SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange act of 1934
For the Quarterly Period Ended March 31, 1998
--------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________________________ to __________________
Commission File Number 0-25378
HCIA INC.
---------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1407998
- --------------------------------------- ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
300 EAST LOMBARD STREET, BALTIMORE, MARYLAND 21202
- -------------------------------------------- -------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (410) 895-7470
--------------
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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----------------- -----------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, at May 1, 1998:
Class: Common Stock Number of Shares: 11,851,125
-----------
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS)
Part 1
Item 1. Financial Statements
<TABLE>
<CAPTION>
1998 1997
(Unaudited)
<S><C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 7,994 $ 5,580
Trade accounts receivable, net of allowance for doubtful accounts
of $2,408 in 1998 and $2,100 in 1997....................................... 29,490 34,354
Prepaid expenses and other current assets................................... 4,314 3,669
Deferred compensation funds held in trust................................... 3,218 3,583
-------- --------
Total current assets........................................................ 45,016 47,186
Furniture and equipment, net.................................................. 12,763 13,671
Computer software costs, net.................................................. 7,539 26,727
Other intangible assets, net.................................................. 39,685 71,298
Net deferred tax asset........................................................ 34,927 23,238
Other......................................................................... 160 120
-------- --------
Total assets................................................................ $140,090 $182,240
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 1,811 $ 2,227
Accrued salaries, benefits and other liabilities............................. 8,498 7,461
Deferred revenue............................................................. 1,919 2,255
Acquired deferred compensation liability .................................... 3,218 3,583
-------- --------
Total current liabilities................................................... 15,446 15,526
-------- --------
Stockholders' equity:
Common stock-$.01 par value; 50,000,000 shares authorized; issued and
outstanding 11,851,125 as of March 31, 1998 and 11,850,094 as of
December 31, 1997.......................................................... 118 118
Additional paid-in capital.................................................... 250,904 250,892
Accumulated deficit........................................................... (126,229) (84,179)
Accumulated other comprehensive loss.......................................... (149) (117)
-------- --------
Total stockholders' equity.................................................. 124,644 166,714
-------- --------
Total liabilities and stockholders' equity.................................... $140,090 $182,240
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 1
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S><C>
Revenue.............................................................. $ 17,556 $25,725
Salaries, wages and benefits......................................... 9,904 10,875
Other operating expenses............................................. 5,920 6,054
Depreciation......................................................... 1,079 932
Amortization......................................................... 3,531 3,740
Impairment loss on intangible assets and restructuring charges....... 50,821 -
-------- -------
Operating (loss) income........................................ (53,699) 4,124
Interest income...................................................... 83 181
Interest expense .................................................... 80 98
-------- -------
(Loss) income before income taxes............................. (53,696) 4,207
(Benefit) provision for income taxes................................. (11,646) 1,679
-------- -------
Net (loss) income............................................ $(42,050) $ 2,528
======== =======
Basic net (loss) income per share.................................... $ (3.55) $ 0.21
======== =======
Basic shares used in per share calculation........................... 11,851 11,800
======== =======
Diluted net (loss) income per share.................................. $ (3.55) $ 0.21
======== =======
Diluted shares used in per share calculation......................... 11,851 12,077
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Paid-in Accumulated Other
Common Stock Capital Accumulated Deficit Comprehensive Loss
------------ ------------------ ------------------- ------------------
<S><C>
BALANCE AT DECEMBER 31, 1996 $118 $249,591 $ (47,220) $ (82)
------------------------------------------------------------------------------
Exercise of stock options - 613 - -
Tax benefits related to exercise of
stock options - 688 - -
Comprehensive loss
Net loss - - (36,959) -
Other comprehensive loss
Foreign currency translation
Unrealized depreciation of short-
term investments
Other comprehensive loss (35)
Comprehensive loss
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $118 $250,892 $ (84,179) $(117)
---------------------------------------------------------------------------
Exercise of stock options - 12 - -
Comprehensive loss
Net loss - - (42,050) -
Other comprehensive loss
Foreign currency translation - - - -
Other comprehensive loss (32)
Comprehensive loss
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998
(Unaudited) $118 $250,904 $(126,229) $(149)
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Total Stockholders'
Comprehensive Loss Equity
<S><C> ------------------ -------------------
BALANCE AT DECEMBER 31, 1996
$ - $202,407
-----------------------------------------
Exercise of stock options
- 613
Tax benefits related to exercise of
stock options
- 688
Comprehensive loss
Net loss (36,959) (36,959)
Other comprehensive loss
Foreign currency translation (31) (31)
Unrealized depreciation of short-
term investments (4) (4)
-----------------
Other comprehensive loss (35)
-----------------
Comprehensive loss $(36,994)
=================
---------------
BALANCE AT DECEMBER 31, 1997 $166,714
---------------
Exercise of stock options - 12
Comprehensive loss
Net loss (42,050) (42,050)
Other comprehensive loss
Foreign currency translation (32) (32)
-----------------
Other comprehensive loss (32)
-----------------
Comprehensive loss $(42,082)
=================
---------------
BALANCE AT MARCH 31, 1998
(Unaudited) $124,644
===============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S><C>
Cash flows from operating activities:
Net loss........................................................................ $(42,050) $ 2,528
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization............................................... 4,610 4,672
Impairment loss on intangible assets and restructuring charges.............. 50,821 -
Deferred tax provision...................................................... (11,689) 1,214
Changes in operating assets and liabilities:
Accounts receivable....................................................... 4,864 (5,856)
Income taxes receivable................................................... - 214
Prepaid expenses and other current assets................................. (645) 451
Accounts payable.......................................................... (416) 887
Accrued salaries, benefits and other liabilities.......................... 239 (1,483)
Deferred revenue.......................................................... (336) (386)
-------- -------
Net cash provided by operating activities............................... 5,398 2,241
-------- -------
Cash flows from investing activities:
Purchases of furniture and equipment............................................ (171) (1,991)
Computer software purchased or capitalized...................................... (2,475) (4,095)
Other intangible assets purchased or capitalized................................ (278) (473)
Proceeds from disposals of short-term investments............................... - 546
Other........................................................................... (40) -
-------- -------
Net cash used in investing activities................................... (2,964) (6,013)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options......................................... 12 453
Income tax benefit related to stock options..................................... - 558
Repayments of notes payable..................................................... - (1,184)
-------- -------
Net cash provided by (used in) financing activities..................... 12 (173)
-------- -------
Impact of currency fluctuations on cash and cash equivalents....................... (32) (18)
-------- -------
Increase (decrease) in cash and cash equivalents .................................. 2,414 (3,963)
Cash & cash equivalents - beginning of period...................................... 5,580 13,302
-------- -------
Cash & cash equivalents - end of period............................................ $ 7,994 $ 9,339
======== =======
Supplemental cash flow information - cash paid during period for interest $ 40 $ 111
======== =======
- cash paid during period for income taxes $ - $ 306
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of the Company have been
prepared in accordance with generally accepted accounting principles. In the
opinion of management, these statements reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
Company's financial condition, results of operations, changes in stockholders'
equity and cash flows for the periods presented. The results of operations for
the period ended March 31, 1998 may not be indicative of the results that may be
expected for the full year ending December 31, 1998. These financial statements
and notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of the Company for the
year ended December 31, 1997 as contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (1934 Act File No. 0-25378).
(2) IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES
During the three months ended March 31, 1998, the Company recorded an impairment
loss on intangible assets and restructuring charges of approximately $50.8
million. Approximately $50.0 million of the charges represented the write-down
of certain intangible assets. This write-down arose primarily due to the failure
of the Company's Integrated Solutions Unit to execute agreements with customers
for large scale custom solutions and the Company's determination that the Unit's
revenue which could be anticipated from future agreements of this type was
significantly less than had been previously anticipated. As the products
marketed by the Integrated Solutions Unit were intended to integrate the
products and technologies of the Company's other business units, this
determination resulted in a reduced expectation of future cash flows from the
Company's intangible assets across most of its business units and accordingly,
an impairment in value of these intangible assets. The remainder of the charges,
totaling approximately $800,000, relate primarily to accruals for the cost of
employee severance and facilities reductions. The following table summarizes the
impairment loss on intangible assets and computer software costs:
<TABLE>
<CAPTION>
Pre-Charge Post-Charge
Asset Net Book Value Write Down Net Book Value
- -----------------------------------------------------------------------------------------------------------
<S><C>
Databases $ 2,871,000 $ 1,649,000 $ 1,222,000
CPHA License 9,113,000 ---- 9,113,000
Goodwill 46,326,000 20,644,000 25,682,000
Customer Bases 2,987,000 2,028,000 959,000
Methodologies 3,549,000 2,355,000 1,194,000
Assembled Workforce 3,266,000 1,751,000 1,515,000
Tradename 1,029,000 1,029,000 ----
Software 28,106,000 20,567,000 7,539,000
==========================================================================
$ 97,247,000 $ 50,023,000 $ 47,224,000
==========================================================================
</TABLE>
(3) INCOME TAXES
During the quarter ended March 31, 1998, the Company recorded a valuation
allowance of $5.0 million to reduce the carrying value of its deferred tax asset
to an amount management believes is realizable through future taxable income.
Page 5
<PAGE>
(4) NEW ACCOUNTING ANNOUNCEMENTS
SFAS No. 130
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) as of January 1, 1998. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Adoption of SFAS No. 130 does not have any material effect on current or prior
period financial displays presented by the Company. The Company has selected
the presentation option of including comprehensive income (loss) in its
Consolidated Statements of Changes in Stockholders' Equity.
SOP 97-2
The Company adopted provisions of Position 97-2, "Software Revenue Recognition"
(SOP 97-2) issued by The American Institute of Certified Public Accountants
Accounting Standards Executive Committee as of January 1, 1998. SOP 97-2
provides revised and new guidance on when and in what amounts revenue should be
recognized for licensing, selling, leasing or otherwise marketing computer
software. Adoption of SOP 97-2 does not have any material effect on the
Company's revenue recognition policies.
(5) EARNINGS PER SHARE
The Company adopted SFAS No. 128 during the fourth quarter of the year ended
December 31, 1997. SFAS No. 128 establishes revised standards for computing and
presenting earnings per share (EPS) data. It requires dual presentation of
"basic" and "diluted" EPS on the face of the statements of operations and a
reconciliation of the numerators and denominators used in the basic and diluted
EPS calculations. As required by SFAS No. 128, EPS data for prior periods
presented have been restated to conform to the new standard.
Basic EPS is calculated by dividing net earnings (loss) by the weighted average
number of common shares outstanding for the applicable period. Diluted EPS is
calculated after adjusting the numerator and the denominator of the basic EPS
calculation for the effect of all potential dilutive common shares outstanding
during the period. Information related to the calculation of net earnings per
share of common stock is summarized as follows:
<TABLE>
<CAPTION>
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------
<S><C>
For the three months ended
March 31, 1997
Basic EPS: 2,528 11,800 0.21
Incremental shares from
assumed exercise of dilutive
options and warrants:
- 277 -
=============================================
Diluted EPS 2,528 12,077 0.21
=============================================
</TABLE>
For the three months ended March 31, 1998, no exercise of options is assumed
since their effect is antidilutive. The weighted average number of common shares
outstanding is 11,851,000.
Page 6
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUE. Revenue for the three months ended March 31, 1998 was $17.6 million, a
decrease of $8.2 million or 32% less than the three months ended March 31, 1997.
The decrease was primarily the result of the failure of the Company's Integrated
Solutions Unit to execute agreements with customers for large scale custom
solutions and reduced revenue from the Company's Implementation Unit.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were $9.9 million for
the three months ended March 31, 1998 as compared to $10.9 million for three
months ended March 31, 1997, but increased as a percentage of revenue to 56% for
the three month period as compared to 42% for the same period in 1997. The
decrease in these expenses was primarily the result of the Company reducing its
overall level of employment during 1997, but with overall employment still at a
level in anticipation of higher revenue for the three months ended March 31,
1998, than was actually achieved.
OTHER OPERATING EXPENSES. Other operating expenses, which include occupancy,
travel and consulting expenses, were $5.9 million for the three months ended
March 31, 1998 as compared to $6.1 million for the three months ended March 31,
1997, but increased as a percentage of revenue to 34% for the three month period
as compared to 24% for the same period in 1997. The decrease in these expenses
was a result of cost control efforts relating to travel and the use of outside
consultants, but with the expenses still at a level in anticipation of higher
revenue for the three months ended March 31, 1998, than was actually achieved.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $4.6 million
for the three months ended March 31, 1998, as compared to $4.7 million for the
three months ended March 31, 1997, but increased as a percentage of revenue to
26% for the three month period as compared to 18% for the same period in 1997.
The decrease in these expenses was a result of the effect of the write-off of
certain intangible assets during 1997, with the increase in these expenses as a
percentage of revenue the result of lower revenue during the three months ended
March 31, 1998, as compared to the comparable period in 1997.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES. These charges
arose primarily due to the failure of the Company's Integrated Solutions Unit to
execute agreements with customers for large scale custom solutions and the
Company's determination that the Unit's revenue which could be anticipated from
future agreements of this type was significantly less than had been previously
anticipated. As the products marketed by the Integrated Solutions Unit were
intended to integrate the products and technologies of the Company's other
business units, this determination resulted in a reduced expectation of future
cash flows from the Company's intangible assets across most of its business
units and, accordingly, an impairment in value of these intangible assets. The
remainder of the charges, totaling approximately $800,000, relate primarily to
accruals for the cost of employee severance and facilities reductions.
INTEREST INCOME AND EXPENSE. Net interest income was $3,000 for the three months
ended March 31, 1998 compared with net interest income of $83,000 for the three
months ended March 31, 1997. This change was the result of a lower invested
balance in 1998.
INCOME TAXES. During the quarter ended March 31, 1998, the Company recorded a
valuation allowance of $5.0 million to reduce the carrying value of its deferred
tax asset to an amount management believes is realizable through future taxable
income. Exclusive of this valuation allowance, the Company's effective tax rate
was 31% for the three months ended March 31, 1998, compared with 39.9% for the
three months ended March 31, 1997. This lower rate is due primarily to the
effect of the write-off of the intangible assets associated with the impairment
loss as discussed above.
Page 7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $25 million revolving line of credit (subject to certain
borrowing limitations) with First Union National Bank ("First Union") for
general corporate purposes including working capital requirements and
acquisitions. Borrowings under this line are collateralized by substantially all
of the Company's assets and bear interest at varying rates based on an index
tied to First Union's prime rate or LIBOR. The Company is required to pay a
commitment fee on the average daily unused portion of the facility at a rate
from 0.25% to 0.375% per annum, depending on the Company's debt/cash flow ratio.
The credit facility also contains financial covenants applicable to the Company,
including debt/cash flow ratios and ratios of debt to capital. As of March 31,
1998, the Company was in compliance with all such financial covenants and had a
maximum borrowing capacity of approximately $11.0 million, and there were no
borrowings outstanding under the facility. The credit facility expires on July
31, 2001.
YEAR 2000 COMPUTER SOFTWARE
The Company has performed a review of its computer systems and software and has
begun to implement the required revisions in anticipation of the Year 2000. The
Company believes that its primary exposure to the issue is in the ability of its
systems to recognize four digit references versus two digit references (i.e.,
1998 versus 98) and to accept such information from its customers in the process
of building its databases. At this time, the Company has completed the required
revisions to certain of its main processing systems to make them Year 2000
compliant and has scheduled the remainder of its efforts such that they should
be completed by June 1999. The Company believes that to a significant extent,
the necessary revisions to its systems and products will be made during the
planned updates and edits to its products offerings. As a result, the cost of
the efforts performed to date and the incremental future costs the Company
expects to incur to make all of its systems and processes Year 2000 compliant
are not anticipated to be material to the Company's results of operations,
liquidity or capital resources.
While the Company, in the process of making its systems Year 2000 compliant,
intends to design algorithms to test data received from its customers and
convert it to a usable format, there can be no assurances that the Company will
not experience difficulties in utilizing data provided by its customers who have
not taken the necessary steps to make their internal systems Year 2000
compliant. It is not currently possible to estimate the effect on the Company's
results of operations from any such difficulties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Page 8
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(B) REPORTS ON FORM 8-K
A current Report on Form 8-K, dated April 17, 1998, was filed in
connection with the Company's results for the three months ended March 31, 1998.
The Report contained a summarized version of that quarter's financial
statements.
Page 9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCIA Inc.
_________
(Registrant)
Date: May 15, 1998
By: ________________________________
Barry C. Offutt
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Page 10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,994
<SECURITIES> 0
<RECEIVABLES> 29,490
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,016
<PP&E> 12,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,090
<CURRENT-LIABILITIES> 15,446
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 250,904
<TOTAL-LIABILITY-AND-EQUITY> 140,090
<SALES> 17,556
<TOTAL-REVENUES> 17,556
<CGS> 0
<TOTAL-COSTS> 71,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> (53,696)
<INCOME-TAX> (11,646)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,050)
<EPS-PRIMARY> (3.55)
<EPS-DILUTED> (3.55)
</TABLE>
