase in the prior period. The Company's
recurring revenue percentage was 69% and 66% in 1995 and 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain items
from the statements of operations of the Company expressed as a percentage of
revenue:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
----- ------ ------
<S><C>
Revenue 100% 100% 100%
Salaries, wages and benefits 50 46 45
Other operating expenses 28 25 23
Depreciation and amortization 16 14 17
Write-off of acquired in-process research and development costs -- 25 65
Operating income (loss) 6 (10) (50)
Net interest income -- 2 1
Income (loss) before income taxes and minority interest in loss (income)
of consolidated subsidiaries 6 (8) (49)
Provision (benefit) for income taxes 3 (3) 8
Net income (loss) 3% (5)% (57)%
</TABLE>
9
<PAGE>
1996 Compared to 1995
Revenue
Revenue for 1996 was $73.5 million, an increase of $25.5 million or 53% over
1995. The increase was the result of increased sales of the Company's decision
support systems. Revenue from the sales of decision support systems
represented 82% of revenue for 1996 and syndicated products represented the
remaining 18% of revenue.
The decision support systems revenue increase was primarily the result of
increased sales to providers and managed care customers, particularly as a
result of acquisitions, as well as increased penetration of the supplier market.
Salaries, Wages and Benefits
Salaries, wages and benefits decreased to 45% of revenue for 1996 from 46% for
1995. This decrease was a result of the continued leveraging of the Company's
historical investments in technology and basic infrastructure as revenue
increased.
Other Operating Expenses
Other operating expenses, which include occupancy, travel and marketing
expenses, decreased to 23% of revenue for 1996 from 25% for 1995. This decrease
was a result of certain of these expenses growing at a slower rate than revenue.
Depreciation and Amortization
Depreciation and amortization increased to 17% of revenue for 1996 from 14% for
1995. This increase was a result of the additional amortization associated with
certain acquisitions and capitalized internal development costs as well as
depreciation of other acquired assets.
Write-Off of Acquired In-Process Research and Development Costs
In connection with four acquisitions completed during 1995 and 1996, the Company
acquired ongoing research and development activities. The Company recorded
one-time charges totaling $12.2 million and $48.1 million during 1995 and 1996,
respectively, resulting from the write-off of the acquired in-process research
and development costs. The amount of the one-time charges was equal to the
estimated current fair value, based on the discounted risk-adjusted cash flows,
of specifically identified technologies for which technological feasibility had
not yet been established pursuant to Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," ("SFAS No. 86") and for which future alternative uses did
not exist.
Interest Income and Expense
Net interest income was $580,000 for 1996 compared with net interest income of
$1.1 million for 1995. The decrease was the result of higher interest expense in
1996 related to debt incurred in connection with certain acquisitions.
Income Taxes
The Company's effective tax rate was 16% for 1996 compared with (39)% for 1995.
The change was primarily the result of non-deductible goodwill and the
non-deductible write-off of the in-process research and development costs
resulting from certain acquisitions during 1996.
10
<PAGE>
1995 Compared to 1994
Revenue
Revenue for 1995 was $48.0 million, an increase of $17.3 million or 56% over
1994. The increase was primarily the result of a 77% increase in revenue from
the sale of decision support systems. Revenue from the sale of decision support
systems represented 80% of revenue for 1995 and Syndicated Products represented
the remaining 20% of revenue.
The decision support systems revenue increase was primarily the result of
increased sales of decision support systems to providers, particularly as a
result of acquisitions during the year, and to a lesser extent, due to increased
sales through CHKS Ltd., the Company's English subsidiary. Sales of the
Company's systems to the supplier market also increased. In particular, the
Company met several performance milestones pursuant to its contract with CIGNA
Healthcare during the year.
Salaries, Wages and Benefits
Salaries, wages and benefits decreased to 46% of revenue for 1995 from 50% for
1994. This decrease was a result of the leveraging of the Company's historical
investments in technology and basic infrastructure as revenue increased.
Other Operating Expenses
Other operating expenses, which include occupancy, travel and marketing
expenses, decreased to 25% of revenue for 1995 from 28% for 1994. This decrease
was a result of certain of these expenses growing at a slower rate than revenue.
Depreciation and Amortization
Depreciation and amortization decreased to 14% of revenue for 1995 from 16% of
revenue for 1994. The decrease was the result of the fixed nature of a large
component of the depreciation and amortization, which was the result of prior
acquisitions, being measured against a larger revenue base.
Write-Off of Acquired In-Process Research and Development Costs
In connection with an acquisition during 1995, the Company acquired ongoing
research and development activities. At the time of the acquisition, the Company
recorded a one-time $12.2 million charge resulting from the write-off of the
acquired in-process research and development costs. The amount of the one-time
charge was equal to the estimated current fair value, based on the risk-adjusted
cash flows, of specifically identified technologies for which technological
feasibility had not yet been established pursuant to SFAS No. 86 and for which
future alternative uses did not exist.
Interest Income and Expense
Net interest income was $1.1 million for 1995 compared with net interest expense
of $20,000 for 1994. The increase in net interest income was the result of a
portion of the proceeds of the Company's public offerings being utilized to
repay the amount due under the Company's credit agreement with the Company's
former majority stockholder, AMBAC Inc. (approximately $1.9 million), with the
balance being invested in cash equivalents and short-term investments.
Income Taxes
The Company's effective income tax rate was (39)% for 1995 compared with 43% for
1994. The change was a result of the Company recording a net loss in 1995.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During 1995 and 1996, the Company completed several public offerings of its
Common Stock. The net proceeds to the Company from the offerings were
approximately $182.3 million.
In August 1996, the Company obtained from First Union National Bank of North
Carolina ("First Union") a credit facility totaling $100 million, consisting of
a $50 million term loan and a $50 million revolving line of credit. The Company
incurred a one-time facility fee of $520,000. The Company borrowed the entire
$50 million term loan and approximately $36 million of the revolving line of
credit in connection with the acquisition of LBA Healthcare Management, Inc.
("LBA") and repaid such borrowings with a portion of the net proceeds to the
Company from a public offering of the Company's common stock.
The Company currently maintains the $50 million (subject to certain borrowing
limitations) revolving line of credit for general corporate purposes, including
future acquisitions and working capital requirements. Borrowings are
collateralized by substantially all of the Company's assets. The Company is
required to pay a commitment fee on the average daily unused portion of the
facility at a rate ranging from 0.25% to 0.375% per annum, depending on the
Company's debt/cash flow ratio. Borrowings bear interest at varying rates based
on an index tied to First Union's prime rate or LIBOR (6.25% at December 31,
1996). The credit facility also contains financial covenants applicable to HCIA,
including a debt/cash flow ratio and ratios of debt to capital. As of December
31, 1996, the Company was in compliance with all such financial covenants and
had a maximum borrowing capacity of $50 million, and there were no borrowings
outstanding under the facility. The credit facility reduces to $37.5 million in
July 1999, $25 million in July 2000 and expires on July 31, 2001.
During 1994, 1995 and 1996, the Company generated net cash from operations of
approximately $4.4 million, $3.1 million and $11.4 million, respectively. During
1995 and 1996, approximately $7.1 million and $12.1 million of cash generated
from operations was used to fund the increase in accounts receivable. The
increases in accounts receivable were primarily the result of revenue growth, as
well as the timing of receipt of payments from certain major customers. Net cash
provided by financing activities during 1994, 1995 and 1996 was approximately
$568,000, $66.2 million and $143.6 million, respectively, primarily as a result
of the Company's public offerings of its common stock. The net cash provided by
operations and financing activities has been utilized primarily for acquisitions
and capital expenditures.
The Company made capital expenditures (including capitalized leases) totaling
$1.6 million, $3.1 million and $6.4 million during 1994, 1995 and 1996,
respectively. As of December 31, 1996, the Company had net working capital of
$37.0 million, including cash, cash equivalents and short-term investments in
the amount of $13.8 million, and did not have any material commitments for
capital expenditures.
12
<PAGE>
In April 1995, the Company completed the acquisition of all of the outstanding
capital stock of Datis Corporation ("Datis"). The purchase price for the capital
stock of Datis was approximately $14.6 million in cash, which included
approximately $14.25 million funded by the Company and $386,000 funded with the
proceeds received from the exercise of certain options to purchase Datis stock.
In addition, the Company repaid approximately $900,000 of outstanding debt of
Datis. In December 1995, the Company acquired the CHAMP unit of William M.
Mercer, Incorporated ("CHAMP") for $17.5 million in cash and, in May 1996, the
Company completed the acquisition of Response Healthcare Information Management,
Inc. ("Response") for approximately $6.3 million in cash. In August 1996, the
Company acquired LBA for a total purchase price of approximately $128.8 million,
$100.1 million of which was paid in cash and $28.7 million of which was paid by
the delivery of HCIA common stock. The Company utilized $86 million in
borrowings under the First Union credit facility discussed above to fund the
cash portion of the purchase price, which was subsequently repaid from the
proceeds of a public offering of Common Stock. In December 1996, the Company
acquired HealthChex, Inc. ("HealthChex") from Equifax Inc. for $11.5 million in
cash. Each of these acquisitions has been accounted for using the purchase
method of accounting and, accordingly, the assets have been valued at their
estimated fair market value.
The Company expects to incur additional costs of $6 to $9 million to complete
the development efforts related to systems and products obtained in connection
with the acquisitions of CHAMP, Response, LBA and HealthChex, and to integrate
these products with the Company's other products. Such costs are expected to
consist of direct labor and contracted labor costs and are expected to be
incurred over the next two to three years.
13
<PAGE>
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
HCIA INC.:
We have audited the accompanying consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HCIA Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 23, 1997
14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands, except per share data)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S><C>
Revenue $30,711 $48,015 $ 73,520
Salaries, wages and benefits 15,457 21,932 32,688
Other operating expenses 8,625 12,055 17,058
Depreciation 957 1,619 2,567
Amortization 3,869 5,245 10,103
Write-off of acquired in-process research and development costs -- 12,152 48,065
------- ------- --------
Operating income (loss) 1,803 (4,988) (36,961)
Interest income 111 1,290 1,110
Interest expense 131 187 530
------- ------- --------
Income (loss) before income taxes and minority interest in income of consolidated
subsidiaries 1,783 (3,885) (36,381)
Provision (benefit) for income taxes 759 (1,554) 5,886
Minority interest in income of consolidated subsidiaries (3) (74) --
------- ------- --------
Net income (loss) $ 1,021 $(2,405) $(42,267)
======= ======= ========
Net income (loss) per share $ 0.19 $ (0.31) $ (4.19)
======= ======= ========
Shares used in per share calculation 5,518 7,733 10,096
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S><C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,190 $ 13,302
Short-term investments 23,280 510
Trade accounts receivable, net of allowance for doubtful accounts
of $454 in 1995 and $1,042 in 1996 16,623 32,122
Prepaid expenses and other current assets 2,236 3,886
Income tax receivable -- 339
Deferred compensation funds held in trust -- 5,321
-------- --------
Total current assets 45,329 55,480
Furniture and equipment, net 6,576 12,188
Computer software costs, net 11,012 20,425
Other intangible assets, net 42,338 115,601
Net deferred tax asset 3,090 17,074
Other 56 123
Deferred compensation funds held in trust -- 2,305
-------- --------
Total assets $108,401 $223,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 732 $ 1,315
Accrued salaries, benefits and other liabilities 4,222 7,957
Capital lease obligations 174 121
Notes payable 2,265 1,718
Income taxes payable 1,098 --
Deferred revenue 1,167 2,052
Acquired deferred compensation liability -- 5,321
-------- --------
Total current liabilities 9,658 18,484
Notes payable 699 --
Acquired deferred compensation liability -- 2,305
-------- --------
Total liabilities 10,357 20,789
-------- --------
Stockholders' equity:
Preferred stock--$0.01 par value; authorized 500,000 shares; no shares issued and outstanding -- --
Common stock--$0.01 par value; authorized 50,000,000 shares; issued and
outstanding 8,955,932 as of December 31, 1995 and 11,781,458 as of December 31, 1996 90 118
Additional paid-in capital 102,882 249,591
Accumulated deficit (4,953) (47,220)
Cumulative unrealized appreciation of short-term investments 44 4
Cumulative effect of currency translation adjustment (19) (86)
-------- --------
Total stockholders' equity 98,044 202,407
-------- --------
Total liabilities and stockholders' equity $108,401 $223,196
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Cumulative
Unrealized
Appreciation/
Preferred Preferred Preferred Total Additional (Depreciation)
Stock Stock Stock Preferred Common Paid-In Accumulated of Short-Term
Series A Series B Series C Stock Stock Capital Deficit Investments
--------- --------- --------- --------- ------ ---------- ----------- --------------
<S><C>
BALANCE AT
DECEMBER 31, 1993 $ 10,662 $ 5,500 $ 6,400 $ 22,562 $ 30 $ 11,319 $ (1,155) --
Capital contributions -- -- -- -- -- 605 -- --
Conversion of preferred stock (10,662) (5,500) (6,400) (22,562) 24 24,952 (2,414) --
Net income -- -- -- -- -- -- 1,021 --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1994 -- -- -- -- 54 36,876 (2,548) --
Sale of common stock
to the public -- -- -- -- 36 66,006 -- --
Net loss -- -- -- -- -- -- (2,405) --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
Unrealized appreciation of
short-term investments -- -- -- -- -- -- -- 44
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1995 -- -- -- -- $ 90 $102,882 $ (4,953) $ 44
Exercise of stock options -- -- -- -- -- 638 -- --
Sale of common stock to
the public -- -- -- -- 23 116,233 -- --
Tax benefits related to exercise
of stock options -- -- -- -- -- 1,128 -- --
Issuance of stock in connection
with an acquisition -- -- -- -- 5 28,710 -- --
Net loss -- -- -- -- -- -- (42,267) --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
Unrealized depreciation of
short-term investments -- -- -- -- -- -- -- (40)
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $118 $249,591 $(47,220) $ 4
======== ======= ======= ======== ==== ======== ======== ====
</TABLE>
Cumulative
Effect of
Currency Total
Translation Stockholders'
Adjustment Equity
----------- -------------
BALANCE AT
DECEMBER 31, 1993 $ 6 $ 32,762
Capital contributions -- 605
Conversion of preferred stock -- --
Net income -- 1,021
Effect of currency
translation adjustment (17) (17)
---- --------
BALANCE AT
DECEMBER 31, 1994 (11) 34,371
Sale of common stock
to the public -- 66,042
Net loss -- (2,405)
Effect of currency
translation adjustment (8) (8)
Unrealized appreciation of
short-term investments -- 44
---- --------
BALANCE AT
DECEMBER 31, 1995 $(19) $ 98,044
Exercise of stock options -- 638
Sale of common stock to
the public -- 116,256
Tax benefits related to exercise
of stock options -- 1,128
Issuance of stock in connection
with an acquisition -- 28,715
Net loss -- (42,267)
Effect of currency
translation adjustment (67) (67)
Unrealized depreciation of
short-term investments -- (40)
---- --------
BALANCE AT
DECEMBER 31, 1996 $(86) $202,407
==== ========
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1994 1995 1996
-------- --------- ----------
<S><C>
Cash flows from operating activities:
Net income (loss) $ 1,021 $ (2,405) $ (42,267)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,826 6,864 12,670
Write-off of acquired in-process research and development costs -- 12,152 48,065
Income tax benefit related to stock options -- -- 1,128
Deferred tax provision (338) (3,625) 5,606
Changes in operating assets and liabilities:
Accounts receivable (349) (7,078) (12,057)
Income taxes payable/receivable 1,097 973 (1,637)
Prepaid expenses (234) (1,505) (328)
Accounts payable (853) 215 (1,247)
Accrued salaries, benefits and other liabilities (771) (816) 812
Deferred revenue 40 (1,714) 674
Minority interest 3 75 --
------- -------- ---------
Net cash provided by operating activities 4,442 3,136 11,419
------- -------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment (1,568) (3,145) (6,357)
Cost of acquisitions, net of cash acquired -- (35,271) (146,765)
Computer software costs purchased or capitalized (2,603) (6,151) (12,671)
Other intangible assets purchased or capitalized (779) (716) (1,742)
Purchases of short-term investments -- (69,312) (59,640)
Proceeds from disposals of short-term investments -- 46,077 82,370
Payments on note receivable 108 1,551 --
Other (40) 104 (67)
------- -------- ---------
Net cash used in investing activities (4,882) (66,863) (144,872)
------- -------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options -- -- 638
Proceeds from public offerings -- 66,042 116,256
Proceeds from issuance of preferred stock 605 -- --
Issuance of stock in connection with an acquisition -- -- 28,715
Acquisition related borrowings -- -- 86,000
Repayment of acquisition related borrowings -- -- (86,000)
Fees paid to establish credit facilities -- -- (520)
Borrowing from related party 1,400 2,915 --
Repayments of notes payable -- (513) (1,246)
Repayments of related party borrowings (1,250) (1,900) --
Principal payments on capital leases (187) (315) (211)
------- -------- ---------
Net cash provided by financing activities 568 66,229 143,632
------- -------- ---------
Impact of currency fluctuations on cash and cash equivalents (17) (8) (67)
------- -------- ---------
Increase in cash and cash equivalents 111 2,494 10,112
Cash and cash equivalents -- beginning of year 585 696 3,190
Cash and cash equivalents -- end of year $ 696 $ 3,190 $ 13,302
======= ======== =========
Supplemental cash flow information
-- cash paid during the year for interest $ 137 $ 89 $ 461
======= ======== =========
-- cash paid during the year for income taxes $ -- $ 1,088 $ 790
======= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
HCIA INC. AND SUBSIDIARIES
(1) BACKGROUND
(a) Description of Business
HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations.
(b) Public Offerings
During February 1995, the Company completed an initial public offering of
approximately 2.0 million shares of common stock at $14.00 per share.
In August 1995, the Company completed a public offering of approximately 2.6
million shares at $28.50 per share, consisting of 1.5 million shares issued by
the Company and approximately 1.1 million shares sold by the Company's then
largest stockholder, AMBAC Inc. ("AMBAC").
In May 1996, approximately 4.2 million shares of the Company's common stock were
sold by AMBAC in a public offering. In connection with the offering the Company
sold 261,951 shares of common stock at $51.00 per share.
In August 1996, approximately 2.2 million shares of the Company's common stock
were sold at $54.125 per share in a public offering. Of these shares, 216,696
were sold by certain stockholders. The Company did not receive any of the
proceeds from the sale of shares by the selling stockholders.
Net proceeds to the Company from the offerings discussed above were
approximately $182.3 million.
(c) Acquisitions
Certain information regarding the Company's major acquisitions in the periods
covered by these financial statements is summarized below:
<TABLE>
<CAPTION>
Datis CHAMP Response LBA
---------------------- --------------------- --------------------- -----------------------
Life of Life of Life of Life of
Asset Asset Asset Asset
------- ------- ------- -------
<S><C>
Purchase Price $14,250,000 $17,500,000 $6,261,000 $128,829,000
Assets Acquired
Current Assets $ 1,338,000 $ 175,000 $1,274,000 $ 4,681,000
Furniture & Equipment $ 1,092,000 3-5 years -- $ 293,000 3-5 years $ 1,533,000 3-5 years
Other Assets $25,000 -- -- --
Deferred tax asset -- -- $ 221,000 $ 18,534,000
Software $ 233,000 5 years $ 859,000 5 years $ 255,000 5 years --
Trade Name -- $ 1,266,000 12 years -- --
Customer base -- $ 595,000 12 years $ 393,000 12 years $ 5,135,000 10 years
Methodologies -- -- -- $ 12,843,000 6 years
Assembled Workforce -- $ 1,102,000 12 years $ 133,000 12 years $ 4,080,000 10 years
Goodwill $16,503,000 20 years $ 1,351,000 12 years $ 304,000 15 years $ 43,859,000 20 years
In-process research
& development -- $12,152,000 $ 4,309,000 $ 41,507,000
Liabilities assumed $ 4,941,000 -- $ 921,000 $ 3,343,000
</TABLE>
HealthChex
----------------------
Life of
Asset
-------
Purchase Price $11,503,000
Assets Acquired
Current Assets $ 508,000
Furniture & Equipment $ 590,000 3-5 years
Other Assets --
Deferred tax asset $ 835,000
Software --
Trade Name --
Customer base $ 599,000 10 years
Methodologies $ 1,628,000 5 years
Assembled Workforce $ 715,000 10 years
Goodwill $ 5,107,000 20 years
In-process research
& development $ 2,249,000
Liabilities assumed $ 728,000
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HCIA INC. AND SUBSIDIARIES
On April 28, 1995, the Company acquired all of the capital stock of Datis
Corporation ("Datis") for $14,250,000 in cash. Datis provided databases and
related analyses to hospitals and hospital systems. The goodwill amortization
period is based on the nature of Datis' products and markets and the historical
rates of change in the products and markets.
On December 15, 1995, the Company acquired the assets constituting the CHAMP
unit of William M. Mercer, Incorporated ("CHAMP") for $17,500,000 in cash. CHAMP
provides database and analytical reporting services to large employers to assist
them in the management of their healthcare costs.
On May 15, 1996, the Company acquired all of the outstanding stock of Response
Healthcare Information Management, Inc. ("Response") for $6,261,000 in cash.
Response develops and markets information products which capture and analyze
point-of-care, patient-centered data relating to disease-specific outcomes
measurement and member/patient satisfaction.
On August 9, 1996, the Company acquired all of the capital stock of LBA
Holdings, Inc. (formerly HealthVision, Inc.) and its operating subsidiary LBA
Health Care Management, Inc. ("LBA"). The purchase price including acquisition
expenses was $128,829,000, of which $100,114,000 was paid in cash and
$28,715,000 was paid through the delivery of 492,961 shares of the Company's
common stock. LBA develops and markets information products that analyze and
benchmark detailed clinical and productivity outcomes. The cash portion of the
purchase price was funded primarily through a credit facility obtained from
First Union National Bank of North Carolina ("First Union") consisting of a
$50,000,000 term loan and a $36,000,000 draw on a $50,000,000 revolving line of
credit (see note 9). These loans were repaid with a portion of the proceeds from
the Company's August 1996 public offering.
On December 2, 1996, the Company purchased all of the capital stock of Equifax
Health Analytical Services, Inc. ("HealthChex") for $11,503,000 in cash. The
parties have agreed to make an election under Internal Revenue Code Sec.
338(h)(10) to treat this acquisition as an asset purchase for tax purposes.
HealthChex provides physician profiling and medical claims review systems to
health care providers and payors.
The values and lives of the intangible assets and in-process research and
development costs obtained in the CHAMP, Response, LBA and HealthChex
acquisitions were determined by an independent appraiser. The lives and values
of the intangible assets were based on, among other things, employee retention
rates, customer retention rates and the historical rates of change in the
products and markets. The current fair value of in-process research and
development costs was determined, based on the risk-adjusted cash flows (at
discount rates of 19% to 22%), of specifically identified technologies for which
technological feasibility had not yet been established pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86") and for which
future alternative uses did not exist. Consideration of technological
feasibility for purposes of these calculations was given on a basis consistent
with that normally utilized by the Company (see note 2d). Non-recurring charges
to write off these costs were recorded on the date of each acquisition. These
charges are recorded as operating expenses on the accompanying consolidated
statements of operations.
During November 1995, the Company acquired an additional 36% interest in CHKS
Limited ("CHKS"). As a result of this acquisition, CHKS became a wholly owned
subsidiary of the Company. The Company issued notes payable to the former
shareholders in the principal amount of $2,795,000. This acquisition was
accounted for using the purchase method of accounting and resulted in additional
goodwill of $2,709,000. The goodwill is being amortized over its estimated
useful life of 15 years. The estimate of the amortization period is based on the
nature of the products and markets of CHKS and the historical rate of change in
the products and markets.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HCIA INC. AND SUBSIDIARIES
Also during 1995, the Company acquired certain assets and assumed certain
liabilities of John Froehlich Associates, MetriCor Inc. and MetaGenerics. The
aggregate purchase price for these acquisitions was $1,677,000, consisting of
cash of $1,166,000 and notes payable of $511,000. These acquisitions resulted in
increases in furniture and equipment of $75,000, increases in other intangible
assets of $1,938,000 and increases in current liabilities of $336,000. The other
intangible assets consist of goodwill which is being amortized on a
straight-line basis over estimated useful lives of 10 to 15 years. The estimate
of each amortization period is based on the nature of the products and markets
of the acquired entities and the historical rate of change in the products and
markets.
During 1996 the Company also acquired all of the stock of IASIST S.A. and all of
the interests in Managed Marketing LLC. The aggregate purchase price for these
acquisitions was $2,713,000 and was paid in cash. These acquisitions resulted in
increases in current assets of $496,000, furniture and equipment of $85,000,
software of $303,000 and goodwill of $2,159,000, offset by increased current
liabilities of $330,000. The goodwill is being amortized on a straight-line
basis over its estimated useful life of 15 years. The estimate of each
amortization period is based on the nature of the products and markets of the
acquired entities and the historical rates of change in the products and
markets.
Unless otherwise noted, funding for the acquisitions discussed above was
provided from the proceeds of the Company's public offerings. All of these
acquisitions were accounted for using the purchase method of accounting.
Unaudited pro forma combined results of the operations of the Company for the
years ended December 31, 1995 and 1996 are presented below and have been
prepared assuming that the acquisitions discussed above had been made as of
January 1, 1995.
1995 1996
------- -------
(unaudited)
Revenue $79,456 $93,568
Net income $ 2,146 $ 7,192
Net income per share $ 0.20 $ 0.59
The pro forma results include the historical accounts of the Company and the
acquired entities adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired, additional interest expense
related to notes payable issued in connection with certain acquisitions, the
reversal of the non-recurring write-off of acquired in-process research and
development costs recorded in connection with certain acquisitions and related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management of
the Company and the acquired entities been combined in 1995 and 1996.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its subsidiaries. The minority interest of CHKS for the periods before it became
wholly owned is stated separately on the financial statements. All significant
intercompany transactions have been eliminated in consolidation.
(b) Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid securities with original maturities of
three months or less at the date acquired by the Company. At December 31, 1995
and 1996, the Company's short-term investments, which are classified as an
available for sale securities portfolio, consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------------------------- -------------------------
Fair Value Cost Fair Value Cost
------------- ----------- ---------- --------
<S><C>
Auction Market Preferred Stock $ 7,000,000 $ 7,000,000 $ -- $ --
Variable Rate Debentures 5,500,000 5,500,000 -- --
Municipal Bonds 10,780,000 10,736,000 510,000 506,000
----------- ----------- -------- --------
Total $23,280,000 $23,236,000 $510,000 $506,000
=========== =========== ======== ========
</TABLE>
The portfolio is carried at fair value in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All securities mature within one year. Realized gains and
losses are recorded using the specific identification basis to determine costs.
During 1995 and 1996, proceeds from sales of the securities totaled $46,077,000
and $82,370,000, respectively. Gross realized gains and losses on sales of the
securities were immaterial in 1995 and 1996.
(c) Furniture and Equipment
Furniture and equipment are stated at cost. Included in furniture and equipment
are computer hardware, furniture and fixtures and leasehold improvements. These
costs are being depreciated on the straight-line method over their estimated
useful lives of three to five years.
(d) Computer Software Costs
Computer software costs include the cost of internally developed software and
the fair market value assigned to computer software obtained in purchase
transactions. Costs for internally developed software are capitalized in
accordance with SFAS No. 86. These costs relate primarily to the building of
production systems and extending existing applications to new markets or
platforms using existing technologies and programming methods. The Company
capitalizes only those costs incurred after a detailed program design or, in the
absence of such, a working prototype has been developed. The Company generally
develops its applications in connection with customer contracts and includes the
related costs as a component of operating expenses in the period incurred. The
Company capitalized or purchased a total of $2,603,000, $7,260,000 and
$13,229,000 of computer software costs in 1994, 1995 and 1996, respectively,
including $1,092,000 in 1995 and $558,000 in 1996 related to business
acquisitions.
Capitalized costs are amortized, beginning with market availability, over the
economic useful life of the product. Typically, this life is five years. The
annual amortization expense is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bears to the total of current
and anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported. Amortization expense for computer software was
$1,456,000, $2,048,000 and $3,816,000 during 1994, 1995 and 1996, respectively.
Accumulated amortization for computer software was $6,510,000 and $10,326,000 at
December 31, 1995 and 1996, respectively.
The Company evaluates, on a quarterly basis, the recoverability of capitalized
software costs on the basis of whether such costs are fully recoverable from
projected undiscounted cash flows of individual system and product lines.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Revenue Recognition
Revenue from license fees for access to the Company's databases is
recognized when access to the database is made available to the customer.
Revenue from custom system or database development and implementation contracts
is recognized on a percentage of completion basis using the
cost-to-cost method. This method of accounting has resulted in unbilled accounts
receivable of $3,073,000 and $3,686,000 at December 31, 1995 and 1996,
respectively. On a quarterly basis, the Company assesses whether the current
estimate of total contract costs for each of these contracts indicates a loss is
expected and accrues any such losses on the entire contract in that quarter.
Where the Company has contracted to provide both access to a Company database
and development of a custom database, the contract value is segmented into its
discrete elements according to their relative values, and revenue is recognized
separately on each element in accordance with the above.
Revenue from group data contracts, which obligate the Company to process data,
produce reports and update databases on periodic intervals, is recognized as the
contracted obligations are fulfilled.
Revenue from licensing of software products is recognized upon shipment,
provided that no vendor obligations remain outstanding. While the Company has no
significant post-contract support ("PCS") obligations, any revenue related to
insignificant PCS obligations on software licenses is deferred and recognized
over the contract term. The Company determines the component of revenue
applicable to PCS obligations based upon its experience in fulfilling such
obligations.
Revenue on all other products is recognized when the product is shipped.
During 1994, one customer accounted for 12% of the Company's revenue. At
December 31, 1994, receivables from that customer represented 12% of the
Company's trade accounts receivable. Consistent with Company policy, no
collateral or other security was held with respect to such trade accounts
receivable. During 1995 and 1996, no single customer accounted for 10% or more
of the Company's revenue or trade accounts receivable.
(f) Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates, while revenue and expenses are translated at rates
prevailing during the period. Accordingly, translation adjustments that arise
due to fluctuations in exchange rates are excluded from operations and are
reported as a separate component of stockholders' equity.
(g) Income Taxes
Prior to the completion of the Company's initial public offering in February
1995, the Company was party to a federal tax-sharing agreement with AMBAC and
was included in AMBAC's consolidated federal income tax return. The tax-sharing
agreement provided for the determination of tax expense or benefit based on the
contribution of the Company to AMBAC's tax liability, computed substantially as
if the Company filed a separate income tax return. The tax liability due AMBAC
was settled quarterly, with a final settlement taking place after the filing of
the consolidated federal tax return. Commencing February 22, 1995, the Company
was no longer included on a consolidated basis for tax purposes with AMBAC and
is responsible for filing its own federal income tax return.
The Company uses the asset and liability method required by Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes," to
account for deferred income taxes. Under this method, deferred income taxes are
recognized for temporary differences between the financial reporting bases of
assets and liabilities and their respective tax bases and for operating loss and
tax credit carryforwards based on enacted rates expected to be in effect when
such amounts are realized or settled. The effects of changes in tax laws or
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
(h) Earnings Per Share
Earnings per share has been calculated based upon the weighted average number of
shares outstanding and using the treasury stock method for outstanding stock
options. The number of shares used in this calculation has been adjusted to
reflect a one-for-three reverse stock split and the conversion of Class A and
Class B common stock into a single class of common stock (see note 10). For
1994, the fair market value per share for the purpose of the calculation of the
weighted average shares outstanding was assumed to be $11.00, which was the
mid-point of the Company's initial public offering price range.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") in accounting for its stock options.
Additional information required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") is
discussed in Note 10.
(j) Use Of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(k) Reclassifications
Certain amounts for 1994 and 1995 have been reclassified to conform to the
presentation for 1996.
(3) FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
1995 1996
------------ ------------
Computer equipment $ 8,629,000 $15,274,000
Office furniture and equipment 1,398,000 1,881,000
Other 392,000 516,000
----------- -----------
10,419,000 17,671,000
Less accumulated depreciation (3,843,000) (5,483,000)
----------- -----------
$ 6,576,000 $12,188,000
=========== ===========
(4) OTHER INTANGIBLE ASSETS
Other intangible assets at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
Capitalized Accumulated Carrying Weighted
Cost Amortization Value Average Life
------------- ------------ ------------- ------------
<S><C>
Databases $ 7,788,000 $ 4,778,000 $ 3,010,000 5
CPHA license and prepaid royalties 14,031,000 3,886,000 10,145,000 17
Goodwill 79,467,000 4,777,000 74,690,000 19
Customer bases 6,722,000 290,000 6,432,000 10
Methodologies 14,471,000 919,000 13,552,000 6
Assembled workforce 6,030,000 276,000 5,754,000 10
Other 2,274,000 256,000 2,018,000 13
------------ ----------- ------------
$130,783,000 $15,182,000 $115,601,000
============ =========== ============
</TABLE>
Other intangible assets at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
Capitalized Accumulated Carrying Weighted
Cost Amortization Value Average Life
------------- ------------ ------------- ------------
<S><C>
Databases $ 5,888,000 $3,711,000 $ 2,177,000 5
CPHA license and prepaid royalties 14,031,000 3,061,000 10,970,000 17
Goodwill 27,536,000 2,231,000 25,305,000 17
Customer bases 595,000 -- 595,000 12
Assembled workforce 1,102,000 -- 1,102,000 12
Other 2,274,000 85,000 2,189,000 13
----------- ---------- -----------
$51,426,000 $9,088,000 $42,338,000
=========== ========== ===========
</TABLE>
Databases consist of the fair market value of various acquired databases, the
cost of acquiring data and internal development costs (direct labor and related
overhead) incurred in standardizing data for use in internally developed
databases. These assets are being amortized on a straight-line basis over their
estimated useful lives of five years. Amortization expense for databases was
approximately $839,000, $962,000 and $1,067,000 during 1994, 1995 and 1996,
respectively.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1992, the Company acquired an exclusive license to access and sell the
databases and certain other assets of the Commission on Professional
and Hospital Activities ("CPHA"). This license was recorded at its estimated
fair value of $8,073,000 at the date of acquisition and is being amortized
on a straight-line basis over 17 years. The amortization period was
determined to be the estimated economic life cycle of the licensed properties,
as corroborated by an independent appraisal, and reflected the remainder of the
existing term of the license at the date of acquisition plus one renewal term
provided under the terms of the agreement. Under the terms of the license, the
Company paid royalties to CPHA based on revenues earned utilizing the licensed
assets. Subsequent to the acquisition, the Company and CPHA entered into a new
license agreement. Under the terms of the new agreement, the Company paid
$5,958,000 to CPHA in lieu of future royalty obligations. The payment is
recorded as prepaid CPHA royalties and is being amortized on a straight-line
basis over 17 years, consistent with the estimated economic life of the licensed
properties.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. Goodwill is being amortized on a straight-line basis over 10 to
20 years. Such amortization periods are estimated based on the nature of the
products and markets of the acquired companies and the historical rates of
changes in these products and market areas.
Customer bases, methodologies and assembled workforces were obtained through the
CHAMP, Response, LBA and HealthChex acquisitions. The values and lives of these
assets were determined by an independent appraiser based on factors such as
going concern value, employee turnover and historical customer retention rates.
Other intangibles consist of a trade name obtained in the CHAMP acquisition and
certain non-competition agreements. The value and life of the tradename was
determined by an independent appraiser. The non-competition agreements are
amortized over their 1 to 2 year terms commencing with the date the employees
are no longer employed by the Company.
(5) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES
Accrued salaries, benefits and other liabilities consist of the following at
December 31:
1995 1996
---------- ----------
Accrued salaries $1,108,000 $2,220,000
Accrued benefits 304,000 477,000
Accrued vacation 562,000 681,000
Other 2,248,000 4,579,000
---------- ----------
$4,222,000 $7,957,000
========== ==========
(6) LEASES
The Company leases office space and certain equipment under operating leases.
Rent expense for these leases was $1,527,000, $2,286,000 and 3,563,000 net of
rental income of $0, $0 and $412,000 during 1994, 1995 and 1996, respectively.
The minimum rental commitments under noncancelable operating leases as of
December 31, 1996, are as follows:
Year Ending December 31:
1997 $ 4,619,000
1998 4,042,000
1999 3,910,000
2000 2,906,000
2001 2,274,000
Thereafter 1,400,000
-----------
Gross minimum payments required $19,151,000
Sublease Income (949,000)
-----------
Net minimum payments required $18,202,000
===========
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SAVINGS INCENTIVE PLAN
The Company maintains the HCIA Inc. Savings Incentive Plan, a profit sharing
plan qualified under Section 401(a) of the Internal Revenue Code. All employees
of the Company who have completed one year of service are eligible to
participate in the Plan. Subject to certain limitations on individual
contributions and allocations and Company deductions, the Plan allows
participants to defer up to 15% of their pay on a pre-tax basis and up to 10% of
their pay on an after-tax basis. The Company also makes matching contributions
equal to 50% of the amount a participant defers up to 6% of the participant's
pay. The Plan also provides for discretionary contributions by the Company. All
participants are fully vested in all of their accounts in the Plan. The
Company's contributions to the Plan during 1994, 1995 and 1996 were
approximately $167,000, $194,000 and $397,000, respectively.
(8) INCOME TAXES
The income tax expense (benefit) relating to the operations of the Company
consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ----------
<S><C>
Federal and state:
Current $1,097,000 $ 2,071,000 $ 280,000
Deferred (338,000) (3,625,000) 5,606,000
---------- ----------- ----------
Total income tax expense (benefit) $ 759,000 $(1,554,000) $5,886,000
========== =========== ==========
</TABLE>
The tax provisions in the accompanying financial statements differ from
prevailing federal corporate rates. A reconciliation of this difference follows:
<TABLE>
<CAPTION>
1994 1995 1996
Amount % Amount % Amount %
----------------- ----------------------- ------------------------
<S><C>
Computed expected tax expense
(benefit) at statutory rate $623,000 35.0% $(1,346,000) (34.0)% $(12,370,000) (34.0)%
Goodwill amortization 44,000 2.5 220,000 5.6 637,000 1.8
Tax-exempt interest -- -- (234,000) (5.9) (216,000) (0.6)
State tax, net of federal benefit 93,000 5.2 (224,000) (5.7) (1,609,000) (4.4)
Acquired in-process research and development -- -- -- -- 19,226,000 52.8
Other, net (1,000) -- 30,000 0.7 218,000 0.6
---------------- --------------------- ----------------------
Provision (benefit) for income taxes $759,000 42.7% $(1,554,000) (39.3)% $ 5,886,000 16.2%
================ ===================== ======================
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and deferred tax assets at December 31, 1995 and
1996, are presented below:
1995 1996
---------- -----------
Deferred tax assets:
Operating accruals $ 403,000 $ 881,000
Basis difference in intangibles 6,297,000 10,091,000
Bonus accrual -- 2,005,000
Net operating loss carryforwards -- 11,457,000
---------- -----------
Gross deferred tax assets 6,700,000 24,434,000
Valuation allowance -- --
---------- -----------
Net deferred tax assets 6,700,000 24,434,000
---------- -----------
Deferred tax liabilities:
Capitalized software 3,005,000 6,226,000
Fixed assets 605,000 1,134,000
---------- -----------
Total deferred tax liabilities 3,610,000 7,360,000
---------- -----------
Net deferred tax assets $3,090,000 $17,074,000
========== ===========
The valuation allowance for deferred tax assets as of January 1, 1995 and
December 31, 1995 and 1996 was $0. Therefore, there was no net change in the
valuation allowance for 1995 and 1996.
The Company has net operating loss carryforwards of $41,600,000 at December 31,
1996, which expire between 2002 and 2011.
(9) CREDIT AGREEMENT
In August 1996 the Company obtained a credit facility from First Union totaling
$100,000,000, consisting of a $50,000,000 term loan and a $50,000,000 revolving
line of credit. The Company incurred a one-time facility fee and related
expenses of $520,000 which is being amortized over the five year term of the
line of credit. The Company borrowed the entire $50,000,000 term loan and
approximately $36,000,000 of the line of credit in connection with the LBA
acquisition (see note 1(c)). These borrowings were repaid by August 31, 1996
with a portion of the proceeds from the Company's August 1996 public offering of
its common stock (see note 1(b)). The Company currently maintains the
$50,000,000 line of credit (subject to borrowing limitations) and made no
additional borrowings against it during 1996.
The line of credit bears interest at rates ranging from First Union's prime rate
to prime plus 0.5% or LIBOR (5.5% at December 31, 1996) plus 0.75% to LIBOR plus
1.75%, depending on the Company's debt to cash flow ratio. The Company pays a
commitment fee on the unused portion of the line of credit at rates ranging from
0.25% to 0.375% depending on the Company's debt to cash flow ratio. The line of
credit is subject to financial covenants including debt to cash flow and debt to
capital ratios. As of December 31, 1996, the Company was in compliance with all
such covenants and had a maximum borrowing capacity of $50,000,000. The credit
facility reduces to $37,500,000 in July 1999, $25,000,000 in July 2000 and
expires on July 31, 2001.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY
(a) Capital Amendment
Effective February 14, 1995, the Company filed an amendment to its articles of
incorporation which effected: (i) a one-for-three reverse stock split; (ii) the
conversion of the Class A and Class B common stock into a single class of common
stock; and (iii) the authorization of a total of 15,000,000 shares of common
stock and 500,000 shares of preferred stock, each having a par value of $.01 per
share. All references to common stock and stock options in these financial
statements have been adjusted to reflect the one-for-three reverse stock split
as if it had occurred prior to January 1, 1994. Effective August 12, 1996, the
Company filed an amendment to its articles of incorporation increasing the
authorized number of shares of common stock to 50,000,000.
(b) Common and Preferred Stock
The preferred stock may be issued from time to time by the board of directors as
shares of one or more series. The description of the shares of each series of
preferred stock is established by the board of directors prior to the issuance
of the series of shares.
During 1994, the Company issued 2,378,672 shares of common stock to AMBACin
exchange for the 225,621 shares of preferred stock then outstanding.
During 1995, the Company issued 3,512,500 shares of common stock in connection
with its public offerings.
During 1996, the Company issued 2,261,591 shares of common stock in connection
with its public offerings and 492,961 shares in connection with its acquisition
of LBA.
(c) Options
At December 31, 1994, 1995 and 1996, the Company had outstanding stock options
as follows:
Stock options outstanding pursuant to:
1994 1995 1996
------- ------- ---------
HCIA Stock Option Plan -- 169,933 956,266
Directors' Option Plan -- 22,500 57,000
Other options 374,226 507,800 451,111
------- ------- ---------
Total stock options outstanding 374,226 700,233 1,464,377
======= ======= =========
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The HCIA Stock Option Plan provides that up to 1,350,000 options may be issued
to employees of the Company. Options granted to date under this plan vest over a
period of three or four years and expire ten years from date of grant. The
Directors' Option Plan provides that up to 200,000 options may be issued to
outside directors of the Company. Options granted to date under this plan vest
over periods of one to two years and expire ten years from the date of grant.
The Company has also issued non-plan options which generally vest over periods
of two or three years and expire six to ten years from date of grant. In
February 1995, the Company issued a non-plan option to its chief executive
officer which was fully vested on the date of grant and expires ten years from
date of grant. All stock options issued by the Company have been granted with
exercise prices equal to or greater than the estimated fair market value of the
common stock on the date of grant. Stock option transactions are summarized as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------- ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- --------- --------
<S><C>
Outstanding at beginning of year 164,997 $ 6.00 374,226 $ 8.62 700,233 $13.80
Granted 217,563 $10.50 357,433 $18.99 1,524,000 $45.61
Exercised -- -- (6,427) $10.50 (62,605) $ 9.27
Cancelled (8,334) $ 6.00 (24,999) $11.20 (697,251) $58.35
Outstanding at end of year 374,226 $ 8.62 700,233 $13.80 1,464,377 $25.89
Options exercisable at end of year -- -- 186,867 $13.50 345,215 $13.13
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Number Weighted Avg. Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S><C>
$6 126,097 3.5 $ 6.00 47,766 $ 6.00
$10 to $15 367,848 7.8 12.43 265,215 12.83
$25 to $30 797,932 9.7 28.30 32,234 26.17
$48 to $51 29,500 9.1 48.65 -- --
$59.88 143,000 9.6 59.88 -- --
--------- --- ------ ------- ------
1,464,377 8.7 $25.89 345,215 $13.13
========= === ====== ======= ======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for its
stock options. Accordingly, no compensation expense has been recognized in
connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFASNo. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1994 1995 1996
------ -------- ---------
Net Income As reported $1,021 $(2,405) $(42,267)
Pro forma $ 812 $(2,996) $(43,795)
Earnings per share As reported $ 0.19 $ (0.31) $ (4.19)
Pro forma $ 0.15 $ (0.39) $ (4.34)
The fair value of the options for purposes of the above pro forma disclosure was
calculated using the Black-Scholes option pricing model and the following
assumptions: a risk-free interest rate of 6.58%, weighted average expected life
of six to seven years, no dividend payments and a volatility of 31.29% based on
the annualized 10 year industry average. The effects of applying SFAS No. 123 in
the pro forma net income and earnings per share for 1994, 1995 and 1996 may not
be representative of the effects on such pro forma information for future years.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade accounts receivable,
other current assets, accounts payable, accrued expenses and capital lease
obligations approximates fair value because of the short-term maturity of these
instruments. The fair value of short-term investments is estimated based on
quoted market prices for these or similar investments. The Company has notes
payable to individuals relating to certain of its business acquisitions. It is
not practicable to estimate the fair value of these notes since they are not
traded, no quoted values are readily available for similar financial instruments
and the Company believes it is not cost-effective to have valuations performed.
However, management believes that there has been no permanent change in the
value of such notes.
30
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
-16-
<PAGE>
PART III
Item 10. Directors and Executive Officers.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
headings "Election of Directors" and "Additional Information -- Section 16(a)
Beneficial Ownership Reporting Compliance," and in Item 4A of this Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Executive Compensation and Other Information."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Security Ownership of Management and Certain Beneficial Owners."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Certain Transactions."
-17-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report:
1. The following report and financial statements are included
in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Form 8-Ks:
1. On October 1, 1996, the Company filed a Form 8-K enclosing
a press release announcing the preliminary results for the quarter ended
September 30, 1996.
2. On October 23, 1996, the Company filed a Form 8-K/A-2 (i)
enclosing a press release announcing the results for the quarter ended June 30,
1996 and (ii) including the following financial statements relating to the
previously announced acquisition of LBA:
Financial Statements of Datis Corporation
Financial Statements of William M. Mercer, Incorporated
National Health Analysis Unit (CHAMP)
Financial Statements of HealthVISION, Inc.
Financial Statements of LBA Health Care Management, Inc.
Pro Forma Financial Statements
(c) Financial Statement Schedules:
Independent Auditors' Report on Schedule
Schedule II -- Valuation and Qualifying Accounts
All other schedules to the financial statements for which
provision is made in the accounting regulations of the Commission are not
applicable, not required or the information is included in the financial
statements or notes thereto and therefore have been omitted.
(d) Exhibits:
-18-
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
3.1 *** Articles of Incorporation of the Registrant, as amended to date.
3.2 Bylaws of the Registrant, as amended to date.
10.1 * Employment Agreement dated as of January 1, 1995 by and between the
Registrant and George D. Pillari.
10.1.1 First Amendment to Employment Agreement.
10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date.
10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge
Resources, Inc., the Registrant and the Commission on Professional and
Hospital Activities.
10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to
date.
10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity
Corporation, American Municipal Bond Holding
Company and the Registrant dated as of July 18,
1991.
10.6 *** Form of Management Retention Agreement.
10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the
Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity
Corporation.
10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the
Registrant and certain stockholders.
10.9 *** Credit Agreement, dated August 8, 1996, by and
between First Union National Bank of North
Carolina, as Agent, and the Registrant.
11.1 Statement regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
</TABLE>
- ------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-94946).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-88226).
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-3. (File No. 333-08639).
-19-
<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.
HCIA INC.
By: /s/ George D. Pillari
----------------------------------
George D. Pillari
Chairman of the Board, President &
CEO
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 in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George D. Pillari Chairman of the Board, March 28, 1997
- --------------------------- President and Chief
George D. Pillari Executive Officer
(principal executive
officer)
/s/ Barry C. Offutt Senior Vice President March 28, 1997
- --------------------------- and Chief Financial Officer
Barry C. Offutt (principal financial and]
accounting officer)
/s/ Phillip B. Lassiter Director March 28, 1997
- ---------------------------
Phillip B. Lassiter
/s/ Richard Dulude Director March 28, 1997
- ---------------------------
Richard Dulude
/s/ Richard Berman Director March 28, 1997
- ---------------------------
Richard Berman
/s/ W. Grant Gregory Director March 28, 1997
- ---------------------------
W. Grant Gregory
/s/ Mark C. Rogers Director March 28, 1997
- ---------------------------
Mark C. Rogers
/s/ Carl J. Schramm Director March 28, 1997
- ---------------------------
Carl J. Schramm
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Page No.
<S> <C>
3.1 *** Articles of Incorporation of the Registrant, as amended to date................
3.2 Bylaws of the Registrant, as amended to date...................................
10.1 * Employment Agreement dated as of January 1, 1995 by and between the
Registrant and George D. Pillari...............................................
10.1.1 First Amendment to Employment Agreement........................................
10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date....................
10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge
Resources, Inc., the Registrant and the Commission on Professional and
Hospital Activities............................................................
10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date....
10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity
Corporation, American Municipal Bond Holding Company and the
Registrant dated as of July 18, 1991...........................................
10.6 *** Form of Management Retention Agreement.........................................
10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the
Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity Corporation......
10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the
Registrant and certain stockholders............................................
10.9 *** Credit Agreement, dated August 8, 1996, by and between First Union National
Bank of North Carolina, as Agent, and the Registrant...........................
11.1 Statement regarding Computation of Per Share Earnings..........................
21.1 Subsidiaries of the Registrant.................................................
23.1 Consent of KPMG Peat Marwick LLP...............................................
27.1 Financial Data Schedule........................................................
</TABLE>
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-94946).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-88226).
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-3. (File No. 333-08639).
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
HCIA Inc.:
Under date of January 23, 1997, we reported on the consolidated balance sheets
of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996, as contained in the annual report on Form 10-K for the year 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this consolidated financial statement schedule based on our
audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 23, 1997
<PAGE>
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance
Beginning Costs and at
Description of Period Expenses End of
<S> <C> Period
Allowance for Doubtful Accounts
Year ended December 31, 1994..... $499 $87 $(227)(A) $359
Year ended December 31, 1995..... 359 214 (119)(A) 454
Year ended December 31, 1996..... 454 560 28 (A) 1,042
</TABLE>
(A) Accounts receivable write-offs and recoveries
Exhibit 3.2
AMENDED AND RESTATED BYLAWS
OF
HCIA INC.
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting. The annual meeting of stockholders of the
Corporation shall be held each year at the principal office of the Corporation
in the State of Maryland, or at such other place, during the month of April, at
such date, hour and place within or without the State as may be fixed by the
Board of Directors for the purpose of election of Directors and for the
transaction of such other business as may properly come before the meeting.
Section 2. Special Meeting. A special meeting of stockholders may be
called by the Board of Directors or by the President to be held at the principal
office of the Corporation in the State of Maryland or at such other place as may
be determined by the Board of Directors when such meeting is called. Special
meetings of stockholders shall also be called by the Secretary upon the written
request of the holders of shares entitled to cast not less than 25% of all the
votes entitled to be cast at such meeting; provided, however, unless requested
by stockholders entitled to cast a majority of all votes entitled to be cast at
such meeting, a special meeting need not be called for the purpose of
considering any matter which is substantially the same as a matter voted on at
any special meeting of the stockholders held during the preceding 12 months.
Such request shall state in general terms the purpose of such meeting and the
matters proposed to be acted on at such meeting. The Secretary shall inform such
stockholders of the reasonably estimated cost of preparing and mailing notice of
the meeting and, upon payment to the Corporation of such costs, the Secretary
shall give notice to each stockholder entitled to notice of the meeting. Notice
of such special meeting shall be given in the same manner as is provided in the
case of annual meetings.
Section 3. Notice. Not less than 10 nor more than 90 days before each
meeting of stockholders, the Secretary shall give to each stockholder entitled
to vote at such meeting and to each stockholder not entitled to vote who is
entitled to notice of the meeting, written or printed notice stating the time
and place of the meeting and, in the case of a special meeting or as otherwise
may be required by statute, the purpose for which the meeting is called, either
by mail or by presenting it to such stockholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be deemed
to be given when deposited in the United States mail addressed to the
stockholder at his post office address as it appears on the records of the
Corporation, with postage thereon prepaid.
<PAGE>
Section 4. Scope of Notice. No business shall be transacted at a
special meeting of stockholders except that designated in the notice. Any
business of the Corporation may be transacted at the annual meeting without
being specifically designated in the notice, except such business as is required
by statute to be stated in such notice.
Section 5. Quorum. At any meeting of stockholders, the presence in
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the Charter for the vote
necessary for the adoption of any measure. If, however, such quorum shall not be
present at any meeting of the stockholders, the stockholders entitled to vote at
such meeting, present in person or by proxy, shall have the power to adjourn the
meeting from time to time to a date not more than 120 days after the original
record date without notice other than announcement at the meeting until such
quorum shall be present. At such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally notified.
Section 6. Voting. A majority of the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
approve any matter which may properly come before the meeting, unless more than
a majority of the votes cast is required by statute or by the Charter. Unless
otherwise provided in the Charter, each outstanding share of stock, regardless
of class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of stockholders.
Section 7. Proxies. A stockholder may vote the shares of stock owned of
record by him, either in person or by proxy executed in writing by the
stockholder or by his duly authorized attorney in fact. Such proxy shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
Section 8. Voting of Shares by Certain Holders. Shares registered in
the name of another corporation, if entitled to be voted, may be voted by the
President, a Vice-President or a proxy appointed by the President or a
Vice-President of such other corporation, unless some other person who has been
appointed to vote such shares pursuant to a bylaw or a resolution of the Board
of Directors of such other corporation presents a certified copy of such bylaw
or resolution, in which case such person may vote such shares. Any fiduciary may
vote shares registered in his name as such fiduciary, either in person or by
proxy.
Shares of its own stock directly or indirectly owned by this
Corporation shall not be voted at any meeting and shall not be counted in
determining the total number of
-2-
<PAGE>
outstanding shares entitled to be voted at any given time, unless they are
held by it in a fiduciary capacity, in which case they may be voted and shall
be counted in determining the total number of outstanding shares at any
given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may certify, the purpose for which the certification
may be made, the form of certification and the information to be contained in
it; if the certification is with respect to a record date or closing of the
stock transfer books, the time after the record date or closing of the stock
transfer books within which the certification must be received by the
Corporation; and any other provisions with respect to the procedure which the
Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
Section 9. Inspectors. At any meetings of stockholders, the chairman of
the meeting may, or upon the request of any stockholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the stockholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there be more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 10. Informal Action by Stockholders. Any action required or
permitted to be taken at a meeting of stockholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by each
stockholder entitled to vote on the matter and any other stockholder entitled to
notice of a meeting of stockholders (but not to vote thereat) has waived in
writing any right to dissent from such action, and such consent and waiver are
filed with the minutes of proceedings of the stockholders.
-3-
<PAGE>
Section 11. Voting by Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
Section 12. Nominations and Stockholder Business.
(a) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of notice provided for in this
Section 12(a), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(a).
(2) For nominations or other business to be
properly brought before an annual meeting by a stockholder pursuant to clause
(iii) of paragraph (a)(1) of this Section 12, the stockholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to the Secretary at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first made. Such stockholder's notice shall
set forth (i) as to each person whom the stockholder proposes to nominate for
election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (including such person's written consent to being named in the
proxy statement as a nominee and to serving as a director if elected); (ii) as
to any other business that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and of the beneficial owner, if
any, on whose behalf the proposal is made; and (iii) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, (x) the name and address of such stockholder, as
they appear on the Corporation's books, and of such beneficial owner and (y) the
number of shares of each class of stock of the
-4-
<PAGE>
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(3) Notwithstanding anything in the second sentence of
paragraph (a)(2) of this Section 12 to the contrary, in the event that the
number of directors to be elected to the Board of Directors is increased and
there is no public announcement naming all of the nominees for director or
specifying the size of the increased Board of Directors made by the Corporation
at least 70 days prior to the first anniversary of the preceding year's annual
meeting, a stockholder's notice required by this Section 12(a) shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the Secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which such public announcement is
first made by the Corporation.
(b) Special Meetings of Stockholders. Only such business as shall have
been brought before the meeting pursuant to the Corporation's notice of meeting
shall be conducted at a special meeting of stockholders. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which directors are to be elected: (i) pursuant to the
Corporation's notice of meeting; (ii) by or at the direction of the Board of
Directors; or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice
provided for in this Section 12(b), who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 12(b). In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any such stockholder
may nominate a person or persons (as the case may be) for election to such
position as specified in the Corporation's notice of meeting, if the
stockholder's notice containing the information required by paragraph (a)(2) of
this Section 12 shall be delivered to the Secretary at the principal executive
offices of the Corporation not earlier than the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 12. The presiding officer of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was
-5-
<PAGE>
made in accordance with the procedures set forth in this Section 12 and, if
any proposed nomination or business is not in compliance with this Section
12, to declare that such defective nomination or proposal be disregarded.
(2) For purposes of this Section 12, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
12, a stockholder shall also comply with all applicable requirements of state
law and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 12. Nothing in this Section 12
shall be deemed to affect any rights of stockholders to request inclusion of
proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Powers. The business and affairs of the Corporation shall be
managed under the direction of its Board of Directors. All powers of the
Corporation may be exercised by or under the authority of the Board of Directors
except as conferred on or reserved to the stockholders by law, by the Charter or
by these Bylaws. A Director need not be a stockholder. The Board of Directors
shall keep minutes of its meetings and full and fair accounts of its
transactions.
Section 2. Number and Term of Office. The Board of Directors shall
consist of such number of Directors as the Board of Directors shall designate
from time to time. The members of the Board of Directors shall be elected to
serve for terms of three (3) years. Unless otherwise provided in the applicable
resolution electing the Director, a Director shall hold office until the annual
meeting for the year in which his term expires and until his successor is
elected and qualifies, or until his death, resignation or removal in the manner
provided in Section 9 of this Article II.
Section 3. Election of Directors. The Board of Directors shall be
divided into three classes. Each such class shall consist, as nearly as
possible, of one-third of the total number of Directors, and any remaining
Directors shall be included within each such class or classes as the Board of
Directors shall designate. At each annual meeting of stockholders, successors to
the class of Directors whose term expires at that annual
-6-
<PAGE>
meeting shall be elected for a term of three years. In the event of the
failure to elect Directors at an annual meeting of the stockholders, then
Directors may be elected at any regular or special meeting of stockholders
entitled to vote for the election of Directors, provided that notice of such
meeting shall contain mention of such purpose. If the number of Directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of Directors in each class as nearly equal as
possible. Except as otherwise provided in the Charter, at each meeting of the
stockholders for the election of directors, provided a quorum is present,
the Directors shall be chosen and elected by a plurality of the votes validly
cast at such election.
Section 4. Vacancies. If the office of a Director becomes
vacant for any reason other than removal or increase in the size of the Board,
such vacancy may be filled by the Board by a vote of a majority of Directors
then in office, although such majority is less than a quorum.
Section 5. Annual Meetings. An annual meeting of the
Board of Directors shall immediately follow the annual meeting of
stockholders each year. No notice of the annual meeting need be given to
the Directors.
Section 6. Special Meetings. Special Meetings of the Board of
Directors may be called at any time by the President, Chairman of the Board or
by any two Directors, to be held at the principal office of the Corporation in
the State of Maryland, or at such other place or places as the Directors may
from time to time designate. Notice of special meetings of the Board of
Directors shall be given to each Director at least twenty four (24) hours
prior to the meeting by service to the Director by telegram, letter or by
personal notice, including telephone notice.
Section 7. Quorum. A quorum for the transaction of
business at every meeting of the Board of Directors shall consist of a
majority of the Board of Directors, and the vote of a majority of those
present at a meeting at which a quorum is present shall be required to pass any
measure or resolution unless a greater number is required by statute or by
the Charter or by these Bylaws. If less than a quorum of Directors is present
at said meeting, a majority of the Directors present may adjourn the meeting
from time to time without further notice. The Directors present at a
meeting which has been duly called and convened may continue to transact
business until adjournment, notwithstanding the withdrawal of enough Directors
to leave less than a quorum.
Section 8. Telephone Meetings. Members of the Board of
Directors may participate in a meeting by means of a conference
telephone or similar communications equipment if all persons participating
in the meeting can hear each other at the same time.
-7-
<PAGE>
Participation in a meeting by these means shall constitute presence in person
at the meeting.
Section 9. Informal Action by Directors. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if an unanimous written consent which sets forth the action
is signed by each Director and such consent is filed with the minutes of
proceedings of the Board of Directors.
Section 10. Compensation. Directors shall not receive any stated salary
for their services as Directors but, by resolution of the Board of Directors, a
fixed sum and expenses of attendance, if any, may be allowed to Directors for
attendance at each annual, regular or special meeting of the Board of Directors
or of any committee thereof; but nothing herein contained shall be construed to
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefor.
Section 11. Removal of Directors. Any Director of the Corporation may
be removed with cause by the affirmative vote of the holders of seventy-five
percent (75%) of all the votes entitled to be cast for the election of
Directors, but no Director may be removed by the stockholders without cause.
Except as otherwise provided by contract, any vacancy in the Board of Directors
caused by any such removal may be filled at such meeting or any adjournment of
such meeting by the holders of shares of stock of all classes representing a
majority of the aggregate number of votes of the shares of stock of all classes
then issued, outstanding and entitled to vote for the election of Directors. If
such stockholders do not fill such vacancy at such meeting, such vacancy may be
filled in any other manner permitted by law.
ARTICLE III
COMMITTEES
Section 1. Number, Tenure and Qualifications. The Board of Directors
may appoint from among its members an Executive Committee and other committees,
composed of two or more Directors, to serve at the pleasure of the Board of
Directors.
Section 2. Powers. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors except as prohibited by law.
Section 3. Meetings. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint a Director to act in the place of such absent
member.
-8-
<PAGE>
Section 4. Telephone Meetings. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. Informal Action by Committees. Any action required or
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if an unanimous consent which sets forth the
action is signed by each member of the committee and such consent is filed with
the minutes of the proceedings of such committee.
Section 6. Minutes of Meetings. The minutes of any meeting of a
committee shall be distributed to each member of the Board of Directors.
ARTICLE IV
OFFICERS
Section 1. General Provisions. The officers of the Corporation shall
consist of a President, Secretary and Treasurer and also may consist of a Chief
Executive Officer, Chief Operating Officer, Chief Financial Officer, Chairman of
the Board, a Vice Chairman of the Board, additional Vice Presidents, one or more
Assistant Treasurers, one or more Assistant Secretaries and such other officers
as the Board may determine from time to time. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as may be convenient. Each officer shall hold office
until his successor is duly elected and qualifies or until his death,
resignation or removal in the manner hereinafter provided. Any two or more
offices except President and Vice President may be held by the same person. In
its discretion, the Board of Directors may leave vacant any office except that
of President, Treasurer and Secretary. Election or appointment of an officer or
agent shall not in itself create contract rights between the Corporation and
such officer or agent.
Section 2. Removal. Any officer or agent of the Corporation may be
removed by the Board of Directors if in its judgment the best interests of the
Corporation would be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed.
-9-
<PAGE>
Section 3. Vacancies. A vacancy in any office may be filled by the
Board of Directors.
Section 4. President. The President shall in general supervise and
control all of the business and affairs of the Corporation. Unless the President
is not a member of the Board of Directors, in the absence of both the Chairman
and the Vice-Chairman of the Board, he shall preside at all meetings of the
Board of Directors and of the stockholders at which he shall be present. In the
absence of a designation of a Chief Executive Officer by the Board of Directors,
the President shall be the Chief Executive Officer and shall be ex officio a
member of all committees that may, from time to time, be constituted by the
Board of Directors. He may execute any deed, mortgage, bond, contract or other
instrument which the Board of Directors has authorized to be executed except in
cases where the execution thereof shall be expressly delegated by the Board of
Directors or by these Bylaws to some other officer or agent of the Corporation
or shall be required by law to be otherwise executed; and in general shall
perform all duties incident to the office of President and such other duties as
may be prescribed by the Board of Directors from time to time.
Section 5. Vice Presidents. In the absence of the President or in the
event of a vacancy in such office, the Vice President (or in the event there be
more than one Vice President, the Vice Presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the President and when so acting
shall have all the powers of and be subject to all the restrictions upon the
President; and shall perform such other duties as from time to time may be
assigned to him by the President or by the Board of Directors. The Board of
Directors may designate one or more Vice Presidents as executive, senior or
Assistant Vice President or as Vice President for particular areas of
responsibility.
Section 6. Secretary. The Secretary shall: (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board in one or more books provided for that purpose; (b) see that all notices
are duly given in accordance with the provisions of these Bylaws or as required
by law; (c) be custodian of the corporate records and of the seal of the
Corporation, if the Corporation shall have a seal; (d) keep a register of the
post office address of each stockholder which shall be furnished to the
Secretary by such stockholder; (e) have general charge of the stock transfer
books of the Corporation; and (f) in general perform such other duties as from
time to time may be assigned to him by the President or by the Board of
Directors.
Section 7. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable
-10-
<PAGE>
effects in the name and to the credit of the Corporation in such depositories
as may be designated by the Board of Directors.
He shall disburse the funds of the Corporation as may be ordered by the
Board of Directors, taking proper vouchers for such disbursements, and shall
render to the President and Board of Directors, at the regular meetings of the
Board or whenever they may require it, an account of all his transactions as
Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, he shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his office
and for the restoration to the Corporation, in case of his death, resignation,
retirement or removal from office, all books, papers, vouchers, money and other
property of whatever kind in his possession or under his control belonging to
the Corporation.
Section 8. Chief Executive Officer. The Board of Directors may
designate a Chief Executive Officer, who shall have responsibility for
implementation of the policies of the Corporation, as determined by the Board of
Directors, and for the administration of the business affairs of the
Corporation.
Section 9. Chief Operating Officer. The Board of Directors may
designate a Chief Operating Officer, who shall have the responsibilities and
duties as set forth by the Board of Directors or the Chief Executive Officer.
Section 10. Chief Financial Officer. The Board of Directors may
designate a Chief Financial Officer, who shall have the responsibilities and
duties as set forth by the Board of Directors or the Chief Executive Officer.
Section 11. Chairman and Vice-Chairman of the Board. The Chairman of
the Board, if one is elected, shall preside over the meetings of the Board of
Directors and of the stockholders at which he shall be present. In the absence
of the Chairman of the Board, the Vice-Chairman of the Board shall preside at
such meetings at which he shall be present. The Chairman of the Board and the
Vice-Chairman of the Board shall, respectively, perform such other duties as may
be assigned to him or them by the Board of Directors.
Section 12. Assistant Secretaries and Assistant Treasurers. The
Assistant Secretaries and Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Secretary or Treasurer, respectively,
or by the President or the Board of Directors. The Assistant Treasurers shall,
if required by the Board of Directors,
-11-
<PAGE>
give bonds for the faithful performance of their duties in such sums and with
such sureties as shall be satisfactory to the Board of Directors.
Section 13. Compensation. The compensation of the officers shall be
fixed from time to time by the Board of Directors and no officer shall be
prevented from receiving such compensation by reason of the fact that he is also
a Director of the Corporation.
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. Contracts. The Board of Directors may authorize any officer
or agent to enter into any contract or to execute and deliver any instrument in
the name of and on behalf of the Corporation and such authority may be general
or confined to specific instances.
Section 2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by the Board of Directors.
Section 3. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VI
SHARES OF STOCK
Section 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the President or Vice-President and countersigned by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer
and may be sealed with the corporate seal. The signatures may be either manual
or facsimile. Certificates shall be consecutively numbered; and if the
Corporation shall, from time to time, issue several classes of stock, each class
may have its own number series. A certificate is valid and may be issued whether
or not an officer who signed it is still an officer when it is issued. Each
certificate representing stock which is restricted as to its transferability or
voting powers, which is preferred or limited as to its dividends or as to its
share of the assets upon liquidation or which is redeemable at the option of the
Corporation, shall have a statement of such restriction, limitation, preference
-12-
<PAGE>
or redemption provision, or a summary thereof, plainly stated on the
certificate. In lieu of such statement of summary, the Corporation may set forth
upon the face or back of the certificate a statement that the Corporation will
furnish to any stockholder, upon request and without charge, a full statement of
such information.
Section 2. Transfers of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate of stock duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Section 3. Lost Certificate. The Board of Directors may direct a new
certificate to be issued in place of any certificate previously issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or his legal representative to advertise the same in such manner as
it shall require and/or to give bond, with sufficient surety, to the Corporation
to indemnify it against any loss or claim which may arise as a result of the
issuance of a new certificate.
Section 4. Closing of Transfer Books or Fixing of Record Date. The
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders, or stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days, and in the case of a meeting of stockholders not less
than 10 days, before the date on which the meeting or particular action
requiring such determination of stockholders is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of
-13-
<PAGE>
or to vote at a meeting of stockholders, such books shall be closed for at
least 10 days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of stockholders, (a) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the Board of
Directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except where the determination has been made
through the closing of the stock transfer books and the stated period of closing
has expired.
Section 5. Stock Ledger. The Corporation shall maintain at its
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate stock ledger containing the name and address of each
stockholder and the number of shares of stock of each class held by such
stockholder.
ARTICLE VII
DIVIDENDS
Section 1. Declaration. Dividends upon the shares of stock of the
Corporation may be declared by the Board of Directors, subject to the
provisions of law and the Charter of the Corporation. Dividends may be paid in
cash, property or shares of the Corporation, subject to the provisions
of law and the Charter of the Corporation.
Section 2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors may from time to time, in its absolute
discretion, think proper as a reserve fund for contingencies, for equalizing
dividends, for repairing or maintaining any property of the Corporation or for
such other purpose or purposes as the Board of Directors shall determine to be
in the best interest of the Corporation, and the Board of Directors may modify
or abolish any such reserve in the manner in which it was created.
-14-
<PAGE>
ARTICLE VIII
SEAL
Section 1. Seal. The corporate seal, if the Corporation shall decide to
have a seal, shall have inscribed thereon the name of the Corporation, the year
of its organization and the word "Maryland". The Board of Directors may
authorize one or more duplicate seals and provide for the custody thereof.
Section 2. Affixing Seal. Whenever the Corporation is required to place
its corporate seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a corporate seal to
place the word "(SEAL)" adjacent to the signature of the person authorized to
execute the document on behalf of the Corporation.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of
December of each year unless otherwise provided by the Board of Directors.
ARTICLE X
INDEMNIFICATION
Section 1. General. The Corporation shall indemnify: (i) any individual
who is a present or former Director or officer of the Corporation; or (ii) any
individual who serves or has served in another corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director or
officer, or as a partner or trustee of such partnership or employee benefit
plan, at the request of the Corporation and who by reason of service in that
capacity was, is or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, to the full extent permitted under the Maryland General
Corporation Law. The Corporation may, with the approval of its Board of
Directors, provide such indemnification for a person who formerly served a
predecessor of the Corporation in any of the capacities described in (i) or (ii)
above and for any employee or agent of the Corporation or a predecessor of the
Corporation.
Section 2. Advancement of Expenses. Reasonable expenses incurred by a
Director or officer who is or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or
-15-
<PAGE>
investigative, shall be paid or reimbursed by the Corporation in advance of the
final disposition of the proceeding upon receipt by the Corporation of:
(i) a written affirmation by the party seeking indemnification that he
has a good faith belief that the standard of conduct necessary for
indemnification by the Corporation as authorized herein has been met; and (ii)
a written undertaking by or on behalf of the party seeking
indemnification to repay the amount if it shall ultimately be determined that
the standard of conduct has not been met.
ARTICLE XI
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Charter or
Bylaws of the Corporation or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XII
AMENDMENT OF BYLAWS
Any provision of these Bylaws may be altered, amended or repealed at
any regular or special meeting of the stockholders or of the Board of Directors
by vote of not less than a majority of the aggregate number of the votes
entitled to be cast thereon, except that Sections 2, 3 and 9 of ARTICLE II and
this ARTICLE XII may be altered, amended or repealed, and any bylaw or provision
of the Charter of the Corporation inconsistent with Sections 2, 3 or 9 of
ARTICLE II or this ARTICLE XII may be adopted, only by the authorization of not
less than seventy-five percent (75%) of the aggregate number of the votes
entitled to be cast thereon by either the stockholders of the Corporation
(considered for this purpose as a single class) or by the Board of Directors, as
applicable.
-16-
<PAGE>
The foregoing are certified as the Amended and Restated Bylaws of the
Corporation as of January 1, 1997.
/s/ Charles A. Berardesco
--------------------------------
Charles A. Berardesco, Secretary
Exhibit 10.1.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT is dated as of November
13, 1996, by and between HCIA INC., a Maryland corporation (the "Company") and
GEORGE D. PILLARI (the "Executive").
R E C I T A L S
WHEREAS, the Company and the Executive entered into an Employment
Agreement, dated as of January 1, 1995 (the "Employment Agreement"), pursuant to
which the Executive serves as the Chairman of the Board, President and Chief
Executive Officer of the Company.
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement to provide for certain additional terms as further set forth
hereinbelow.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto agree as follows:
1. Definitions. Except as otherwise defined herein, any
capitalized term used herein shall have the meaning set forth in the Employment
Agreement.
2. Amendment to Section 4(b)(i). Section 4(b)(i) of the
Employment Agreement is hereby amended by deleting the penultimate sentence
thereof and inserting the following in lieu thereof:
"(i) As used herein, the "Severance Amount" shall mean two
times the sum of (x) the Executive's highest Salary and (y) the highest Target
Bonus percentage paid or payable to the Executive at any time prior to the date
of such termination or resignation (such sum being not less than 140% of such
salary). (For purposes of calculating the Severance Amount, the Target Bonus
shall include cash bonuses and the value on the grant date, as determined by the
Compensation Committee of the Board of Directors, of any restrictive stock or
restrictive stock units or other awards granted in lieu of cash, but excluding
the value of any stock options)."
3. Amendment to Section 6(a) of the Employment Agreement.
Section 6(a) of the Employment Agreement is hereby amended by adding the
following after subparagraph (iv) therein:
"(v) the Executive shall be fully vested in all stock options,
restrictive stock, restrictive stock units and other awards theretofore awarded
under the Company's 1994 Stock and Incentive Plan, as amended, or any successor
thereto;
(vi) for the purposes of calculating the Executive's benefit
under any in force retirement plan (the "Retirement Plan"), the Executive shall
receive an additional two (2) years of credited service;
<PAGE>
(vii) within five business days following the Executive's
termination of employment, the Company shall make a lump sum payment to the
Executive equal to the amount that the Company would have contributed for the
Executive's account under the Company's Savings Incentive Plan (or any successor
plan) (the "SIP") in respect of the two years following the date of termination,
based on (A) the formula for determining employer contributions in effect on the
date of termination and (B) the Executive's Salary and Target Bonus used for
purposes of determining the Severance Amount, and calculated without giving
effect to the limitations provided for in Sections 401(a)(17) and 415 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor
provisions thereto;
(viii) within five business days following the date of
termination of employment, the Executive shall receive a lump sum payment of his
account balance as of the date of termination of any non-qualified plan, if any,
maintained by the Company or any of its affiliates to provide benefits in excess
of those permitted under the Code to be provided by the Retirement Plan. The
Company shall remain obligated to pay to the Executive or his beneficiaries any
benefits to which he or they may be entitled under any non-qualified plan
maintained by the Company or any of its affiliates providing benefits in excess
of those permitted under the Code to be provided by the Retirement Plan, if any;
such payments shall be made in accordance with the terms of such plans, and
benefits thereunder shall take account of the two years of additional credited
service provided for in subclause (vii) above;
(ix) for a period of two years following the date of
termination of employment (the "Continuation Period"), the Executive and his
dependents, if any, shall continue to participate (at no greater expense to them
then was the case for such coverage prior to his termination) in the employee
benefit arrangements described in Section 3(d) hereunder; provided, however,
that the benefits shall cease to the extent the Executive begins coverage under
the plans of a subsequent employer;
(x) at the end of the Continuation Period, the Executive and
his dependents shall be entitled to, for the remainder of his life, medical and
dental benefits under any applicable plans and programs of the Company as if he
retired on the last day of the Continuation Period, with such benefits to
commence immediately at the end of the Continuation Period and with the amount
of contributions by the Executive to be no greater than that of any other
employee of the Company who had retired on the last day of the Continuation
Period (it being understood and agreed that the contribution rates may be
changed, and the terms of such benefits may be modified, to the extent permitted
under the relevant plans, from those in effect on the date thereof);
(xi) during the Continuation Period, the Company shall provide
the Executive with appropriate individual outplacement services and financial
planning at the Company's expense;
-2-
<PAGE>
(xii) the Executive shall be fully vested in all stock
options, restrictive stock, restrictive stock units and any other awards
theretofore awarded to him under the Company's 1994 Stock and Incentive Plan, as
amended, and any successor thereto; and
(xiii) the Executive shall receive all amounts due to him
under any compensatory plan or arrangement of the Company and not specifically
addressed above, in accordance with the terms of the relevant plan or
arrangement."
4. Amendment to Section 6.
Section 6 is hereby amended by adding the following new
subsection 6(c) thereto:
"(c) Upon any Change in Control, the Executive shall be fully
vested in all stock options, restrictive stock, restrictive stock units and any
other awards therefore awarded to him under the Company's 1994 Stock and
Incentive Plan, as amended, or any successor thereto."
5. Amendment to Section 10(b)(i). Section 10(b)(i) is hereby
amended to change the addressee of notices to the Company as follows:
"(i) To the Company:
HCIA Inc.
300 East Lombard Street
Baltimore, Maryland 21202
Attention: General Counsel"
6. Other Provisions. Except as amended hereby, the Employment
Agreement shall continue in full force and effect in accordance with its
terms. This First Amendment shall be construed and enforced in accordance
with the laws of the State of Maryland, exclusive of its conflicts of laws
provision.
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date first set forth hereinabove.
HCIA INC.
By: /s/ Charles A. Berardesco
_______________________________________
Charles A. Berardesco
Senior Vice President & General Counsel
EXECUTIVE:
/s/ George D. Pillari
_______________________________________
George D. Pillari
Exhibit 10.2
HCIA INC.
1994 STOCK AND INCENTIVE PLAN
As Amended Through November 13, 1996
Section 1. Purpose
The purpose of the HCIA Inc. 1994 Stock and Incentive Plan
(the "Plan") is to attract and retain outstanding individuals as Key Employees
of HCIA Inc. (the "Company") and its Affiliates, as hereinafter defined, and to
motivate such individuals to achieve the long-term performance goals of the
Company by providing incentives to such individuals in the form of stock
ownership or monetary payments based on the value of the capital stock of the
Company or its financial performance, or both, on the terms and conditions set
forth herein.
Section 2. Definitions
As used in the Plan and unless the context clearly indicates
otherwise, the following terms shall have the respective meanings set forth
below:
(a) "Affiliate" shall mean any entity that, directly
or indirectly, controls or is controlled by the Company.
(b) "Award" shall mean any Option, Stock Appreciation
Right, Restricted Stock, Restricted Stock Unit or Performance Award granted
under the Plan.
(c) "Award Agreement" shall mean any written agreement,
contract or other instrument or document evidencing any Award granted under the
Plan.
(d) "Beneficiary" shall mean the person designated by the
Participant, on a form provided by the Company, to exercise the Participant's
rights in accordance with Section 7(h) of the Plan in the event of death, or, if
no such person is designated, the estate or personal representatives of such
Participant.
(e) "Board of Directors" shall mean the Board of
Directors of the Company.
(f) "Code" shall mean the Internal Revenue Code of 1986,
as amended.
(g) "Commission" shall mean the United States Securities
and Exchange Commission or any successor agency.
<PAGE>
(h) "Committee" shall mean the Compensation Committee of the
Board of Directors. The Committee shall be composed of two or more directors,
all of whom shall be "disinterested persons" within the meaning of Rule 16b-3
and "outside directors" within the meaning of Section 162(m)(4)(C) of the Code
and any regulations issued thereunder.
(i) "Disability" shall mean a total and permanent disability
within the meaning of the Company's long-term disability plan, as amended from
time to time.
(j) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
(k) "Fair Market Value" shall mean the average of the highest
and lowest selling prices of the Shares as reported on the National Association
of Securities Dealers Automated Quotation System National Market System or such
other national securities exchange as may be designated by the Committee or, in
the event that the Shares are not listed for trading on a national securities
exchange, the average of the highest and lowest quoted selling prices of the
Shares as reported by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or, if not listed on NASDAQ, the fair market value
of the Shares as determined in good faith by the Board of Directors or the
Committee, in any such case as of the valuation date.
(l) "Incentive Stock Option" shall mean a stock option granted
under Section 7(a) of the Plan that is intended to meet the requirements of
Section 422 of the Code or any successor provision thereto.
(m) "Key Employee" shall mean any officer or other
employee of the Company or any Affiliate who is described in Section 6 of the
Plan.
(n) "Non-Qualified Stock Option" shall mean a stock option
granted under Section 7(a) of the Plan that is not intended to be an Incentive
Stock Option.
(o) "Option" shall mean an Incentive Stock Option or a
Non-Qualified Stock Option.
(p) "Participant" shall mean a Key Employee who is
designated to be granted or has received an Award under the Plan.
(q) "Performance Award" shall mean any Award granted
under Section 7(d) of the Plan.
(r) "Person" shall mean any individual, corporation,
partnership, limited liability company, association, joint-stock company, trust,
unincorporated organization or government or political subdivision thereof.
-2-
<PAGE>
(s) "Released Securities" shall mean Restricted Stock with
respect to which all applicable restrictions have expired, lapsed or been
waived.
(t) "Restricted Stock" shall mean any Shares granted and
issued under Section 7(c) of the Plan.
(u) "Restricted Stock Unit" shall mean any Award granted under
Section 7(c) of the Plan that is denominated in Shares.
(v) "Restriction Period" shall mean, with respect to
Restricted Stock or Restricted Stock Units, that period of time determined by
the Committee pursuant to Section 7(c) of the Plan.
(w) "Retirement" shall mean termination of a Participant's
employment with the Company or any Affiliate at his or her "normal retirement
date" as defined in the Company's Savings Incentive Plan or any successor plan.
(x) "Termination" shall mean any resignation or discharge from
employment with the Company or any Affiliate except in the event of Disability,
Retirement or death.
(y) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the
Commission under the Exchange Act or any successor rule or regulation thereto.
(z) "Shares" shall mean shares of the common stock, par value
$.01 per share, of the Company and such other securities or property as may
become the subject of Awards or become subject to Awards pursuant to an
adjustment made under Section 8 of the Plan.
(aa) "Stock Appreciation Right" shall mean any Award
granted under Section 7(b) of the Plan.
Section 3. Effective Date; Stockholder Approval; Termination
(a) Effective Date and Stockholder Approval. Subject
to the approval of the Plan by the stockholders of the Company in accordance
with the provisions of Rule 16b-3, the Plan shall be effective as of December
22, 1994.
(b) Termination. No Award shall be granted under the Plan
after December 31, 2004; provided, however, that any Award granted on or before
December 31, 2004 may extend beyond such date unless expressly provided
otherwise herein or in the applicable Award Agreement; provided further, to the
extent set forth in Section 8 hereof, the authority of the Committee to amend,
alter, adjust, suspend, discontinue or terminate any Award or to waive any
conditions or restrictions with respect to any Award, and the authority of the
Board of Directors to amend the Plan, shall extend beyond such date.
-3-
<PAGE>
Section 4. Administration
(a) The Plan shall be administered by the Committee; provided,
however, that if at any time the Committee shall not be in existence, the
functions of the Committee as specified in the Plan shall be exercised by those
members of the Board of Directors who qualify as "disinterested persons" under
Rule 16b-3 and as "outside directors" under Section 162(m)(4)(C) of the Code and
any regulations issued thereunder.
Subject to the terms of the Plan and applicable law, the
Committee shall have full power and authority with respect to the Plan,
including, without limitation, the power to:
(i) designate Participants;
(ii) determine the types of Awards to be granted to
each Participant under the Plan;
(iii) determine the number of Shares to be covered
by (or with respect to which payments, rights or other matters are to be
calculated in connection with) Awards;
(iv) determine the terms and conditions of any Award;
(v) determine whether, to what extent, under what
circumstances and the method by which Awards may be settled or exercised in
cash, Shares, other securities, other Awards or other property, or canceled,
forfeited or suspended;
(vi) determine whether, to what extent and under what
circumstances cash, Shares, other securities, other Awards, other property
and other amounts payable with respect to an Award shall be deferred either
automatically or at the election of the holder thereof or of the Committee;
(vii) interpret and administer the Plan and any
instrument or agreement relating to, and any Award made under, the Plan
(including, without limitation, any Award Agreement);
(viii) establish, amend, suspend and waive such rules
and regulations and appoint such agents as it shall deem appropriate for the
proper administration of the Plan; and
(ix) make any other determination and take any other
action that the Committee deems necessary or desirable for the administration
of the Plan.
Unless otherwise expressly provided in the Plan, all
designations, determinations, interpretations and other decisions under or with
respect to the Plan, or any Award, shall be within the sole discretion of the
Committee, may be made at any time and shall be final, conclusive and
-4-
<PAGE>
binding upon all Persons, including the Company, any Affiliate, any Participant,
any holder or Beneficiary of any Award, any stockholder and any employee of the
Company or any Affiliate.
The Committee shall not have the authority to (i) amend the
exercise price of any outstanding Option without the approval of the
stockholders of the Company or (ii) grant an Award of Restricted Stock or a
Restricted Stock Unit which has a vesting period of less than 3 years.
Notwithstanding the foregoing, the Committee shall have the authority to amend
the exercise price of outstanding Options and/or grant Awards of Restricted
Stock or Restricted Stock Units with vesting periods of less than 3 years
provided that the aggregate number of shares subject to such amended Options or
Awards does not exceed 10% of the aggregate number of shares with respect to
which Awards may be granted under the Plan.
(b) No member of the Committee shall be liable for any action
or determination made in good faith, and the members of the Committee shall be
entitled to indemnification and reimbursement in the manner provided in the
Company's Charter and Bylaws, as amended from time to time.
(c) The Committee may designate persons other than its members
to carry out its responsibilities under such conditions or limitations as it may
set, except that the Committee may not delegate: (i) its authority with regard
to Awards (including decisions concerning the timing, pricing and amount of
Awards) granted to Key Employees who are officers or directors for purposes of
Section 16(b) of the Exchange Act; or (ii) its authority pursuant to Section 8
to amend the Plan.
Section 5. Grants of Awards; Shares Available for Award
(a) The Committee may, from time to time, grant Awards to one
or more Key Employees; provided, however, that:
(i) subject to any adjustment pursuant to Section
8, (x) the aggregate number of Shares available with respect to which Awards
may be granted under the Plan shall be 1,350,000 and (y) the aggregate number
of Shares with respect to which Awards may be made to any one Key Employee
during any single fiscal year of the Company may not exceed 250,000.
(ii) to the extent that any Shares covered by an
Award granted under the Plan, or to which any Award relates, are forfeited,
or if an Award otherwise terminates, expires or is canceled prior to the
delivery of all of the Shares or of other consideration issuable or payable
pursuant to such Award, then the number of Shares counted against the number
of Shares available under the Plan in connection with the grant of such Award,
to the extent of any such forfeiture, termination, expiration or cancellation,
shall be available for granting of Awards under the Plan;
(iii) Shares which have been issued, or any other
shares of the capital stock of the Company, which a Participant tenders to the
Company in satisfaction of income and payroll
-5-
<PAGE>
tax withholding obligations or in satisfaction of the exercise price of any
Award shall be available for granting of Awards under the Plan;
(iv) notwithstanding anything herein to the
contrary, the Committee may limit the application of Sections 5(a)(ii) and
5(a)(iii) in any manner that it considers necessary or appropriate to ensure
that the Plan complies with the requirements of Rule 16b-3 under the Exchange
Act or any successor provision; and
(v) notwithstanding anything herein to the
contrary, any Shares ceasing to be subject to an Award due to the exercise
of an Award or expiration of a Restriction Period shall no longer be
available for granting of Awards under the Plan.
(b) For purpose of this Section 5:
(i) if an Award is denominated in Shares, the
number of Shares covered by such Award, or to which such Award relates, shall
be counted on the date of grant of such Award against the number of Shares
available for granting of Awards under the Plan; and
(ii) if an Award is not denominated in Shares, the
number of Shares shall be counted on the date of grant of such Award against
the number of Shares available for granting Awards under the Plan equal to
the quotient of the Fair Market Value (calculated as of the date of grant) of
the maximum amount of cash or other consideration payable pursuant to such
Award, divided by the Fair Market Value of one Share on the date of grant.
(c) Any Shares delivered by the Company pursuant to an Award
may consist, in whole or in part, of authorized and unissued Shares or of
treasury Shares. In determining the size of any Award, the Committee may take
into account a Participant's responsibility level, performance, potential, cash
compensation level, the Fair Market Value of the Shares at the time of the Award
and such other considerations as it deems appropriate.
Section 6. Eligibility
Any employee, including any executive officer or
employee-director of the Company or any Affiliate, who is not a member of the
Committee and who, in the opinion of the Committee, contributes to the continued
growth, development and financial success of the Company or an Affiliate shall
be eligible to be designated as a Participant.
Section 7. Awards
(a) Options. The Committee is hereby authorized to grant
Options to Participants in the form of either Non-Qualified Stock Options or
Incentive Stock Options with the terms and conditions set forth in this Section
7 and with such additional terms and conditions, in either case not inconsistent
with the provisions of the Plan, as the Committee shall determine.
-6-
<PAGE>
(i) Limitations on Incentive Stock Options.
(A) In the event the Committee grants Incentive
Stock Options, the aggregate Fair Market
Value (determined at the time the Incentive
Stock Options are granted) of the Shares
underlying any such Incentive Stock Options,
together with the shares underlying any
incentive stock options (as defined in
Section 422 of the Code) under any other
plans of the Company or any Affiliate, which
shall be first exercisable by any one
Participant shall not, during any calendar
year, exceed $100,000, or such other
limitation as may be provided in the Code.
(B) The grant of Incentive Stock Options
hereunder shall be subject to guidelines
adopted by the Committee with respect to the
timing and size of Incentive Stock Options.
(C) The terms of any Incentive Stock Option
granted under the Plan shall comply in all
respects with the provisions of Section 422
of the Code, or any successor provision
thereto, and any regulations promulgated
thereunder.
(ii) Exercise Price. The exercise price per
Share purchasable under an Option shall be determined by the Committee;
provided, however, that such exercise price shall not be less than the Fair
Market Value of a Share on the date of grant of the Option (or, if the
Committee so determines, in the case of any Option granted in tandem with
or in substitution for another Award or any outstanding award granted
under any other plan of the Company, on the date of grant of such other Award
or award).
(iii) Option Term. The term of each Option
shall be fixed by the Committee; provided, however, that in no event shall
the term of an Incentive Stock Option exceed a period of ten years from the date
of its grant.
(iv) Exercisability and Method of Exercise. Except
for such limitations as may be set forth herein, an Option shall become
exercisable in such manner and within such period or periods and in such
installments as shall be determined by the Committee and set forth in the
Award Agreement evidencing the Option. The Committee also shall determine
the method or methods by which, and the form or forms in which, payment of the
exercise price with respect to any Option may be made or deemed to have been
made.
(b) Stock Appreciation Rights. The Committee is hereby
authorized to grant Stock Appreciation Rights to Participants. Subject to the
terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right
granted under the Plan shall confer on the holder thereof a right to receive,
upon exercise thereof, the difference of (i) the Fair Market Value of one Share
on the date of exercise or, if the Committee shall so determine in the case of
any such right
-7-
<PAGE>
other than one related to any Incentive Stock Option, at any time during a
specified period before or after the date of exercise, less (ii) the grant
price of the right as specified by the Committee, which shall not be less than
the Fair Market Value of one Share on the date of grant of the Stock
Appreciation Right (or, if the Committee so determines, in the case of any Stock
Appreciation Right granted in tandem with or in substitution for another Award
or any outstanding award granted under any other plan of the Company, on the
date of grant of such other Award or award). Subject to the terms of the Plan
and any applicable Award Agreement, the grant price, term, methods of exercise,
methods of settlement and any other terms and conditions of any Stock
Appreciation Right shall be as determined by the Committee. The Committee may
impose such conditions or restrictions on the exercise of any Stock Appreciation
Right as it may deem appropriate, including, without limitation, restricting the
time of exercise of the Stock Appreciation Right to specified periods as may be
necessary to satisfy the requirements of Rule 16b-3.
(c) Restricted Stock and Restricted Stock Units.
(i) Issuance. The Committee is hereby
authorized to grant Awards of Restricted Stock and Restricted Stock Units to
Participants, such Awards, including the total number of Shares to which
they pertain, to be evidenced by an Award Agreement.
(ii) Restrictions. Shares of Restricted Stock
and Restricted Stock Units shall be issued in the name of the Participant
without payment of consideration, and shall be subject to such restrictions
as the Committee may impose (including, without limitation, a Restriction
Period, any limitation on the right to vote a Share of Restricted Stock or the
right to receive any dividend or other right or property), which restrictions
may lapse separately or in combination at such time or times, in such
installments or otherwise, as the Committee may deem appropriate. Different
Restricted Stock or Restricted Stock Unit Awards may, among other things, have
different Restriction Periods.
(iii) Registration. Any Restricted Stock granted
under the Plan may be evidenced in such manner as the Committee may deem
appropriate, including, without limitation, book-entry registration or
issuance of a stock certificate or certificates. In the event any stock
certificate is issued to evidence Shares of Restricted Stock granted under the
Plan, such certificate shall be registered in the name of the Participant and
shall bear an appropriate legend (as determined by the Committee) referring to
the terms, conditions and restrictions applicable to such Restricted Stock. Upon
completion of the applicable Restriction Period, the related restriction or
restrictions upon the Award shall expire and new certificates representing
the Award shall be issued without the applicable restrictive legend
described herein. Such Shares shall be delivered in accordance with the
terms and conditions of such Participant's Award Agreement.
(d) Other Stock or Stock-Based Awards. An Award other than as
described in (a) through (c) above may be granted pursuant to which Shares are,
or in the future may be acquired, or which is valued or determined in whole or
in part by reference to, or otherwise based upon, Shares.
-8-
<PAGE>
(e) Code Section 162(m) Requirements. The Committee in its
sole discretion shall determine whether Awards made pursuant to the Plan shall
be designed to meet the requirements of performance-based compensation within
the meaning of Section 162(m) of the Code and any regulations issued thereunder.
(f) Termination of Employment. The Agreement relating to an
Award will set forth provisions governing the disposition of an Award in the
event of the retirement, disability, death or other termination of a
Participant's employment.
(g) Election to Recognize Income. If a Participant makes an
election in a timely manner pursuant to Section 83(b) of the Code to recognize
income for tax purposes when an Award is first made, the Participant shall
notify the Company within 10 days of the making of such election.
(h) General.
(i) Award Agreements. Each Award granted
under the Plan shall be evidenced by an Award Agreement in such form as shall
have been approved by the Committee.
(ii) Awards May Be Granted Separately or
Together. Awards may be granted either alone or in addition to, in tandem
with, or in substitution for any other Award or any award granted under any
other plan of the Company or any Affiliate. Awards granted in addition to or
in tandem with other Awards, or in addition to or in tandem with awards
granted under any other plan of the Company or any Affiliate, may be granted
either at the same time as or at a different time from the grant of such other
Awards or awards.
(iii) Forms of Payment Under Awards. Subject
to the terms of the Plan and of any applicable Award Agreement, payments or
transfers to be made by the Company or any Affiliate upon the grant, exercise
or payment of an Award may be made in such form or forms as the Committee
shall determine, including, without limitation, cash, Shares, other
securities, other Awards or other property, or any combination thereof, and
may be made in a single payment or transfer, in installments or on a deferred
basis, in each case in accordance with the rules and procedures established
by the Committee. Such rules and procedures may include, without limitation,
provisions for the payment or crediting of interest in installments or deferred
payments.
(iv) Limits on Transfer of Awards. No Award
(other than Released Securities), except as otherwise provided by the
Committee in its discretion, and no right under any such Award, shall be
assignable, alienable, saleable or transferable by a Participant otherwise
than by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code or Title I of ERISA
(or, in the case of an Award of Restricted Stock, to the Company); provided,
however, that, if so determined by the Committee, a Participant may, in the
manner established by the Committee, designate a Beneficiary to exercise
the rights of the Participant, and to receive any property distributable
with respect to any Award upon the death of the Participant. Each
Award, and each right under any Award, shall be exercisable, during the
Participant's lifetime, only by the Participant or, if permissible under
applicable law, by the
-9-
<PAGE>
Participant's guardian or legal representative. No Award (other than Released
Securities), and no right under any such Award, may be pledged, alienated,
attached or otherwise encumbered, and any purported pledge, alienation,
attachment or encumbrance thereof shall be void and unenforceable against
the Company or any Affiliate.
(v) Term of Awards. Except as otherwise
provided herein, the term of each Award shall be for such period as may be
determined by the Committee.
(vi) Share Certificates and Representation by
Participants. All certificates for Shares or other securities delivered under
the Plan pursuant to any Award or the exercise thereof shall be subject to
such stop transfer orders and other restrictions as the Committee may deem
advisable under the Plan or the rules, regulations and other requirements of
the Commission, any stock exchange or other market upon which such Shares
or other securities are then listed or traded, and any applicable federal
or state securities laws, and the Committee may cause a legend or legends to be
inscribed upon any such certificate(s) to make appropriate reference to such
restrictions. The Committee may require each Participant or other Person who
acquires Shares or other securities under the Plan to represent to the
Company in writing that such Participant or other Person is acquiring the
Shares or other securities without a view to the distribution thereof.
Section 8. Amendment and Termination; Adjustments; Corrections
(a) Amendments to the Plan. The Committee may, at any time or
from time to time, amend, alter, suspend, discontinue or terminate the Plan in
whole or in part; provided, however, that no amendment, alteration, suspension,
discontinuation or termination of the Plan shall in any manner (except as
otherwise provided in this Section 8) adversely affect the rights of any
Participant under any Award granted and then outstanding under the Plan, without
the consent of the respective Participant; provided further, however, that any
amendment which under the requirements of applicable law must be approved by the
stockholders of the Company shall not be effective unless and until such
stockholder approval has been obtained in compliance with such law, and
provided, further, that any amendment that must be approved by the stockholders
of the Company in order to maintain the continued qualification of the Plan
under Rule 16b-3 under the Exchange Act, or any successor provision, shall not
be effective unless and until such stockholder approval has been obtained in
compliance with such rule. No termination or amendment of the Plan may, without
the consent of the Participant to whom an Award has been granted, adversely
affect the rights of such Participant under such Award.
(b) Certain Adjustments of Awards.
(i) In the event the Company or any Affiliate
shall assume outstanding employee awards or the right or obligation to make
future such awards in connection with the acquisition of another business or
business entity, the Committee may make such adjustments in the terms of
Awards, not inconsistent with the terms of the Plan, as it shall deem
appropriate in
-10-
<PAGE>
order to achieve reasonable comparability or other equitable relationship
between the assumed awards and the Awards granted under the Plan, as so
adjusted.
(ii) In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of
cash, Shares, other securities or other property), recapitalization, stock
split, reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase or exchange of Shares or other securities
of the Company, issuance of warrants or other rights to purchase Shares or
other securities of the Company, or other similar corporate transaction,
change in applicable laws, regulations or financial accounting principles or
other event affects the Shares, such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan,
then the Committee may, in such manner as it may deem equitable, adjust any or
all of: (A) the number and type of Shares (or other securities or property)
which thereafter may be made the subject of Awards under the Plan; (B) the
number and type of Shares (or other securities or property) subject to
outstanding Awards; and (C) the grant, purchase or exercise price with respect
to any Award, or, if deemed appropriate, make provision for a cash payment to
the holder of an outstanding Award; provided, however, in each case, that with
respect to Awards of Incentive Stock Options, no such adjustment shall be
authorized to the extent that such authority would cause the Plan to violate
Section 422(b)(1) of the Code or any successor provision thereto; provided
further, that the number of Shares subject to any Award denominated in Shares
shall always by a whole number. The foregoing adjustments shall be determined by
the Committee in its sole discretion.
(c) Correction of Defects, Omissions and
Inconsistencies. The Committee may correct any defect, supply any omission or
reconcile any inconsistency in any Award or Award Agreement in the manner and
to the extent it shall deem desirable to carry the Plan into effect.
Section 9. General Provisions
(a) No Rights to Awards. No Key Employee, Participant or other
Person shall have any claim to be granted any Award under the Plan, and there is
no obligation for uniformity of treatment of Key Employees, Participants or
holders or Beneficiaries of Awards under the Plan. The terms and conditions of
Awards need not be the same with respect to each Participant.
(b) Withholding. No later than the date as of which an amount
first becomes includable in the gross income of a Participant for federal income
tax purposes with respect to any Award under the Plan, the Participant shall pay
to the Company, or make arrangements satisfactory to the Company regarding the
payment of, any federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. Unless otherwise determined by
the Committee, withholding obligations arising with respect to Awards under the
Plan may be settled with Shares (other than Restricted Stock), including Shares
that are part of, or are received upon exercise of, the Award that gives rise to
the withholding requirement. The obligations of the Company under the Plan shall
be conditioned on such payment or arrangements, and the Company and any
Affiliate shall, to the extent permitted by law, have the right to deduct any
such taxes from
-11-
<PAGE>
any payment otherwise due to the Participant. The Committee may establish such
procedures as it deems appropriate for the settling of withholding
obligations with Shares, including, without limitation, the
establishment of such procedures as may be necessary to satisfy the requirements
of Rule 16b-3.
(c) Acceleration. Except as otherwise provided hereunder, the
Committee may, in its discretion, (i) accelerate the time at which an
outstanding Award granted hereunder may be exercised and (ii) extend the
post-termination of employment exercise period of any outstanding Award. With
respect to Restricted Stock, in the event of a public tender offer for all or
any portion of the Shares of the Company, or in the event that any proposal to
merge or consolidate the Company with another entity is submitted to the
stockholders of the Company for a vote, the Committee, in its sole discretion,
may shorten or eliminate the Restriction Period consistent with the best
interests of the Company.
(d) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or any Affiliate. Further, the Company or any Affiliate may at any time
dismiss a Participant from employment, free from any liability or any claim
under the Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.
(e) Unfunded Status of the Plan. Unless otherwise determined
by the Committee, the Plan shall be unfunded and shall not create (or be
construed to create) a trust or a separate fund or funds. The Plan shall not
establish any fiduciary relationship between the Company and any Participant or
other Person. To the extent any Person holds any right by virtue of the grant of
an Award under the Plan, such right (unless otherwise determined by the
Committee) shall be no greater than the right of an unsecured general creditor
of the Company.
(f) Government and Other Regulations. The obligation of the
Company to make payment of Awards in Shares or otherwise shall be subject to all
applicable laws, rules and regulations, and to such approvals by any government
agencies as may be required. If Shares awarded hereunder may in certain
circumstances be exempt from registration under the Securities Act of 1933, as
amended, the Company may restrict its transfer in such manner as it deems
advisable to ensure such exempt status.
(g) No Restriction on Right of Company to Effect Corporate
Changes. The Plan shall not affect in any way the right or power of the Company
or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of stock or options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Shares or the rights thereof or which are convertible into or
exchangeable for the Shares, or dissolution or liquidation of the Company, or
any sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.
-12-
<PAGE>
(h) Governing Law. The validity, construction and
effect of the Plan, and any rules and regulations relating to the Plan,
shall be determined in accordance with the laws of the State of Maryland,
exclusive of its conflicts of law provisions, and applicable Federal law.
(i) Severability. If any provision of the Plan, any Award
Agreement or any Award is or becomes or is deemed to be invalid, illegal or
unenforceable in any jurisdiction, or as to any Person or Award, or would
disqualify the Plan, any Award Agreement or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or, if it cannot be so construed or deemed
amended without, in the determination of the Committee, materially altering the
intent of the Plan, the Award Agreement or the Award, such provision shall be
stricken as to such jurisdiction, Person or Award, and the remainder of the
Plan, such Award Agreement and such Award shall remain in full force and effect.
(j) No Fractional Shares. No fractional Shares shall be issued
or delivered pursuant to the Plan, any Award Agreement or any Award, and the
Committee shall determine whether cash, other securities or other property shall
be paid or transferred in lieu of any fractional Shares, or whether such
fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.
(k) Headings. Headings are given to the sections and
subsections of the Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
-13-
Exhibit 10.4
HCIA INC.
1995 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
As Amended Through August 7, 1996
1. Definitions
For purposes of the Plan:
(a) "Annual Award" means an award of Options
pursuant to Section 5(b) of the Plan.
(b) "Annual Meeting" means an annual meeting of
the Company's stockholders.
(c) "Board" means the Board of Directors of the
Company.
(d) Change in Control" means
(i) the acquisition by an individual,
entity or group (within the meaning of Section 13(d)(3) of the Exchange Act),
other than (A) an employee benefit plan (or related trust) sponsored or
maintained by the Company or any of its affiliates or (B) AMBAC Inc., a Delaware
corporation ("AMBAC"), AMBAC Indemnity Corporation, a Wisconsin stock insurance
corporation ("AIC") or any of their respective affiliates, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 30% or more of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors or of equity securities
having a value equal to 30% or more of the total value of all equity securities
of the Company, provided, however, that any securities of the Company acquired
by any individual, entity or group directly from AMBAC, AIC or any of their
respective affiliates, or from an underwriter or placement agent (or other
person or entity performing similar services) who acquired such securities
directly from AMBAC, AIC or any of their respective affiliates, shall not be
included in the number of shares acquired by such individual, entity or grou
for purposes of determining whether a Change in Control has occurred; or
(ii) individuals who as of the Offering
Date constitute the Board, and subsequently elected members of the Board whose
election is approved or recommended by at least a majority of such current
members or their successors whose election was so approved or recommended,
cease for any reason to constitute at least a majority of such Board.
(e) "Code" means the Internal Revenue Code of
1986, as amended.
<PAGE>
(f) "Committee" means the committee designated
by the Board pursuant to Section 3(c) of the Plan.
(g) "Common Stock" means the Common Stock of
the Company, par value $.01 per share, or such other class or kind of shares
or other securities as may be applicable under Section 12.
(h) "Company" means HCIA Inc., a Maryland
corporation, or any successor to substantially all its business.
(i) "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
(j) "Exchange Act" means the Securities Exchange
Act of 1934, as amended.
(k) "Fair Market Value" means the average of the
highest and the lowest quoted selling prices of the Common Stock as reported
on the National Association of Securities Dealers Automated Quotation System
National Market System or such other national securities exchange as may be
designated by the Committee or, in the event that the Common Stock is not
listed for trading on a national securities exchange, the average of the
highest and lowest quoted selling prices of the Common Stock as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), in any such case for the applicable valuation date or, if there
were no sales on such valuation date, for the most recent day for which there
was such a sale.
(l) "Initial Award" means an award of Options
pursuant to Section 5(a) of the Plan.
(m) "Non-Employee Director" means a member of
the Board who is not an employee of the Company or any of its subsidiaries and
is not an employee of AMBAC, AIC or any of their respective subsidiaries while
AMBAC and AIC maintain, in the aggregate, an equity interest in the Company
representing 25% or more of the voting power of the Company's outstanding voting
stock.
(n) "Offering Date" means the effective date
of the Company's registration statement no. 33-88226 relating to the initial
public offering of the Common Stock.
(o) "Option" means an option to purchase shares
of Common Stock awarded to a Non-Employee Director pursuant to the Plan.
(p) "Option Shares" means the shares of Common
stock issuable upon exercise of an Option.
-2-
<PAGE>
(q) "Permanent Disability" means a physical or
mental impairment rendering a Non-Employee Director substantially unable to
function as a member of the Board for any period of six consecutive months.
Any dispute as to whether a Non-Employee Director is Permanently Disabled
shall be resolved by a physician mutually acceptable to the Non-Employee
Director and the Company, whose decision shall be final and binding upon the
Non-Employee Director and the Company.
(r) "Plan" means the HCIA Inc. 1995 Non-Employee
Directors Stock Option Plan as described herein.
(s) "Retirement" means a Non-Employee Director
ceasing to be a member of the Board as a result of retirement from the Board
in accordance with the retirement policy then applicable to Board members.
(t) "1933 Act" means the Securities Act of 1933,
as amended.
2. Purpose
The purpose of the Plan is to retain the services of qualified
persons who are not employees of the Company to serve as members of the Board
and to secure for the Company the benefits of the incentives inherent in
increased Common Stock ownership by Non-Employee Directors, by granting to such
person options to purchase shares of Common Stock.
3. Shares Available; Administration
(a) Subject to the provisions of Section 12 of the Plan, the
maximum number of shares of Common Stock which may be issued under the Plan
shall not exceed 200,000 shares. Either authorized and unissued shares of Common
Stock or treasury shares may be delivered upon exercise of Options awarded
pursuant to the Plan.
(b) If Options have been forfeited to the Company as described
in Section 6(d), the Options Shares underlying such Options shall again be
available for issuance in connection with future awards under the Plan.
(c) The Plan will be administered by a committee designated by
the Board and composed exclusively of members of the Board who are not
Non-Employee Directors (the "Committee"). The Committee may adopt rules and
regulations necessary to carry out the Plan's purposes. The Committee's
interpretation and construction of any Plan provision shall be final and
conclusive.
4. Eligibility
Options awarded pursuant to the Plan shall be granted only to
Non-Employee Directors.
-3-
<PAGE>
5. Awards
(a) Initial Award. On the date of a Non-Employee Director's
initial election or appointment to the Board (or in the case of a Non-Employee
Director who is a member of the Board as of the Offering Date, on the Offering
Date), such Non-Employee Director (including any Non-Employee Director reelected
or reappointed after a period of at least 12 calendar months during which he did
not serve on the Board) shall be granted an Initial Award consisting of an
Option to purchase 5,000 shares of Common Stock. Such Option shall have a per
share exercise price equal to the Fair Market Value of the Common Stock on the
date of award and shall be subject to the vesting schedule provided for in
Section 6(a) and the other terms and conditions provided for herein.
(b) Annual Awards. At each Annual Meeting, commencing with the
Annual Meeting held in 1995 subsequent to the Offering Date, each person who has
served as a member of the Board during the period elapsed since the immediately
preceding Annual Meeting (or in the case of the Annual Meeting held in 1995,
each person who has served as a member of the Board since the Offering Date),
and who has, during all or a portion of such service, been a Non-Employee
Director for purposes of the Plan shall be granted as of the date of such Annual
Meeting an Annual Award consisting of an Option to purchase 5,000 shares of
Common Stock (or such lesser number determined by multiplying 5,000 by a
fraction, the numerator of which is the number of full or partial months since
the immediately preceding Annual Meeting (or Offering Date, if applicable)
during which such person served on the Board in the capacity of a Non-Employee
Director, and the denominator of which is the number of full or partial months
since the immediately preceding Annual Meeting (or Offering Date, if
applicable)). Such Option shall have a per share exercise price equal to the
Fair Market Value of the Common Stock on the date of award and shall be subject
to the vesting schedule provided for in Section 6(b) and the other terms and
conditions provided for herein.
6. Vesting
(a) Vesting of Initial Awards. Initial Awards shall
vest and become exercisable as follows:
(i) An Initial Award made other than in connection
with a Non-Employee Director's initial election to the Board at an Annual
Meeting shall vest and become exercisable in two equal installments as of the
first and second anniversaries of the date of grant, provided that the
Non-Employee Director remains in service as a member of the Board until the
relevant vesting date.
(ii) An Initial Award made in connection with a
Non-Employee Director's initial election to the Board at an Annual Meeting shall
vest and become exercisable as to 50% of the Options Shares subject to the
Option constituting such Initial Award as of the date of the first Annual
Meeting following the date of award, and as to the remaining 50% of the
Option Shares subject to such Option as of the date of the second Annual
Meeting following the date of award, provided the Non-Employee Director to whom
such Annual Award was made
-4-
<PAGE>
continues in service as a member of the Board until the relevant vesting date
(whether or not the Non-Employee Director is nominated for reelection at the
Annual Meeting held on either vesting date, and whether or not, if nominated, he
is reelected).
(b) Vesting of Annual Awards. Each Annual Award shall vest and
become exercisable as of the date of the first Annual Meeting following the date
of award, provided the Non-Employee Director to whom such Annual Award was made
continues in service as a member of the Board until the vesting date (whether or
not the Non-Employee Director is nominated for reelection at the Annual Meeting
held on such vesting date, and whether or not, if nominated, he is reelected).
(c) Accelerated Vesting. Notwithstanding anything to the
contrary in Sections 6(a) and 6(b), an Option shall become fully vested and
exercisable upon the first to occur of (i) a Non-Employee ceasing to be a member
of the Board as a result of death, Permanent Disability or Retirement, or (ii) a
Change in Control of the Company.
(d) Forfeiture. In the event of a Non-Employee Director's
termination of service as a member of the Board for any reason other than death,
Permanent Disability or Retirement prior to the satisfaction of any vesting
period requirement hereof, the unvested portion of any Options awarded to the
Non-Employee Director shall be forfeited to the Company as of the date of
termination of service, and the Non-Employee Director shall have no further
right or interest therein.
7. Term of Options
(a) Ten-Year Term. Each Option shall expire ten years
from its date of award, subject to earlier termination as provided herein.
(b) Exercise Following Certain Terminations of Service. If a
Non-Employee Director's service as a member of the Board terminates for any
reason other than death, Permanent Disability or Retirement, the Non-Employee
Director shall have the right, subject to the terms and conditions hereof, to
exercise the Option, to the extent it has vested as of the date of such
termination of service, at any time within six months after the date of such
termination, subject to the earlier expiration of the Option as provided in
Section 7(a). At the end of such six-month period the Option shall expire.
(c) Exercise Following Termination of Service Due to Death,
Permanent Disability or Retirement. If a Non-Employee Director's service as a
member of the Board terminates by reason of death, Permanent Disability or
Retirement, all Options awarded to such Non-Employee Director may be exercised
by such Non-Employee Director, or by his or her estate, personal representative
or beneficiary, as the case may be, at any time within one year after the date
of termination of service, subject to the earlier expiration of the Option as
provided in Section 7(a). At the end of such one-year period the Option shall
expire.
-5-
<PAGE>
(d) Exercise Following Termination of Service Subject to
Company Policies and Procedures on Insider Trading. Any exercise of an Option
pursuant to Section 7(b) or 7(c) following termination of a Non-Employee
Director's service as a member of the Board for any reason other than death
shall be subject to, and shall be permitted only to the extent such exercise
complies with, the policies and procedures of the Company concerning insider
trading that were applicable to the Non-Employee Director on the date of such
termination of service (as such policies and procedures may be amended by the
Company during the period provided in Section 7(b) or 7(c), as the case may be,
for exercise of the Option).
8. Time and Manner of Exercise
(a) Notice of Exercise. Subject to the other terms and
conditions hereof, a Non-Employee Director may exercise any Options (to the
extent vested) by giving written notice of exercise to the Company, provided,
however, that no less than 10 Option Shares may be purchased upon any exercise
of the Option unless the number of Option Shares purchased at such time is the
total number of Option Shares in respect of which an Option is then exercisable,
and provided, further, that in no event shall an Option be exercisable for a
fractional share. The date of exercise of an Option shall be the later of (i)
the date on which the Company receives such written notice or (ii) the date on
which the conditions provided in Section 8(b) are satisfied. Notwithstanding any
other provision of the Plan or of the notice of award relating to an Option
provided for in Section 9, no Option may be exercised, whether in whole or in
part, and no Option Shares will be issued by the Company in respect of any such
attempted exercise, at any time when such exercise is prohibited by Company
policy then in effect concerning transactions by a Non-Employee Director in the
Company's securities. In the event that a Non-Employee Director gives written
notice of exercise to the Company at a time when such exercise is prohibited by
such policy, the Company in its sole discretion may disregard such notice of
exercise or may consider such notice to be delivered as of the first date that
the Non-Employee Director is permitted to exercise such option in accordance
with such Company policy.
(b) Payment. Prior to the issuance of a certificate pursuant
to Section 8(e) hereof evidencing the Option Shares in respect of which all or a
portion of an Option shall have been exercised, a Non-Employee Director shall
have paid to the Company the Option Price for all Option Shares purchased
pursuant to the exercise of such Option. Payment may be made by personal check,
bank draft or postal or express money order (such modes of payment are
collectively referred to as "cash") payable to the order of the Company in U.S.
dollars or in shares of Common Stock already owned by the Non-Employee Director
valued at their Fair Market Value as of the last business day preceding the date
of exercise, or in any combination of cash or such shares as the compensation
committee of the Board in it sole discretion may approve. Payment of the
exercise price in shares of Common Stock shall be made by delivering to the
Company the share certificate(s) representing the required number of shares,
with the Non-Employee Director signing his or her name on the back, or by
attaching executed stock powers (the signature of the Non-Employee Director must
be guaranteed in either case).
-6-
<PAGE>
(c) Stockholder Rights. A Non-Employee Director shall have no
rights as a stockholder with respect to any shares of Common Stock issuable upon
exercise of an Option until a certificate evidencing such shares shall have been
issued to the Non-Employee Director pursuant to Section 8(e), and no adjustment
shall be made for dividends or distributions or other rights in respect of any
share for which the record date is prior to the date upon which the Non-Employee
Director shall become the holder of record thereof.
(d) Limitation on Exercise. No Option shall be exercisable
unless the Common Stock subject thereto has been registered under the Securities
Act and qualified under applicable state "blue sky" laws in connection with the
offer and sale thereof, or the Company has determined that an exemption from
registration under the Securities Act and from qualification under such state
"blue sky" laws is available.
(e) Issuance of Shares. Subject to the foregoing conditions,
as soon as is reasonably practicable after its receipt of a proper notice of
exercise and payment of the Option Price for the number of shares with respect
to which the Option is exercised, the Company shall deliver to the Non-Employee
Director (or following the Non-Employee Director's death, such other person
entitled to exercise the Option), at the principal office of the Company or at
such other location as may be acceptable to the Company and the Non-Employee
Director (or such other person), one or more stock certificates for the
appropriate number of shares of Common Stock issued in connection with such
exercise. Such shares shall be fully paid and nonassessable and shall be issued
in the name of the Non-Employee Director (or such other person).
(f) Tax Withholding. The Company shall have the right, prior
to the delivery of any certificates evidencing shares of Common Stock to be
issued upon full or partial exercise of an Option, to require a Non-Employee
Director to remit to the Company any amount sufficient to satisfy any Federal,
state or local tax withholding requirements. The Company may permit the
Non-Employee Director to satisfy, in whole or in part, such obligation to remit
taxes, by directing the Company to withhold shares of Common Stock that would
otherwise be received by the Non-Employee Director, pursuant to such rules as
the Committee may establish from time to time. The Company shall also have the
right to deduct from all cash payments made pursuant to or in connection with
the Option any Federal, state or local taxes required to be withheld with
respect to such payments.
(g) Restrictions on Transfer. An Option may not be
transferred, pledged, assigned, or otherwise disposed of, except by will or by
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of ERISA ("QDRO"). The Option
shall be exercisable, during the Participant's lifetime, only by the Participant
or by the person to whom the Option has been transferred pursuant to a QDRO. No
assignment or transfer of the Option, or of the rights represented thereby,
whether voluntary or involuntary, by operation of law or otherwise, except by
will or the laws of descent and distribution or pursuant to a QDRO, shall vest
in the assignee or transferee any interest or right in the Option, but
immediately upon any attempt to assign or transfer the Option the same shall
terminate and be of no force or effect.
-7-
<PAGE>
(h) Non-qualified Status of Options. Options awarded
under the Plan are not intended to qualify, and shall not be treated, as an
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.
9. Notice of Award
The terms and conditions of each award of Options shall be
embodied in a notice of award which shall contain terms and conditions not
inconsistent with the Plan and which shall incorporate the Plan by reference.
Each notice of award shall state the date on which the Options were granted, the
number of shares subject to such Option and the per share exercise price
therefor.
10. Effective Date; Term of the Plan
The effective date of the Plan shall be the Offering Date.
Unless earlier terminated in accordance with Section 11 below, the term of the
Plan shall expire on the tenth anniversary of the Offering Date. After such
date, no further awards of Options may be made hereunder, but previously granted
awards shall remain outstanding subject to the terms hereof.
11. Amendments
The Board may at any time and from time to time alter, amend,
suspend or terminate the Plan in whole or in part, provided, however, that in no
event may the provisions of the Plan respecting eligibility to participate or
the timing or amount of awards be amended more frequently than once every six
months, other than to comport with changes in the Code, ERISA or any rules or
regulations thereunder, provided, further, that any amendment which under the
requirements of applicable law must be approved by the stockholders of the
Company shall not be effective unless and until such stockholder approval has
been obtained in compliance with such law, and provided, further, that any
amendment that must be approved by the stockholders of the Company in order to
maintain the continued qualification of the Plan under Rule 16b-3 under the
Exchange Act, or any successor provision, shall not be effective unless and
until such stockholder approval has been obtained in compliance with such rule.
No termination or amendment of the Plan may, without the consent of the
Non-Employee Director, affect any such person's rights under the provisions of
the Plan with respect to awards of Options which were made prior to such action.
12. Adjustment of and Changes in Common Stock
In the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, distribution of property, special cash
dividend, or other change in corporate structure affecting the Common Stock, the
Committee shall make such adjustments, if any, as it considers necessary or
appropriate in the number and class of shares subject to Options or authorized
to be awarded hereunder, in order to prevent dilution or enlargement of rights.
Any new or additional
-8-
<PAGE>
Options awarded pursuant to such adjustments shall be subject to all of the
terms and conditions of the Plan.
13. No Right to Reelection
Nothing in the Plan shall be deemed to create any obligation
on the part of the Board to nominate any of its members for reelection by the
Company's stockholders, nor confer upon any Non-Employee Director the right to
remain a member of the Board for any period of time, or at any particular rate
of compensation.
14. Governing Law
The Plan and all notices issued or agreements entered into
under the Plan shall be construed in accordance with and governed by the laws of
the State of Maryland.
15. No Restriction on Right of Company to Effect Corporate Changes
The Plan shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or any
issue of stock or of options, warrants or rights to purchase stock or of bonds,
debentures, preferred or prior preference stocks whose rights are superior to or
affect the Common Stock or the rights thereof or which are convertible into or
exchangeable for Common Stock, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or any
other corporate act or proceeding, whether of a similar character or otherwise.
Exhibit 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(In Thousands Except Per Share Amounts)
Fully
Primary Diluted (1)
Year ended December 31, 1996
Weighted average shares outstanding.................... 10,096
Effect of dilutive common stock equivalents(1)......... -- N/A
--------
Weighted average shares outstanding for EPS purposes... 10,096
Net loss............................................... $(42,267)
--------
Net loss per share (2)................................. $ (4.19)
========
(1) As of December 31, 1996, options to purchase 1,464,377 shares of common
stock were outstanding.
As the Company had a net loss for the year ended December 31, 1996, the fully
diluted earnings per share is not applicable.
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Response Healthcare Information Management, Inc.
Healthcare Knowledge Systems, Limited
CHKS Limited*
CHKS, S.A.
IASIST, S.A.
LBA Holdings, Inc.
LBA Health Care Solutions, Inc.**
HealthChex, Inc.
HCIA Holding (Germany) GmbH
* CHKS Limited is 55% owned by Healthcare Knowledge Systems, Limited and 45%
owned directly by the Registrant.
** A wholly owned subsidiary of LBA Holdings, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
HCIA Inc.:
We consent to incorporation by reference in the registration statements (No.
33-98328 and No. 33-98330) on Form S-8 of HCIA Inc. of our reports dated January
23, 1997 relating to the consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1995 and 1996 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996 and the
related consolidated financial statement schedule, which reports appear, or are
incorporated by reference, in the December 31, 1996 annual report on Form 10-K
of HCIA Inc.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,302
<SECURITIES> 510
<RECEIVABLES> 32,122
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 55,480
<PP&E> 12,188
<DEPRECIATION> 0
<TOTAL-ASSETS> 223,196
<CURRENT-LIABILITIES> 18,484
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 249,591
<TOTAL-LIABILITY-AND-EQUITY> 223,196
<SALES> 73,520
<TOTAL-REVENUES> 73,520
<CGS> 0
<TOTAL-COSTS> 110,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (580)
<INCOME-PRETAX> (36,381)
<INCOME-TAX> 5,886
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,267)
<EPS-PRIMARY> (4.19)
<EPS-DILUTED> 0
</TABLE>
