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, 1997
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
--- ---
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. [X]
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 27, 1998, was $158,622,210.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 27, 1998 was 11,850,094.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III.
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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(TM)"), 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"). 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 261,591 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.
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 approximately 400 customers, including hospitals, integrated delivery
systems, self-insured employers, pharmaceutical companies and managed care
organizations. The Company's less complex database products (formerly referred
to as syndicated products) are sold to over 7,000 customers.
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By utilizing its core collection of proprietary data standardization
methodologies and value-added clinical measurement tools, HCIA creates clinical
databases and information systems and products from many large and disparate
incoming data streams. For example, the Company's proprietary ICCS System(TM)
allows for the standardization and comparison of detailed clinical data across a
broad range of data sources. The Company's other proprietary data-handling and
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
understanding and modifying medical practice patterns than information derived
from traditional health care data sources.
SYSTEMS AND PRODUCTS
HCIA offers a range of database systems and products, 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
systems and products to measure and analyze the cost and quality of medical
interventions. Buyers, such as managed care organizations, indemnity insurers
and self-insured employers, utilize the Company's information and analyses on
medical resource usage and outcomes to fortify their overall management of
medical costs and 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 databases and products to analyze the size and
composition of addressable markets for their products and to evaluate the costs
and benefits associated with the distribution of their products into the health
care economy.
The Company's delivers its systems and products to the U.S. market through three
business units: Content Products, which focuses on distributing standard data
content products; Integrated Solutions, which aligns multiple HCIA competencies
to create an integrated solution for a client; and Implementation, which
provides data-focused implementation services to providers. The company's
European operations, HCIA-Europe, offers services similar to the Company's
domestic units to hospitals and insurance organizations predominately located in
the United Kingdom and Spain.
CONTENT PRODUCTS
The Content Products unit markets the Company's database products to hospitals,
integrated delivery systems and professional services firms that service the
provider market. Content Products are distributed to more than 1,600 hospitals
through HCIA's partnerships with 20 state and specialty hospital associations.
Each association acts as a marketing agent for HCIA, while HCIA collects data
from the association's member-hospitals, builds a membership-specific data
mart and provides access to the data mart to the members and the association
through a variety of methods including hard-copy reports, electronic databases
provided through HCIA's proprietary software applications and, beginning in
1998, Internet-based analytical systems.
Other Content 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), and
include databases and publications that allow customers to analyze different
sub-sectors of the health care industry (e.g., The 100 Top Hospitals study).
HCIA also markets to managed care clients a number of more sophisticated Content
Products containing national and regional normative data on length of stay,
costs and medical necessity. The Company markets these Content 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 Content Products generally are
used for utilization management, claims adjudication and actuarial forecasting.
Most of the Company's Content Products customer contracts provide that as the
Company extracts data from the customer (as part of the process of delivering a
system or product to the customer), the data become part of the Company's
database. The Company supplements its databases with data it purchases or
licenses from federal and state governments, trade groups and other industry
sources. The Company maintains several terabytes of live
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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.
In addition to creating and distributing many of the Company's databases, the
Content Products unit also supports Databridge(TM), HCIA's collection of
proprietary data-handling technologies. A typical HCIA 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. A significant component of
Databridge(TM) is HCIA's International Clinical Classification System, or 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 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), and is used by the Company to create the most clinically
detailed portion of its database.
INTEGRATED SOLUTIONS
While the Content Products unit brings narrowly focused databases and products
to a large number of customers, the Integrated Solutions unit combines many of
the Company's databases and methodologies into complex database systems for
customers, including managed care organizations, self-insured employers and
pharmaceutical and medical device manufacturers. Database systems typically
include large amounts of customer-specific data that are standardized into
HCIA's formats and delivered back to the customer together with comparative data
and supplemental analyses from HCIA.
Deliverables from the Integrated Solutions unit may also include data collected
through patient-centric surveys that are merged with transactional data from a
customer's core systems. In combining key information such as health risk
assessments, actual medical utilization experience, and post-utilization
resource consumption and behavior, the Company is able to create a detailed and
valuable portrait of the full continuum of care for the customer.
IMPLEMENTATION
In addition to providing databases and application software, the Company,
utilizing proprietary methodologies, assists providers with the implementation
of product-line specific re-engineering solutions. The Company's knowledge-based
clinical implementation programs allow HCIA to leverage its databases 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 and an implementation
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management team to assist customers in reducing clinical resource consumption
and improving outcomes in major specialties, including invasive cardiovascular,
vascular, orthopaedics, oncology and medical cardiology.
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. In 1996 and 1997, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 28% and 31% of its revenue during 1996 and 1997,
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 located in the three primary business units and HCIA-Europe. 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 specialized and is able to draw on
the Company's clinical implementation management team. In addition, HCIA has
entered into agreements with other health care information systems vendors
whereby the Company's products are marketed through their respective sales
forces. The Company also approaches each of the major market constituencies
through the sale of lower-priced Content products, such as directory
publications, and also uses efforts such as the 100 Top Hospitals study 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 less complex database products.
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. 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, and offer a broader
range of systems and products. 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, large data processing and information companies and
systems consultants and integrators. 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
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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 one patent, 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 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, and
could, in certain circumstances, limit the Company's access to certain types of
information. 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.
The U.S. Food and Drug Administration (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 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.
EMPLOYEES
As of December 31, 1997, the Company had 684 employees, including 79 in sales
and marketing, 318 in health care data, 176 in technology and 111 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
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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 may continue the acquisition of methodological,
analytical and technical resources that will further enhance and expand the
Company's systems and products.
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'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 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. The Company's operating results for any particular quarterly or
annual period may not be indicative of results for future periods.
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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 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
greater financial, technical, product development and marketing resources than
the Company, and broader product offerings. 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 1996 and 1997, the Company's ten largest customers
accounted for approximately 28% and 31%, 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
implementation products, 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 has been, and may continue to
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
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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 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 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. 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, and could, in certain circumstances, limit the
Company's access to certain types of information. 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.
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.
YEAR 2000 ISSUES. The Company's primary exposure to the Year 2000 is the ability
of its systems to recognize four digit versus two digit references (i.e., 1998
versus 98) and to accept such information from its customers in the process of
building its databases. The Company currently believes the incremental costs
that the Company has and expects to incur, to make its systems and products Year
2000 compliant, will not be material to the Company's results of operations,
liquidity or capital resources. However, 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.
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 66,000 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 47,000 square
feet of office space in
9
<PAGE>
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, 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.
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
- ---- --- --------
Barry C. Offutt 36 Senior Vice President and Chief Financial
Officer
Jean Chenoweth 51 Senior Vice President-Industry Relations
Charles A. Berardesco 39 Senior Vice President, General Counsel and
Secretary
Donald S. Good, Jr. 35 Senior Vice President-Operations
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. He was appointed Senior
Vice President-Operations, in August 1997. Prior to May 1996, he was a
healthcare consultant with Arthur Andersen & Co.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
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:
1996 1997
High Low High Low
---- --- ---- ---
First Quarter $55-3/4 $41-7/8 $42 $16-3/4
Second Quarter 67-7/8 45-5/8 34-1/2 15-1/8
Third Quarter 67-3/8 50-1/16 33-3/8 13
Fourth Quarter 36-1/8 23-1/4 16-3/16 11-3/8
As of February 28, 1998, there were 122 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 in August 1996, 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,
1993 1994 1995(1) 1996(1) 1997(2)
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue $ 28,111 $ 30,711 $ 48,015 $ 73,520 $ 82,905
Salaries, wages and benefits 14,168 15,457 21,932 32,688 40,811
Other operating expenses 8,611 8,625 12,055 17,058 24,463
Depreciation and amortization 4,595 4,826 6,864 12,670 19,558
Write-off of acquired in-process research and development costs -- -- 12,152 48,065 --
Impairment loss on intangible assets and restructuring charges -- -- -- -- 41,129
-------- -------- -------- -------- --------
Operating income (loss) 737 1,803 (4,988) (36,961) (43,056)
Interest income -- 111 1,290 1,110 447
Interest expense 111 131 187 530 401
-------- -------- -------- -------- --------
Income (loss) before income taxes, minority interest
in loss (income) of consolidated subsidiaries and cumulative
effect of change in accounting for income taxes 626 1,783 (3,885) (36,381) (43,010)
Provision (benefit) for income taxes 362 759 (1,554) 5,886 (6,051)
Minority interest in loss (income) of consolidated subsidiaries 90 (3) (74) -- --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting for income taxes 354 1,021 (2,405) (42,267) (36,959)
Cumulative effect of change in accounting for income taxes (142) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 212 $ 1,021 $ (2,405) $(42,267) $(36,959)
======== ======== ======== ======== ========
Net income (loss) per share $ 0.19 $ (0.31) $ (4.19) $ (3.12)
======== ======== ======== ========
Shares used in per share calculation 5,518 7,733 10,096 11,834
======== ======== ======== ========
BALANCE SHEET DATA:
Working capital $ 3,852 $ 5,620 $ 35,671 $ 36,996 $ 31,660
Total assets 41,122 40,865 108,401 223,196 182,240
Long-term liabilities, excluding current installments 2,136 1,835 699 2,305 --
Stockholders' equity 32,762 34,371 98,044 202,407 166,714
</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.
(2) During 1997, the Company recorded charges related to the write-down of
certain intangible assets as well as reserves for the costs of restructuring
its Implementation unit. Exclusive of such charges and related income tax
effects, net loss per share would have been $(0.18) for 1997.
<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.
The Company has made a substantial investment in the acquisition and development
of its core collection of methodologies, clinical measurement tools and
technical resources. In addition to internal development efforts, the Company
has made a series of acquisitions of other health care information companies,
product lines and data resources. The Company's strategy is to integrate and
leverage these developed and acquired 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. The
Company does not track profitability by product line since many of the Company's
resources are utilized throughout its systems and products.
In connection with certain 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. During 1997, the Company recorded a charge totaling $41.1
million related to an impairment loss on intangible assets and a restructuring
charge related primarily to the Company's 1996 acquisition of LBA Health Care
Management, Inc. ("LBA"). 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 dates of acquisition. See Note 1 of
the Notes to Consolidated Financial Statements.
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 $6.9 million, $14.4 million and $14.9
million during 1995, 1996 and 1997, respectively. Consequently, the Company has
recorded amortization expense of $5.2 million, $10.1 million and $15.4 million
during 1995, 1996 and 1997, 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.
During 1997, the Company reorganized its internal sales and marketing structure
into four business units: Content, which focuses on distributing standard data
content products; Integrated Solutions, which aligns multiple HCIA competencies
to create an integrated solution for a client; Implementation, which provides
data-focused implementation services to providers; and HCIA-Europe. Effective in
1997, the Company began tracking its revenue through the four units, in lieu of
its historical tracking of revenue by sales of decision support systems and
syndicated products.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain items
from the consolidated statements of operations of the Company expressed as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
---- ---- ----
<S> <C>
Revenue 100% 100% 100%
Salaries, wages and benefits 46 45 49
Other operating expenses 25 23 30
Depreciation and amortization 14 17 24
Write-off of acquired in-process research and development costs 25 65 --
Impairment loss on intangible assets and restructuring charges -- -- 49
Operating loss (10) (50) (52)
Interest income, net 2 1 --
Loss before income taxes (8) (49) (52)
Provision (benefit) for income taxes (3) 8 (7)
Net loss (5)% (57)% (45)%
</TABLE>
9
<PAGE>
1997 COMPARED TO 1996
Revenue
Revenue for 1997 was $82.9 million, an increase of $9.4 million or 13% over
1996. The increase was primarily the result of increased sales in 1997 by the
Company's Integrated Solutions and Implementation units.
The increase in Integrated Solutions sales was the result of the inclusion of a
full year's revenue from HealthChex, Inc. ("HealthChex") and Response Healthcare
Information Management, Inc. ("Response"), both of which were acquired in 1996,
and increased penetration of the pharmaceutical market. Sales by the
Implementation unit increased as a result of the inclusion of a full year's
revenue of LBA, which was acquired in 1996.
During 1997, revenue historically classified as from sales of decision support
systems represented approximately 85% of revenue and syndicated products
represented the remaining 15% of revenue. All of the Company's revenue growth in
1997 was the result of increased sales of decision support systems.
Salaries, Wages and Benefits
Salaries, wages and benefits increased to 49% of revenue for 1997 from 45% for
1996. The increase was primarily the result of the Company establishing staffing
levels in anticipation of a higher revenue level than actually achieved during
the second and third quarters of 1997 and the Company's decision to maintain
staffing levels in the fourth quarter of 1997 at a level which would be
necessary to support higher levels of revenue for 1998.
Other Operating Expenses
Other operating expenses, which include occupancy, travel and consulting
expenses, increased to 30% of revenue for 1997 from 23% for 1996. This increase
was a result of the Company establishing levels for certain of these expenses,
primarily consulting and occupancy, in anticipation of a higher revenue level
than actually achieved in 1997.
Depreciation and Amortization
Depreciation and amortization increased to 24% of revenue for 1997 from 17% for
1996. This increase was primarily a result of the additional amortization and
depreciation associated with the acquisitions of HealthChex, Response and LBA.
Write-off of Acquired In-process Research and Development Costs
In connection with the acquisitions of Response, HealthChex and LBA during 1996,
the Company acquired ongoing research and development activities. The Company
recorded one-time charges totaling $48.1 million during 1996, 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," and for which
future alternative uses did not exist.
Impairment Loss on Intangible Assets and Restructuring Charges
During 1997, the Company recorded an impairment loss on intangible assets and
restructuring charges of approximately $41.1 million. Approximately $37.6
million of the charges represented the write-down of certain intangibles, which
arose from the Company's acquisition of LBA, to their estimated realizable
value. The charge resulted from the assessment that the Company's Implementation
unit, formed upon the acquisition of LBA, would not generate the cash flows
anticipated at the time of the LBA acquisition. The remainder of the charges,
totaling $3.5 million, represented reserves for the cost of employee severance,
facilities reduction, and customer allowances related to product
discontinuances, which were incurred primarily in connection with restructuring
the ongoing operations of the Implementation unit.
Interest Income and Expense
Net interest income was $46,000 for 1997 compared with $580,000 for 1996. This
change was the result of a lower invested balance in 1997 due to the use of cash
for acquisitions and to fund internal development costs and equipment
acquisitions.
Income Taxes
The Company's effective income tax rate was (14)% for 1997 compared with 16% for
1996. The change in the rate results from the effect of the non-deductible
write-off of the in-process research and development costs resulting from
certain acquisitions during 1996, which was partially offset by the increased
amortization of non-deductible goodwill during 1997 (see Note 8 of the Notes to
Consolidated Financial Statements).
10
<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," and for which future alternative uses did not exist.
Interest Income and Expense
Net interest income was $580,000 for 1996 compared with $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 income 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.
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 and repaid such borrowings with
a portion of the net proceeds to the Company from a public offering of the
Company's common stock.
During 1997, the Company reduced the amount available under the revolving line
of credit and currently maintains a $25 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. 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, 1997, the Company was in
compliance with all such financial covenants and had a maximum borrowing
capacity of $11.7 million, and there were no borrowings outstanding under the
facility. The credit facility reduces to $18.8 million in July 1999, $12.5
million in July 2000 and expires on July 31, 2001.
During 1995, 1996 and 1997, the Company generated net cash from operations of
approximately $3.1 million, $10.3 million and $12.8 million, respectively.
During 1996 and 1997, approximately $12.1 million and $4.8 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 (used) by financing activities during 1995, 1996
and 1997 was approximately $66.2 million, $116.0 million and ($.4) million,
respectively. The cash generated by financing activities in 1995 and 1996 was
primarily 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, software development costs and capital expenditures.
The Company made capital expenditures (including capitalized leases) totaling
$3.1 million, $6.4 million and $5.6 million during 1995, 1996 and 1997,
respectively. As of December 31, 1997, the Company had net working capital of
$31.7 million, including cash and cash equivalents in the amount of $5.6
million, and did not have any material commitments for capital expenditures.
In April 1995, the Company completed the acquisition of all of the outstanding
capital stock of Datis Corporation ("Datis") for $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 and 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 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 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.
12
<PAGE>
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 product 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.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In
addition, the American Institute of Certified Public Accountants issued
Statement of Position No. 97-2, "Software Revenue Recognition" during 1997. The
Company will adopt the provisions of these pronouncements in 1998 and has
determined that they will not have a material effect on its financial position
or results of operation and is assessing their effect on its financial statement
presentation and disclosure.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-K contain forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company and its management. These statements are not
guarantees of future performance and involve a number of risks and uncertainties
which are difficult to predict. Therefore, actual outcomes and results could
differ materially from those indicated by such forward-looking statements. HCIA
undertakes no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements are (i) variations in
quarterly results, (ii) the assimilation of acquisitions, (iii) the management
of the Company's growth and expansion, (iv) dependence on key personnel, (v)
development by competitors of new or superior products or entry into the market
of new competitors, (vi) dependence on major customers, (vii) dependence on
intellectual property rights, (viii) integrity, availability and reliability of
the Company's data, (ix) volatility of the Company's stock price, (x) changes in
the health care industry from both a regulatory and financial perspective, (xi)
implementation of required changes to computer systems and software for the year
2000, and (xii) other risks identified from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HCIA INC.:
We have audited the accompanying consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Baltimore, Maryland
January 22, 1998
14
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands, except per share data)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C>
Revenue $ 48,015 $ 73,520 $ 82,905
Salaries, wages and benefits 21,932 32,688 40,811
Other operating expenses 12,055 17,058 24,463
Depreciation 1,619 2,567 4,199
Amortization 5,245 10,103 15,359
Write-off of acquired in-process research and development costs 12,152 48,065 --
Impairment loss on intangible assets and restructuring charges -- -- 41,129
-------- -------- --------
Operating loss (4,988) (36,961) (43,056)
Interest income 1,290 1,110 447
Interest expense 187 530 401
-------- -------- --------
Loss before income taxes (3,885) (36,381) (43,010)
Provision (benefit) for income taxes (1,554) 5,886 (6,051)
Minority interest in income of consolidated subsidiaries (74) -- --
-------- -------- --------
Net loss $ (2,405) $(42,267) $(36,959)
======== ======== ========
Net loss per share $ (0.31) $ (4.19) $ (3.12)
======== ======== ========
Shares used in per share calculation 7,733 10,096 11,834
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,302 $ 5,580
Short-term investments 510 --
Trade accounts receivable, net of allowance for doubtful accounts
of $1,042 in 1996 and $2,100 in 1997 32,122 34,354
Prepaid expenses and other current assets 4,225 3,669
Deferred compensation funds held in trust 5,321 3,583
--------- ----------
Total current assets 55,480 47,186
Furniture and equipment, net 12,188 13,671
Computer software costs, net 20,425 26,727
Other intangible assets, net 115,601 71,298
Net deferred tax asset 17,074 23,238
Other 123 120
Deferred compensation funds held in trust 2,305 --
--------- ----------
Total assets $ 223,196 $ 182,240
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,315 $ 2,227
Accrued salaries, benefits and other liabilities 8,078 7,430
Notes payable 1,718 31
Deferred revenue 2,052 2,255
Acquired deferred compensation liability 5,321 3,583
--------- ----------
Total current liabilities 18,484 15,526
Acquired deferred compensation liability 2,305 --
--------- ----------
Total liabilities 20,789 15,526
--------- ----------
Stockholders' equity:
Preferred stock -- $0.01 par value; 500,000 shares authorized;
no shares issued and outstanding -- --
Common stock -- $0.01 par value; 50,000,000 shares authorized; issued and
outstanding 11,781,458 as of December 31, 1996 and 11,850,094 as of December 31, 1997 118 118
Additional paid-in capital 249,591 250,892
Accumulated deficit (47,220) (84,179)
Cumulative unrealized appreciation of short-term investments 4 --
Cumulative effect of currency translation adjustment (86) (117)
--------- ----------
Total stockholders' equity 202,407 166,714
--------- ----------
Total liabilities and stockholders' equity $ 223,196 $ 182,240
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Cumulative Cumulative
Unrealized Effect of
Additional Appreciation Currency Total
Preferred Common Paid-In Accumulated of Short-Term Translation Stockholders'
Stock Stock Capital Deficit Investments Adjustment Equity
----- ---- -------- --------- ----- ------ ---------
<S> <C>
BALANCE AT
DECEMBER 31, 1994 $ -- $ 54 $ 36,876 $ (2,548) $ -- $ (11) $ 34,371
Sale of common stock to
the public -- 36 66,006 -- -- -- 66,042
Net loss -- -- -- (2,405) -- -- (2,405)
Effect of currency
translation adjustment -- -- -- -- -- (8) (8)
Unrealized appreciation of
short-term investments -- -- -- -- 44 -- 44
----- ---- -------- --------- ----- ------ ---------
BALANCE AT
DECEMBER 31, 1995 $ -- $ 90 $102,882 $ (4,953) $ 44 $ (19) $ 98,044
Exercise of stock options -- -- 638 -- -- -- 638
Income tax benefits related to exercise
of stock options -- -- 1,128 -- -- -- 1,128
Sale of common stock to
the public -- 23 116,233 -- -- -- 116,256
Issuance of stock in connection
with an acquisition -- 5 28,710 -- -- -- 28,715
Net loss -- -- -- (42,267) -- -- (42,267)
Effect of currency
translation adjustment -- -- -- -- -- (67) (67)
Unrealized depreciation of
short-term investments -- -- -- -- (40) -- (40)
----- ---- -------- --------- ----- ------ ---------
BALANCE AT
DECEMBER 31, 1996 $ -- $118 $249,591 $(47,220) $ 4 $ (86) $202,407
Exercise of stock options -- -- 613 -- -- -- 613
Income tax benefits related to exercise
of stock options -- -- 688 -- -- -- 688
Net loss -- -- -- (36,959) -- -- (36,959)
Effect of currency
translation adjustment -- -- -- -- -- (31) (31)
Unrealized depreciation of
short-term investments -- -- -- -- (4) -- (4)
----- ---- -------- --------- ----- ------ ---------
BALANCE AT
DECEMBER 31, 1997 $ -- $118 $250,892 $(84,179) $ -- $(117) $166,714
===== ==== ======== ========= ===== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(in thousands)
HCIA INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C>
Cash flows from operating activities:
Net loss $ (2,405) $ (42,267) $ (36,959)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,864 12,670 19,558
Write-off of acquired in-process research and development costs 12,152 48,065 --
Impairment loss on intangible assets and restructuring charges -- -- 41,129
Deferred tax provision (benefit) (3,625) 5,606 (6,164)
Changes in operating assets and liabilities:
Trade accounts receivable (7,078) (12,057) (4,846)
Prepaid expenses and other current assets (532) (1,965) 697
Accounts payable 215 (1,247) 912
Accrued salaries, benefits and other liabilities (816) 812 (1,587)
Deferred revenue (1,714) 674 88
Minority interest 75 -- --
---------- ----------- ----------
Net cash provided by operating activities 3,136 10,291 12,828
---------- ----------- ----------
Cash flows from investing activities:
Purchases of furniture and equipment (3,145) (6,357) (5,643)
Cost of acquisitions, net of cash acquired (35,271) (118,050) (104)
Computer software costs purchased or capitalized (6,151) (12,671) (13,389)
Other intangible assets purchased or capitalized (716) (1,742) (1,506)
Purchases of short-term investments (69,312) (59,640) --
Proceeds from disposals of short-term investments 46,077 82,370 506
Payments on notes receivable 1,551 -- --
Other 104 (67) 3
---------- ----------- ----------
Net cash used in investing activities (66,863) (116,157) (20,133)
---------- ----------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options -- 638 613
Income tax benefits related to stock options -- 1,128 688
Proceeds from public offerings 66,042 116,256 --
Acquisition related borrowings -- 86,000 --
Repayment of acquisition related borrowings -- (86,000) --
Fees paid to establish credit facilities -- (520) --
Borrowing from related party 2,915 -- --
Repayments of related party borrowing (1,900) -- --
Repayments of notes payable (513) (1,246) (1,687)
Principal payments on capital leases (315) (211) --
---------- ----------- ----------
Net cash provided by (used in) financing activities 66,229 116,045 (386)
---------- ----------- ----------
Impact of currency fluctuations on cash and cash equivalents (8) (67) (31)
---------- ----------- ----------
(Decrease) increase in cash and cash equivalents 2,494 10,112 (7,722)
Cash and cash equivalents--beginning of year 696 3,190 13,302
========== ========== ==========
Cash and cash equivalents--end of year $ 3,190 $ 13,302 $ 5,580
========== ========== ==========
Supplemental cash flow information
-- cash paid during the year for interest $ 89 $ 461 $ 367
========== ========== ==========
-- cash paid during the year for income taxes $ 1,088 $ 790 $ 415
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 and 1997
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
In 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 261,591 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 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>
<TABLE>
<CAPTION>
HealthChex
-----------------------
Life of
Asset
-----
<S> <C>
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
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
HealthChex, Inc. ("HealthChex") for $11,503,000 in cash. The parties have made
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 1997, the Company recorded a $37,649,000 impairment loss on intangible
assets related to the LBA acquisition and reduced the economic lives of certain
of the remaining intangible assets (see note 4).
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.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
year ended December 31, 1996 are presented below and have been prepared assuming
that the acquisitions discussed above had been made as of January 1, 1996.
1996
-----------
(unaudited)
Revenue $93,568
Net income $ 7,192
Net income per share $ 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 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, 1996,
the Company's short-term investments, which are classified as an available for
sale securities portfolio, consisted of municipal bonds, which had a fair value
and a cost of $510,000 and $506,000 respectively.
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 1996 and 1997, proceeds from sales of the securities totaled $82,370,000
and $506,000, respectively. Gross realized gains and losses on sales of the
securities were immaterial in 1996 and 1997.
(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 $7,260,000, $13,229,000 and
$13,389,000 of computer software costs in 1995, 1996 and 1997, 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
$2,048,000, $3,816,000 and $6,204,000 during 1995, 1996 and 1997, respectively.
Accumulated amortization for computer software was $10,326,000 and $16,530,000
at December 31, 1996 and 1997, 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 $3,686,000 and
$3,424,000 at December 31, 1996 and 1997, 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.
(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. The Company's foreign
operations account for less than 10% of assets and revenue of the Company for
1997.
(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
became 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.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS
No. 128"), which was effective for financial statements issued for periods
ending after December 15, 1997. This Statement replaces the presentation of
primary earnings per share ("EPS") with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures. The Company adopted
SFAS No. 128 in 1997. While SFAS No. 128 requires restatement of all prior
period EPS data presented, there was no effect on the Company's prior period EPS
data for the years ended December 31, 1995 and 1996 because the Company
experienced losses in those years. The number of shares used in these
calculations 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).
(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 1995 and 1996 have been reclassified to conform to the
presentation for 1997.
(3) FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
1996 1997
------------ ------------
Computer equipment $ 15,274,000 $ 17,896,000
Office furniture and equipment 1,881,000 4,329,000
Other 516,000 919,000
------------ ------------
$ 17,671,000 $ 23,144,000
Less accumulated depreciation (5,483,000) (9,473,000)
------------ ------------
$ 12,188,000 $ 13,671,000
============ ============
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) OTHER INTANGIBLE ASSETS
Other intangible assets at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
Capitalized Accumulated Carrying Weighted
Cost Amortization Value Average Life
------------- ------------- ------------- ------------
<S> <C>
Databases $ 8,340.000 $ 5,457,000 $ 2,883,000 5
CPHA license and prepaid royalties 14,031,000 4,711,000 9,320,000 17
Goodwill 53,289,000 6,230,000 47,059,000 19
Customer bases 3,395,000 287,000 3,108,000 7
Methodologies 4,138,000 437,000 3,701,000 5
Assembled workforce 3,682,000 316,000 3,366,000 9
Other 2,289,000 428,000 1,861,000 13
------------- ----------- ------------
$ 89,164,000 $17,866,000 $ 71,298,000
============= =========== ============
</TABLE>
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>
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 $962,000, $1,067,000, and $679,000 during 1995, 1996 and 1997,
respectively.
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. 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 trade name were
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.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Periodically the Company evaluates the carrying values and economic lives of its
intangible assets relative to the expected future cash flows of the underlying
businesses with which they are associated. At September 30, 1997, this
evaluation indicated that the carrying value of the intangible assets arising
from the acquisition of LBA in August 1996 were not fully realizable (see note
1). Accordingly the Company recorded an impairment loss on intangible assets of
approximately $37.6 million in the quarter ended September 30, 1997.
Commensurate with the write-down of the intangible assets, the Company
reevaluated the remaining economic lives of these assets and made appropriate
prospective adjustments. The following table summarizes the impairment loss on
intangible assets and changes to the asset lives:
<TABLE>
<CAPTION>
Pre-Charge Post-Charge Pre-Charge Post-Charge
Asset Net Book Value Write Down Net Book Value Remaining Life Remaining Life
- --------------------- --------------- ----------- --------------- --------------- --------------
<S> <C>
Customer bases $ 4,536,000 $ 2,728,000 $ 1,808,000 9 4
Assembled workforce 3,604,000 1,872,000 1,732,000 9 6
Methodologies 10,345,000 7,835,000 2,510,000 5 4
Software 1,236,000 828,000 408,000 4 4
Goodwill 41,804,000 24,386,000 17,418,000 19 19
------------ ------------ ------------
$ 61,525,000 $ 37,649,000 $ 23,876,000
============ ============ ============
</TABLE>
The Company also implemented a restructuring of certain of its operations,
primarily related to its Implementation unit, which was formed after the
acquisition of LBA. A $3.5 million restructuring charge was recorded during the
quarter ended September 30, 1997, representing the cost of employee severance,
facilities reduction and customer allowances.
(5) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES
Accrued salaries, benefits and other liabilities consist of the following at
December 31:
1996 1997
----------- -----------
Accrued salaries $ 2,220,000 $ 2,244,000
Accrued benefits 477,000 515,000
Accrued vacation 681,000 774,000
Other 4,700,000 3,897,000
----------- -----------
$ 8,078,000 $ 7,430,000
=========== ===========
(6) LEASES
The Company leases office space and certain equipment under operating leases.
Rent expense for these leases was $2,286,000, $3,563,000 and $4,907,000 net of
rental income of $0, $412,000 and $609,000 during 1995, 1996 and 1997,
respectively. The minimum rental commitments under noncancelable operating
leases as of December 31, 1997, are as follows:
Year Ending December 31:
1998 $ 5,381,000
1999 4,857,000
2000 3,775,000
2001 3,001,000
2002 2,239,000
Thereafter --
-----------
Gross minimum payments required $19,253,000
Sublease Income (317,000)
-----------
Net minimum payments required $18,936,000
===========
26
<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 1995, 1996 and 1997 were
approximately $194,000, $397,000 and $624,000, respectively.
(8) INCOME TAXES
The income tax expense (benefit) relating to the operations of the Company
consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C>
Federal and state:
Current $ 2,071,000 $ 280,000 $ 113,000
Deferred (3,625,000) 5,606,000 (6,164,000)
------------- ------------ -------------
Total income tax expense (benefit) $ (1,554,000) $ 5,886,000 $ (6,051,000)
============= ============ =============
</TABLE>
The tax provisions in the accompanying financial statements differ from
prevailing federal corporate rates. A reconciliation of this difference is as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
Amount % Amount % Amount %
----------------------- ------------------------ -------------------------
<S> <C>
Computed expected tax expense
(benefit) at statutory rate $ (1,346,000) (34.0)% $(12,370,000) (34.0)% $ (14,623,000) (34.0)%
Goodwill amortization 220,000 5.6 637,000 1.8 922,000 2.1
Impairment loss on intangible assets -- -- -- -- 9,754,000 22.7
Tax-exempt interest (234,000) (5.9) (216,000) (0.6) -- --
State tax, net of federal benefit (224,000) (5.7) (1,609,000) (4.4) (2,350,000) (5.5)
Acquired in-process research and development costs 19,226,000 52.8 -- --
Other, net 30,000 0.7 218,000 0.6 246,000 0.6
---------------------- --------------------- ------------------------
Provision (benefit) for income taxes $ (1,554,000) (39.3)% $ 5,886,000 16.2% $ (6,051,000) (14.1)%
====================== ===================== ========================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and deferred tax assets at December 31, 1996 and
1997, are presented below:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C>
Deferred tax assets:
Operating accruals $ 881,000 $ 2,205,000
Basis differences in software and intangibles 3,865,000 4,439,000
Bonus accrual 2,005,000 --
Net operating loss carryforwards 11,457,000 17,752,000
----------- -----------
Gross deferred tax assets 18,208,000 24,396,000
Valuation allowance -- --
----------- -----------
Net deferred tax assets $18,208,000 $24,396,000
----------- -----------
Deferred tax liabilities:
Bonus accrual -- 209,000
Basis differences in fixed assets 1,134,000 949,000
----------- -----------
Total deferred tax liabilities 1,134,000 1,158,000
----------- -----------
Net deferred tax asset $17,074,000 $23,238,000
=========== ===========
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance for deferred tax assets as of December 31, 1996 and 1997
was $0. Therefore, there was no net change in the valuation allowance for 1996
and 1997.
The Company has net operating loss carryforwards of $55,400,000 at December 31,
1997, which expire between 2002 and 2011. The utilization of certain of these
carryforwards is subject to limitations under U.S. federal income tax laws.
Realization of these carryforwards is dependent on the Company generating
sufficient taxable income prior to their expiration. Although realization is not
assumed, management believes it is more likely than not that they will be
realized through future taxable income. However, the net deferred tax assets
could be reduced by a valuation allowance if management's estimates of future
taxable income are significantly reduced.
(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 in August 1996 with a
portion of the proceeds from the Company's August 1996 public offering of its
common stock (see note 1(b)). During 1997, the Company reduced the amount
available under the revolving line of credit and currently maintains a
$25,000,000 line of credit (subject to borrowing limitations) and made no
additional borrowings against it during 1997.
The line of credit bears interest at rates ranging from First Union's prime rate
to prime plus 0.5% or LIBOR 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, 1997 the Company was in compliance with all such
covenants and had a maximum borrowing capacity of $11.7 million, and there were
no borrowings outstanding under the facility. The credit facility reduces to
$18.8 million in July 1999, $12.5 million in July 2000 and expires on July 31,
2001.
(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, 1995. 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 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.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(C) OPTIONS
At December 31, 1995, 1996 and 1997, the Company had outstanding stock options
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ---------- ----------
<S><C>
Stock options outstanding pursuant to:
HCIA Stock Option Plan 169,933 956,266 1,399,952
Directors' Option Plan 22,500 57,000 87,000
Other options 507,800 451,111 388,425
------- --------- ---------
Total stock options outstanding 700,233 1,464,377 1,875,377
======= ========= =========
</TABLE>
The HCIA Stock Option Plan provides that up to 2,350,000 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 the 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. 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 the 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 five years from the 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>
1995 1996 1997
----------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- --------- ------ --------- -------
<S><C>
Outstanding at beginning of year 374,226 $ 8.62 700,233 $13.80 1,464,377 $25.89
Granted 357,433 $18.99 1,524,000 $45.61 891,500 $23.87
Exercised (6,427) $10.50 (62,605) $ 9.27 (65,907) $ 8.50
Canceled (24,999) $11.20 (697,251) $58.35 (414,593) $30.10
------- --------- ---------
Outstanding at end of year 700,233 $13.80 1,464,377 $25.89 1,875,377 $24.61
======= ========= =========
Options exercisable at end of year 186,867 $13.50 345,215 $13.13 640,905 $20.00
======= ========= =========
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1997:
<TABLE>
<CAPTIONS>
Options Outstanding Options Exercisable
--------------------------------------------- ----------------------------
Number Weighted Avg. Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
--------------- ----------- ---------------- --------------- ------------ --------------
<S><C>
$6 85,498 2.5 $ 6.00 85,498 $ 6.00
$10 to $24 936,928 7.5 15.04 336,929 12.52
$25 to $40 638,576 8.4 30.71 152,978 27.73
$48 to $51 80,750 5.1 48.72 7,250 49.07
$59.88 133,625 8.5 59.88 58,250 59.88
--------- -------------- --------------- ------- ----------
1,875,377 7.5 $ 24.61 640,905 $ 20.00
========= ============== =============== ======= ==========
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 FASB No. 123, the Company's net
loss and loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S><C>
Net loss As reported $ (2,405) $ (42,267) $ (36,959)
Pro forma $ (2,996) $ (43,795) $ (40,781)
Loss per share As reported (0.31) (4.19) (3.12)
Pro forma (0.39) (4.34) (3.45)
</TABLE>
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% in 1995 and 1996 and 5.80% in
1997; a weighted average expected life of four to seven years; no dividend
payments; and a volatility of 31.29% in 1995 and 1996, based on the annualized
10 year industry average, and 67.22% in 1997 based on the Company's historical
volatility. The effects of applying SFAS No. 123 in the pro forma net loss and
loss per share for 1995, 1996 and 1997 may not be representative of the effects
on such pro forma information for future years.
(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.
(12) NEW ACCOUNTING PRONOUNCEMENTS
SFAS NO. 130
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. This statement is
effective for both interim and annual periods beginning after December 15, 1997.
It is not anticipated that SFAS No. 130 will have any material effect on current
or prior period financial statement displays presented by the Company.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS NO. 131
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
(SFAS No. 131). SFAS No. 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated, unless it is impracticable to do so. The
Company is currently assessing the effect of the pronouncement on its current
disclosure.
SOP 97-2
In November 1997, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position 97-2,
"Software Revenue Recognition" (SOP 97-2). 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. The Statement is
generally effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company does not anticipate that SOP 97-2 will have
any material impact on its revenue recognition policies.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
11
<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 1998 Annual Meeting of Stockholders under the headings
"Election of Directors" 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 1998 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 1998 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 1998 Annual Meeting of Stockholders under the heading "Certain
Transactions."
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT 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:
None
(c) Exhibits:
(d) Schedules to Financial Statement
Independent Auditors' Report
Financial Statement Schedule II
<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 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 between First Union National Bank of North Carolina
and the Registrant.
10.9.1 First Amendment to Credit Agreement.
10.9.2 Second Amendment to Credit Agreement.
10.9.3 Third Amendment to Credit Agreement.
11.1 Statement regarding Computation of Per Share Earnings.
21.1 **** Subsidiaries of the Registrant.
</TABLE>
13
<PAGE>
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
* 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).
**** Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1996.
14
<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 26, 1998
________________________ President and Chief
George D. Pillari Executive Officer
(principal executive
officer)
/s/ Barry C. Offutt Senior Vice President March 26, 1998
________________________ and Chief Financial Officer
Barry C. Offutt (principal financial and
accounting officer)
/s/ Richard A. Berman Director March 26, 1998
________________________
Richard A. Berman
/s/ Richard Dulude Director March 26, 1998
________________________
Richard Dulude
/s/ W. Grant Gregory Director March 26, 1998
________________________
W. Grant Gregory
/s/ Phillip B. Lassiter Director March 26, 1998
________________________
Phillip B. Lassiter
/s/ Mark C. Rogers Director March 26, 1998
________________________
Mark C. Rogers
/s/ Carl J. Schramm Director March 26, 1998
________________________
Carl J. Schramm
15
<PAGE>
Exhibit Index
<TABLE>
<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.
10.9.1 First Amendment to Credit Agreement.
10.9.2 Second Amendment to Credit Agreement.
10.9.3 Third Amendment to Credit Agreement.
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).
**** Incorporated by reference to the Registrant's Report on Form 10-K for
the year ended December 31, 1996.
16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
HCIA Inc.:
Under date of January 22, 1998, we reported on the consolidated balance sheets
of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1996 and 1997,
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,
1997, as contained in the annual report on Form 10-K for the year 1997. 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 22, 1998
17
<PAGE>
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Deductions Balance at
Beginning Costs and End of Period
Description of Period Expenses
<S><C>
Allowance for Doubtful Accounts
Year ended December 31, 1995..................$ 359 $ 214 $(119)(A) $454
Year ended December 31, 1996..................$ 454 $ 560 $ 28 (A) $1,042
Year ended December 31, 1997..................$1,042 $1,361 $(303)(A) $2,100
</TABLE>
(A) Accounts receivable write-offs and recoveries
18
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 50% 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
<PAGE>
stockholder at his post office address as it appears on the records of the
Corporation, with postage thereon prepaid.
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.
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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 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.
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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
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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
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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
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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.
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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.
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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.
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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
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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,
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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
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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
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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.
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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
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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.
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The foregoing are certified as the Amended and Restated Bylaws of the
Corporation as of January 1, 1998.
Charles A. Berardesco
--------------------------------
Charles A. Berardesco, Secretary
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Exhibit 10.2
HCIA INC.
1994 STOCK AND INCENTIVE PLAN
AS AMENDED THROUGH AUGUST 6, 1997
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
or consultant to 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.
(s) "Released Securities" shall mean Restricted Stock with
respect to which all applicable restrictions have expired, lapsed or been
waived.
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(t) "Restricted Stock" shall mean any Shares granted and
issued under SECTION 7(d) 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.
SECTION 4. ADMINISTRATION
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(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 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.
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<PAGE>
The Committee shall not have the authority, without the
approval of the stockholders of the Company, to (i) amend the exercise price of
any outstanding Option without the approval of the stockholders of the Company,
(ii) cancel any outstanding Option and grant a substitute Option to the same
Optionee with an exercise price less than the exercise price of the cancelled
Option or (iii) grant an Award of Restricted Stock or a Restricted Stock Unit
which has a vesting period of less than three years. Notwithstanding the
foregoing, the Committee shall have the authority to amend the exercise price of
outstanding Options, cancel outstanding Options and award substitute Options
with an exercise price less than the exercise price of the cancelled Option
and/or grant Awards of Restricted Stock or Restricted Stock Units with vesting
periods of less than three 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 2,350,000 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
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<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 or consultant, 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.
(i) LIMITATIONS ON INCENTIVE STOCK OPTIONS.
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<PAGE>
(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 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
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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. Any such Award must be
either (i) performance based, with a minimum vesting period of one year, or (ii)
non-performance based, which would be specifically awarded in lieu of salary
and/or bonus payments which would have otherwise been paid to the Participant.
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(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
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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
order to achieve reasonable comparability or other equitable relationship
between the assumed awards and the Awards granted under the Plan, as so
adjusted.
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(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 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
-11-
<PAGE>
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.
(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.
-12-
<PAGE>
(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 10.9.1
August 15, 1996
HCIA Inc.
300 East Lombard Street
Baltimore, Maryland 21202
Attention: Mr. Barry C. Offutt, Chief Financial Officer
Telecopy: (410) 547-8750
Re: Credit Agreement dated as of August 8, 1996, between HCIA
Inc., a Maryland corporation (the "Borrower"), First Union
National Bank of North Carolina, a national banking
association, as agent (the "Agent"), and the Lenders parties
thereto from time to time
Dear Mr. Offutt:
The purpose of this letter is to confirm our agreement to amend the
above-referenced Credit Agreement to permit the voluntary repayment of Loans
upon one (1) Business Day's notice rather than five (5) Business Days' notice as
currently provided. Capitalized terms used herein shall have the meanings
specified in the Credit Agreement. The amendment shall be as set forth below:
Effective as of August 8, 1996, the Credit Agreement is hereby
amended by deleting the reference to "five (5) Business Days" in the
fourth line of Section 2.5(a) and substituting in its place a reference
to "one (1) Business Day."
Please indicate your agreement to the foregoing by signing and returning to me
the enclosed duplicate copy of this letter agreement. Upon signature by HCIA
Inc., this letter agreement shall constitute an amendment to the Credit
Agreement. The Credit Agreement, as amended hereby, shall remain in full force
and effect.
Sincerely,
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
Agreed and accepted
as of the date above
HCIA INC.
By: /s/ Barry C. Offutt
_______________________________
Title: Senior Vice President
cc: HCIA Inc.
300 East Lombard Street
Baltimore, Maryland 21202
Attention: Charles A. Berardesco,
General Counsel
Exhibit 10.9.2
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of June ___, 1997
(this "Amendment"), is made among HCIA, INC. (the "Borrower"), the Lenders (as
hereinafter defined) that have executed this Amendment (the "Required Lenders"),
and FIRST UNION NATIONAL BANK OF NORTH CAROLINA, as agent for the Lenders (in
such capacity, the "Agent").
RECITALS
A. The Borrower, certain banks (the "Lenders") and the Agent are
parties to a Credit Agreement, dated as of August 8, 1996 (the "Credit
Agreement"), as amended, providing for the availability of certain credit
facilities to the Borrower upon the terms and conditions set forth therein.
Capitalized terms used herein without definition shall have the meanings given
to them in the Credit Agreement.
B. The Borrower, the Lenders and the Agent desire to make certain
amendments to the Credit Agreement, and the Required Lenders have agreed to
effect such amendments upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I.
AMENDMENTS
1.1 Definitions. SECTION 1.1 of the Credit Agreement is hereby amended
as follows:
The definitions of Annualized EBITDA, Annualized EBITDAR and Fixed
Charges are deleted in their entirety and replaced with the following:
"Annualized EBITDA" shall mean, as of the last day of any
fiscal quarter, Consolidated EBITDA for the three (3) immediately
preceding fiscal quarters, multiplied by 1.333.
"Annualized EBITDAR" shall mean, as of the last day of any
fiscal quarter, Annualized EBITDA, plus Rent Expense for the three (3)
immediately preceding fiscal quarters, multiplied by 1.333.
<PAGE>
"Fixed Charges" shall mean, as of the last day of any fiscal
quarter, (a) the current maturity of Debt for borrowed money, plus (b)
the sum of the following for the three (3) immediately preceding fiscal
quarters then ending: (i) Interest Expense, (ii) Rent Expense, and
(iii) Capital Expenditures, multiplied by 1.333.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
2.1 Compliance with Credit Agreement. The Borrower is in compliance
with all terms and provisions set forth in the Credit Agreement to be observed
or performed, except where the Borrower's failure to comply has been waived in
writing by the Lenders.
2.2 Representations in Credit Agreement. The representations and
warranties of the Borrower set forth in the Credit Agreement, except for those
relating to a specific date other than the date hereof, are true and correct in
all material respects on and as of the date hereof as if made on and as of the
date hereof.
2.3 No Event of Default. No Event of Default (as defined in the Credit
Agreement), nor any event that upon notice, lapse of time or both would become
an Event of Default is continuing other than those, if any, waived in writing by
the Lenders.
2.4 Continuing Security Interests. All Loans and advances by the
Lenders to the Borrower under the Credit Agreement, as amended hereby, and the
Notes will continue to be secured by the Agent's security interest in all of the
Collateral granted under the Credit Agreement or other Loan Documents, and
nothing herein will affect the validity, perfection or enforceability of such
security interests.
ARTICLE III.
MODIFICATION OF LOAN DOCUMENTS
3.1 Loan Documents. The other Loan Documents are amended as follows:
Any individual or collective reference to any of the Loan Documents in
any of the other Loan Documents to which the Borrower is a party shall mean,
unless otherwise specifically provided, such Loan Document as amended and
supplemented by this Second Amendment to Credit Agreement and as such Loan
Document is further amended, restated, supplemented or modified from time to
time and any substitute or replacement therefor or renewals thereof, including
without limitation, all references to the Credit Agreement, which shall mean the
Credit Agreement as amended hereby and as further amended from time to time.
2
<PAGE>
ARTICLE IV.
MISCELLANEOUS
4.1 Full Force and Effect. As expressly amended hereby, the Credit
Agreement shall continue in full force and effect in accordance with the
provisions thereof, and no change or modification in any of the terms thereof
except as specifically set forth herein has been effected. As used in the Credit
Agreement, "hereinafter," "hereto," "hereof," and words of similar import shall,
unless the context otherwise requires, mean the Credit Agreement as amended by
this Amendment.
4.2 Nature of Amendment. This Amendment is limited as specified and
shall not constitute or be deemed to constitute an amendment, modification or
waiver of any provision of the Credit Agreement except as expressly set forth
herein. Except as expressly amended hereby, the Credit Agreement shall remain in
full force and effect in accordance with the provisions thereof on the date
hereof.
4.3 Governing Law. This Amendment shall be governed by and construed
and enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
4.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
4.5 Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all of which
shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
HCIA, INC.
By: ____________________________________
Title: ____________________________________
3
<PAGE>
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA, as Agent
By: ____________________________________
Title: ____________________________________
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA,
By: ____________________________________
Title: ____________________________________
BANK BOSTON, N.A., FORMERLY KNOWN
AS THE FIRST NATIONAL BANK OF
BOSTON
By: ____________________________________
Title: ____________________________________
SIGNET BANK
By: ____________________________________
Title: ____________________________________
4
Exhibit 10.9.3
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT, dated as of November 10, 1997
(this "Amendment"), is made among HCIA, INC. (the "Borrower"), the Lenders (as
hereinafter defined) that have executed this Amendment (the "Required Lenders"),
and FIRST UNION NATIONAL BANK (formerly, First Union National Bank of North
Carolina), as agent for the Lenders (in such capacity, the "Agent").
RECITALS
A. The Borrower, certain banks (the "Lenders") and the Agent are
parties to a Credit Agreement, dated as of August 8, 1996 (the "Credit
Agreement"), as amended, providing for the availability of certain credit
facilities to the Borrower upon the terms and conditions set forth therein.
Capitalized terms used herein without definition shall have the meanings given
to them in the Credit Agreement.
B. The Borrower, the Lenders and the Agent desire to make certain
amendments to the Credit Agreement, including (i) reducing the total revolving
credit commitment from $50,000,000 to $25,000,000, (ii) reducing the available
letter of credit subfacility amount from $5,000,000 to $2,000,000 and (iii)
revising certain financial covenants, and the Required Lenders have agreed to
effect such amendments upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE 1
AMENDMENTS
1.1 Definitions. SECTION 1.1 of the Credit Agreement is hereby amended
by adding the following defined term in the appropriate alphabetical order:
"Net Trading Assets" shall mean, as of the last day of any fiscal
quarter with respect to the Borrower and its Subsidiaries on a
consolidated basis excluding intercompany items, the sum of (a)
accounts receivable minus (b) accounts payable.
<PAGE>
1.2 Letters of Credit. SECTION 2.17(a)(i) of the Credit Agreement is
hereby deleted and replaced in its entirety as follows:
(i) No Letter of Credit shall be issued the Stated Amount upon issuance
of which (i) when added to all other Letter of Credit Outstandings as
such time, would exceed $2,000,000 or (ii) when added to all other
Letter of Credit Outstandings at such time and the aggregate principal
amount of all Revolving Credit Loand then outstanding, would exceed the
Total Revolving Credit Commitment at such time;
1.3 Financial Covenants. The financial covenants in the Credit
Agreement are hereby amended as follows:
(a) SECTION 6.9 of the Credit Agreement is hereby deleted and
replaced in its entirety as follows:
6.9 Consolidated Debt to Annualized EBITDA. Permit the ratio of
Consolidated Debt to Annualized EBITDA as of the end of any fiscal
quarter, beginning with the fiscal quarter ending December 31, 1997, to
be greater than 1.0 to 1.0.
(b) A new SECTION 6.9A is hereby added to the Credit Agreement
immediately following SECTION 6.9 as follows:
6.9A Consolidated Debt to Net Trading Assets. Permit the amount of
Consolidated Debt as of the end of any fiscal quarter, beginning with
the fiscal quarter ending December 31, 1997, to be greater than fifty
percent (50%) of Net Trading Assets as of such date.
1.4 Reduction of Revolving Credit Commitments. The Revolving Credit
Commitments of the Lenders are hereby reduced to the following amounts:
First Union National Bank $10,000,000
The First National Bank of Boston $7,500,000
Signet Bank $7,500,000
ARTICLE 2
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants that:
2.1 Compliance with Credit Agreement. The Borrower is in compliance
with all terms and provisions set forth in the Credit Agreement to be observed
or performed, except where the Borrower's failure to comply has been waived in
writing by the Lenders.
2
<PAGE>
2.2 Representations in Credit Agreement. The representations and
warranties of the Borrower set forth in the Credit Agreement, except for those
relating to a specific date other than the date hereof, are true and correct in
all material respects on and as of the date hereof as if made on and as of the
date hereof.
2.3 No Event of Default. No Event of Default (as defined in the Credit
Agreement), nor any event that upon notice, lapse of time or both would become
an Event of Default is continuing other than those, if any, waived in writing by
the Lenders.
2.4 Continuing Security Interests. All Loans and advances by the
Lenders to the Borrower under the Credit Agreement, as amended hereby, and the
Notes will continue to be secured by the Agent's security interest in all of the
Collateral granted under the Credit Agreement or other Loan Documents, and
nothing herein will affect the validity, perfection or enforceability of such
security interests.
ARTICLE 3
MODIFICATION OF LOAN DOCUMENTS
3.1 Loan Documents. The other Loan Documents are amended as follows:
Any individual or collective reference to any of the Loan Documents in
any of the other Loan Documents to which the Borrower or any Subsidiary is a
party shall mean, unless otherwise specifically provided, such Loan Document as
amended and supplemented by this Third Amendment to Credit Agreement and as such
Loan Document is further amended, restated, supplemented or modified from time
to time and any substitute or replacement therefor or renewals thereof,
including without limitation, all references to the Credit Agreement, which
shall mean the Credit Agreement as amended hereby and as further amended from
time to time.
ARTICLE 4
MISCELLANEOUS
4.1 Full Force and Effect. As expressly amended hereby, the Credit
Agreement shall continue in full force and effect in accordance with the
provisions thereof, and no change or modification in any of the terms thereof
except as specifically set forth herein has been effected. As used in the Credit
Agreement, "hereinafter," "hereto," "hereof," and words of similar import shall,
unless the context otherwise requires, mean the Credit Agreement as amended by
this Amendment.
4.2 Nature of Amendment. This Amendment is limited as specified and
shall not constitute or be deemed to constitute an amendment, modification or
waiver of any provision of the Credit Agreement except as expressly set forth
herein. Except as expressly amended hereby,
3
<PAGE>
the Credit Agreement shall remain in full force and effect in accordance with
the provisions thereof on the date hereof.
4.3 Governing Law. This Amendment shall be governed by and construed
and enforced in accordance with the laws of the State of North Carolina (without
regard to the conflicts of law provisions thereof).
4.4 Severability. To the extent any provision of this Amendment is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in any such jurisdiction, without prohibiting or
invalidating such provision in any other jurisdiction or the remaining
provisions of this Amendment in any jurisdiction.
4.5 Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which, when so executed and delivered, shall be an original, but all of which
shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
HCIA, INC.
By: ____________________________________
Title: ____________________________________
FIRST UNION NATIONAL BANK, as Agent
By: ____________________________________
Title: ____________________________________
FIRST UNION NATIONAL BANK
By: ____________________________________
Title: ____________________________________
4
<PAGE>
THE FIRST NATIONAL BANK OF BOSTON
By: ____________________________________
Title: ____________________________________
SIGNET BANK
By: ____________________________________
Title: ____________________________________
5
Exhibit 11.1
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(In Thousands Except Per Share Amounts)
Basic Diluted(1)
----- ----------
Year ended December 31, 1997
Weighted average shares outstanding.................... 11,834
Effect of dilutive common stock equivalents(1)......... -- N/A
------
Weighted average shares outstanding for EPS purposes... 11,834
Net loss...............................................$(36,959)
------
Net loss per share (2).................................$ (3.12)
======
(1) As of December 31, 1997, options to purchase 1,875,377 shares of common
stock were outstanding.
As the Company had a net loss for the year ended December 31, 1997, the
diluted earnings per share is not applicable.
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
22, 1998 relating to the consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1996 and 1997 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, 1997 and the
related consolidated financial statement schedule, which reports appear, or are
incorporated by reference, in the December 31, 1997 annual report on Form 10-K
of HCIA Inc.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,580
<SECURITIES> 0
<RECEIVABLES> 34,354
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,186
<PP&E> 13,671
<DEPRECIATION> 0
<TOTAL-ASSETS> 182,240
<CURRENT-LIABILITIES> 15,526
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 250,892
<TOTAL-LIABILITY-AND-EQUITY> 182,240
<SALES> 82,905
<TOTAL-REVENUES> 82,905
<CGS> 0
<TOTAL-COSTS> 125,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (46)
<INCOME-PRETAX> (43,010)
<INCOME-TAX> (6,051)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,959)
<EPS-PRIMARY> (3.12)
<EPS-DILUTED> 0
</TABLE>
