SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [x]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[x] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HCIA INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
- --------------------------------------------------------------------------------
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
common stock, $0.01 par value per share
2) Aggregate number of securities to which transaction applies:
(i) 11,851,125 shares of common stock outstanding and (ii) vested
"in-the-money" options to purchase 1,075,342 shares of HCIA Inc. common
stock as of September 3, 1999
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(Set forth the amount on which the filing fee is calculated and state
how it was determined):
$11.00 per share of common stock, which is the amount of the proposed
cash payment per share to be transferred to HCIA security holders in
this transaction.
4) Proposed maximum aggregate value of transaction: $134,857,751
5) Total fee paid: $26,971.56
[x] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------
3) Filing Party:
--------------------------------------------
4) Date Filed:
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[GRAPHIC OMITTED]
October 11, 1999
Dear Stockholder:
We will hold a special meeting of our stockholders on Wednesday, November
17, 1999 at 10:00 a.m., local time, at our offices located at 300 East Lombard
Street, Suite 1700, Baltimore, Maryland 21202. At the special meeting, you will
be asked to vote on and approve the merger of HCIA with and into an indirect
subsidiary of VS&A Communications Partners III, L.P.
If the merger is approved, you will be entitled to receive $11.00 in cash
for each share of common stock of HCIA you own, subject to reduction for any
applicable federal backup or other withholding taxes.
Attached is a notice of special meeting of stockholders and a proxy
statement relating to the merger. The proxy statement describes the merger in
detail. We encourage you to read it carefully.
After careful consideration, your Board of Directors unanimously approved
this transaction and concluded that it is in the best interests of HCIA and its
stockholders. Your board of directors unanimously recommends that you vote
"FOR" the merger.
We cordially invite you to attend the meeting. However, whether or not you
plan to attend the meeting, please complete, sign and date the enclosed proxy
and return it to us in the enclosed envelope as promptly as possible. If you
attend the meeting, you may vote in person if you wish, even though you have
previously returned your proxy.
Please do not send your stock certificates at this time.
ON BEHALF OF THE BOARD OF DIRECTORS AND ALL OF THE EMPLOYEES OF HCIA, I
WISH TO THANK YOU FOR YOUR CONTINUED SUPPORT.
Sincerely yours,
/s/ GEORGE D. PHILLRI
George D. Pillari
Chairman & CEO
This proxy statement is dated October 11, 1999 and was first mailed to
stockholders on or about October 12, 1999.
<PAGE>
HCIA INC.
300 East Lombard Street
Baltimore, Maryland 21202
- --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON
NOVEMBER 17, 1999
- --------------------------------------------------------------------------------
TO THE STOCKHOLDERS OF HCIA INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of HCIA
Inc., a Maryland corporation, will be held at our offices at 300 East Lombard
Street, Suite 1700, Baltimore, Maryland 21202, on Wednesday, November 17, 1999
at 10:00 a.m., local time, to consider and vote on the merger of HCIA with and
into an indirect subsidiary of VS&A Communications Partners III, L.P.
No other business will be considered at the meeting.
This proposal is more fully described in the proxy statement that
accompanies this notice, which you should read carefully.
We have fixed the close of business on October 8, 1999 as the record date
for the determination of our stockholders entitled to vote at this meeting.
By Order of the Board of Directors,
/s/ CHARLES A BERARDESCO
Charles A. Berardesco
Secretary
Baltimore, Maryland
October 11, 1999
To ensure your representation at the special meeting, please complete, date,
sign and return the enclosed proxy as promptly as possible in the postage-paid
envelope provided hereby whether or not you plan to attend the meeting. If you
attend the special meeting, you may vote in person even if you have returned a
proxy.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
MERGER INFORMATION SUMMARY ............................................ 1
The Companies ........................................................ 1
The HCIA Special Meeting to Consider Approval of the Merger .......... 1
Record Date and Required Vote ........................................ 1
HCIA Board's Recommendation to the Stockholders ...................... 1
HCIA's Reasons for the Merger ........................................ 1
Opinion of HCIA's Financial Advisor .................................. 1
Regulatory Approvals Required Before the Merger can be Completed ..... 2
Accounting Treatment of the Merger ................................... 2
Voting Agreement ..................................................... 2
Interests of Certain Persons in the Merger ........................... 2
Material Federal Income Tax Considerations ........................... 2
Terms of the Merger .................................................. 2
MARKET PRICE AND DIVIDENDS ............................................ 4
WHERE CAN YOU FIND MORE INFORMATION ................................... 4
THE HCIA SPECIAL MEETING .............................................. 5
Date, Time and Place of Meeting ...................................... 5
Purpose of the Special Meeting ....................................... 5
Record Date .......................................................... 5
Voting Rights and Quorum ............................................. 5
Required Vote ........................................................ 5
Abstentions; Broker Non-Votes ........................................ 5
Share Ownership of Management ........................................ 5
Expenses of Proxy Solicitation ....................................... 5
Voting of Proxies .................................................... 5
Independent Auditors ................................................. 6
Board Recommendation ................................................. 6
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS ....................... 6
Background of the Merger ............................................. 6
HCIA's Reasons for the Merger ........................................ 8
Opinion of HCIA's Financial Advisor .................................. 9
Material Federal Income Tax Considerations ........................... 13
Regulatory Matters ................................................... 13
Accounting Treatment ................................................. 14
Voting Agreement ..................................................... 14
Dissenters' Appraisal Rights ......................................... 15
THE MERGER ............................................................ 15
General .............................................................. 15
Closing Date; Effective Time ......................................... 15
Payment for Common Stock ............................................. 15
Exchange of Certificates ............................................. 15
Treatment of Stock Options ........................................... 15
Representations and Warranties ....................................... 16
HCIA Covenants ....................................................... 17
VS&A Covenants ....................................................... 18
Conditions to the Merger ............................................. 18
Termination of the Merger Agreement .................................. 19
Termination Fees and Expenses ........................................ 19
Indemnification ...................................................... 20
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
BENEFITS OF THE MERGER TO HCIA DIRECTORS AND EXECUTIVE OFFICERS ................ 20
Acceleration of Stock Options ................................................. 20
Employment Agreement .......................................................... 21
Management Retention Agreements ............................................... 21
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT OF HCIA ............ 22
BUSINESS OF HCIA ............................................................... 23
Background .................................................................... 23
General ....................................................................... 23
Product Lines ................................................................. 23
Customers ..................................................................... 25
Sales and Marketing ........................................................... 25
Competition ................................................................... 25
Intellectual Property ......................................................... 25
Government Regulation ......................................................... 26
Employees ..................................................................... 26
SELECTED FINANCIAL DATA ........................................................ 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................... 28
Overview ...................................................................... 28
1998 Compared to 1997 ......................................................... 28
1997 Compared to 1996 ......................................................... 29
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998 ..... 30
Liquidity and Capital Resources ............................................... 31
Year 2000 Readiness Disclosure ................................................ 31
Forward Looking Statements .................................................... 32
INDEPENDENT AUDITORS ........................................................... 32
HCIA FINANCIAL STATEMENTS ...................................................... F-1
APPENDIX A -- AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
APPENDIX B -- OPINION OF DEUTSCHE BANK SECURITIES INC.
APPENDIX C -- AMENDED AND RESTATED AGREEMENT WITH STOCKHOLDERS OF HCIA INC.
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, you will receive $11.00 in cash, without
interest, for each share of common stock of HCIA you own. This amount will
be subject to reduction for any applicable federal backup or other
withholding taxes.
Q: WILL I RECOGNIZE A GAIN OR LOSS ON THE TRANSACTION?
A: You will recognize gain or loss for United States federal income tax
purposes, depending on your tax basis in your shares. We urge you to consult
your own tax adviser to determine your particular tax consequences.
For a more complete description of the tax consequences, see the section
entitled "APPROVAL OF THE MERGER AND RELATED TRANSACTIONS -- Material Federal
Income Tax Considerations" on page 13.
Q: WHAT DO I NEED TO DO NOW?
A: Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares will be counted at the special meeting of
HCIA stockholders. If you attend the special meeting in person, you may vote
in person even if you have returned a proxy.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you want to change your vote, send the Secretary of HCIA a later-dated
signed proxy card before the meeting or attend the meeting in person. You
also may revoke your proxy by sending written notice to the Secretary of
HCIA before the meeting.
For a more complete description of how to change your vote, see the
section entitled "THE HCIA SPECIAL MEETING -- Voting of Proxies" on page 5.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES?
A: Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
For a more complete description of voting shares held in "street name,"
see the section entitled "THE HCIA SPECIAL MEETING -- Voting of Proxies" on
page 5.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, VS&A's paying agent will send you written
instructions for exchanging your share certificates.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as quickly as possible.
Completion of the merger is subject to, among other things, HCIA stockholder
approval. If HCIA stockholders approve the merger at the special meeting on
November 17, 1999 and the other conditions to the merger are satisfied or
waived by that time, we currently expect to complete the merger on or about
November 23, 1999.
For a more complete description of the conditions to the merger, see the
section entitled "THE MERGER -- Conditions to the Merger" on page 18.
Q: AM I ENTITLED TO DISSENTERS' APPRAISAL RIGHTS?
A: No. Under applicable law, holders of HCIA common stock are not entitled to
dissenters' appraisal rights in connection with the merger.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: If you have additional questions about the merger or would like additional
copies of this document, you should contact:
HCIA Inc.
300 East Lombard Street
Suite 1700
Baltimore, Maryland 21202
Attention: Corporate Secretary
(410) 576-9600
You also may obtain additional information about HCIA from documents that
we file with the Securities and Exchange Commission by following the
instructions in the section entitled "WHERE YOU CAN FIND MORE INFORMATION" on
page 4.
iii
<PAGE>
MERGER INFORMATION SUMMARY
Following is a summary of the information contained elsewhere in this
proxy statement. You should read this proxy statement and the accompanying
appendices in their entirety because the summary does not contain a complete
description of the merger agreement or the merger.
THE COMPANIES
HCIA Inc.
300 East Lombard Street
Suite 1700
Baltimore, Maryland 21202
(410) 576-9600
Nasdaq Stock Market Symbol: HCIA
We collect, manage, and distribute comparative health care information.
Our customers deliver, purchase and manufacture health care products and
services. By combining industry leading databases, methodologies, and analytic
services, we create information assets that help our customers manage health
care costs and improve patient care.
VS&A Communications Partners III, L.P.
350 Park Avenue
New York, N.Y. 10022
(212) 935-4990
VS&A Communications Partners III, L.P. ("VS&A") is a $1.0 billion private
equity fund affiliated with Veronis, Suhler & Associates Inc. VS&A focuses
exclusively on making equity investments in the information, communications and
media industries. VS&A has advised HCIA that, after the completion of the
merger, it intends to combine HCIA with other businesses in related fields that
it and its affiliates may acquire from time to time, including, without
limitation, businesses VS&A is currently negotiating to acquire.
THE HCIA SPECIAL MEETING TO CONSIDER APPROVAL OF THE MERGER (PAGE 5)
A special meeting of the stockholders of HCIA will be held on Wednesday,
November 17, 1999, at 10:00 a.m., local time, at our offices located at 300
East Lombard Street, Suite 1700, Baltimore, Maryland 21202. At the HCIA special
meeting, we will ask the HCIA stockholders to consider and vote upon a proposal
to approve the merger.
RECORD DATE AND REQUIRED VOTE (PAGE 5)
Only holders of record of HCIA common stock on October 8, 1999, the record
date for the special meeting, are entitled to notice of and to vote at the
special meeting and any adjournments or postponements thereof. On the record
date, there were issued and outstanding 11,857,725 shares of HCIA common stock.
The affirmative vote of the holders of a majority of the issued and outstanding
shares of HCIA common stock entitled to vote at the special meeting is required
to approve the merger.
HCIA BOARD'S RECOMMENDATION TO THE STOCKHOLDERS (PAGE 6)
The HCIA Board has determined that the merger is fair, from a financial
point of view to, and in the best interests of, HCIA and its stockholders and
has unanimously approved and adopted the merger, the merger agreement and the
transactions contemplated by it.
HCIA'S REASONS FOR THE MERGER (PAGE 8)
In reaching its determination that the merger agreement and the merger are
in the best interests of HCIA and its stockholders, the HCIA Board considered a
number of factors, as more fully described under "APPROVAL OF THE MERGER AND
RELATED TRANSACTIONS -- HCIA's Reasons for the Merger."
OPINION OF HCIA'S FINANCIAL ADVISOR (PAGE 9)
The HCIA Board has received an opinion of its financial advisor, Deutsche
Bank Securities Inc. ("Deutsche Bank"), as to the fairness, from a financial
point of view, of the merger consideration to be received by the holders of
HCIA common stock in the merger. The full text of Deutsche Bank's written
opinion dated August 11, 1999 is attached to the back of this
1
<PAGE>
proxy statement as Appendix B. We encourage you to read this opinion carefully
in its entirety for a description of the assumptions made, matters considered
and limitations on the review undertaken. Deutsche Bank's opinion is directed
to the HCIA Board and does not constitute a recommendation to any stockholder
as to how to vote with respect to matters relating to the proposed merger.
REGULATORY APPROVALS REQUIRED BEFORE THE MERGER CAN BE COMPLETED (PAGE 13)
U.S. antitrust laws require that before completing the merger we must
furnish information to both the Antitrust Division of the Department of Justice
and the Federal Trade Commission and a required 30-day waiting period must have
ended or been previously terminated. Both HCIA and VS&A filed the required
notification and report forms, and received early termination of the waiting
period on September 14, 1999. However, the Department of Justice, the Federal
Trade Commission and various other parties continue to have authority to
challenge the merger on antitrust grounds before or after the merger is
completed. The merger must also satisfy the requirements of Maryland and
Delaware corporate law.
ACCOUNTING TREATMENT OF THE MERGER (PAGE 14)
The merger is being accounted for as a purchase by VS&A for financial
reporting and accounting purposes, under generally accepted accounting
principles.
VOTING AGREEMENT (PAGE 14)
HCIA's executive officers, who collectively own approximately 2.1% of the
outstanding HCIA common stock, have entered into an agreement to vote in favor
of the merger and have agreed not to dispose of any of their HCIA common stock
or take any action to solicit, initiate or encourage any other merger or
acquisition proposal.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 20)
In considering the merger and the recommendation of HCIA's Board regarding
the merger, you should be aware of interests which certain HCIA executive
officers and directors have in the merger which differ from your interests as
stockholders. These interests include the acceleration of stock options for
HCIA' s executive officers and directors.
In addition, the executive officers of HCIA may be entitled to financial
benefits as a result of the merger, payable under employment and management
retention agreements. As a result of these benefits, the interests of HCIA's
executive officers in the merger may be different from yours.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS (PAGE 13)
For federal income tax purposes, the merger will be taxable to you, and
you will recognize gain or loss based upon the difference between the cash
received and your basis in the shares.
Tax matters can be complicated and the tax consequences of the merger to
you will depend upon the facts of your own situation. You should consult your
own tax advisors to understand fully the tax consequences of the merger to you.
TERMS OF THE MERGER (PAGE 15)
WHAT WILL HAPPEN? (PAGE 15)
The merger agreement provides for the merger of HCIA with and into
VS&A-HCIA, L.L.C., a subsidiary of VS&A. As a result of the merger, the
separate existence of HCIA will end and VS&A-HCIA, L.L.C. will survive as an
indirect subsidiary of VS&A. The former holders of HCIA common stock will be
entitled to receive $11.00 in cash, without interest, for each share of HCIA
common stock they held immediately prior to the effective time of the merger,
subject to reduction for any applicable federal backup or other withholding
taxes.
TREATMENT OF STOCK OPTIONS (PAGE 15)
At the effective time of the merger, outstanding options issued under
HCIA's stock option plans and pursuant to individual stock option grants to
directors, officers and employees will become fully vested and convert into the
right to receive an amount equal to:
o the excess, if any, of $11.00 over the per share exercise price of the
HCIA option, multiplied by
2
<PAGE>
o the number of shares of HCIA common stock subject to that option that are
vested and exercisable at the effective time of the merger.
WE CANNOT SOLICIT ANOTHER POSSIBLE ACQUIRER (PAGE 17)
We have agreed that we will not, directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with, or
provide any information to, any third party concerning any merger, sale of
assets, sale of shares of our capital stock or other similar transactions. We
also will not authorize or permit any of our officers, directors, employees,
representatives or agents to undertake any of these prohibited actions.
However, we may furnish information and access to a third party in response to
a third party's unsolicited proposal, after receipt of written advice from
legal counsel stating that there is a significant possibility that a failure to
provide such information would constitute a breach of the HCIA Board's
fiduciary duties. HCIA may participate in discussions and negotiations with
that third party, if (i) the third party has submitted an unsolicited bona fide
written proposal and the HCIA Board determines in good faith that the
unsolicited proposal is more favorable than the merger and that it is
reasonably likely to be consummated and (ii) failing to engage in discussions
and negotiations would result in a significant possibility that the HCIA Board
would breach its fiduciary duties to HCIA stockholders.
CONDITIONS TO THE MERGER (PAGE 18)
The completion of the merger depends on a number of conditions being
satisfied, including the following:
o HCIA stockholders must have approved the merger;
o HCIA and VS&A must have obtained all governmental approvals required for
the merger;
o the absence of a permanent injunction or other court order prohibiting
the merger or making it illegal; and
o at the closing, the representations and warranties of HCIA and VS&A must
be true and HCIA and VS&A must have performed their respective covenants
in the merger agreement.
TERMINATION OF THE MERGER AGREEMENT AND TERMINATION FEE (PAGE 19)
The merger agreement may be terminated before the merger becomes
effective, whether before or after approval of the merger by HCIA stockholders:
o by mutual consent of HCIA and VS&A;
o by either HCIA or VS&A if there is a permanent injunction or other court
order prohibiting the merger or making it illegal or if any required
governmental approval has been denied and such denial has become final
and nonappealable;
o by either HCIA or VS&A if the merger is not completed by December 31,
1999, other than as a result of a breach of the merger agreement by the
terminating party, or if HCIA stockholder approval has not been obtained;
o by HCIA if:
-- VS&A breaches a representation or warranty, or breaches any covenant
or agreement under the merger agreement if the breach has a material
adverse effect on VS&A or the consummation of the merger and is
incapable of being cured by VS&A or is not cured within 30 days of
written notice thereof from HCIA; or
-- HCIA enters into a definitive agreement concerning a superior
acquisition proposal; or
o by VS&A if:
-- HCIA's board of directors (i) withdraws, modifies or changes its
approval or recommendation of the merger, or (ii) recommends an
alternative merger or acquisition transaction; or
-- HCIA breaches a representation or warranty, or breaches any covenant
or agreement under the merger agreement if the breach has a material
adverse effect on HCIA or the consummation of the merger and is
incapable of being cured by HCIA or is not cured within 30 days of
written notice thereof from VS&A.
Any termination of the merger agreement will generally terminate the
obligations of the parties to perform their covenants in the merger agreement,
except for certain miscellaneous provisions, including VS&A's agreement to
refrain from divulging or using the confidential information of HCIA, except as
permitted by the merger agreement.
HCIA will be required to pay VS&A a termination fee in an amount equal to
3 1/2% of the aggregate merger consideration payable to HCIA stockholders
(approximately $4.7 million), plus up to $1.0 million to reimburse VS&A for
expenses,
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<PAGE>
costs and fees incurred by VS&A in connection with the merger if (a) HCIA's
Board subsequently withdraws its recommendation to HCIA stockholders to approve
the merger, (b) HCIA terminates the merger agreement for a more favorable
acquisition proposal and either (i) at the time of termination an alternative
acquisition proposal has been made and is consummated within one year after the
termination of the merger agreement with VS&A, or (ii) within 18 months after
the termination of the merger agreement, HCIA enters into an alternative
acquisition proposal it subsequently consummates, or (c) VS&A terminates the
merger agreement because of certain breaches by HCIA of representations,
warranties, covenants or agreements in the merger agreement. HCIA also will be
required to reimburse VS&A for up to $1.0 million of expenses, costs and fees
incurred by VS&A in connection with the merger if the merger agreement
terminates other than as a result of:
o the mutual consent of HCIA and VS&A; or
o VS&A's breach of a representation or warranty or any covenant or
agreement in the merger agreement.
MARKET PRICE AND DIVIDENDS
Our common stock is traded on the Nasdaq National Market under the symbol
"HCIA." The following table sets forth the quarterly high and low closing
prices for our common stock since January 1, 1997.
<TABLE>
<CAPTION>
1997
-----------------------
HIGH LOW
----------- -----------
<S> <C> <C>
First Quarter ... $ 42.00 $ 16.75
Second Quarter .. 34.50 15.125
Third Quarter ... 33.375 13.00
Fourth Quarter .. 16.188 11.375
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------
HIGH LOW
------------ ------------
<S> <C> <C>
First Quarter ... $ 16.625 $ 11.125
Second Quarter .. 15.00 6.188
Third Quarter ... 12.688 5.00
Fourth Quarter .. 5.625 3.188
</TABLE>
<TABLE>
<CAPTION>
1999
----------------------
HIGH LOW
---------- -----------
<S> <C> <C>
First Quarter ..... $ 5.50 $ 3.313
Second Quarter .... 9.938 3.375
Third Quarter
(through
October 4, 1999) .. 10.906 8.313
</TABLE>
As of October 4, 1999, there were 103 holders of record of HCIA'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.
To help you in your analysis of the proposed merger, we have included the
following table which sets forth the high and low prices per share of our
common stock on the Nasdaq National Market on April 20, 1999 and August 11,
1999, which were, respectively, the last trading days before the announcement
(i) that HCIA was exploring strategic alternatives and (ii) of the proposed
merger.
<TABLE>
<CAPTION>
<S> <C> <C>
April 20, 1999 .......... $ 4.125 $ 3.75
August 11, 1999 ......... 9.00 8.50
</TABLE>
We have not declared or paid any cash dividends on our common stock since
becoming a publicly traded company. We currently anticipate that we will retain
all future earnings for use in our business and do not anticipate paying any
cash dividends in the foreseeable future.
WHERE CAN YOU FIND MORE INFORMATION
We file reports, proxy statements and other information with the
Securities and Exchange Commission. You may inspect the documents we file with
the SEC and copy them, at prescribed rates, at the following public reference
facilities maintained by the SEC:
<TABLE>
<S> <C> <C>
Judiciary Plaza Seven World Trade Center Citicorp Center
Room 1024 500 West Madison Street Suite 2400
450 Fifth Street, N.W 13th Floor New York, New York
Washington, D.C. 20549 Chicago, Illinois 60661 10048
</TABLE>
Copies of these materials can also be obtained by mail, at prescribed
rates, from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at (800) SEC-0330. You will also
find our filings at the SEC's web site at http://www.sec.gov.
4
<PAGE>
THE HCIA SPECIAL MEETING
DATE, TIME AND PLACE OF MEETING
A special meeting of the stockholders of HCIA will be held on Wednesday,
November 17, 1999 at 10:00 a.m., local time, at our offices located at 300 East
Lombard Street, Suite 1700, Baltimore, Maryland 21202.
PURPOSE OF THE SPECIAL MEETING
At the HCIA special meeting, the HCIA stockholders will be asked to
consider and vote upon a proposal to approve the merger.
RECORD DATE
Only holders of record of HCIA common stock on October 8, 1999, the record
date for the special meeting, are entitled to notice of and to vote at the
special meeting and any adjournments or postponements thereof. On the record
date, there were issued and outstanding 11,857,725 shares of HCIA common stock.
VOTING RIGHTS AND QUORUM
Each holder of HCIA common stock will be entitled to one vote for each
share of HCIA common stock held of record on October 8, 1999. The presence, in
person or by proxy, of holders of record of a majority of the issued and
outstanding shares of HCIA common stock constitutes a quorum for action at the
special meeting.
REQUIRED VOTE
The approval of the merger will require the affirmative vote of a majority
of the issued and outstanding shares of HCIA common stock entitled to vote at
the special meeting.
ABSTENTIONS; BROKER NON-VOTES
Abstentions and broker non-votes will have the effect of a vote against
the approval of the merger.
SHARE OWNERSHIP OF MANAGEMENT
On the record date, directors and executive officers of HCIA as a group
beneficially owned 850,494 shares of HCIA common stock, or approximately 6.9%
of the outstanding shares on that date. Of those shares, 448,299 are shares
subject to unexercised stock options.
EXPENSES OF PROXY SOLICITATION
HCIA and VS&A will each pay 50% of the expenses of soliciting proxies to
be voted at the meeting. Following the original mailing of the proxies and
other soliciting materials, HCIA and its agents also may solicit proxies by
mail, telephone, telegraph or in person. Following the original mailing of the
proxies and other soliciting materials, HCIA will request brokers, custodians,
nominees and other record holders of common stock to forward copies of the
proxy and other soliciting materials to persons for whom they hold shares of
common stock and to request authority for the exercise of proxies. Upon the
request of the record holders, HCIA will reimburse them for their reasonable
expenses.
The proxy accompanying this proxy statement is solicited on behalf of the
HCIA board of directors for use at the meeting. Please date and sign the
accompanying proxy and promptly return it in the enclosed envelope or otherwise
mail it to HCIA. All properly signed proxies received by HCIA prior to the vote
at the meeting that are not revoked will be voted at the meeting according to
the instructions indicated on the proxies or, if no direction is indicated, to
approve the merger.
VOTING OF PROXIES
You may revoke your proxy at any time before it is exercised at the
meeting, by taking any of the following actions:
o delivering to the Secretary of HCIA, by any means, including facsimile, a
written notice, bearing a date later than the date of the proxy, stating
that the proxy is revoked;
o signing and so delivering a proxy relating to the same shares and bearing
a later date prior to the vote at the meeting; or
o attending the meeting and voting in person, although attendance at the
meeting will not, by itself, revoke a proxy.
5
<PAGE>
Please note, however, that if your shares are held of record by a broker,
bank or other nominee and you wish to vote at the special meeting, you must
bring to the special meeting a letter from the broker, bank or other nominee
confirming your beneficial ownership of the shares.
INDEPENDENT AUDITORS
KPMG LLP, our independent auditors, will be present at the special
meeting, will have the opportunity to make a statement at the special meeting,
if they desire to do so, and will be available to respond to appropriate
questions.
BOARD RECOMMENDATION
The HCIA Board has approved and adopted the merger agreement and the
transactions contemplated by it and has determined that the merger is fair,
from a financial point of view to, and in the best interests of, HCIA and the
HCIA stockholders.
AFTER CAREFUL CONSIDERATION, THE HCIA BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS A VOTE FOR THE APPROVAL OF THE MERGER.
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
This section contains forward-looking statements of HCIA within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of these words and similar
expressions are intended to identify these forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statements of HCIA as a result of many factors, including those under
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." You should not place undue reliance on forward-looking statements
in this document, which reflect the analysis of the management of HCIA only as
of the date of this document.
BACKGROUND OF THE MERGER
During the past year, the HCIA Board and senior management have regularly
discussed their concerns regarding the decline in HCIA's stock price, trading
volume and attention from market analysts. These discussions encompassed the
reasons for these declines, both internal and external, as well as ways to
increase HCIA's financial and stock price performance. As a result of these
discussions, at its regular quarterly meeting on February 3, 1999, the HCIA
Board formed an informal committee consisting of three outside directors,
Messrs. Dulude, Gregory and Lassiter, to work with management in its review and
evaluation of HCIA's short-term and long-term business and financial objectives
and prospects in order to enable the HCIA Board to consider whether HCIA should
explore strategic alternatives. HCIA's Board also retained Deutsche Bank to
assist in this process. The members of this committee, together with HCIA's
Chairman of the Board and Chief Executive Officer, George D. Pillari, and
representatives of Deutsche Bank, met several times to review these matters.
At a meeting held on April 19, 1999, the full HCIA Board formally decided
to explore strategic alternatives for HCIA. The HCIA Board also formed a
special committee, consisting of Mr. Gregory, as chair, and Mr. Dulude and Dr.
Schramm, to work with management to help frame an appropriate process. HCIA
announced its intentions in this regard in a press release dated April 21,
1999.
Subsequent to the April 1999 announcement and prior to August 1999, the
special committee held two formal meetings and the HCIA Board held a total of
three meetings. During these meetings, the HCIA Board and the special committee
reviewed with management and Deutsche Bank the process to be undertaken to
solicit third party indications of interest, including information as to
prospective interested third parties and the trading multiples of HCIA relative
to other health care information companies. During these meetings and informal
discussions with management and representatives of Deutsche Bank, the HCIA
Board determined that a merger or sale would be the strategic alternative most
likely to maximize stockholder value.
HCIA instituted a formal process whereby prospective bidders were required
to execute a confidentiality agreement prior to obtaining a copy of a
descriptive memorandum relating to HCIA and were requested to provide a
non-binding written indication of interest by the end of May, 1999. Of the
approximately 60 parties originally contacted, 41 executed confidentiality
agreements and 12 submitted preliminary indications of interest by the end of
May. Each of the parties that had submitted a preliminary indication of
interest was then invited to attend a presentation by HCIA senior management
and review materials in a data room at HCIA's headquarters. Ten parties
attended the management presentations, and performed
6
<PAGE>
some level of due diligence. At that point, each of the parties was provided
with a form of merger agreement, and instructed to provide a preliminary bid
and mark-up of the agreement by the end of June, 1999.
By June 30, 1999, HCIA had received a total of five written preliminary
bids. Of those bidders, four ultimately provided either a mark-up of HCIA's
form of merger agreement or a draft agreement of their own. At a meeting held
on June 30, 1999, the HCIA Board reviewed the written preliminary bids with
management and Deutsche Bank. At that point, four of the bids involved cash
only or cash and a small amount of stock, and one involved a transaction that
would result in HCIA remaining as a public company and owning a percentage of
another entity. Three of the bids, including VS&A's, were conditioned on the
bidder obtaining financing, one of the bids involved a draft merger agreement
which was substantially different from the one proposed by HCIA, and one
involved significant structural and valuation issues, and was conditioned upon
additional due diligence. VS&A subsequently withdrew its financing contingency.
At the June 30, 1999 meeting, the HCIA Board authorized continued
negotiations with each of the five parties that had submitted preliminary bids.
During the period from June 30, 1999 through July 26, 1999, representatives of
HCIA conducted substantial negotiations and discussions with these parties. One
of the parties ultimately withdrew its preliminary bid because of a failure to
obtain financing. Discussions with the bidder that had proposed a transaction
in which HCIA would remain as a public company terminated after that bidder was
informed of HCIA's view that its stockholders should be entitled to a greater
pro forma equity interest in the entity resulting from the transaction than had
been proposed by the bidder. Discussions also ultimately terminated with a
third bidder that had requested, but had not been granted, an agreement from
HCIA to negotiate exclusively with that bidder while it performed its due
diligence review of HCIA or, alternatively, to reimburse the bidder for its
out-of-pocket expenses incurred in the due diligence process.
The HCIA Board met again on July 26, 1999, at which time it received an
update on the status of the process and ongoing negotiations. Representatives
of HCIA continued to engage in substantial negotiations with the two remaining
parties, VS&A and another bidder. Each of the two remaining parties conducted
substantial on-site due diligence, including financial and document review,
interviews of management and visits to HCIA sites. During the period from July
26, 1999 through August 7, 1999, HCIA's representatives met numerous times with
representatives of each of the bidders to conduct due diligence, review
financial information and valuation issues, and negotiate the provisions of the
merger agreement.
The HCIA Board met on August 7, 1999 with HCIA's management and legal and
financial advisors and reviewed the VS&A proposal, the resulting negotiations
and discussions and the proposed merger agreement. The HCIA Board also received
an update on the status of negotiations with the other interested party, which
demonstrated that the other party's proposal was less desirable from both a
price and terms perspective. Following questions by the HCIA Board to HCIA's
management and its legal and financial advisors and further discussion
regarding the proposed transaction and the terms and conditions of the proposed
transaction, the HCIA Board authorized management to attempt to finalize
negotiations of a merger agreement with VS&A and to report back to the HCIA
Board when this was completed.
The HCIA Board convened again on August 11, 1999, with HCIA's management
and its legal and financial advisors in attendance. At that meeting, the HCIA
Board discussed the VS&A proposal, the results of further negotiations and
discussions and the proposed merger agreement, noting that the VS&A proposal
contained a higher price per share, a lower termination fee and other terms
deemed more favorable by the HCIA Board than the alternative proposal.
Following questions by the HCIA Board to HCIA's management and its legal and
financial advisors and further discussion regarding the proposed transaction
and the terms and conditions of the transaction, the HCIA Board determined that
the VS&A proposal, as set forth in the definitive agreement presented to the
HCIA Board, was advisable and fair to and in the best interests of HCIA and its
stockholders. At the meeting, Deutsche Bank delivered to the HCIA Board its
oral opinion, which opinion was confirmed by delivery of a written opinion
dated August 11, 1999, to the effect that, as of that date and based on and
subject to the matters described in its opinion, the merger consideration was
fair, from a financial point of view, to the holders of HCIA common stock.
On August 11, 1999, shortly after the conclusion of the HCIA Board
meeting, HCIA and VS&A executed the merger agreement and issued a press release
announcing the merger. The merger agreement was amended and restated effective
October 11, 1999 to provide for the merger of HCIA with and into the LLC. Under
the original merger agreement, HCIA was the surviving entity. For a description
of the reasons HCIA decided to engage in the merger, see " -- HCIA's Reasons
for the Merger" below.
7
<PAGE>
HCIA'S REASONS FOR THE MERGER
The following are the material factors considered by the HCIA Board in
approving the merger:
o the limited trading volume and public float of HCIA common stock, HCIA's
small market capitalization, and diminishing research attention from
market analysts, had adversely affected the trading markets for, and the
value of, HCIA's common stock. In addition, HCIA's stock price
performance since its secondary offering in August 1996 had steadily
declined and health care stocks had underperformed major indices since
January 1, 1996. The HCIA Board also considered its discussions with
Deutsche Bank with respect to these market and trading considerations.
The HCIA Board concluded that under the circumstances the $11.00 per
share cash consideration to be received by stockholders pursuant to the
merger agreement was preferable to continuing to hold shares in HCIA as a
public company. Accordingly, the HCIA Board concluded that HCIA's
remaining an independent public company would not be likely to maximize
stockholder values;
o the inconsistent results of operations and slowed earnings growth of HCIA
in recent years. The HCIA Board also considered the impact that these
factors had and could have on the value of HCIA shares in the future and
on HCIA's overall value as a going concern;
o the cash merger price of $11.00 per share represented (i) a 193% premium
over $3.75, the closing price of HCIA common stock on April 20, 1999, the
day before HCIA's announcement that it was seeking strategic
alternatives, and (ii) a 31% premium over $8.38, the closing price of
HCIA common stock on August 10, 1999, the day before the HCIA Board
meeting at which the merger was approved;
o recent consolidation among health care information and system and
software companies resulting in increased pressure to grow to remain
competitive with companies having greater resources and product
offerings;
o significant constraints on HCIA's acquisition strategy imposed by the
decreased value of its stock as a currency for acquisitions of other
businesses;
o the financial and other terms and conditions of the merger agreement
relative to the market price of HCIA common stock;
o the attractiveness of the all cash offer from VS&A relative to the
opportunities and feasibility of other possible strategic alternatives to
enhance long-term stockholder value;
o the fact that payment in cash eliminates any uncertainties in valuing the
consideration to be received by the HCIA stockholders; and
o the opinion of Deutsche Bank, dated August 11, 1999, to the HCIA Board as
to the fairness, from a financial point of view, of the merger
consideration to the holders of HCIA common stock, and the related
financial analyses performed by Deutsche Bank in connection with its
opinion, as more fully described below under " -- Opinion of HCIA's
Financial Advisor".
The HCIA Board also considered the following negative factors concerning
the merger:
o the fact that HCIA stockholders will receive cash in the merger, which
will not afford them the opportunity to participate in any growth in the
business of HCIA going forward; and
o the risk that the merger will not be completed, and the disruption of
HCIA's business if the merger is abandoned.
This discussion of the information and factors considered by the HCIA
Board is not intended to be exhaustive but includes all material factors
considered by the HCIA Board. In view of the complexity and wide variety of
information and factors considered, both positive and negative, the HCIA Board
did not find it practical to quantify, rank or otherwise assign relative or
specific weights to these factors. In addition, the HCIA Board did not reach
any specific conclusion with respect to each of the factors considered, or any
aspect of any particular factor, but conducted an overall analysis of these
factors, including thorough discussions with HCIA's management and legal and
financial advisors. Individual members of the HCIA Board may have given
different weight to different factors. After taking into consideration all of
these factors, the HCIA Board unanimously concluded that the merger was fair
to, and in the best interests of, HCIA and its stockholders and that HCIA
should proceed with the merger.
8
<PAGE>
OPINION OF HCIA'S FINANCIAL ADVISOR
HCIA engaged Deutsche Bank to act as its financial advisor in connection
with the merger. On August 11, 1999, at a meeting of the HCIA Board held to
evaluate the proposed merger, Deutsche Bank rendered an oral opinion, which
opinion was confirmed by delivery of a written opinion dated August 11, 1999,
to the effect that, as of that date and based on and subject to the matters
described in its opinion, the merger consideration to be received by the
holders of HCIA common stock in the merger was fair, from a financial point of
view, to such holders.
The full text of Deutsche Bank's written opinion, dated August 11, 1999,
which describes the assumptions made, matters considered and limitations of the
review undertaken, is attached as Appendix B and is incorporated into this
proxy statement by reference. DEUTSCHE BANK'S OPINION IS DIRECTED TO THE HCIA
BOARD AND ADDRESSES ONLY THE FAIRNESS OF THE MERGER CONSIDERATION TO BE
RECEIVED BY THE HOLDERS OF HCIA COMMON STOCK IN THE MERGER FROM A FINANCIAL
POINT OF VIEW. THE OPINION DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION BY HCIA TO ENGAGE IN THE MERGER, AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW TO VOTE WITH RESPECT TO MATTERS
RELATING TO THE PROPOSED MERGER. The summary of Deutsche Bank's opinion
described below is qualified in its entirety by reference to the full text of
its opinion attached as Appendix B.
In connection with Deutsche Bank's role as HCIA's financial advisor, and
in arriving at its opinion, Deutsche Bank:
o reviewed publicly available financial and other information concerning
HCIA and internal analyses and other information furnished to or
discussed with Deutsche Bank by HCIA and its advisors;
o held discussions with members of the senior management of HCIA and VS&A
regarding the business and prospects of HCIA;
o reviewed the reported prices and trading activity for the HCIA common
stock;
o compared financial and stock market information for HCIA with similar
information for other companies whose securities are publicly traded;
o reviewed the financial terms of recent business combinations which
Deutsche Bank deemed comparable in whole or in part;
o reviewed the terms of the merger agreement; and
o performed other studies and analyses and considered other factors as
Deutsche Bank deemed appropriate.
In addition, in connection with its engagement, Deutsche Bank was
authorized to approach, and held discussions with, third parties to solicit
indications of interest with respect to the acquisition of HCIA.
Deutsche Bank did not assume responsibility for independent verification
of, and did not independently verify, any information, whether publicly
available or furnished to Deutsche Bank, concerning HCIA, including any
financial information, forecasts or projections considered in connection with
the rendering of its opinion. For purposes of its opinion, Deutsche Bank
assumed and relied upon the accuracy and completeness of all information that
it reviewed and did not conduct a physical inspection of any of the properties
or assets, or prepare or obtain any independent evaluation or appraisal of any
of the assets or liabilities, of HCIA. With respect to the financial forecasts
and projections made available to Deutsche Bank and used in its analyses,
Deutsche Bank assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and judgments as to the matters covered
by the forecasts and projections. In rendering its opinion, Deutsche Bank
expressed no view as to the reasonableness of the forecasts and projections or
the assumptions on which they were based. Deutsche Bank's opinion was
necessarily based on economic, market and other conditions existing on, and the
information made available to Deutsche Bank as of, the date of its opinion.
For purposes of rendering its opinion, Deutsche Bank assumed that, in all
respects material to its analyses, the representations and warranties of HCIA
and VS&A contained in the merger agreement were true and correct, HCIA and VS&A
will each perform all of the covenants and agreements to be performed by it
under the merger agreement and all conditions to the obligations of each of
HCIA and VS&A to consummate the merger will be satisfied without any waiver.
Deutsche Bank also assumed that all material governmental, regulatory or other
approvals and consents required in connection with the consummation of the
merger will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which
either HCIA or VS&A is a party or is subject or by which it is bound, no
limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on HCIA
9
<PAGE>
or materially reduce the contemplated benefits of the merger to HCIA. No other
instructions or limitations were imposed by the HCIA Board on Deutsche Bank
with respect to the investigations made or the procedures followed by it in
rendering its opinion.
The following is a summary of the material analyses performed by Deutsche
Bank in connection with its opinion to the HCIA Board dated August 11, 1999.
THE FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN
TABULAR FORMAT. IN ORDER TO FULLY UNDERSTAND DEUTSCHE BANK'S FINANCIAL
ANALYSES, THE TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY. THE
TABLES ALONE DO NOT CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL
ANALYSES. CONSIDERING THE DATA SET FORTH BELOW WITHOUT CONSIDERING THE FULL
NARRATIVE DESCRIPTION OF THE FINANCIAL ANALYSES, INCLUDING THE METHODOLOGIES
AND ASSUMPTIONS UNDERLYING THE ANALYSES, COULD CREATE A MISLEADING OR
INCOMPLETE VIEW OF DEUTSCHE BANK' S FINANCIAL ANALYSES.
ANALYSIS OF SELECTED PUBLIC COMPANIES
Deutsche Bank compared financial and stock market information for HCIA and
the following eight selected publicly held companies in the information
technology industry:
o Caredata.com
o DAOU Systems, Inc.
o Healthcare Recoveries, Inc.
o Health Management Systems, Inc.
o Mecon, Inc.
o National Research Corporation
o QuadraMed Corporation
o Sunquest Information Systems, Inc.
Deutsche Bank reviewed adjusted market values, calculated as equity market
value, plus debt, less cash, as multiples of latest 12 months revenues,
earnings before interest, taxes, depreciation and amortization, commonly
referred to as EBITDA, and earnings before interest and taxes, commonly
referred to as EBIT. Deutsche Bank also reviewed equity market values as a
multiple of latest 12 months and estimated calendar years 1999 and 2000 net
income. All multiples were based on closing stock prices on August 10, 1999.
Estimated financial data for the selected companies were based on publicly
available research analysts' estimates and estimated financial data for HCIA
were based both on publicly available research analysts' estimates and HCIA
management estimates. Latest 12 months EBIT and net income data for HCIA were
considered not meaningful due to operating losses of HCIA for these operational
measures. This analysis indicated the following implied adjusted market value
and equity market value multiples for the selected companies, as compared to
the following implied multiples for HCIA based on the merger consideration:
<TABLE>
<CAPTION>
IMPLIED MULTIPLES OF
SELECTED COMPANIES
-------------------------- MULTIPLES FOR HCIA IMPLIED
MEAN RANGE BY MERGER CONSIDERATION
--------- -------------- ---------------------------
<S> <C> <C> <C>
ADJUSTED MARKET VALUES:
Latest 12 months revenues ..................................... 1.0x 0.4x - 1.6x 1.9x
Latest 12 months EBITDA ....................................... 5.8x 1.5x - 11.2x 12.3x
Latest 12 months EBIT ......................................... 7.6x 2.1x - 13.0x NM
EQUITY MARKET VALUES:
Latest 12 months net income ................................... 16.6x 6.4x - 33.3x NM
Estimated calendar year 1999 net income (research analysts'
estimates) ................................................... 14.2x 6.7x - 22.6x 44.0x
Estimated calendar year 2000 net income (research analysts'
estimates) ................................................... 11.7x 5.1x - 21.1x 22.4x
Estimated calendar year 1999 net income (management estimates) -- -- 35.7x
Estimated calendar year 2000 net income (management estimates) -- -- 20.2x
</TABLE>
10
<PAGE>
ANALYSIS OF SELECTED PRECEDENT TRANSACTIONS.
Deutsche Bank reviewed the purchase prices and implied transaction
multiples in the following 13 selected transactions in the information
technology industry:
<TABLE>
<CAPTION>
ACQUIROR TARGET
- ---------------------------------------------------- -------------------------------------------
<S> <C>
o Science Applications International Corporation o Oasis Healthcare Holdings Corporation
o Eclipsys Corporation o Transition Systems, Inc.
o IMS Health, Inc. o Pharmaceutical Marketing Services, Inc.
o HBO & Co. o US Servis, Inc.
o QuadraMed Corporation o Medicus Systems Corporation
o National Data Corporation o Source Informatics, Inc.
o National Data Corporation o Pharmaceutical Marketing Services, Inc.
o IDX Systems Corporation o PHAMIS, Inc.
o Snyder Communications, Inc. o American List Corporation
o Warburg, Pincus Ventures, L.P. o Transition Systems, Inc.
o HCIA Inc. o William Mercer, Inc. (Champ Division)
o HCIA Inc. o Datis Corporation
o Health Management Systems, Inc. o Health Care Microsystems, Inc.
</TABLE>
Deutsche Bank reviewed adjusted market values in the selected transactions
as multiples of latest 12 months revenues, EBITDA and EBIT, and equity market
values as a multiple of latest 12 months and one-year forward net income. All
multiples were based on publicly available information at the time of
announcement of the relevant transaction. Latest 12 months EBIT and net income
data for HCIA were considered not meaningful due to operating losses of HCIA
for these operational measures. This analysis indicated the following implied
adjusted market value and equity market value multiples for the selected
transactions, as compared to the following implied multiples for HCIA based on
the merger consideration:
<TABLE>
<CAPTION>
IMPLIED MULTIPLES OF
SELECTED TRANSACTIONS
------------------------- MULTIPLES FOR HCIA
MEAN RANGE IMPLIED BY MERGER CONSIDERATION
--------- --------------- --------------------------------
<S> <C> <C> <C>
ADJUSTED MARKET VALUES:
Latest 12 months revenues .................................. 2.8x 1.6x - 6.9x 1.9x
Latest 12 months EBITDA .................................... 12.1x 7.5x - 18.9x 12.3x
Latest 12 months EBIT ...................................... 16.3x 8.2x - 30.3x NM
EQUITY MARKET VALUES:
Latest 12 months net income ................................ 26.6x 13.3x - 46.4x NM
One-year forward net income (research analysts' estimates) . 23.0x 16.3x - 30.1x 27.8x
One-year forward net income (management estimates) ......... -- -- 24.3x
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS.
Deutsche Bank performed a discounted cash flow analysis to estimate the
present value of the unlevered (I.E., without indebtedness for borrowed money),
after-tax free cash flows that HCIA could generate during fiscal years 1999
through 2003. The range of estimated terminal values for HCIA was calculated by
applying terminal value multiples ranging from 4.0x to 8.0x to HCIA's projected
fiscal year 2003 EBITDA. The present value of the cash flows and terminal
values were calculated using discount rates ranging from 17.0% to 21.0%. This
analysis was based both on internal estimates of the management of HCIA ("Case
I") and sensitivity adjustments to the Case I estimates developed in
consultation with HCIA management which assumed, among other things, lower
revenue growth rates and lower EBITDA and EBIT margins than the Case I
estimates ("Case II"). This analysis yielded the following implied equity
reference ranges for HCIA based on the Case I and Case II estimates, as
compared to the merger consideration:
<TABLE>
<CAPTION>
IMPLIED PER SHARE EQUITY PER SHARE EQUITY VALUE FOR HCIA
REFERENCE RANGE FOR HCIA IMPLIED BY MERGER CONSIDERATION
-------------------------- --------------------------------
<S> <C> <C>
Discounted Cash
Flow Analysis (Case I) .......... $ 10.24-$17.75 $ 11.00
Discounted Cash
Flow Analysis (Case II) ......... $ 7.85-$13.21 $ 11.00
</TABLE>
11
<PAGE>
PREMIUMS ANALYSIS.
Deutsche Bank reviewed the premiums paid in 171 selected transactions
completed since January 1, 1997, including 169 selected change of control
merger and acquisition transactions, 25 selected transactions in the health
care industry and two selected transactions in the information technology
industry having transaction values between $100 million to $200 million, as
well as two additional selected transactions in the information technology
industry. Deutsche Bank analyzed the premiums in these transactions based on
the target company's stock price one day and one month prior to public
announcement of the transaction. This analysis indicated the following premiums
for the target companies in the selected transactions, as compared to the
implied premiums in the merger on April 20, 1999, which is the trading day
prior to HCIA's public announcement that it was exploring strategic
alternatives, August 10, 1999, which is the trading day prior to public
announcement of the merger and July 11, 1999, which is the trading day one
month prior to public announcement of the merger:
<TABLE>
<CAPTION>
PREMIUM
----------------------------- IMPLIED MERGER PREMIUMS
MEAN RANGE FOR HCIA
---------- ------------------ ------------------------
<S> <C> <C> <C>
SELECTED M&A TRANSACTIONS (169)
April 20, 1999 .......................................... 21.4% (33.3%) - 132.0% 193.3%
Day Prior to Public Announcement ........................ 21.4% (33.3%) - 132.0% 31.3%
One Month Prior to Public Announcement .................. 33.4% (18.8%) - 176.2% 10.0%
SELECTED HEALTH CARE M&A TRANSACTIONS (25)
April 20, 1999 .......................................... 21.3% (6.7%) - 54.9% 193.3%
Day Prior to Public Announcement ........................ 21.3% (6.7%) - 54.9% 31.3%
One Month Prior to Public Announcement .................. 45.1% (8.6%) - 118.2% 10.0%
SELECTED INFORMATION TECHNOLOGY M&A TRANSACTIONS (4)
April 20, 1999 .......................................... 37.3% 18.9% - 57.5% 193.3%
Day Prior to Public Announcement ........................ 37.3% 18.9% - 57.5% 31.3%
One Month Prior to Public Announcement .................. 39.2% 25.8% - 62.2% 10.0%
</TABLE>
OTHER FACTORS.
In rendering its opinion, Deutsche Bank also reviewed and considered,
among other things:
o historical market prices for the HCIA common stock and the relationship
between movements in the HCIA common stock, movements in the common stock
of selected companies and movements in the common stock of the S&P 500
Index; and
o a stockholder profile of HCIA.
The above summary is not a complete description of Deutsche Bank's opinion
to the HCIA Board or the financial analyses performed and factors considered by
Deutsche Bank in connection with its opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to
the most appropriate and relevant methods of financial analyses and the
application of those methods to the particular circumstances and, therefore, a
fairness opinion is not readily susceptible to summary description. Deutsche
Bank believes that its analyses and the summary above must be considered as a
whole and that selecting portions of its analyses and factors or focusing on
information presented in tabular format, without considering all analyses and
factors or the narrative description of the analyses, could create a misleading
or incomplete view of the processes underlying Deutsche Bank's analyses and
opinion.
In performing its analyses, Deutsche Bank considered industry performance,
general business, economic, market and financial conditions and other matters
existing as of the date of its opinion, many of which are beyond the control of
HCIA. No company, transaction or business used in such analyses as a comparison
is identical to HCIA or the merger, and an evaluation of the results of those
analyses is not entirely mathematical. Rather, the analyses involve complex
considerations and judgments concerning financial and operating characteristics
and other factors that could affect the acquisition, public trading or other
values of the companies, business segments or transactions analyzed.
The estimates contained in Deutsche Bank's analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by its analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, Deutsche Bank's analyses and estimates are inherently
subject to substantial uncertainty.
12
<PAGE>
The type and amount of consideration payable in the merger was determined
through negotiation between HCIA and VS&A. Although Deutsche Bank provided
financial advice to HCIA during the course of negotiations, the decision to
enter into the merger was solely that of the HCIA Board. Deutsche Bank's
opinion and financial analyses were only one of many factors considered by the
HCIA Board in its evaluation of the merger and should not be viewed as
determinative of the views of the HCIA Board or management with respect to the
merger or the consideration payable in the merger.
Deutsche Bank is an internationally recognized investment banking firm
and, as a customary part of its investment banking business, is engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, private placements and valuations for
estate, corporate and other purposes. HCIA selected Deutsche Bank based on
Deutsche Bank's reputation, expertise and familiarity with HCIA. Deutsche Bank
and its predecessors and affiliates have in the past provided financial
services to HCIA and affiliates of VS&A unrelated to the merger, for which
services Deutsche Bank and its affiliates have received compensation. An
affiliate of Deutsche Bank also is a limited partner of VS&A.
In the ordinary course of business, Deutsche Bank and its affiliates may
actively trade or hold the securities and other instruments and obligations of
HCIA for their own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities, instruments
or obligations.
Under the terms of Deutsche Bank's engagement, HCIA has agreed to pay
Deutsche Bank for its services upon completion of the merger an aggregate
financial advisory fee equal to 1.5% of the total consideration, including
liabilities assumed, payable in the merger. In addition, HCIA has agreed to
reimburse Deutsche Bank for its reasonable travel and other out-of-pocket
expenses, including reasonable fees and disbursements of counsel, and to
indemnify Deutsche Bank and related parties against liabilities, including
liabilities under the federal securities laws, relating to, or arising out of,
its engagement.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The receipt of cash for shares of HCIA common stock under the merger
agreement will be a taxable transaction for federal income tax purposes. In
general, a holder of HCIA common stock will recognize gain or loss for federal
income tax purposes equal to the difference between $11.00 times the number of
HCIA shares held by the stockholder and the stockholder's adjusted tax basis in
the shares. Assuming the shares constitute capital assets in the hands of the
stockholder, the gain or loss will constitute capital gain or loss. The gain or
loss will be long-term capital gain or loss provided that the shares exchanged
were held by the stockholder for more than twelve months. Under current federal
law, long-term capital gains of individuals are taxed at a maximum rate of 20%
and a minimum rate of 10%. Capital gains that are not long-term capital gains
are taxed at ordinary income rates.
A stockholder who exchanges shares of HCIA common stock may be subject to
a 31% backup withholding tax unless the stockholder provides its taxpayer
identification number, or unless an exemption applies. If backup withholding
applies to a stockholder, VS&A's paying agent will be required to withhold 31%
from payments to the stockholder. Backup withholding is not an additional tax.
Rather, the amount of the backup withholding can be credited against the
federal income tax liability of the person subject to the backup withholding,
provided that the required information is given to the IRS. If backup
withholding results in an overpayment of tax, a refund can be obtained by the
stockholder upon filing an income tax return.
The foregoing tax discussion is included for general information only and
is based upon present federal law. The discussion does not address tax
consequences under the laws of state or local governments or any other
jurisdiction or tax consequences to categories of stockholders that may be
subject to special rules, such as foreign persons, tax-exempt entities,
insurance companies, financial institutions and dealers in stocks and
securities. The foregoing discussion may not be applicable to a stockholder who
acquired his or her shares of HCIA common stock pursuant to the exercise of
stock options or otherwise as compensation. Each holder of HCIA common stock
should consult such holder's own tax advisor concerning the specific tax
consequences of the merger to such holder, including the application and effect
of federal, state, local and other tax laws and the possible effect of changes
in such tax laws.
REGULATORY MATTERS
The merger may be reviewed by the Antitrust Division of the Department of
Justice and the Federal Trade Commission (the "FTC") to determine whether it
complies with applicable antitrust laws. Under the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R Act"), the
merger may not be consummated until HCIA and VS&A furnish information to the
Department of Justice and the FTC and the specified waiting period requirements
of the H-S-R
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Act have ended or been previously terminated. HCIA and VS&A filed the required
notification and report forms on August 27, 1999, and received early
termination of the waiting period on September 14, 1999.
At any time, the Department of Justice, the FTC, state attorneys general,
foreign regulatory agencies or a private person or entity could challenge the
merger under the antitrust laws and seek, among other things, to enjoin the
merger, to cause VS&A to divest itself of significant assets of HCIA and VS&A,
or to impose conditions on VS&A with respect to the business operations of the
combined companies.
We are aware of no other material governmental or regulatory approvals
required for consummation of the merger, other than compliance with Maryland
and Delaware corporate law.
ACCOUNTING TREATMENT
The merger is being accounted for as a purchase by VS&A for financial
reporting and accounting purposes, under generally accepted accounting
principles.
VOTING AGREEMENT
In connection with the merger agreement and the transactions contemplated
thereby, VS&A entered into a voting agreement with the following executive
officers of HCIA: George D. Pillari, Donald S. Good, Jr., Barry C. Offutt and
Charles A. Berardesco, who collectively own approximately 2.1% of the
outstanding shares of HCIA common stock.
The following summary describes the material terms of the voting
agreement, as amended and restated on October 11, 1999. However, because the
description of the voting agreement contained in this document is a summary, it
does not contain all the information that may be important to you and is
qualified by reference to the entire text of the voting agreement. You should
read carefully the entire copy of the voting agreement attached as Appendix C
to this proxy statement and incorporated herein by reference.
VOTING
During the period beginning on the date of the voting agreement and ending
on the earlier of the effective time of the merger or the date of termination
of the merger agreement for any reason, each executive has agreed to vote all
the shares of HCIA common stock issued and outstanding and beneficially owned
or controlled by such executive as of the date of the voting agreement as well
as any shares with respect to which such executive becomes the owner after the
date of the voting agreement in favor of the merger and any actions
contemplated by the merger agreement.
During the same period, each executive has agreed that he will vote his
shares of HCIA common stock against the approval of any other merger,
reorganization, share exchange, tender offer, consolidation or similar
transaction or any other matters related thereto or corporate action which
would impede, frustrate, prevent or nullify the voting agreement or the
transactions contemplated by the voting agreement or the merger agreement.
The foregoing voting requirements will not be applicable, if an executive
or the HCIA Board receives written advice from legal counsel to HCIA stating
that such action would result in a significant possibility that the executive
would breach any of his fiduciary duties to HCIA.
NO SOLICITATION
Each executive has agreed that he will not, directly or indirectly:
o take any action to solicit, initiate, encourage or facilitate any
acquisition proposal other than the merger; or
o engage in negotiations or discussions with, or furnish or disclose any
information relating to an acquisition proposal to any third party,
except that the executives may negotiate and participate in negotiations
regarding another acquisition proposal to the extent HCIA is permitted to
do so under the merger agreement.
Also, each executive has agreed to promptly inform VS&A in writing after
receipt of an acquisition proposal or any indication that any third party is
considering making an acquisition proposal.
TRANSFER
Each executive has agreed that he will not sell, transfer, assign,
encumber or dispose of any shares of HCIA common stock until the expiration of
the period referred to above under " -- Voting," other than pursuant to the
terms of the voting agreement or pursuant to the terms of the merger.
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DISSENTERS' APPRAISAL RIGHTS
You are not entitled to dissenters appraisal rights under applicable law
with regard to the merger.
THE MERGER
The following discussion summarizes the material provisions of the merger
agreement and the other related agreements and transactions. The following is
not, however, a complete statement of all the provisions of the merger
agreement and related agreements. Detailed terms of and conditions to the
merger are contained in the merger agreement, a copy of which is attached to
this proxy statement as Appendix A and is incorporated herein by reference. For
a complete presentation of this information, you are urged to read the more
detailed information set forth in Appendix A.
GENERAL
The merger agreement provides for the merger of HCIA with and into
VS&A-HCIA, L.L.C., an indirect limited liability company subsidiary of VS&A. As
a result of the merger, the separate existence of HCIA will end and HCIA-VS&A,
L.L.C. will survive as a subsidiary of VS&A. The former holders of HCIA common
stock will be entitled to receive $11.00 in cash, without interest, subject to
reduction for any applicable federal backup or other withholding taxes, for
each share of HCIA common stock they held immediately prior to the effective
time of the merger.
CLOSING DATE; EFFECTIVE TIME
The closing will occur no later than two business days after all
conditions to closing have been satisfied or waived, unless another date is
agreed to by the parties. The merger will become effective upon the filing of
articles of merger with the Maryland State Department of Assessments and
Taxation and a certificate of merger with the Secretary of State of the State
of Delaware, or at whatever time is stated in the articles and certificate of
merger. If HCIA stockholders approve the merger at the special meeting on
November 17, 1999 and the other conditions to the merger are satisfied or
waived by that time, we currently expect the merger to become effective on
November 23, 1999.
PAYMENT FOR COMMON STOCK
At the effective time of the merger, each share of HCIA common stock
issued and outstanding immediately prior to the effective time of the merger,
other than shares owned by any subsidiary of HCIA, and shares owned by VS&A or
any of its subsidiaries, will be converted into the right to receive $11.00 in
cash, without interest, subject to reduction for any applicable federal backup
or other withholding taxes.
EXCHANGE OF CERTIFICATES
As a result of the merger, all shares of HCIA common stock outstanding
immediately prior to the effective time of the merger will be converted into
the right to receive cash as described above. Consequently, after the effective
time of the merger, no further transfers of HCIA common stock will be recorded
in the stock transfer books of HCIA. Soon after the effective time, VS&A's
paying agent will mail to HCIA stockholders a letter of transmittal and
instructions for use in surrendering HCIA stock certificates in exchange for
cash. In the event that your stock certificate has been lost or destroyed, you
will have to execute an affidavit of lost certificate and post a bond
satisfactory to VS&A as indemnity against any claim that may be made against
VS&A with respect to that stock certificate. Promptly after receipt by VS&A's
paying agent of your HCIA stock certificate or an affidavit of lost certificate
accompanied by a bond, an executed letter of transmittal and any other required
documents, your stock certificates will be canceled and you will receive cash
as set forth above.
You should not submit your HCIA stock certificates for exchange until you
receive the transmittal instructions and a form of letter of transmittal from
VS&A's paying agent.
TREATMENT OF STOCK OPTIONS
At the effective time of the merger, outstanding options issued under
HCIA's stock option plans or pursuant to individual option grants will become
immediately vested and exercisable and converted into the right to receive:
o the excess, if any, of $11.00 over the per share exercise price of the
HCIA option, multiplied by
o the number of shares of HCIA common stock subject to that option that are
vested and exercisable at the effective time of the merger.
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<PAGE>
The amounts payable with respect to outstanding options will be paid as
promptly as practicable following the effective time of the merger and in no
event later than 10 days following the closing date of the merger.
The HCIA stock option plans will terminate as of the effective time of the
merger so that, after the effective time of the merger, there will be no
outstanding HCIA stock options, and HCIA has agreed to use its commercially
reasonable best efforts (which shall include attempting to obtain consents, if
required, of holders of HCIA stock options) to ensure that, following the
effective time of the merger, there are no outstanding HCIA stock options.
REPRESENTATIONS AND WARRANTIES
Section 3 of the merger agreement contains various representations and
warranties of HCIA, including representations and warranties as to:
o our and our subsidiaries' due organization, valid existence, good
standing, corporate power and authority to own and operate our properties
and carry on our business;
o our lack of any ownership of or investment in any other entity;
o our capitalization and the ownership of our capital stock;
o our power and authority to enter into and perform under the merger
agreement;
o compliance with the Securities Act of 1933 and the Securities Exchange
Act of 1934;
o the accuracy of the information we supply for this proxy statement and
the compliance of this proxy statement with the Securities Exchange Act
of 1934;
o the third-party consents required for the merger and the absence of
conflict between (i) the merger agreement and (ii) our corporate
documents and agreements with third parties and applicable law;
o the accuracy of our financial statements and the absence of certain
changes with respect to our business since December 31, 1998;
o the absence of litigation, tax audits or investigations pending or
threatened against us;
o compliance with all applicable laws, including employment and
environmental laws and regulations and laws and regulations applicable to
our employee benefit plans;
o the timely filing of our tax returns and our liabilities for taxes;
o our ownership of intellectual property and the absence of infringement of
third-party intellectual property rights by us;
o the absence of any brokerage, finder's or other fees or commissions owed
by us to anyone in connection with the merger agreement;
o our material contracts and our compliance with the terms of those
contracts;
o our net operating loss carryforwards; and
o the accuracy of our disclosures made under and pursuant to the merger
agreement.
The merger agreement contains representations and warranties of VS&A as
to:
o VS&A's due organization, valid existence and good standing, and VS&A's
power and authority to own and operate its properties and carry on its
business;
o VS&A's power and authority to enter into and perform under the merger
agreement;
o the accuracy of the information VS&A supplies for this proxy statement;
o the third-party consents required for the merger and the absence of
conflict between (i) the merger agreement and (ii) VS&A's partnership
documents and third-party agreements and applicable law;
o the absence of litigation pending or threatened against VS&A; and
o the absence of any brokerage, finder's or other fees or commissions owed
by VS&A to anyone in connection with the merger agreement.
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HCIA COVENANTS
A complete list of the covenants of HCIA is set forth in Sections 4 and 5
of the merger agreement, which is attached to this proxy statement as Appendix
A.
GENERAL AFFIRMATIVE COVENANTS
In the merger agreement, we have agreed that until the earlier of the
effective time of the merger or the termination of the merger agreement, we
will:
o provide VS&A with access to our files, books, records and offices as may
be reasonably required;
o obtain the government approvals and third-party consents necessary for
the merger;
o promptly notify VS&A of any event that is likely to cause any
representation or warranty of HCIA to be materially untrue or inaccurate,
or of any material failure to comply with any covenant, condition or
agreement under the merger agreement;
o promptly notify VS&A of any change or event having or which could
reasonably be expected to have a material adverse effect on HCIA; and
o use our best efforts to cause the merger to be completed.
CONDUCT OF BUSINESS
In the merger agreement, we agreed that, until the effective time of the
merger or until termination of the merger agreement, we will conduct our
operations in the ordinary course, consistent with past practice, use
commercially reasonable best efforts to keep available the services of our
current officers and other key employees and to preserve our relationships with
customers, suppliers and other third parties. We also agreed that we will not,
without VS&A's prior consent:
o amend our articles of incorporation or bylaws;
o issue stock, except through our existing stock option plans;
o authorize any stock splits or reclassifications, or pay any dividends or
other distributions on our stock;
o adopt any complete or partial liquidation, reorganization or
restructuring of our corporate structure;
o except in the ordinary course of business, incur or assume any debt;
o change, amend or terminate any employee benefit plans except as may be
required by law;
o acquire, sell, lease, license, or otherwise encumber or subject to any
lien any of our property or assets or dispose of any assets outside of
the ordinary course of business;
o change any of our accounting principles or practices except as may be
required by generally accepted accounting principles;
o acquire any business or any person, enter into any agreement other than
in the ordinary course of business and within certain dollar limits, or
make any investment or purchase any property of any entity other than a
subsidiary;
o permit any of our material insurance policies to be canceled or
terminated without prior notice to VS&A;
o pay, discharge or satisfy any claims, liabilities or obligations except
in the ordinary course of business consist with past practice; or
o take or propose to take any action that would make our representations
and warranties untrue.
NO OTHER NEGOTIATIONS
During the pre-closing period, we will not, directly or indirectly,
encourage, solicit, participate in or initiate discussions or negotiations
with, or provide any information to, any third party concerning any acquisition
proposal, i.e., any proposal to acquire 10% or more of our assets or our
capital stock, whether by merger, tender offer, exchange offer, sale of assets
or similar transaction. We also will not authorize or permit any of our
officers, directors, employees, representatives or agents to undertake any of
these prohibited actions.
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However, we may furnish information and access to a third party in
response a third party's unsolicited acquisition proposal, and may participate
in discussions and negotiate with that third party, if in the opinion of HCIA's
Board, after receipt of written advice from legal counsel, the failure to
provide such information would result in a significant possibility that the
HCIA Board would breach or violate its fiduciary duties to HCIA's stockholders.
HCIA may participate in discussions and negotiations with that third party, if
(i) the third party has submitted an unsolicited bona fide written proposal and
the HCIA Board determines in good faith that the unsolicited proposal is more
favorable than the merger and that it is reasonably likely to be consummated
and (ii) failing to engage in discussions and negotiations would result in a
significant possibility that the HCIA Board would breach its fiduciary duties
to HCIA stockholders.
The HCIA Board must provide a copy of any acquisition proposal or inquiry
which it receives to VS&A promptly upon its receipt. In addition, the HCIA
Board must promptly advise VS&A of any changes in the status or content of any
such proposals. HCIA may not enter into an agreement with respect to any third
party acquisition proposal unless it first gives VS&A notice of its intent to
do so and causes its financial and legal advisors to negotiate with VS&A during
the notice period so as to enable HCIA to proceed with the merger on amended
terms.
VS&A COVENANTS
In the merger agreement, VS&A agrees that it will:
o obtain the government approvals and third-party consents necessary for
the merger;
o promptly notify HCIA of any event that is likely to cause any
representation or warranty of VS&A to be materially untrue or inaccurate,
or of any material failure to comply with any of covenant, condition or
agreement under the merger agreement;
o maintain in effect for three years following the merger all rights to
indemnification in favor of current and former officers or directors of
HCIA and provide directors' and officers' liability insurance for the
foregoing persons for two years following the merger; and
o use its best efforts to cause the merger to be completed.
CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATIONS OF BOTH PARTIES
The obligations of both parties to effect the merger are conditioned upon:
o approval of the merger agreement by HCIA stockholders;
o the absence of any statute, law, ordinance, rule or regulation declaring
the merger agreement to be unenforceable in any material respect or which
would prohibit the consummation of the merger;
o the absence of any threatened suit, action or proceeding by any
governmental entity seeking to prohibit or impose material limitations on
VS&A's ownership or operation of HCIA's business or assets; and
o the receipt or filing of any required governmental or regulatory notices
or approvals.
CONDITIONS TO THE OBLIGATIONS OF HCIA
The obligations of HCIA to effect the merger are conditioned upon:
o the representations and warranties of VS&A being true and correct in all
material respects on and as of the closing date;
o VS&A having performed and complied in all material respects with all of
its obligations under the merger agreement on or before the closing date;
and
o HCIA having received a legal opinion from counsel to VS&A.
CONDITIONS TO THE OBLIGATIONS OF VS&A
The obligations of VS&A to effect the merger are conditioned upon:
o the representations and warranties of HCIA being true and correct in all
material respects on and as of the closing date;
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o HCIA having performed and complied in all material respects with all of
its obligations under the merger agreement on or before the closing date;
o HCIA having received all consents necessary to continue in full force one
of its material contracts;
o the absence of any material adverse change in HCIA;
o HCIA's stockholders' rights plan having been terminated or the rights
issued thereunder having become nonredeemable or nonexercisable; and
o VS&A having received a legal opinion from counsel to HCIA.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated before the merger becomes
effective, whether before or after approval of the merger by the HCIA
stockholders:
o by mutual consent of HCIA and VS&A;
o by either HCIA or VS&A if, despite the best efforts of the terminating
party to prevent it, there is a final non-appealable permanent injunction
or other final court order prohibiting the merger, declaring the merger
agreement to be unenforceable in any material respect or making it
illegal, or if, despite the best efforts of the terminating party to
obtain approval, any governmental entity has issued a final order denying
approval of the merger or imposing material restrictions on VS&A's
ownership or operation of HCIA's business; or
o by either HCIA or VS&A if the merger is not completed by December 31,
1999, other than as a result of a breach of the merger agreement by the
terminating party, or if HCIA stockholder approval has not been obtained.
by HCIA if:
o VS&A breaches a representation or warranty, or breaches any covenant or
agreement in the merger agreement if the breach has a material adverse
effect on VS&A or the consummation of the merger and is incapable of
being cured by VS&A or is not cured within 30 days of written notice from
HCIA; or
o HCIA enters into a definitive agreement concerning a merger, sale of
assets, sale of shares of HCIA capital stock or a similar transaction
that the HCIA Board determines in good faith to be more favorable to HCIA
stockholders than the merger with VS&A, after consultation with its
financial advisers.
by VS&A if:
o HCIA's board of directors (i) withdraws, modifies or changes its approval
or recommendation of the merger or (ii) enters into or recommends another
proposal concerning a merger, sale of assets, sale of shares of HCIA
common stock or a similar transaction; or
o HCIA breaches a representation or warranty, or breaches any covenant or
agreement under the merger agreement if the breach has a material adverse
effect on HCIA or the consummation of the merger and is incapable of
being cured by HCIA or is not cured by HCIA within 30 days of written
notice from VS&A.
Terminating the merger agreement will generally terminate the obligations
of the parties to perform their covenants in the merger agreement, except that
the parties will be required to continue to comply with various miscellaneous
provisions, including VS&A's agreement to refrain from divulging or using the
confidential information of HCIA, except as provided in the merger agreement.
Upon termination of the merger agreement, each party will bear its own
expenses in connection with the merger agreement, except that each of HCIA and
VS&A has agreed to bear 50% of the expenses of (i) printing, filing and mailing
this proxy statement and (ii) filings required under the H-S-R Act.
TERMINATION FEES AND EXPENSES
HCIA will be required to pay VS&A a termination fee in an amount equal to
3 1/2% of the aggregate merger consideration payable to HCIA stockholders
(approximately $4.7 million), plus up to $1.0 million to reimburse VS&A for
expenses, costs and fees incurred by VS&A in connection with the merger, upon
the occurrence of the events described below:
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o if VS&A terminates the merger agreement because (i) HCIA's Board
withdraws, modifies or changes its approval or recommendation of the
merger, or recommends another merger or acquisition proposal or (ii) HCIA
breaches a representation or warranty in the merger agreement or breaches
any covenant or agreement that has a material adverse effect on HCIA or
the consummation of the merger and notice of such breach has been given;
or
o if HCIA terminates the merger agreement because HCIA enters into an
alternative acquisition proposal more favorable to HCIA stockholders than
the merger with VS&A and (i) prior to the termination of the merger
agreement an alternative acquisition proposal shall have been made and
consummated within one year of such termination or (ii) within 18 months
of such termination HCIA enters into a different merger or acquisition
proposal, in either case at a price and on terms at least as favorable to
the HCIA stockholders as the merger.
HCIA also will be required to reimburse VS&A for up to $1.0 million of
out-of-pocket expenses, costs and fees incurred by VS&A in connection with the
merger, if the merger agreement terminates other than as a result of:
o the mutual consent of HCIA and VS&A; or
o VS&A's breach of a representation or warranty or any covenant or
agreement in the merger agreement.
INDEMNIFICATION
The merger agreement provides that, for a period of three years after the
effective time, VS&A will maintain in effect current rights to indemnification
of the present and former officers and directors of HCIA and its subsidiaries
from liabilities arising out of actions or omissions in their capacity as such
prior to or at the effective time of the merger, to the full extent permitted
under applicable law or as provided in HCIA's or its subsidiaries'
organizational documents or any written indemnification agreements. In
addition, VS&A will maintain directors' and officers' insurance coverage for
two years after the effective time on terms no less favorable to such
indemnified parties than existing insurance coverage.
BENEFITS OF THE MERGER TO HCIA DIRECTORS AND EXECUTIVE OFFICERS
When you consider the HCIA Board's recommendation to vote for the merger,
you should be aware of interests which some of the HCIA directors and executive
officers have in the merger that may be different from your and their interests
as HCIA stockholders. The HCIA Board was aware of these and other interests and
considered them before approving and adopting the merger agreement.
ACCELERATION OF STOCK OPTIONS
The completion of the merger will cause the full vesting of the following
number of in-the-money options to purchase shares of HCIA common stock held by
the following executive officers and directors of HCIA:
<TABLE>
<CAPTION>
NAME AND TITLE NO. OF OPTIONS
- ------------------------------------------------------------------------- ---------------
<S> <C>
George D. Pillari, Chairman of the Board and Chief Executive Officer .... 179,500
Donald S. Good, President and Chief Operating Officer ................... 110,250
Barry C. Offutt, Senior Vice President .................................. 98,149
Charles A. Berardesco, Senior Vice President ............................ 37,300
Richard A. Berman, Director ............................................. 5,000
Richard Dulude, Director ................................................ 5,000
Phillip B. Lassiter, Director ........................................... 5,000
Dr. Carl J. Schramm, Director ........................................... 5,000
W. Grant Gregory, Director .............................................. 5,000
</TABLE>
At the effective time of the merger, all options issued pursuant to the
HCIA option plans or individual grants will be canceled and all option holders,
including the above named directors and executive officers, will, as promptly
as practicable following the effective time, and in no event later than 10 days
following the closing date of the merger, be paid an amount equal to:
o the difference between $11.00 and the exercise price of the HCIA option,
multiplied by
o the number of shares of HCIA common stock subject to the option.
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EMPLOYMENT AGREEMENT
Effective as of January 1, 1995, HCIA entered into an employment agreement
with its Chief Executive Officer, George D. Pillari, pursuant to which HCIA
continued his employment as Chairman of the Board and Chief Executive Officer.
Pursuant to the employment agreement, Mr. Pillari receives an annual base
salary of $265,000 and is entitled to participate in a bonus arrangement under
which he is eligible to earn an annual bonus based on HCIA's achieving certain
performance goals to be established by the HCIA Board. The employment agreement
has an initial term of two years, and unless either party provides notice of
termination to the other, the term of the agreement automatically renews daily
for succeeding two year periods.
The employment agreement provides that in the event of the termination of
Mr. Pillari's employment resulting from a change in control of HCIA (as defined
in the employment agreement), Mr. Pillari would be entitled to receive a
lump-sum payment equal to two times the sum of his highest base annual salary
and highest target bonus payable at any time (such sum being not less than 140%
of such base annual salary). Mr. Pillari also will become fully vested in all
stock options and other awards under HCIA's stock option plans, and will be
entitled to receive certain lump sum payments HCIA would have made to his
account under various HCIA plans. In addition, he would continue to participate
in all HCIA benefit plans until the earlier of two years from the date of
termination or such time as he is covered by a comparable plan of a subsequent
employer. Mr. Pillari is also subject to certain restrictions under the
agreement prohibiting him from competing with HCIA or any of its subsidiaries
and from divulging any confidential proprietary information obtained by him
while in the employ of HCIA and for a period of time thereafter.
In the event Mr. Pillari is terminated following a "change of control,"
HCIA expects that cash severance payments payable to Mr. Pillari under the
employment agreement would equal approximately $795,000. The closing of the
merger will constitute a "change in control" for purposes of the employment
agreement.
MANAGEMENT RETENTION AGREEMENTS
We have entered into a management retention agreement with each of our
officers other than Mr. Pillari. These agreements provide for payments and
other benefits if there is a change in control of HCIA and, within two years of
such change in control, the officer's employment is terminated by HCIA or its
successor other than for cause, or the officer resigns for good reason. For
certain senior executive officers, good reason includes a change in such
officers' organizational reporting responsibilities following a change in
control of HCIA. Under each agreement, the officer would receive, following
termination of employment under such circumstances, cash payments equal to up
to two times the sum of:
o the officer's highest annual rate of base salary; and
o the product of the officer's highest bonus percentage (as a percentage of
base salary) times his highest base salary (referred to as the "Reference
Amount").
The officer may elect to receive payment either in a lump sum or in the
form of periodic payments following his termination of employment. For certain
officers, amounts in excess of one times the Reference Amount will be made in
the form of periodic payments, and will be subject to reduction, on a
dollar-for-dollar basis, by any compensation the officer earns from a
subsequent employer unrelated to HCIA.
In addition to the payments described above, the officer would be fully
vested in all stock options and other awards under HCIA's stock option plans
upon a change in control and receive following termination of employment a
lump-sum payment equal to the amount that HCIA would have contributed for the
officer's account under the HCIA savings incentive plan during the two years
following termination of employment. The officer and his family will remain
eligible to participate in HCIA's medical and other welfare benefits programs
for two years from the date of the officer's termination of employment (except
that coverage will end to the extent the officer begins coverage under the
plans of a subsequent employer).
Assuming that HCIA stockholders approve the merger agreement, the
management retention agreements will continue in effect until HCIA or a
successor company has satisfied its obligations under those agreements. The
table below shows the cash amounts Messrs. Good, Offutt and Berardesco would
likely receive if they were terminated through a qualifying termination on
December 31, 1999.
21
<PAGE>
<TABLE>
<CAPTION>
BASE SALARY ANNUAL BONUS
NAME BENEFITS BENEFITS
- -------------------------------------------------------- ------------ --------------
<S> <C> <C>
Donald S. Good, President and Chief Operating Officer .. $450,000 $225,000
Barry C. Offutt, Senior Vice President ................. $362,200 $163,000
Charles A. Berardesco, Senior Vice President ........... $331,200 $132,500
</TABLE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT OF HCIA
The following table sets forth certain information, as of October 4, 1999,
with respect to the beneficial ownership of HCIA common stock by:
o each stockholder known by HCIA to be the beneficial owner of more than 5%
of the HCIA common stock;
o each director;
o HCIA's Chief Executive Officer and each of the three other most highly
compensated executive officers of HCIA based on HCIA's fiscal year 1998
compensation; and
o all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ---------------------------------------------------------------- ------------ --------
<S> <C> <C>
George D. Pillari(2) ........................................... 461,929 3.8
Richard A. Berman(3) ........................................... 19,500 *
Richard Dulude(3) .............................................. 20,500 *
W. Grant Gregory(3)(4) ......................................... 141,200 1.2
Phillip B. Lassiter(3) ......................................... 50,500 *
Carl J. Schramm, Ph.D.(3)(5) ................................... 20,900 *
Donald S. Good, Jr.(6) ......................................... 46,878 *
Barry C. Offutt(6) ............................................. 70,819 *
Charles A. Berardesco(6) ....................................... 18,268 *
Massachusetts Financial Services Company(7) .................... 1,264,737 10.7
Merrill Lynch & Co.(8) ......................................... 1,322,000 11.1
T. Rowe Price Associates, Inc.(9) .............................. 1,232,100 10.4
Dimensional Fund Advisors Inc.(10) ............................. 622,300 5.2
All directors and executive officers as a group (9 persons)(11) 850,494 6.9
</TABLE>
- ---------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to the shares. Shares of HCIA common stock subject to options
currently exercisable or exercisable within 60 days of October 4, 1999 are
deemed outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of
any other person.
(2) Includes (i) 233,330 shares as to which Mr. Pillari shares beneficial
ownership with his wife, (ii) 1,950 shares held as custodian for minor
children, (iii) 4,149 shares for Mr. Pillari's benefit in the HCIA Savings
Incentive Plan ("SIP") and (iv) exercisable options to acquire 222,500
shares of common stock.
(3) Includes 19,500 shares subject to options under HCIA's Directors Option
Plan.
(4) Includes 4,000 shares owned through a partnership of which Mr. Gregory is a
partner.
(5) Includes 1,400 shares held as custodian for minor children.
(6) Includes 45,375, 66,224 and 16,700 shares subject to options held by
Messrs. Good, Offutt and Berardesco, respectively. Also includes 603 and
3,095 shares held for Messrs. Good and Offutt, respectively, in the SIP.
(7) Based on a Schedule 13G filed by the listed entity. According to the
Schedule 13G, there is sole dispositive power with respect to all shares
and sole voting power with respect to 1,238,637 shares. The address of
Massachusetts Financial Services Company is 500 Boylston Street, Boston,
Massachusetts 02116.
(8) Based on a Schedule 13G filed by listed entity. The address of Merrill
Lynch & Co. is World Financial Center, North Tower, 250 Vesey Street, New
York, New York 10381. According to the Schedule 13G, there is shared
voting and dispositive power with respect to all shares. In addition, the
Schedule 13G indicates that Merrill Lynch Special Value Fund, Inc. holds
shared voting and dispositive power as to 859,500 shares. The address of
Merrill Lynch Special Value Fund, Inc. is 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
(9) Based on a Schedule 13G filed by the listed entity. The address of T. Rowe
Price Associates, Inc. is 100 E. Pratt Street, Baltimore, Maryland 21202.
According to the Schedule 13G, there is sole dispositive power as to all
shares and sole voting power as to 21,800 shares.
(10) Based on a Schedule 13G filed by the listed entity. The address of
Dimensional Fund Advisors Inc. is 1299 Ocean Avenue, 11th Floor, Santa
Monica, California 90401.
(11) Includes 448,299 shares subject to options and 7,847 shares held in the
SIP.
22
<PAGE>
BUSINESS OF HCIA
BACKGROUND
HCIA was incorporated in Maryland in 1985. In 1988, all of our then
outstanding capital stock was acquired by Citicorp Financial Guaranty Holdings,
Inc., which subsequently transferred the stock to AMBAC Inc ("AMBAC"). From
1988 until our initial public offering in the first quarter of 1995, AMBAC
provided additional capital and financing for our growth. In March 1992, we
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 acquired by HCIA had revenue for the fiscal year ended December 31,
1991 of approximately $4.8 million. In April 1992, we acquired all of the
outstanding capital stock of Healthcare Knowledge Resources, Inc., a health
care information company with revenue for the fiscal year ended June 30, 1991
of approximately $12.2 million. During the first quarter of 1995, we completed
an initial public offering of approximately 2.0 million newly issued shares of
HCIA common stock. Subsequent to the offering, in April 1995, we 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 of its common stock and AMBAC sold approximately 1.1 million
shares of HCIA common stock at $28.50 per share in a combined public offering.
In December 1995, we acquired the assets constituting the CHAMP unit of
William M. Mercer, Incorporated, which provides a database service for the
analysis of health care costs to employers, for $17.5 million in cash. In May
1996, we acquired Response Healthcare Information Management, Inc., a
patient-centered data collection company, for approximately $6.3 million in
cash. In August 1996, we acquired LBA Health Care Management, Inc., 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 HCIA common stock. In December 1996, we
acquired all of the capital stock of HealthChex, Inc., 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, we have also acquired a number of smaller companies and business lines,
including several acquisitions in Europe. During 1996, we completed two
additional public offerings. In May 1996, AMBAC sold the remaining shares of
HCIA common stock it held, and we sold an additional 261,591 shares of our
common stock, at a per share price of $51.00. In August 1996, we 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 Health Care.
In March 1999, we sold our Implementation Unit, which consisted of the
assets acquired as part of the LBA Health Care acquisition. These assets are
now being reported as discontinued operations, and unless otherwise indicated,
this discussion does not include information relating to the Implementation
Unit.
GENERAL
HCIA collects, manages, and distributes comparative health care
information. Its customers deliver, purchase and manufacture health care
products and services. By combining industry leading databases, methodologies,
and analytic services, we create information assets that help our customers
manage health care costs and improve patient care.
HCIA's value to its customers is its ability to create clinical databases
and information products from many large and disparate incoming data streams.
For example, our patient-centered outcomes systems allow for the collection and
standardization of patient-reported outcomes and the merging of such data with
a patient's medical-claims and pharmaceutical-usage histories. Our 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 us to
provide a level of clinical information that is substantially more detailed and
useful in understanding and modifying medical practice patterns than
information derived from traditional health care data sources.
PRODUCT LINES
HCIA offers a range of information products that are utilized by each of
the three major health care market constituencies. Providers, such as hospitals
and integrated delivery systems, use our 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 our
information and analyses of 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 our databases
and products to analyze the size and composition
23
<PAGE>
of markets for their products and to evaluate the costs and benefits associated
with the distribution of their products into the health care economy.
Our two product lines are Data Management Services and Information Tools.
Data Management Services account for the majority of our revenues and are
offered to all three major markets. Data Management Services generally involve
the collection of data from or on behalf of a client, the merging of
proprietary benchmark and comparative data from HCIA, and the creation of a
database and analytical system to analyze the data. We also develop and market
Syndicated Data Products that are created from our proprietary benchmark and
comparative databases. Information Tools primarily consist of physician and
hospital profiling software that is sold to providers and buyers of health
care.
Our European operations, HCIA-Europe, offers services similar to our
domestic product lines to hospitals and insurance organizations predominately
located in the United Kingdom and Spain.
DATA MANAGEMENT SERVICES
Data Management Services account for the majority of our revenues and are
marketed to pharmaceutical companies, managed care organizations, and
hospitals. Data Management Services are utilized by more than 400
pharmaceutical companies, employers and managed care organizations.
Additionally, through marketing partnerships with 19 state and specialty
hospital associations, our Data Management Services reach approximately 1,200
hospitals. 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
Internet-based data-delivery applications. Syndicated Data Products, or
information products created from our proprietary and benchmark databases,
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 HospitalsTM study). HCIA also markets
to managed care clients a number of more sophisticated Syndicated Data Products
containing national and regional normative data on length of stay, costs and
medical necessity. HCIA markets these Syndicated Data Products directly to
managed care organizations, and through alliances with information systems
vendors, third-party administrators and other entities that process data
streams for managed care organizations and payors. These Syndicated Data
Products generally are used for utilization management, claims adjudication and
actuarial forecasting. HCIA reaches more than 5,000 customers with its
Syndicated Data Products.
Most of our Data Management Services customer contracts provide that as
HCIA extracts data from the customer (as part of the process of delivering a
system or product to the customer), the data become part of our database. We
supplement our databases with data we purchase or license from federal and
state governments, trade groups and other industry sources. We maintain several
terabytes of live health care data, including data from medical records,
laboratory, pharmacy, imaging, outpatient clinics, physician's offices,
insurance claims, managed care encounters and point-of-care member patient
surveys.
Our database resides in a relational database structure that utilizes a
network of large Sun Microsystems servers. We believe that our current software
and hardware platforms are scaleable and provide us with a cost and flexibility
advantage. We have made a significant investment in an open-network
architecture that links our several geographical locations and provides
customers with leased-line, dial-up, and Internet access. We support most of
the major commercially available relational database platforms. We have
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 our database, as well as the upgrading
and maintaining of its core methodologies. We believe that our 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 our databases and
syndicated products, the Data Management Services product line 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 its 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). We hold a perpetual and exclusive
license to the ICCS System(TM), subject only to our 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
24
<PAGE>
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 HCIA to create the most clinically detailed portion of its
database.
INFORMATION TOOLS
Information Tools are used by managed care organizations, hospitals, and
integrated delivery systems to measure and compare the clinical and financial
performance of individual hospitals and physicians. Information Tools are
generally delivered in the form of software that resides on a client's internal
computer systems and are often integrated into the workflow of an organization.
The software delivered by HCIA is typically updated at least annually, and in
some cases, several times per year. Included in the software are proprietary
algorithms and benchmark data that allow for the standardization of a client's
data and subsequent comparison of those data to national and regional
benchmarks supplied by HCIA. HCIA's Information Tools are used by approximately
300 hospitals and 125 managed care organizations throughout the U.S.
CUSTOMERS
Our customers include numerous health care industry participants located
throughout the United States, United Kingdom and Spain, including major
providers and provider groups, managed care organizations, and pharmaceutical,
biotechnology and medical device companies. In 1997 and 1998, no single
customer accounted for 10% or more of HCIA's revenue. HCIA's ten largest
customers accounted for approximately 31% and 30% of its revenue during 1997
and 1998, 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. We utilize a
direct sales approach with the existing customer base to market our Data
Management Services and Information Tools and seek to present proposals to both
existing and potential clients in face-to-face meetings at the executive level.
Our field sales force is specialized and is able to draw on our clinical staff
for sales support. In addition, we have entered into agreements with health
care information systems vendors whereby our products are marketed through
their respective sales forces. Approximately 25% of our revenues in 1998 were
derived from third-party relationships. We also approached each of the major
market constituencies through the sale of Syndicated Data Products and use
efforts such as our 100 Top Hospitals(TM )study to increase the visibility of
HCIA as an industry-leading source of health care information. We use both
telemarketing and direct-mail efforts in the sales of our less complex
Syndicated Data Products.
COMPETITION
The market for health care information products and services is intensely
competitive. We believe that the principal competitive factors in the health
care information market are the breadth and quality of product offerings,
access to proprietary data, proprietary methodologies and technical resources,
price and the effectiveness of marketing and sales efforts. In addition, we
believe 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 HCIA competes for the
sale of products and the resulting access to data with different companies in
each of its target markets. Many of our competitors have significantly greater
financial, technical, product development, marketing and other resources than
we do, 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 we compete. HCIA'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. We seek to protect our proprietary information through
confidentiality agreements with our employees. Our policy is to have employees
enter into confidentiality agreements containing provisions prohibiting the
disclosure of confidential information to anyone outside HCIA, requiring
employees to acknowledge, and, if requested, assist in confirming HCIA's
ownership of any new ideas, developments, discoveries or inventions conceived
during employment, and requiring assignment to HCIA of proprietary rights to
such matters that are related to HCIA's business. HCIA also relies on a
combination of trade secret, copyright and trademark
25
<PAGE>
laws, contractual provisions in agreements with customers and technical
measures to protect its rights in various methodologies, systems and products
and databases. HCIA has one patent, and no copyright registration applications,
covering its software technology. Due to the nature of its software
applications, HCIA believes that patent, trade secret and copyright protection
are generally less significant than its ability to further develop, enhance and
modify its current products.
GOVERNMENT REGULATION
The confidentiality of patient records and the circumstances under which
records may be released for inclusion in our 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 HCIA, our databases have been designed to enable health
care providers to comply with the confidentiality requirements of state law. We
believe that our 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 levels. This
legislation may require holders of such information to implement security
procedures that may result in substantial costs to us, and could, in certain
circumstances, limit our access to certain types of information. We cannot
assure you that changes to state or federal laws will not materially restrict
the ability of health care providers to submit information from patient records
to us.
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, we expect 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.
HCIA'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
deemed a medical device under FDA regulations or policy, HCIA 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 our 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 our 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 our 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 us.
EMPLOYEES
As of September 30, 1999, HCIA had 500 employees, including 71 in sales
and marketing, 200 in health care data, 166 in technology and 63 in finance and
administration. None of HCIA's employees are represented by a union or other
collective bargaining group. HCIA believes its relationships with its employees
is good.
26
<PAGE>
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data for HCIA
and its subsidiaries. HCIA derived the annual data from its audited financial
statements. HCIA derived the six months data from its unaudited quarterly
financial statements. In the opinion of HCIA, the data reflect and include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations of HCIA for
those periods. The data for the six months ended June 30, 1999 are not
necessarily indicative of the results of operations for the entire year. The
data should be read together with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes, contained herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1994 1995 1996
------------- ------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Statements of Operations Data:
Revenue ............................................................ $30,711 $ 48,015 $ 61,177
Salaries, wages and benefits ....................................... 15,457 21,932 28,040
Other operating expenses ........................................... 8,625 12,055 15,887
Depreciation and amortization ...................................... 4,826 6,864 10,347
Write-off of acquired in-process
Research and development costs .................................... -- 12,152 6,558
Impairment loss on intangible assets and restructuring charges ..... -- -- --
------- --------- ----------
Operating income (loss) ........................................... 1,803 (4,988) 345
Interest income .................................................... 111 1,290 1,110
Interest expense ................................................... 131 187 530
------- --------- ----------
Income (loss) from continuing operations before income
taxes, and minority interest in income of consolidated
subsidiaries ..................................................... 1,783 (3,885) 925
Provision (benefit) for income taxes ............................... 759 (1,554) 3,322
Minority interest in income of consolidated subsidiaries ........... (3) (74) --
--------- --------- ----------
Income (loss) from continuing operations .......................... 1,021 (2,405) (2,397)
Loss from discontinued operations, net of tax ...................... -- -- (39,870)
Gain on sale of discontinued operations ............................ -- -- --
Net income (loss) .................................................. $1,021 $ (2,405) $ (42,267)
======== ========= ==========
Net income (loss) per share from continuing operations:
Basic income (loss) per share ..................................... $ 0.19 $ (0.31) $ (0.24)
Basic shares used in per share calculation ........................ 5,518 7,733 10,096
Diluted income (loss) per share ................................... 0.19 (0.31) (0.24)
Diluted shares used in per share calculation ...................... 5,518 7,733 10,096
Income (loss) per share from discontinued operations:
Basic income (loss) per share ..................................... $ -- $ -- $ (3.95)
Basic shares used in per share calculation ........................ -- -- 10,096
Diluted income (loss) per share ................................... -- -- (3.95)
Diluted shares used in per share calculation ...................... -- -- 10,096
Net income (loss) per share:
Basic net income (loss) per share ................................. $ 0.19 $ (0.31) $ (4.19)
Diluted net income (loss) per share ............................... 0.19 (0.31) (4.19)
Balance Sheet Data:
Working capital ................................................... $ 5,620 $ 35,671 $ 32,810
Total assets ...................................................... 40,865 108,401 214,520
Long-term liabilities, excluding current installments ............. 1,835 699 --
Stockholders' equity .............................................. 34,371 98,044 202,407
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------------
1997 1998 1998 1999
-------------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER (Unaudited)
SHARE DATA)
<S> <C> <C> <C> <C>
Statements of Operations Data:
Revenue ............................................................ $ 66,845 $ 62,954 $ 31,301 $ 32,829
Salaries, wages and benefits ....................................... 30,682 32,699 16,135 15,308
Other operating expenses ........................................... 20,300 22,793 10,659 10,489
Depreciation and amortization ...................................... 14,325 11,365 6,312 5,330
Write-off of acquired in-process
Research and development costs .................................... -- -- -- --
Impairment loss on intangible assets and restructuring charges ..... 371 27,777 25,067 --
---------- --------- --------- --------
Operating income (loss) ........................................... 1,167 (31,680) (26,872) 1,702
Interest income .................................................... 447 374 202 206
Interest expense ................................................... 401 276 124 130
---------- --------- --------- --------
Income (loss) from continuing operations before income
taxes, and minority interest in income of consolidated
subsidiaries ..................................................... 1,213 (31,582) (26,794) 1,778
Provision (benefit) for income taxes ............................... 802 (4,237) (3,589) 799
Minority interest in income of consolidated subsidiaries ........... -- -- -- --
---------- --------- --------- --------
Income (loss) from continuing operations .......................... 411 (27,345) (23,205) 979
Loss from discontinued operations, net of tax ...................... (37,370) (21,302) (18,776) (336)
Gain on sale of discontinued operations ............................ -- -- -- 607
Net income (loss) .................................................. $ (36,959) $ (48,647) $ (41,981) $ 1,250
========== ========= ========= ========
Net income (loss) per share from continuing operations:
Basic income (loss) per share ..................................... $ 0.04 $ (2.31) $ (1.96) $ 0.08
Basic shares used in per share calculation ........................ 11,834 11,851 11,851 11,851
Diluted income (loss) per share ................................... 0.03 (2.31) (1.96) 0.08
Diluted shares used in per share calculation ...................... 12,127 11,851 11,851 11,851
Income (loss) per share from discontinued operations:
Basic income (loss) per share ..................................... $ (3.16) $ (1.80) $ (1.58) $ 0.02
Basic shares used in per share calculation ........................ 11,834 11,851 11,851 11,851
Diluted income (loss) per share ................................... (3.08) (1.80) (1.58) 0.02
Diluted shares used in per share calculation ...................... 12,127 11,851 11,851 11,851
Net income (loss) per share:
Basic net income (loss) per share ................................. $ (3.12) $ (4.11) $ (3.54) $ 0.11
Diluted net income (loss) per share ............................... (3.05) (4.11) (3.54) 0.11
Balance Sheet Data:
Working capital ................................................... $ 29,434 $ 22,245 $ 29,902 $ 25,252
Total assets ...................................................... 177,835 129,493 136,522 133,407
Long-term liabilities, excluding current installments ............. -- -- -- --
Stockholders' equity .............................................. 166,714 118,099 124,694 119,162
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
HCIA collects, manages and distributes comparative health care
information. Its customers deliver, purchase and manufacture health care
products and services. By combining industry leading databases, methodologies
and analytic services, HCIA creates information assets that help customers
manage health care costs and improve patient care.
We have made a substantial investment in the acquisition and development
of our core collection of methodologies, clinical measurement tools and
technical resources. In addition to internal development efforts, we have made
a series of acquisitions of other health care information companies, product
lines and data resources. In connection with our acquisitions and internal
development efforts and the difficulties encountered in the process of
integration of certain of these efforts, we have recorded a series of charges.
During 1996, in connection with certain acquisitions, HCIA recorded
one-time charges related to acquired in-process research and development costs
totaling $48.1 million. Of these charges, $41.5 million related to the
acquisition of LBA Health Care Solutions, Inc. During the quarter ended March
31, 1999, we disposed of the assets and business activities acquired in
connection with the LBA acquisition and, accordingly, the related assets and
results of operations are classified as discontinued operations in the
accompanying financial statements.
During 1997 and 1998, as a result of our evaluation of the carrying values
of our intangible assets relative to the expected future cash flows of the
underlying business with which they were associated, we recorded an impairment
loss on intangible assets and related restructuring charges totaling $41.1
million and $56.2 million, respectively. The charges related to the assets and
operations of LBA, as well as the assets and operations of our continuing
operations, are allocated in the accompanying financial statements between
continuing operations and discontinued operations based on the classification
of the affected assets and operations.
Our internal product development efforts are generally performed in
connection with customer contracts, and the related costs are included as a
component of operating expenses in the year incurred. We capitalize costs
related to internal product development that are not performed in connection
with a specific customer contract from the point of technological feasibility
to the point of general availability.
As a result of our acquisitions of health care information companies,
product lines and data resources, we have acquired intangible assets, the cost
of which we amortize over various useful lives. In addition, we have
capitalized internal development costs and acquired assets relating to the
development of methodologies, clinical measurement tools and technical
resources, including our database, of $13.5 million, $13.8 million and $6.5
million during 1996, 1997 and 1998, respectively. Consequently, we have
recorded amortization expense of $7.9 million, $10.7 million and $7.6 million
during 1996, 1997 and 1998, respectively. See Notes 1, 2, and 5 of the Notes to
Consolidated Financial Statements.
As a result of our unique ability to integrate health care data collected
from numerous sources and across varied treatment settings, we believe that we
are 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.
1998 COMPARED TO 1997
REVENUE. Revenue for 1998 was $62.9 million, a decrease of $3.9 million or
6% from 1997. Revenue from the Content Unit decreased by $5.8 million, which
was primarily the result of revenue from large-scale custom engagements during
1997, which did not recur during 1998. This decrease was partially offset by a
$1.5 million increase in revenue from HCIA's Managed Care Unit, and a $400,000
increase in revenue from HCIA Europe. The increase in Managed Care revenue was
primarily the result of an increased sales effort.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits increased to
52% of revenue for the year ended December 31, 1998 from 46% for the year ended
December 31, 1997. The increase was primarily the result of HCIA establishing
staffing levels across all units in anticipation of a higher revenue level than
achieved in 1998. During the fourth quarter of 1998, we commenced a program to
reduce our staffing levels to reflect the lower than expected levels of revenue
achieved during 1998. As a result of this program, we had reduced the number of
employees from approximately 580 as of September 30, 1998 to approximately 510
as of December 31, 1998.
28
<PAGE>
OTHER OPERATING EXPENSES. Other operating expenses, which include data
acquisitions, occupancy, travel and consulting expenses, increased to 36% of
revenue for the year ended December 31, 1998 from 30% for the year ended
December 31, 1997. This increase was a result of an increase in the cost of
data acquisition for a specific project in the Content Unit partially offset by
a reduction in facility costs and travel related expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to
18% of revenue for the year ended December 31, 1998 from 21% for the year ended
December 31, 1997. This decrease was the result of the effect of the write-off
of certain intangibles during 1997 and 1998.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES. During
1998, HCIA recorded a charge from continuing operations relating to an
impairment loss on intangible assets and restructuring charges of approximately
$27.8 million. Approximately $24.3 million of the charges arose due to the
failure of HCIA's Content Unit to execute agreements with customers for
large-scale custom solutions and HCIA's determination that the Unit's revenue,
which could be anticipated from future agreements of this type, was
significantly less than had been previously anticipated. As the products
marketed by the Content Unit were intended to integrate the products and
technologies of HCIA's other business units, this determination resulted in a
reduced expectation of future cash flows from HCIA's intangible assets across
most of its business units and, accordingly, an impairment in the value of
these intangible assets. The remainder of the charges, totaling approximately
$3.5 million, relates primarily to accruals for the cost of employee severance
and facilities reduction.
INTEREST INCOME AND EXPENSE. Net interest income was $98,000 for the year
ended December 31, 1998 compared with net interest income of $46,000 for the
year ended December 31, 1997. This change was the result of lower bank fees in
1998.
INCOME TAXES. HCIA's effective tax rate was (13%) for the year ended
December 31, 1998 compared with 66% for the year ended December 31, 1997.
During 1998, HCIA recorded a valuation allowance of $8.4 million to reduce the
carrying value of its deferred tax asset to an amount management believes is
realizable through future taxable income. Exclusive of this valuation
allowance, HCIA's effective tax rate was (40%) compared with 66% for the year
ended December 31, 1997. The higher rate in 1997 is the result of the large
percentage impact of certain tax items, primarily goodwill amortization, in
1997 due to the change in taxable income between years. See Note 10 of the
Notes to Consolidated Financial Statements.
DISCONTINUED OPERATIONS. During the quarter ended March 31, 1999, we
disposed of our Implementation Unit. This Unit was formed at the time of the
LBA acquisition to carry on the operations of LBA. Revenues for the
Implementation Unit were $8.8 million and $16.1 million for the years ended
1998 and 1997, respectively. The Implementation Unit had losses, net of tax, of
$21.3 million and $37.4 million during 1998 and 1997, respectively, including
pre-tax impairment losses on intangible assets and related restructuring
charges of $28.4 million and $40.8 million, respectively. See Note 3 of the
Notes to Consolidated Financial Statements.
1997 COMPARED TO 1996
REVENUE. Revenue for 1997 was $66.8 million, an increase of $5.7 million
or 9% over 1996. Revenue from the Content Unit increased by $5.0 million, which
was primarily the result of significant one-time licenses of existing
methodologies. Revenue from the Managed Care Unit decreased by $600,000.
Revenue from HCIA Europe increased by $1.3 million, which was primarily the
result of an acquisition.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were consistent
at 46% of revenue for the years ended December 31, 1997 and 1996.
OTHER OPERATING EXPENSES. Other operating expenses, which include
occupancy, travel and consulting expenses, increased to 30% of revenue for 1997
from 26% for 1996. This increase was a result of HCIA establishing levels for
certain of these expenses, primarily external consulting and occupancy, in
anticipation of a higher revenue level than actually achieved in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased to
21% 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, Inc. and Response Healthcare Information
Management, Inc. during 1996.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES. During
1997, HCIA recorded a restructuring charge related to continuing operations of
approximately $400,000. The charge represented the cost of employee severance
and facilities reduction.
29
<PAGE>
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection
with the acquisitions of Response and HealthChex, during 1996, HCIA acquired
ongoing research and development activities. HCIA recorded one-time charges
totaling $6.6 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.
INTEREST INCOME AND EXPENSE. Net interest income was $46,000 for 1997
compared with net interest income of $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. Our effective tax rate was 66% for 1997 compared with 359%
for 1996. The higher rate in 1996 is primarily the result of the effect of the
non-deductible write-off of the in-process research and development costs
resulting from certain acquisitions during 1996. See Note 10 of the Notes to
Consolidated Financial Statements.
DISCONTINUED OPERATIONS. During the quarter ended March 31, 1999, we
disposed of our Implementation Unit. This Unit was formed at the time of the
LBA acquisition to carry on the operations of LBA. Revenues for the
Implementation Unit were $16.1 million and $12.3 million for the years ended
1997 and 1996, respectively. The Implementation Unit had a loss of $37.4
million and $39.9 million during 1997 and 1996, respectively, including pre-tax
charges for write-off of acquired in-process research and development,
impairment loss on intangible assets and related restructuring charges of $40.8
million and $41.5 million, respectively. See Note 3 of Notes to Consolidated
Financial Statements.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUE. Revenue for the six months ended June 30, 1999 was $32.8 million,
an increase of $1.5 million or 4.9% over the six months ended June 30, 1998.
The increase was the result of a $2.1 million increase in revenue from HCIA's
Managed Care Unit, which was partially offset by a $300,000 decrease in revenue
from HCIA Europe and a $300,000 decrease in revenue from HCIA's Content Unit.
Revenue increases were the result of the expansion of HCIA's service to the
employer and pharmaceutical markets. The revenue decreases were the result of
lower levels of sales to HCIA's hospital customers.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were $15.3
million or 47% of revenue for the six months ended June 30, 1999 as compared to
$16.1 million or 52% of revenue for the six months ended June 30, 1998. This
decrease was primarily the result of HCIA's restructuring of operations during
1998.
OTHER OPERATING EXPENSES. Other operating expenses, which include facility
costs, royalty payments, production costs, travel and consulting expenses, were
$10.5 million or 32% of revenue for the six months ended June 30, 1999 as
compared to $10.7 million or 34% of revenue for the six months ended June 30,
1998. The decrease in other operating expenses was the result of lower
occupancy and employee related costs as a result of HCIA's restructuring of
operations during 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $5.3
million or 16% of revenue for the six months ended June 30, 1999, as compared
to $6.3 million or 20% of revenue for the six months ended June 30, 1998. This
decrease was a result of the effect of the write-off of certain intangible
assets and equipment in 1998.
IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES. During the
three months ended March 31, 1998, HCIA recorded a charge from continuing
operations relating to an impairment loss on intangible assets and
restructuring charges of approximately $25.1 million. Approximately $24.6
million of the charges arose due to the failure of HCIA's Content Unit to
execute agreements with customers for large-scale custom solutions and HCIA's
determination that the Unit's revenue, which could be anticipated from future
agreements of this type, was significantly less than had been previously
anticipated. As the products marketed by the Content Unit were intended to
integrate the products and technologies of HCIA's other business units, this
determination resulted in a reduced expectation of future cash flows from
HCIA's intangible assets across most of its business units and, accordingly, an
impairment in the value of these intangible assets. The remainder of the
charges, totaling approximately $500,000, related primarily to accruals for the
cost of employee severance and facilities reduction.
INTEREST INCOME AND EXPENSE. Net interest income was $76,000 for the six
months ended June 30, 1999 compared with net interest income of $78,000 for the
six months ended June 30, 1998.
INCOME TAXES. During the quarter ended March 31, 1998, HCIA recorded a
valuation allowance of $5.0 million to reduce the carrying value of its
deferred tax asset to an amount management believed was realizable through
future taxable
30
<PAGE>
income. Exclusive of this valuation allowance, HCIA's effective tax rate was
13.4% for the six months ended June 30, 1998, compared with 44.9% for the six
months ended June 30, 1999. The higher rate in 1999 is due primarily to the
effect of the write-off of the intangible assets associated with the impairment
loss in 1998 and the effects of interperiod tax allocations on HCIA's 1999 tax
provision.
DISCONTINUED OPERATIONS. HCIA decided to discontinue operations of its
Implementation Unit during the quarter ended December 31, 1998. As of March 31,
1999, HCIA had sold the Unit. Revenues for the Implementation Unit were $1.0
million and $2.6 million for the three months ended March 31, 1999 and 1998,
respectively. During the three months ended March 31, 1999, the Implementation
Unit had net income of $271,000 which included a $607,000 gain on the sale and
a $(336,000) loss from operations. During the three months ended March 31,
1998, the Unit had a net loss of $(19.2) million including pre-tax impairment
losses on intangible assets and related restructuring charges of $25.7 million.
LIQUIDITY AND CAPITAL RESOURCES
HCIA maintains a $25 million revolving line of credit (subject to certain
borrowing limitations) with First Union National Bank for general corporate
purposes including working capital requirements and acquisitions. Borrowings
under this line are collateralized by substantially all of HCIA's assets and
bear interest at varying rates based on an index tied to First Union's prime
rate or LIBOR. HCIA is required to pay a commitment fee on the average daily
unused portion of the facility at a rate from 0.25% to 0.375% per annum,
depending on HCIA's debt/cash flow ratio. The credit facility also contains
financial covenants applicable to HCIA, including debt/cash flow ratios and
ratios of debt to capital. As of June 30, 1999, HCIA was in compliance with all
such financial covenants and had a maximum borrowing capacity of approximately
$11.3 million, and there were no borrowings outstanding under the facility. The
credit facility expires on July 31, 2001.
YEAR 2000 READINESS DISCLOSURE
HCIA has created a Year 2000 Program Office to review its exposure to Year
2000 issues, to coordinate its efforts to identify those computer software
systems which require revisions in anticipation of the Year 2000 and to
coordinate such revisions on a corporate-wide basis. This has entailed the
development of a company-wide assessment, remediation and certification
process, which is monitored by the Program Office and members of HCIA's senior
management. In addition, senior management reports to the audit committee of
the HCIA Board on a regular basis regarding HCIA's progress in its Year 2000
remediation efforts. While HCIA does not currently intend to engage any outside
parties to certify the completion of its Year 2000 remediation efforts, it does
intend to utilize an internal certification process, whereby remediation
efforts will be reviewed and certified by HCIA personnel not directly involved
in the remediation.
HCIA believes that its primary exposure to the issue is in the ability of
its data processing systems to recognize four digit references versus two digit
references (i.e., 1998 versus 98) and to accept and process such information
from its customers in the process of building databases. In addition, HCIA
faces exposure in connection with (i) certain of its software products which
are used to deliver data to clients, (ii) third-party software products,
particularly for its management information systems and (iii) non-information
technology systems used in its business, particularly those operated by third
parties, such as the owners or operators of buildings where HCIA's offices are
located.
HCIA has completed the evaluation of its own data processing systems and
software products, and has substantially completed remediation of these systems
and products. HCIA has also completed its evaluation of third-party software
products used by HCIA. HCIA believes that as of September 30, 1999, it has
completed approximately 98% of its total expected efforts and has verified as
Year 2000 compliant approximately 90% of its data processing systems, software
products and third-party software. It is HCIA's goal, and HCIA's Year 2000 work
plans have been scheduled, to finish Year 2000 remediation of all of its data
processing, software products and third-party software by no later than October
31, 1999.
HCIA has not undertaken a substantial effort to verify the Year 2000
compliance on non-information technology systems.
Through September 30, 1999, HCIA has expended approximately $750,000 on
Year 2000 remediation efforts, primarily as the result of allocation of
personnel to evaluation, remediation and verification efforts, that it would
not have otherwise expended but for the Year 2000 remediation process. HCIA
believes that it will expend an additional $15,000 on such Year 2000
remediation efforts through 1999. HCIA has not, to any material extent,
scheduled the acceleration of the replacement of any systems or products as a
result of the Year 2000 effort, but has instead been able to schedule such
replacement or remediation as part of the planned updates and revisions to its
systems and products. HCIA intends to have completed the development of all
systems which will replace existing non-compliant systems by October 31, 1999.
31
<PAGE>
In the event HCIA does not properly remediate its data processing systems,
it might be unable to accept data from its clients and others for processing.
This would materially and adversely affect its ability to deliver its
information products and provide its Data Management Services. The failure of
HCIA to remediate its software products would also materially and adversely
affect its ability to deliver its Information Products and Data Management
Services. In either case, this could place HCIA in default of many of its
agreements, and also threaten HCIA's right to payment from many of its clients.
HCIA believes that the risks from the failure of third-party software and
non-information technology systems to be Year 2000 compliant is less
significant for HCIA's ability to meet its client obligations, but could have
an adverse impact on its ability to carry out functions such as financial
reporting and accounts receivable and payable management.
While HCIA, in the process of making its data processing 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
HCIA's customers will not experience difficulties in actually providing data
produced by their systems to HCIA as a result of Year 2000-related
difficulties. It is not currently possible to estimate the effect on HCIA's
results of operations from any such difficulties.
HCIA plans to finalize contingency plans for non-"mission-critical"
systems and products by December 31, 1999. It should be noted that because most
of HCIA's data processing and information product releases involve data which
trails the calendar period by one to three months, the full effect of any
failure of HCIA's systems or products to be Year 2000 compliant would most
likely not be experienced until the first quarter of 2000.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this proxy statement contain
forward-looking statements, including statements regarding the intent, belief
or current expectations of HCIA and its management. These statements are not
guarantees of future performance and involve a number of risks and
uncertainties that 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 HCIA'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 HCIA's data, (ix) volatility of HCIA's stock
price, (x) changes in the health care industry from both a regulatory and
financial perspective, (xi) risks posed by the year 2000 phenomenon, and (xii)
other risks identified from time to time in HCIA's reports and registration
statements filed with the Securities and Exchange Commission.
INDEPENDENT AUDITORS
The consolidated balance sheets of HCIA as of December 31, 1997 and
December 31, 1998, and the related consolidated statements of operation,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998, included in this proxy statement have been audited by
KPMG LLP, independent auditors, as stated in their report.
32
<PAGE>
HCIA INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Financial Statements of HCIA Inc.:
Independent Auditors' Report ............................................................ F-2
Consolidated Statements of Operations (Years Ended December 31, 1996, 1997 and 1998) .... F-3
Consolidated Balance Sheets (December 31, 1997 and 1998) ................................ F-4
Consolidated Statements of Changes in Stockholders' Equity (Years ended December 31,
1996, 1997 and 1998).................................................................... F-5
Consolidated Statements of Cash Flows (Years Ended December 31, 1996, 1997 and 1998) .... F-6
Notes to Consolidated Financial Statements (December 31, 1996, 1997 and 1998) ........... F-7
Unaudited Consolidated Financial Statements of HCIA Inc.:
Consolidated Balance Sheets (December 31, 1998 and June 30, 1999) ....................... F-18
Consolidated Statements of Operations (Six Months Ended June 30, 1998 and 1999) ......... F-19
Consolidated Statement of Changes in Stockholders' Equity (Year ended December 31, 1998,
and Six Months Ended June 30, 1999) ................................................... F-20
Consolidated Statements of Cash Flows (Six Months Ended June 30, 1998 and 1999) ......... F-21
Notes to Unaudited Consolidated Financial Statements (June 30, 1998 and 1999) ........... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS HCIA INC.:
We have audited the accompanying consolidated balance sheets of HCIA Inc.
and subsidiaries as of December 31, 1998 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Baltimore, Maryland
January 27, 1999
F-2
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenue ............................................................. $ 61,177 $ 66,845 $ 62,954
Salaries, wages and benefits ........................................ 28,040 30,682 32,699
Other operating expenses ............................................ 15,887 20,300 22,793
Depreciation ........................................................ 2,413 3,637 3,729
Amortization ........................................................ 7,934 10,688 7,636
Write-off of acquired in-process research and development costs ..... 6,558 -- --
Impairment loss on intangible assets and restructuring charges ...... -- 371 27,777
--------- --------- ---------
Operating income (loss) ............................................ 345 1,167 (31,680)
Interest income ..................................................... 1,110 447 374
Interest expense .................................................... 530 401 276
--------- --------- ---------
Income (loss) from continuing operations before income taxes ....... 925 1,213 (31,582)
Provision (benefit) for income taxes ................................ 3,322 802 (4,237)
--------- --------- ---------
Income (loss) from continuing operations ........................... (2,397) 411 (27,345)
Loss from discontinued operations, net of tax ....................... (39,870) (37,370) (21,302)
--------- --------- ---------
Net loss ........................................................... $ (42,267) $ (36,959) $ (48,647)
--------- --------- ---------
Income (loss) per share from continuing operations:
Basic income (loss) per share ...................................... $ (0.24) $ 0.04 $ (2.31)
Basic shares used in per share calculation ......................... 10,096 11,834 11,851
Diluted income (loss) per share .................................... $ (0.24) $ 0.03 $ (2.31)
Diluted shares used in per share calculation ....................... 10,096 12,127 11,851
Loss per share from discontinued operations:
Basic loss per share ............................................... $ (3.95) $ (3.16) $ (1.80)
Basic shares used in per share calculation ......................... 10,096 11,834 11,851
Diluted loss per share ............................................. $ (3.95) $ (3.08) $ (1.80)
Diluted shares used in per share calculation ....................... 10,096 12,127 11,851
Net loss per share:
Basic net loss per share ........................................... $ (4.19) $ (3.12) $ (4.11)
Diluted net loss per share ......................................... $ (4.19) $ (3.05) $ (4.11)
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998
----------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 5,580 $ 7,343
Trade accounts receivable, net of allowance for doubtful accounts of $1,560 in 1997 and
$1,816 in 1998 ........................................................................ 31,524 23,677
Prepaid expenses and other current assets ............................................... 3,451 2,619
--------- ----------
Total current assets .................................................................. 40,555 33,639
Furniture and equipment, net ............................................................. 11,706 8,325
Computer software costs, net ............................................................. 26,340 10,525
Other intangible assets, net ............................................................. 48,326 38,366
Net deferred tax asset ................................................................... 23,238 36,719
Net assets of discontinued operations .................................................... 27,550 1,363
Other .................................................................................... 120 556
--------- ----------
Total assets .......................................................................... $ 177,835 $ 129,493
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 2,147 $ 1,219
Accrued salaries, benefits and other liabilities ........................................ 6,719 8,879
Deferred revenue ........................................................................ 2,255 1,296
--------- ----------
Total current liabilities ............................................................. 11,121 11,394
--------- ----------
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
11,850,094 as of December 31, 1997 and 11,851,125 as of December 31, 1998 ............. 118 118
Additional paid-in capital .............................................................. 250,892 250,904
Accumulated deficit ..................................................................... (84,179) (132,826)
Accumulated other comprehensive loss .................................................... (117) (97)
--------- ----------
Total stockholders' equity ............................................................ 166,714 118,099
--------- ----------
Total liabilities and stockholders' equity ............................................... $ 177,835 $ 129,493
--------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN
STOCK STOCK CAPITAL
----------- -------- ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ................ $-- $ 90 $102,882
Exercise of stock options ................... $-- -- 638
Tax benefits related to exercise of stock
options .................................... $-- -- 1,128
Sale of common stock to the public .......... $-- 23 116,233
Issuance of stock in connection with an
acquisition ................................ $-- 5 28,710
Comprehensive loss
Net loss ................................... $-- -- --
Other comprehensive loss:
Foreign currency translation ............... $-- -- --
Unrealized depreciation of short-term
investments .............................. $-- -- --
Other comprehensive loss ................... $-- -- --
Comprehensive loss .......................... $-- -- --
BALANCE AT DECEMBER 31, 1996 ................ $-- $118 $249,591
--- ---- --------
Exercise of stock options ................... $-- -- 613
Tax benefits related to exercise of stock
options .................................... $-- -- 688
Comprehensive loss:
Net loss ................................... $-- -- --
Other comprehensive loss:
Foreign currency translation ............... $-- -- --
Unrealized depreciation of short-term
investments .............................. $-- -- --
Other comprehensive loss ................... $-- -- --
Comprehensive loss .......................... $-- -- --
BALANCE AT DECEMBER 31, 1997 ................ $-- $118 $250,892
--- ---- --------
Exercise of stock options ................... $-- -- 12
Comprehensive loss:
Net loss ................................... $-- -- --
Other comprehensive loss:
Foreign currency translation ............... $-- -- --
Other comprehensive loss ................... $-- -- --
Comprehensive loss .......................... $-- -- --
BALANCE AT DECEMBER 31, 1998 ................ $-- $118 $250,904
--- ---- --------
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
DEFICIT LOSS LOSS EQUITY
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ................ $ (4,953) $ 25 $ -- $ 98,044
Exercise of stock options ................... -- -- -- 638
Tax benefits related to exercise of stock
options .................................... -- -- -- 1,128
Sale of common stock to the public .......... -- -- -- 116,256
Issuance of stock in connection with an
acquisition ................................ -- -- -- 28,715
Comprehensive loss
Net loss ................................... (42,267) -- (42,267) (42,267)
Other comprehensive loss:
Foreign currency translation ............... -- -- (67) (67)
Unrealized depreciation of short-term
investments .............................. -- -- (40) (40)
--------
Other comprehensive loss ................... -- (107) (107) --
-------- ---------
Comprehensive loss .......................... -- -- $(42,374) --
-------- ---------
BALANCE AT DECEMBER 31, 1996 ................ $ (47,220) $ (82) $202,407
---------- ------ ---------
Exercise of stock options ................... -- -- -- 613
Tax benefits related to exercise of stock
options .................................... -- -- -- 688
Comprehensive loss:
Net loss ................................... (36,959) -- (36,959) (36,959)
Other comprehensive loss:
Foreign currency translation ............... -- -- (31) (31)
Unrealized depreciation of short-term
investments .............................. -- -- (4) (4)
-----------
Other comprehensive loss ................... -- (35) (35) --
---------- ----------
Comprehensive loss .......................... -- -- $(36,994) --
---------- ----------
BALANCE AT DECEMBER 31, 1997 ................ $ (84,179) $ (117) $166,714
---------- ------ ----------
Exercise of stock options ................... -- -- -- 12
Comprehensive loss:
Net loss ................................... (48,647) -- (48,647) (48,647)
Other comprehensive loss:
Foreign currency translation ............... -- -- 20 20
----------
Other comprehensive loss ................... -- 20 20 --
---------- ----------
Comprehensive loss .......................... -- -- $(48,627) --
========== ----------
BALANCE AT DECEMBER 31, 1998 ................ $ (132,826) $ (97) $118,099
---------- ------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................................................ $ (42,267) $ (36,959) $ (48,647)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ..................................................... 10,347 14,325 11,365
Write-off of acquired in-process research and development costs ................... 6,558 -- --
Write-off of acquired in-process research and development costs of discontinued
operations ....................................................................... 41,507 -- --
Impairment loss on intangible assets and restructuring charges .................... -- 371 27,777
Impairment loss on intangible assets and restructuring charges of discontinued
operations ....................................................................... -- 40,758 28,414
Deferred tax provision (benefit) .................................................. 5,606 (6,164) (13,481)
Changes in operating assets and liabilities:
Trade accounts receivable ........................................................ (9,295) (3,981) 7,847
Prepaid expenses and other current assets ........................................ (1,615) 473 832
Accounts payable ................................................................. 348 658 (928)
Accrued salaries, benefits, and other liabilities ................................ 1,296 (795) (554)
Deferred revenue ................................................................. 674 88 (959)
---------- --------- ---------
Net cash provided by operating activities ....................................... 13,159 8,774 11,666
---------- --------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment ................................................ (5,252) (5,600) (785)
Cost of acquisitions, net of cash acquired .......................................... (118,050) (104) --
Computer software costs purchased or capitalized .................................... (11,946) (12,681) (5,126)
Other intangible assets purchased or capitalized .................................... (1,590) (1,158) (1,350)
Purchases of short-term investments ................................................. (59,640) -- --
Proceeds from disposals of short-term investments ................................... 82,370 506 --
Investment in net assets of discontinued operations ................................. (4,864) 2,986 (2,227)
Other ............................................................................... (67) 3 (447)
---------- --------- ---------
Net cash used in investing activities ........................................... (119,039) (16,048) (9,935)
---------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ............................................. 638 613 12
Income tax benefits related to stock options ........................................ 1,128 688 --
Proceeds from public offerings ...................................................... 116,256 -- --
Acquisition related borrowings ...................................................... 86,000 -- --
Repayment of acquisition related borrowings ......................................... (86,000) -- --
Fees paid to establish credit facilities ............................................ (520) -- --
Repayments of notes payable ......................................................... (1,246) (1,718) --
Principal payments on capital leases ................................................ (197) -- --
---------- --------- ---------
Net cash provided by (used in) financing activities ............................. 116,059 (417) 12
---------- --------- ---------
Impact of currency fluctuations on cash and cash equivalents ......................... (67) (31) 20
---------- --------- ---------
Increase (decrease) in cash and cash equivalents ..................................... 10,112 (7,722) 1,763
Cash and cash equivalents -- beginning of year ....................................... 3,190 13,302 5,580
---------- --------- ---------
Cash and cash equivalents -- end of year ............................................. $ 13,302 $ 5,580 $ 7,343
---------- --------- ---------
Supplemental cash flow information
-- cash paid during the year for interest ........................................ $ 461 $ 367 $ 137
---------- --------- ---------
-- cash paid during the year for income taxes .................................... $ 790 $ 415 $ 96
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(1) BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
HCIA Inc. ("HCIA" or the "Company") collects, manages and distributes
comparative health care information. Its customers deliver, purchase and
manufacture health care products and services. By combining industry leading
databases, methodologies and analytic services, HCIA creates information assets
that help customers manage health care costs and improve patient care.
(B) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid securities with original
maturities of three months or less at the date acquired by the Company.
(D) 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.
(E) 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 Statement of Financial Accountings Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". 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 $11,900,000, $12,700,000 and $5,100,000 of computer
software costs in 1996, 1997 and 1998, respectively, including $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 $3,816,000, $6,041,000 and $3,731,000 during 1996, 1997 and 1998,
respectively. Accumulated amortization for computer software was $16,530,000
and $3,680,000 at December 31, 1997 and 1998, 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. In connection with the evaluation performed as of March 31,
1998, the Company recorded a charge to reduce the carrying value of certain
software. (See Note 5.)
(F) 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 cost-to-cost method.
This method of accounting has resulted in unbilled
F-7
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
accounts receivable of $3,424,000 and $1,752,000 at December 31, 1997 and 1998,
respectively. On a quarterly basis, the Company assesses whether the current
estimate of total contract costs for each of these contacts 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.
(G) 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 the average rate 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.
(H) INCOME TAXES
The Company uses the asset and liability method required by SFAS 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.
(I) EARNINGS PER SHARE
SFAS No. 128, "Earnings Per Share," requires dual presentation of the
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and a reconciliation of the numerators and
denominators used in the basic and diluted EPS claculations. Basic EPS is
calculated by dividing net earnings (loss) by weighted average number of shares
for the applicable period. Diluted EPS is calculated after adjusting the
numerator and denominator of the basic EPS calculation for the effect of all
potential dilutive common shares outstanding during the period.
The following table summarizes the calculation of earnings per share of
common stock:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1997
----------------------------------------- -----------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------- ------------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS ............. $ (42,267) 10,096 $ (4.19) $ (36,959) 11,834 $ (3.12)
Incremental shares from
assumed increase of
dilutive options and
warrants ............. -- 293
------ ------
Diluted EPS ........... $ (42,267) 10,096 $ (4.19) $ (36,959) 12,127 $ (3.05)
--------- ------ ------- --------- ------ -------
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998
----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic EPS ............. $ (48,647) 11,851 $ (4.11)
Incremental shares from
assumed increase of
dilutive options and
warrants ............. --
------
Diluted EPS ........... $ (48,647) 11,851 $ (4.11)
--------- ------ -------
</TABLE>
F-8
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
(J) 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 SFAS No. 123, "Accounting
for Stock-Based Compensation," is discussed in Note 12.
(K) 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.
(2) ACQUISITIONS
Certain information regarding the Company's major acquisitions in the
periods covered by these financial statements is summarized below:
<TABLE>
<CAPTION>
RESPONSE LBA HEALTHCHEX
------------------------- --------------------------- -------------------------
LIFE OF LIFE OF LIFE OF
ASSET ASSET ASSET
----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Purchase price ........................ $6,261,000 $128,829,000 $11,503,000
Assets acquired
Current assets ....................... $1,274,000 $ 4,681,000 $ 508,000
Furniture & equipment ................ $ 293,000 3-5 years $ 1,533,000 3-5 years $ 590,000 3-5 years
Deferred tax asset ................... $ 221,000 $ 18,534,000 $ 835,000
Software ............................. $ 255,000 5 years -- --
Customer base ........................ $ 393,000 12 years $ 5,135,000 10 years $ 599,000 10 years
Methodologies ........................ -- $ 12,843,000 6 years $ 1,628,000 5 years
Assembled workforce .................. $ 133,000 12 years $ 4,080,000 10 years $ 715,000 10 years
Goodwill ............................. $ 304,000 15 years $ 43,859,000 20 years $ 5,107,000 20 years
In-process research & development ..... $4,309,000 $ 41,507,000 $ 2,249,000
Liabilities assumed ................... $ 921,000 $ 3,343,000 $ 728,000
</TABLE>
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 developed and marketed information products that 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 developed and marketed 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 11). These loans were repaid with a portion of the proceeds
from the Company's August 1996 public offering. During 1997 and 1998, as a
result of the Company's evaluation of the carrying values of the intangible
assets acquired in connection with the acquisition of LBA relative to the
expected future cash flows of the underlying business, the Company recorded
impairment loss on intangible assets and related restructuring charges totaling
$37.6 and $28.4 million, respectively. During the quarter ended December 31,
1998, the Company adopted a plan to dispose of the assets and business
activities acquired in connection with the LBA acquisition (see Note 3) and,
accordingly, the net assets and results of operations of the business,
including the charges discussed above, are classified as discontinued
operations in the accompanying financial statements.
F-9
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) ACQUISITIONS -- (Continued)
On December 2, 1996, the Company purchased all of the capital stock of
HealthChex, Inc. ("HealthChex") for $11,503,000 in cash. The parties made an
election under Internal Revenue Code Sec. 338(h)(10) to treat this acquisition
as an asset purchase for tax purposes. HealthChex provided 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 acquisitions were determined by an
independent appraiser. The lives and values of the intangible assets were based
on, among other things, employee retention rate, 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 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 1e). Non-recurring charges to write off these costs were
recorded on the date of each acquisition.
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.
(3) DISCONTINUED OPERATIONS
During the fourth quarter of 1998, the Company adopted a plan to dispose
of its Implementation Unit. This Unit was formed at the time of the LBA
acquisition to carry on the operations of LBA. The Company is currently seeking
a buyer for its Implementation Unit and has engaged investment bankers to
facilitate the sale process. The Company expects the Unit to be sold during the
year ending December 31, 1999.
Based on the adoption of the plan for the sale of the Implementation Unit,
the assets and results of operations of the Unit are included as discontinued
operations in the accompanying financial statements.
Summary operating results of the discontinued operations are as follows:
<TABLE>
<CAPTION>
PERIOD FROM AUGUST 15, 1996 YEARS ENDED
THROUGH DECEMBER 31, DECEMBER 31,
----------------------------- ---------------------------------
1996 1997 1998
----------------------------- ---------------- ----------------
<S> <C> <C> <C>
Revenue ..................................................... $ 12,343,000 $ 16,060,000 $ 8,827,000
Expenses .................................................... 8,142,000 19,525,000 10,829,000
Impairment loss on intangible assets ........................ -- 37,650,000 25,474,000
Restructuring charges ....................................... -- 3,108,000 2,940,000
Write-off of acquired in-process research and development ... 41,507,000 -- --
------------- ------------- -------------
Loss before taxes ........................................... (37,306,000) (44,223,000) (30,416,000)
Income tax expense (benefit) ................................ 2,564,000 (6,853,000) (9,114,000)
------------- ------------- -------------
Net loss .................................................... $ (39,870,000) $ (37,370,000) $ (21,302,000)
------------- ------------- -------------
</TABLE>
The write-off of acquired in-process research and development costs
included in the results for 1996 represents the estimated fair value of
in-process research and development costs at the acquisition date of LBA and
was determined by an independent appraiser based on the risk-adjusted cash
flows of specially identified technologies for which technological feasibility
had not yet been established pursuant to SFAS No. 86 and for which future
alternatives did not exist. Consideration
F-10
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) DISCONTINUED OPERATIONS -- (Continued)
of technological feasibility for the purpose of this calculation was done on a
basis consistent with that normally utilized by the Company (see Note 1e).
The impairment loss on intangible assets and restructuring charges related
to the Implementation Unit included in the above results for 1997 and 1998 were
the result of the Company's evaluation of the carrying value and economic lives
of its intangible assets relative to the net present value of expected future
cash flows of the underlying business and the determination that the carrying
values were not realizable. In connection with this determination, the Company
also recorded restructuring charges relating primarily to the cost of employee
severance and facility reductions.
At December 31, 1998, net assets of the discontinued operations of
approximately $1.4 million consisted of $3.0 million of assets, including
accounts receivable, fixed assets and other assets, and $1.6 million of current
liabilities including restructuring accruals and accrued salaries and benefits.
At December 31, 1997, net assets of discontinued operations of approximately
$27.5 million consisted of $28.3 million of assets including accounts
receivable, fixed assets, other assets and intangibles, and $0.8 million of
current liabilities including accrued salaries and benefits.
(4) FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------------- ----------------
<S> <C> <C>
Computer equipment ...................... $ 16,386,000 $ 16,639,000
Office furniture and equipment .......... 3,289,000 2,570,000
Other ................................... 836,000 908,000
------------ -------------
$ 20,511,000 $ 20,117,000
Less accumulated depreciation ........... (8,805,000) (11,792,000)
------------ -------------
$ 11,706,000 $ 8,325,000
============ =============
</TABLE>
(5) OTHER INTANGIBLE ASSETS
Other intangible assets at December 31, 1998 consist of the following:
<TABLE>
<CAPTION>
CAPITALIZED ACCUMULATED CARRYING WEIGHTED
COST AMORTIZATION VALUE AVERAGE LIFE
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Databases .............................. $ 1,802,000 $ 128,000 $ 1,674,000 5
CPHA license and prepaid royalties ..... 14,030,000 5,537,000 8,493,000 17
Goodwill ............................... 32,170,000 7,175,000 24,995,000 17
Customer bases ......................... 1,017,000 156,000 861,000 10
Methodologies .......................... 1,628,000 678,000 950,000 5
Assembled workforce .................... 1,817,000 424,000 1,393,000 11
----------- ----------- -----------
$52,464,000 $14,098,000 $38,366,000
=========== =========== ===========
</TABLE>
F-11
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER INTANGIBLE ASSETS -- (Continued)
Other intangible assets at December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
CAPITALIZED ACCUMULATED CARRYING WEIGHTED
COST AMORTIZATION VALUE AVERAGE LIFE
------------- -------------- ------------- -------------
<S> <C> <C> <C> <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 ............................... 35,871,000 6,012,000 29,859,000 17
Customer bases ......................... 1,587,000 197,000 1,390,000 11
Methodologies .......................... 1,628,000 311,000 1,317,000 5
Assembled workforce .................... 1,950,000 254,000 1,696,000 11
Other .................................. 2,289,000 428,000 1,861,000 13
----------- ----------- -----------
$65,696,000 $17,370,000 $48,326,000
=========== =========== ===========
</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 $1,067,000, $679,000 and $255,000 during 1996, 1997
and 1998, respectively.
The Company holds an exclusive license to access and sell the databases
and certain other assets of the Commission on Professional and Hospital
Activities ("CPHA"). This license was recorded at its estimated fair value of
$8,073,000 at the date of acquisition and is being amortized on a straight-line
basis over 17 years. The amortization period was determined to be the estimated
economic life cycle of the licensed properties, as corroborated by an
independent appraisal, and reflected the remainder of the existing term of the
license at the date of acquisition plus one renewal term provided under the
terms of the agreement. Under the terms of the license, the Company paid
royalties to CPHA based on revenues earned utilizing the licensed assets.
Subsequent to the acquisition, the Company and CHPA 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 various 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.
Periodically the Company evaluates the carrying values of its intangible
assets relative to the net present value of expected future cash flows of the
underlying business with which they are associated. At March 31, 1998, this
evaluation indicated that the carrying value of certain of the Company's
intangible assets were not fully realizable. Accordingly the Company recorded
an impairment loss on intangible assets of approximately $50.0 million in the
quarter ended March 31, 1998, of which approximately $25.5 million related to
discontinued operations and $24.5 million related to continuing operations.
F-12
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER INTANGIBLE ASSETS -- (Continued)
The following table summarizes the impairment loss on intangible assets:
<TABLE>
<CAPTION>
PRE-CHARGE POST-CHARGE
ASSET NET BOOK VALUE WRITE DOWN NET BOOK VALUE
- ----------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Databases ................... $ 2,871,000 $ 1,649,000 $ 1,222,000
CPHA License ................ 9,113,000 -- 9,113,000
Goodwill .................... 46,326,000 20,644,000 25,682,000
Customer Bases .............. 2,987,000 2,028,000 959,000
Methodologies ............... 3,549,000 2,355,000 1,194,000
Assembled Workforce ......... 3,266,000 1,751,000 1,515,000
Tradename ................... 1,029,000 1,029,000 --
Software .................... 28,106,000 20,567,000 7,539,000
----------- ----------- -----------
$97,247,000 $50,023,000 $47,224,000
=========== =========== ===========
</TABLE>
The Company also recorded a restructuring charge of approximately $800,000
during the quarter ended March 31, 1998, representing the cost of employee
severence and facilities reductions. As of December 31, 1998, approximately
$775,000 of the accruals had been used.
(6) SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that the Company report information about its operating segments. The
Company's three operating segments, Content, Managed Care and HCIA Europe, each
have separate management teams and offer different products and services.
The Content Unit builds, manages and maintains comparative databases. The
Managed Care Unit helps pharmaceutical companies, employers, managed care
organizations and indemnity insurers better manage the overall health status
and costs of a covered population by providing medical resource usage and
outcomes information. HCIA Europe provides clinical, financial, and operational
efficiency analyses to hospitals and health care purchasers outside of the
United States.
The accounting policies of the operating segments are the same as those
described in Note 1. The Company evaluates the performance of its operating
segments based on contribution margin. Contribution margin includes direct
payroll costs and other direct costs, but does not include any corporate
allocations of overhead costs, nonrecurring items, interest income, interest
expense, amortization or depreciation. The Company tracks accounts receivable
by business segment but does not track any other assets or liabilities by
segment other than HCIA Europe, which had total net assets, including accounts
receivable, of $4,765,000 and $4,883,000 as of December 31, 1998 and 1997,
respectively.
Summarized financial information regarding the Company's operating
segments is shown in the following table. The "Corporate Costs" column includes
corporate related items, results of insignificant operations and income and
expense not allocated to operating segments.
<TABLE>
<CAPTION>
CONTENT MANAGED CARE HCIA EUROPE CORPORATE COSTS CONSOLIDATED
-------------- -------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
1998 Revenues ................. $39,855,000 $16,838,000 $6,261,000 -- $ 62,954,000
Contribution margin (loss) .... 18,391,000 5,470,000 1,769,000 (29,533,000) (3,903,000)
Accounts receivable ........... 16,875,000 5,300,000 1,502,000 -- 23,677,000
1997 Revenues ................. 45,634,000 15,355,000 5,856,000 -- 66,845,000
Contribution margin (loss) .... 25,727,000 6,624,000 872,000 (31,685,000) 1,538,000
Accounts receivable ........... 23,425,000 6,148,000 1,951,000 -- 31,524,000
1996 Revenues ................. 40,642,000 15,921,000 4,614,000 -- 61,177,000
Contribution margin (loss) .... 23,144,000 9,620,000 397,000 (26,258,000) 6,903,000
Accounts receivable ........... 19,492,000 6,040,000 1,795,000 -- 27,327,000
</TABLE>
F-13
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES
Accrued salaries, benefits and other liabilities consist of the following
at December 31:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Accrued salaries .......... $1,883,000 $1,887,000
Accrued benefits .......... 340,000 580,000
Accrued vacation .......... 707,000 646,000
Restructuring accruals .... -- 2,197,000
Other ..................... 3,789,000 3,569,000
---------- ----------
$6,719,000 $8,879,000
========== ==========
</TABLE>
(8) 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 7% 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 1996, 1997 and 1998 were
approximately $397,000, $505,000 and $519,000, respectively.
(9) LEASES
The Company leases office space and certain equipment under operating
leases. Rent expense for these leases was $3,563,000, $4,907,000 and $4,947,000
net of rental income of $412,000, $609,000 and $254,000 during 1996, 1997 and
1998, respectively. The minimum rental commitments under noncancelable
operating leases as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1999 ........................... $ 5,080,000
2000 ........................... 3,636,000
2001 ........................... 2,893,000
2002 ........................... 2,028,000
2003 ........................... 119,000
Thereafter ..................... --
Gross minimum payments required $13,756,000
-----------
Sublease Income ................ (71,000)
Net minimum payments required .. $13,685,000
-----------
</TABLE>
(10) INCOME TAXES
The income tax expense (benefit) relating to the continuing operations of
the Company consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- ---------------
<S> <C> <C> <C>
Federal and state:
Current ...................................... $ 332,000 $262,000 $ 158,000
Deferred ..................................... 2,990,000 540,000 (4,395,000)
---------- -------- ------------
Total income tax expense (benefit) ......... $3,322,000 $802,000 $ (4,237,000)
========== ======== ============
</TABLE>
F-14
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES -- (Continued)
The tax provisions in the accompanying financial statements differ from
prevailing federal corporate rates. A reconciliation of this difference is as
follows:
<TABLE>
<CAPTION>
1996 1997
------------------------ ----------------------
AMOUNT % AMOUNT %
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Computed expected tax expense (benefit) at
statutory rate ................................. $ 315,000 34.0% $ 412,000 34.0%
Goodwill amortization ............................ 333,000 36.0 337,000 27.8
Tax-exempt interest .............................. (216,000) (23.4) -- --
State tax, net of federal benefit ................ 56,000 6.1 73,000 6.0
Acquired in-process research and development ..... 2,623,000 283.6 -- --
Impairment loss on intangible assets ............. -- -- -- --
Valuation allowance .............................. -- -- -- --
Other, net ....................................... 211,000 22.8 (20,000) (1.7)
---------- ----- --------- ----
Provision (benefit) for income taxes ............. $3,322,000 359.1% $ 802,000 66.1%
========== ===== ========= ====
<CAPTION>
1998
-------------------------------
AMOUNT %
----------------- -------------
<S> <C> <C>
Computed expected tax expense (benefit) at
statutory rate ................................. $ (10,738,000) (34.0)%
Goodwill amortization ............................ 331,000 1.0
Tax-exempt interest .............................. -- --
State tax, net of federal benefit ................ (1,774,000) ( 5.6)
Acquired in-process research and development ..... -- --
Impairment loss on intangible assets ............. 104,000 0.3
Valuation allowance .............................. 8,400,000 26.6
Other, net ....................................... (560,000) ( 1.7)
------------- -----
Provision (benefit) for income taxes ............. $ (4,237,000) (13.4)%
============= =====
</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, 1997 and 1998, are presented below:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Operating accruals ................................... $ 2,205,000 $ 3,031,000
Basis differences in software and intangibles ........ 4,439,000 18,545,000
Net operating loss carryforwards ..................... 17,752,000 25,044,000
----------- -----------
Gross deferred tax assets ............................ 24,396,000 46,620,000
Valuation allowance .................................. -- 8,400,000
----------- -----------
Net deferred tax assets .............................. $24,396,000 $38,220,000
----------- -----------
Deferred tax liabilities:
Bonus accrual ........................................ 209,000 1,185,000
Fixed assets ......................................... 949,000 316,000
----------- -----------
Total deferred tax liabilities ......................... 1,158,000 1,501,000
----------- -----------
Total .................................................. $23,238,000 $36,719,000
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of $73,500,000 at
December 31, 1998, which expire between 2003 and 2018. The utilization of
certain of these carryforwards is subject to certain 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.
The Company periodically evaluates the realizability of its tax assets
based on, among other things, the Company's projected future taxable income.
During 1998, in connection with the evaluation process, the Company recorded a
valuation allowance of $8.4 million to reduce the carrying value of the net tax
asset to a level that management believes is more likely than not realizable
through future taxable income. The net deferred tax asset could be further
reduced in the future by an additional valuation allowance if management's
estimate of future taxable income is significantly reduced.
(11) 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 2). These
F-15
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CREDIT AGREEMENT -- (Continued)
borrowings were repaid in August 1996 with a portion of the proceeds from the
Company's August 1996 public offering of its common stock. 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). The Company has made no additional borrowings against the credit
facility during 1997 or 1998.
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, 1998, the Company was in
compliance with all such covenants and had a maximum borrowing capacity of $6.9
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.
(12) STOCKHOLDERS' EQUITY
(A) CAPITAL AMENDMENT
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.
In May 1996, approximately 4.2 million shares of the Company's common
stock were sold by an investor in a public offering. In connection with the
offering the Company sold 261,591 shares of newly issued common stock at $51.00
per share.
In August 1996, the Company sold approximately 2.0 million shares of newly
issued common stock at $54.125 in a public offering. In connection with this
offering, 216,696 shares were sold by certain stockholders. The Company did not
receive any of the proceeds from the sale of shares by the selling
stockholders.
(C) OPTIONS
At December 31, 1996, 1997 and 1998, the Company had outstanding stock
options as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ----------- ------------
<S> <C> <C> <C>
Stock options outstanding pursuant to:
HCIA Stock Option Plan .................. 956,266 1,399,952 1,427,281
Directors' Option Plan .................. 57,000 87,000 117,000
Other options ........................... 451,111 388,425 386,703
------- --------- ---------
Total stock options outstanding ......... 1,464,377 1,875,377 1,930,984
========= ========= =========
</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
either vest over a period of three or four years and expire over a period of
five to ten years from the date of grant or vest based upon the Company's stock
price reaching certain levels (but in no event later han seven years from the
date of grant) and expire after eight 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. 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:
F-16
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) STOCKHOLDERS' EQUITY -- (Continued)
<TABLE>
<CAPTION>
1996 1997 1998
------------------------------- -------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ ------------------ ------------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year ......................... 700,233 $ 13.80 1,464,377 $ 25.89 1,875,377 $ 24.61
Granted ....................... 1,524,000 $ 45.61 891,500 $ 23.87 1,013,222 $ 7.55
Exercised ..................... (62,605) $ 9.27 (65,907) $ 8.50 (167) $ 10.50
Canceled ...................... (697,251) $ 58.35 (414,593) $ 30.10 (957,448) $ 32.67
--------- --------- ---------
Outstanding at end of year .... 1,464,377 $ 25.89 1,875,377 $ 24.61 1,930,984 $ 11.66
--------- --------- ---------
Options exercisable at end of
year ......................... 345,215 $ 13.13 640,905 $ 20.00 639,345 $ 15.50
--------- --------- ------- ---------
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
NUMBER WEIGHTED AVG. WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
- --------------------- ------------- ------------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$6 to $9 ........... 875,187 8.6 $ 6.11 92,098 $ 6.01
$10 to $14 ......... 424,672 3.7 12.31 345,872 12.56
$15 to $24 ......... 590,875 7.2 16.50 161,125 17.51
$25 to $40 ......... 5,750 7.2 28.08 5,750 28.08
$41 to $60 ......... 34,500 7.5 58.70 34,500 58.70
------- --- ------- ------- -------
1,930,984 7.1 $ 11.66 639,345 $ 15.50
========= === ======= ======= =======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation expense has been recognized
in connection with its stock options. Had compensation expense for the
Company's stock options been determined consistent with SFAS No. 123, the
Company's net loss and basic loss per share would have been equal to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss As reported $ (42,267) $ (36,959) $ (48,647)
Pro forma $ (43,795) $ (40,781) $ (52,489)
Net loss per share As reported $ (4.19) $ (3.12) $ (4.11)
Pro forma $ (4.34) $ (3.45) $ (4.43)
</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 1996, 5.80% in
1997, and 4.70% in 1998; a weighted average expected life of six to seven
years; no dividend payments; and a volatility of 31.29% in 1997, based on the
annualized 10 year industry average, and 67.22% and 111.51% for 1997 and 1998,
respectively, based on the historical volatility of the Company's stock price.
The effects of applying SFAS No. 123 in calculating the pro forma net income
and earnings per share for 1996, 1997 and 1998 may not be representative of the
effects on such pro forma information for future years.
(13) 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.
F-17
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ............................................................... $ 11,336 $ 7,343
Trade accounts receivable, net of allowance for doubtful accounts of $1,573 in 1999 and
$1,816 in 1998......................................................................... 24,596 23,677
Prepaid expenses and other current assets ............................................... 3,565 2,619
---------- ----------
Total current assets .................................................................. 39,497 33,639
Furniture and equipment, net ............................................................. 7,222 8,325
Computer software costs, net ............................................................. 12,669 10,525
Other intangible assets, net ............................................................. 36,916 38,366
Net deferred tax asset ................................................................... 35,933 36,719
Other assets............................................................................. 1,170 556
Net assets of discontinued operations .................................................... -- 1,363
---------- ----------
Total assets .......................................................................... $ 133,407 $ 129,493
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................................ $ 2,031 $ 1,219
Accrued salaries, benefits and other liabilities ........................................ 8,854 8,879
Deferred revenue................................................... ..................... 1,373 1,296
Net liabilities of discontinued operations .............................................. 1,987 --
---------- ----------
Total current liabilities ............................................................. 14,245 11,394
---------- ----------
Total liabilities
Stockholders' equity:
Common stock -- $.01 par value; 50,000,000 shares authorized; issued and outstanding
11,851,125 shares ....................................................................... 118 118
Additional paid-in capital ............................................................... 250,904 250,904
Accumulated deficit ...................................................................... (131,576) (132,826)
Accumulated other comprehensive loss ..................................................... (284) (97)
---------- ----------
Total stockholders' equity ............................................................ 119,162 118,099
---------- ----------
Total liabilities and stockholders' equity ............................................... $ 133,407 $ 129,493
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------- ------------
<S> <C> <C>
Revenue ............................................................. $32,829 $ 31,301
Salaries, wages and benefits ........................................ 15,308 16,135
Other operating expenses ............................................ 10,489 10,659
Depreciation ........................................................ 1,694 1,889
Amortization ........................................................ 3,636 4,423
Impairment loss on intangible assets and restructuring charges ...... -- 25,067
------- ---------
Operating income (loss) .......................................... 1,702 (26,872)
Interest income ..................................................... 206 202
Interest expense .................................................... 130 124
------- ---------
Income (loss) from continuing operations before income taxes ..... 1,778 (26,794)
Provision (benefit) for income taxes ................................ 799 (3,589)
------- ---------
Income (loss) from continuing operations ......................... 979 (23,205)
Loss from discontinued operations, net of tax...... ................. (336) (18,776)
Gain on sale of discontinued operations, net of tax.................. 607 --
------- ---------
Income (loss) from discontinued operations ....................... 271 (18,776)
Net income (loss) ................................................ $ 1,250 $ (41,981)
======= =========
Income (loss) per share from continuing operations:
Basic net income (loss) per share ................................... $ 0.08 $ (1.96)
======= =========
Basic shares used in per share calculation .......................... 11,851 11,851
======= =========
Diluted net income (loss) per share ................................. $ 0.08 $ (1.96)
======= =========
Diluted shares used in per share calculation ........................ 11,851 11,851
======= =========
Income (loss) per share from discontinued operations:
Basic net income (loss) per share ................................... $ 0.02 $ (1.58)
======= =========
Basic shares used in per share calculation .......................... 11,851 11,851
======= =========
Diluted net income (loss) per share ................................. $ 0.02 $ (1.58)
======= =========
Diluted shares used in per share calculation ........................ 11,851 11,851
======= =========
Net income (loss) per share:
Basic net income (loss) per share ................................... $ 0.11 $ (3.54)
======= =========
Diluted net income (loss) per share ................................. $ 0.11 $ (3.54)
======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
LOSS
YEAR ENDED DECEMBER 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL ACCUMULATED OTHER
COMMON PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE TOTAL STOCKHOLDERS'
STOCK CAPITAL DEFICIT INCOME (LOSS) INCOME (LOSS) EQUITY
-------- ------------ ------------- ------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
DECEMBER 31, 1997 ............ $118 $250,892 $ (84,179) $ (117) $ 166,714
---- -------- ---------- ------ ---------
Exercise of stock options ..... -- 12 -- -- -- 12
Comprehensive loss:
Net loss ..................... -- -- (48,647) -- (48,647) (48,647)
Other comprehensive loss
Foreign currency
translation ............... -- -- -- -- 20 20
-------
Other comprehensive loss -- -- -- 20 20 --
-------
Comprehensive loss ............ -- -- -- -- $ (48,627) --
---- -------- ---------- ------ ========= ---------
BALANCE AT
DECEMBER 31, 1998 ............ $118 $250,904 $ (132,826) $ (97) $ 118,099
==== ======== ========== ====== =========
Exercise of stock options ..... -- -- -- -- -- --
Comprehensive income
Net income ................... -- -- 1,250 -- 1,250 1,250
Other comprehensive loss
Foreign currency
translation ............... -- -- -- -- (187) (187)
---------
Other comprehensive loss -- -- -- (187) (187) --
---------
Comprehensive income .......... -- -- -- -- $ (1,063) --
---- -------- ---------- ------ ========= ---------
BALANCE AT JUNE 30,
1999 (Unaudited) ............. $118 $250,904 $ (131,576) $ (284) $ 119,162
==== ======== ========== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................................................... $ 1,250 $ (41,981)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sale of discontinued operations ............................................... (1,041) --
Depreciation and amortization ......................................................... 5,330 6,312
Impairment loss on intangible assets and restructuring charges ........................ -- 25,067
Impairment loss on intangible ass ts and restructuring charges of discontinued -- 25,754
operations
Deferred tax provision ................................................................ 786 (11,679)
Changes in operating assets and liabilities:
Accounts receivable .................................................................. (919) 5,073
Prepaid expenses and other current assets ............................................ (833) (438)
Accounts payable ..................................................................... 812 (378)
Accrued salaries, benefits and other liabilities ..................................... (25) (244)
Deferred revenue ..................................................................... 77 (989)
-------- ---------
Net cash provided by operating activities .......................................... 5,437 6,497
-------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment ................................................... (591) (488)
Computer software purchased or capitalized ............................................. (3,872) (3,800)
Other intangible assets purchased or capitalized ....................................... (458) (590)
Proceeds from sale of discontinued operations .......................................... 7,500 --
Investment in net assets of discontinued operations .................................... -- (165)
Net liabilities of discontinued operations ............................................. (3,222) --
Other .................................................................................. (614) (40)
-------- ---------
Net cash used in investing activities .............................................. (1,257) (5,083)
-------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options ................................................ -- 12
-------- ---------
Net cash provided by financing activities .......................................... -- 12
Impact of currency fluctuations on cash and cash equivalents ............................ (187) (51)
-------- ---------
Increase in cash and cash equivalents ................................................... 3,993 1,375
Cash & cash equivalents -- beginning of period .......................................... 7,343 5,580
-------- ---------
Cash & cash equivalents -- end of period ................................................ $ 11,336 $ 6,955
======== =========
Supplemental cash flow information -- cash paid during period for interest .............. $ 63 $ 63
======== =========
-- cash paid during period for income taxes .......... $ 181 $ 31
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of the Company
have been prepared in accordance with generally accepted accounting principles.
In the opinion of management, these statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial condition, results of operations,
changes in stockholders' equity and comprehensive loss and cash flows for the
periods presented. The results of operations for the period ended June 30, 1999
may not be indicative of the results that may be expected for the full year
ending December 31, 1999. These financial statements and notes should be read
in conjunction with the financial statements and notes included in the audited
consolidated financial statements of the Company for the year ended December
31, 1998 as contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (1934 Act File No. 0-25378).
(2) IMPAIRMENT LOSS ON INTANGIBLE ASSETS AND RESTRUCTURING CHARGES
During the three months ended March 31, 1998, the Company recorded an
impairment loss on intangible assets and restructuring charges of approximately
$50.8 million. Approximately $50.0 million of the charges represented the
write-down of certain intangible assets. This write-down arose primarily due to
the failure of the Company's Content Unit to execute agreements with customers
for large-scale custom solutions and the Company's determination that the
Unit's revenue which could be anticipated from future agreements of this type,
was significantly less than had been previously anticipated. As the products
marketed by the Content Unit were intended to integrate the products and
technologies of the Company's other business units, this determination resulted
in a reduced expectation of future cash flows from the Company's intangible
assets across most of its business units and, accordingly, an impairment in
value of these intangible assets. The remainder of the charges, totaling
approximately $800,000, related primarily to accruals for the cost of employee
severance and facilities reductions. As of June 30, 1999, substantially all of
the accruals had been used. The following table summarizes the impairment loss
on intangible assets and computer software costs:
<TABLE>
<CAPTION>
POST-CHARGE
PRE-CHARGE NET BOOK VALUE
ASSET NET BOOK VALUE WRITE DOWN AS OF 3/31/98
- ----------------------------- ---------------- -------------- ---------------
<S> <C> <C> <C>
Databases ................. $ 2,871,000 $ 1,649,000 $ 1,222,000
CPHA License .............. 9,113,000 -- 9,113,000
Goodwill .................. 46,326,000 20,644,000 25,682,000
Customer Bases ............ 2,987,000 2,028,000 959,000
Methodologies ............. 3,549,000 2,355,000 1,194,000
Assembled Workforce ....... 3,266,000 1,751,000 1,515,000
Tradename ................. 1,029,000 1,029,000 --
Software .................. 28,106,000 20,567,000 7,539,000
----------- ----------- -----------
$97,247,000 $50,023,000 $47,224,000
=========== =========== ===========
</TABLE>
The charges have been allocated to continuing operations ($25.1 million)
and discontinued operations ($25.7 million) based on the nature of the assets
and operations incurring the charge.
(3) INCOME TAXES
During the quarter ended March 31, 1998, the Company recorded a valuation
allowance of $5.0 million to reduce the carrying value of its deferred tax
asset to an amount management believed was realizable through future taxable
income. As of June 30, 1999, the total valuation allowance was $8.4 million.
F-22
<PAGE>
HCIA INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (CONTINUED)
(4) SEGMENT INFORMATION
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that the Company report information about its operating segments. The
Company's three operating segments, Content, Managed Care/Pharmaceutical and
HCIA Europe, each have separate management teams and offer different products
and services.
The Content Unit builds, manages and maintains comparative databases. The
Managed Care/ Pharmaceutical Unit helps pharmaceutical companies, employers,
managed care organizations and indemnity insurers better manage the overall
health status and costs of a covered population by providing medical resource
usage and outcomes information. HCIA Europe provides clinical, financial, and
operational efficiency analyses to hospitals and health care purchasers outside
of the United States.
The Company evaluates the performance of its operating segments based on
contribution margin. Contribution margin includes direct payroll costs and
other direct costs, but does not include any corporate allocations of overhead
costs, nonrecurring items, interest income, interest expense, amortization or
depreciation. Certain 1998 amounts have been reclassified to conform with the
1999 presentation.
Summarized financial information regarding the Company's operating
segments is shown in the following table. The "Corporate Costs" column includes
corporate related items, results of insignificant operations and income and
expense not allocated to operating segments. There are no material
inter-segment revenues or receivables.
<TABLE>
<CAPTION>
MANAGED CARE/
CONTENT PHARMACEUTICAL HCIA EUROPE CORPORATE COSTS CONSOLIDATED
------------ ---------------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue ...................... 15,654,620 14,055,566 3,119,558 -- 32,829,744
Contribution ................. 7,135,402 5,708,867 1,031,563 (12,173,042) 1,702,790
SIX MONTHS ENDED JUNE 30, 1998
Revenue ...................... 15,938,425 11,942,463 3,420,387 31,301,275
Contribution ................. 7,987,000 4,128,000 994,809 (14,914,798) (1,804,989)
</TABLE>
(5) NEW ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants (AICPA) has issued
Statement of Position 98-9, Modifications of SOP 97-2 "Software Revenue
Recognition" (SOP 98-9), with respect to certain transactions. The new SOP will
have a limited impact on certain revenue recognition practices of the Company.
The new SOP will be effective for the Company's 2000 quarterly and annual
financial statements. The new SOP delays the definition of Vendor Specific
Objective Evidence as stipulated in SOP 97-2 until fiscal years beginning after
March 31, 1999. The Company is currently evaluating the effect of this
pronouncement.
(6) EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No.128,
"Earnings Per Share". Basic EPS is calculated by dividing net income (loss) by
the weighted average number of common shares outstanding for the applicable
period. Diluted EPS is calculated after adjusting the numerator and the
denominator of the basic EPS calculation for the effect of all potential
dilutive common shares outstanding during the period. For the six months ended
June 30, 1999 and 1998, there were no potentially dilutive common shares and,
accordingly, Basic EPS was equal to Diluted EPS
(7) SUBSEQUENT EVENT
The Company filed a Form 8-K on August 12, 1999, in connection with its
entering into an Agreement and Plan of Reorganization dated August 11, 1999
with VS&A Communications Partners III, L.P., VS&A-HCIA, L.L.C. and VS&A-HCIA,
Inc.
F-23
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
HCIA INC.
VS&A COMMUNICATIONS PARTNERS III, L.P.
VS&A-HCIA, L.L.C.
AND
VS&A-HCIA, INC.
DATED AS OF OCTOBER 11, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER .......................................................... A-1
SECTION 1.1 The Merger ...................................................... A-1
SECTION 1.2 Closing ......................................................... A-1
SECTION 1.3 Effective Time .................................................. A-1
SECTION 1.4 Effects of the Merger ........................................... A-2
SECTION 1.5 Limited Liability Company Agreement of the Surviving LLC ........ A-2
SECTION 1.6 Stockholders' Meeting ........................................... A-2
SECTION 1.7 Directors and Officers of the Surviving LLC ..................... A-2
ARTICLE II EFFECT OF THE MERGER ON THE EQUITY INTERESTS OF THE CONSTITUENT
ENTITIES EXCHANGE OF CERTIFICATES .......................................... A-2
SECTION 2.1 Effect on Capital Stock ......................................... A-2
(a) Cancellation of Treasury Stock and Acquiror-Owned Stock .......... A-3
(b) Conversion of HCIA Common Stock .................................. A-3
(c) Acquiror and LLC Equity Interests ................................ A-3
(d) Options .......................................................... A-3
SECTION 2.2 Exchange of Certificates ........................................ A-3
(a) Exchange Agent ................................................... A-3
(b) Exchange Procedures .............................................. A-3
(c) No Further Ownership Rights in HCIA Common Stock ................. A-4
(d) Termination of Exchange Fund ..................................... A-4
(e) No Liability ..................................................... A-4
(f) Investment of Exchange Fund ...................................... A-4
(g) Lost Certificates ................................................ A-4
ARTICLE III REPRESENTATIONS AND WARRANTIES .................................... A-4
SECTION 3.1 Representations and Warranties of Acquiror and the LLC .......... A-4
(a) Organization, Standing and Corporate Power ....................... A-4
(b) Authority; Noncontravention ...................................... A-4
(c) Compliance with Applicable Laws; Litigation ...................... A-5
(d) Brokers .......................................................... A-5
(e) Ownership of HCIA Common Stock ................................... A-5
(f) Full Disclosure .................................................. A-6
SECTION 3.2 Representations and Warranties of HCIA .......................... A-6
(a) Organization, Standing and Corporate Power ....................... A-6
(b) Subsidiaries ..................................................... A-6
(c) Capital Structure ................................................ A-6
(d) Authority; Noncontravention ...................................... A-7
(e) SEC Documents; Undisclosed Liabilities ........................... A-7
(f) Information Supplied ............................................. A-8
(g) Absence of Certain Changes or Events ............................. A-8
(h) Compliance with Applicable Laws; Litigation ...................... A-9
(i) Absence of Changes in Benefit Plans .............................. A-9
(j) Benefit Plans .................................................... A-9
(k) Taxes ............................................................ A-10
(l) Voting Requirements .............................................. A-11
(m) State Takeover Statutes .......................................... A-11
(n) Brokers .......................................................... A-11
(o) Opinion of Financial Advisor ..................................... A-11
(p) Ownership of Acquiror Equity Interests ........................... A-11
(q) Intellectual Property ............................................ A-11
(r) Certain Contracts ................................................ A-13
(s) HCIA Rights Agreement ............................................ A-14
(t) Environmental Liability .......................................... A-14
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(u) Insurance ....................................................... A-14
(v) Transactions with Affiliates .................................... A-15
(w) Employment Matters .............................................. A-15
(x) Title and Condition of Properties ............................... A-15
(y) Net Operating Loss Carryforwards ................................ A-15
(z) Full Disclosure ................................................. A-15
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS ........................... A-15
SECTION 4.1 Conduct of Business ............................................. A-15
(a) Conduct of Business by HCIA ..................................... A-15
(b) Other Actions ................................................... A-17
(c) Advice of Changes ............................................... A-17
SECTION 4.2 No Solicitation by HCIA ......................................... A-17
ARTICLE V ADDITIONAL AGREEMENTS ................................................ A-18
SECTION 5.1 Access to Information; Confidentiality .......................... A-18
SECTION 5.2 Best Efforts .................................................... A-18
SECTION 5.3 Indemnification, Exculpation and Insurance ...................... A-19
SECTION 5.4 Fees and Expenses ............................................... A-19
SECTION 5.5 Public Announcements ............................................ A-20
SECTION 5.6 Conveyance Taxes ................................................ A-20
SECTION 5.7 Employee Benefits ............................................... A-20
ARTICLE VI CONDITIONS PRECEDENT ................................................ A-20
SECTION 6.1 Conditions to Each Party's Obligation to Effect the Merger ...... A-20
(a) Stockholder Approval ............................................ A-20
(b) Governmental, Regulatory and Other Approvals .................... A-20
(c) No Injunctions or Restraints .................................... A-20
SECTION 6.2 Conditions to Obligations of HCIA ............................... A-20
(a) Representations and Warranties .................................. A-20
(b) Performance of Obligations of Acquiror .......................... A-21
(c) Opinion ......................................................... A-21
(d) Certificate ..................................................... A-21
SECTION 6.3 Conditions to Obligations of Acquiror ........................... A-21
(a) Representations and Warranties .................................. A-21
(b) Performance of Obligations of HCIA .............................. A-21
(c) HCIA Rights Agreement ........................................... A-21
(d) Opinion ......................................................... A-21
(e) Material Adverse Change ......................................... A-21
(f) Consents ........................................................ A-21
(g) Certificate ..................................................... A-21
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER .................................. A-21
SECTION 7.1 Termination ..................................................... A-21
SECTION 7.2 Effect of Termination ........................................... A-22
SECTION 7.3 Amendment ....................................................... A-23
SECTION 7.4 Extension; Waiver ............................................... A-23
ARTICLE VIII GENERAL PROVISIONS ................................................ A-24
SECTION 8.1 Nonsurvival of Representations and Warranties ................... A-24
SECTION 8.2 Notices ......................................................... A-24
SECTION 8.3 Definitions ..................................................... A-25
SECTION 8.4 Interpretation .................................................. A-25
SECTION 8.5 Counterparts .................................................... A-25
SECTION 8.6 Entire Agreement; No Third-Party Beneficiaries .................. A-25
SECTION 8.7 Governing Law ................................................... A-25
SECTION 8.8 Assignment ...................................................... A-25
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 8.9 Headings, Etc. ................................................. A-25
SECTION 8.10 Severability ................................................... A-25
SECTION 8.11 Transfer and Similar Taxes ..................................... A-26
</TABLE>
iii
<PAGE>
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (this
"Agreement") is dated as of October 11, 1999, among HCIA INC., a Maryland
corporation ("HCIA"), VS&A Communications Partners III, L.P., a Delaware
limited partnership ("Acquiror"), VS&A-HCIA, L.L.C., a Delaware limited
liability company wholly owned by the Acquiror and its affiliate, VS&A
Communication Parallel Partners III, L.P. (the "LLC"), and VS&A-HCIA, INC., a
Delaware corporation and a wholly owned subsidiary of the LLC (the "Merger
Sub").
WITNESSETH:
WHEREAS, the parties have entered into an agreement and plan of
reorganization dated as of August 11, 1999 (the "Original Merger Agreement")
providing, among other things, for the merger of Merger Sub into HCIA;
WHEREAS, the parties wish to amend the Original Merger Agreement to
provide, among other things, for the merger of HCIA into the LLC instead of the
merger of Merger Sub into HCIA;
WHEREAS, the Board of Directors of HCIA, the General Partner of Acquiror
and the Managing Member of the LLC (together, the "Constituent Entities") have
each approved the merger of HCIA with and into the LLC (the "Merger"), upon the
terms and subject to the conditions set forth in this Agreement, whereby each
issued and outstanding share of common stock, par value $.01 per share, of HCIA
("HCIA Common Stock," which reference shall be deemed to include the associated
HCIA Rights (as defined in Section 3.2(c)), other than shares owned by HCIA or
Acquiror, will be converted into the right to receive the Merger Consideration
(as defined in Section 2.1(b));
WHEREAS, the Board of Directors of HCIA and the Managing Member of the LLC
have each approved the transactions contemplated by this Agreement;
WHEREAS, pursuant to an agreement, dated as of August 11, 1999, as amended
as of the date hereof, among the Acquiror and certain stockholders of HCIA (the
"Voting Agreement"), such stockholders have agreed, pursuant to the terms and
conditions thereof, to vote all of the shares of HCIA Common Stock held by them
in favor of the Merger;
WHEREAS, the Board of Directors of HCIA has resolved to recommend to its
stockholders the approval and adoption of this Agreement and the Merger and the
consummation of the transactions contemplated hereby upon the terms and subject
to the conditions set forth herein; and
WHEREAS, HCIA and Acquiror desire to make certain representations,
warranties, covenants and agreements in connection with the Merger and also to
prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements set forth herein, the parties agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Maryland General
Corporation Law (the "MGCL") and the Delaware Limited Liability Company Act
(the "DLLCA"), HCIA shall be merged with and into the LLC at the Effective Time
(as defined in Section 1.3). Following the Effective Time, the separate
corporate existence of HCIA shall cease and the LLC shall be the successor or
surviving limited liability company in the Merger (the "Surviving LLC") and
shall succeed to and assume all the rights and obligations of HCIA in
accordance with the MGCL and the DLLCA.
SECTION 1.2 CLOSING. The closing of the Merger (the "Closing") will take
place on a date to be specified by the parties (the "Closing Date"), which
shall be no later than the second business day after satisfaction or waiver of
the conditions set forth in Article VI, unless another time or date is agreed
to by the parties hereto. The Closing will be held at the offices of Whiteford,
Taylor & Preston L.L.P., Seven Saint Paul Street, Baltimore, Maryland
21202-1626.
SECTION 1.3 EFFECTIVE TIME. Subject to the provisions of this Agreement,
as soon as practicable on the Closing Date, the parties shall cause the Merger
to be consummated by filing articles and certificates of merger or other
appropriate documents (in any such case, the "Certificate of Merger") executed
in accordance with the relevant provisions of the MGCL and the DLLCA and shall
make all other filings or recordings required under the MGCL and the DLLCA. The
Merger shall become effective at such time as the Certificate of Merger is duly
filed with the Delaware Secretary of State, or at such subsequent date or time
as HCIA and the LLC shall agree and specify in the Certificate of Merger (the
time the Merger becomes effective is hereinafter referred to as the "Effective
Time").
A-1
<PAGE>
SECTION 1.4 EFFECTS OF THE MERGER. The Merger shall have the effects set
forth in the MGCL and the DLLCA.
SECTION 1.5 LIMITED LIABILITY COMPANY AGREEMENT OF THE SURVIVING LLC. At
the Effective Time, the limited liability company agreement of the LLC, as in
effect immediately prior to the Effective Time, shall be the limited liability
company agreement of the Surviving LLC, until thereafter amended in accordance
with applicable law.
SECTION 1.6 STOCKHOLDERS' MEETING.
HCIA, acting through its Board of Directors, shall, in accordance with
applicable law as promptly as practicable following the date of this Agreement:
(a) duly call, give notice of, convene and hold a special meeting of its
stockholders (the "HCIA Stockholders Meeting") as promptly as practicable
following the execution of this Agreement for the purpose of considering
and taking action upon the approval of the Merger and the adoption of this
Agreement and shall, subject to the provisions of Section 4.2(b), recommend
to its stockholders the approval of this Agreement, the Merger and the
other transactions contemplated hereby;
(b) prepare and file a definitive proxy statement with the Securities and
Exchange Commission (the "SEC") and cause the definitive proxy statement,
including any amendment or supplement thereto (the "Proxy Statement"), to
be mailed to its stockholders relating to the merger and this agreement,
provided that no amendment or supplement to the Proxy Statement shall be
made by HCIA without consultation with the Acquiror and its counsel, and
(y) to obtain the necessary approvals for the Merger and this Agreement
from its stockholders; and
(c) subject to the provisions of Section 4.2(b) hereof, (x) include in
the Proxy Statement the recommendation of the Board of Directors that the
stockholders of HCIA approve the Merger, this Agreement and the
transactions contemplated hereby, (y) use its best efforts to solicit from
stockholders of HCIA proxies in favor of approval and adoption of this
Agreement and the Merger and to take all other actions necessary or in the
Acquiror's reasonable judgment advisable to secure such vote and (z)
cooperate with the Acquiror and the LLC with respect to each of the
foregoing matters. Notwithstanding the foregoing, HCIA and its Board of
Directors may take and disclose to stockholders a position contemplated by
Rule 14e-2 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), if required to do so by the provisions of the
Exchange Act applicable to HCIA, may comply with Rule 14d-9 promulgated
under the Exchange Act if required to do so by the provisions of the
Exchange Act applicable to HCIA, and may make all other disclosures
required by the provisions of the Exchange Act applicable to HCIA.
(d) If at any time prior to the Effective Time any information relating
to Acquiror or HCIA, or any of their respective affiliates, officers or
directors, should be discovered by Acquiror or HCIA which should be set
forth in an amendment or supplement to the Proxy Statement, so that any
document would not include any misstatement of a material fact or omit to
state any material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading, the party
which discovers such information shall promptly notify the other parties
hereto in writing and an appropriate amendment or supplement describing
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the stockholders of HCIA.
(e) HCIA's obligations under this Section 1.6 shall at all times remain
subject to the provisions of Sections 4.2(b), in the event that under the
circumstances described therein, the Board of Directors of HCIA shall have
received and accepted a Superior Proposal.
SECTION 1.7 DIRECTORS AND OFFICERS OF THE SURVIVING LLC. The Managing
Member of the Surviving LLC shall, from and after the Effective Time, be the
Managing Member of the Surviving LLC until its successor shall have been duly
elected or appointed or qualified or until its resignation or removal in
accordance with the limited liability company agreement of the LLC.
ARTICLE II
EFFECT OF THE MERGER ON THE EQUITY INTERESTS
OF THE CONSTITUENT ENTITIES;
EXCHANGE OF CERTIFICATES
SECTION 2.1 EFFECT ON CAPITAL STOCK. As of the Effective Time, by virtue
of the Merger and without any action on the part of Acquiror, the LLC, HCIA or
the holder of any shares of the following securities:
A-2
<PAGE>
(a) CANCELLATION OF TREASURY STOCK AND ACQUIROR-OWNED STOCK. Each share
of HCIA Common Stock that as of the Effective Time is owned by HCIA as
treasury stock or is owned by Acquiror or the LLC shall automatically be
canceled and retired and shall cease to exist, and no consideration shall
be delivered in exchange therefor.
(b) CONVERSION OF HCIA COMMON STOCK. Each issued and outstanding share of
HCIA Common Stock (other than shares to be canceled in accordance with
Section 2.1(a)), shall be converted into the right to receive $11.00 in
cash, without interest (the "Merger Consideration"). As of the Effective
Time, all such shares of HCIA Common Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist,
and each holder of a certificate representing any such shares of HCIA
Common Stock shall cease to have any rights with respect thereto, except
the right to receive the Merger Consideration.
(c) ACQUIROR AND LLC EQUITY INTERESTS. At and after the Effective Time,
each unit or other equity interest of Acquiror and the LLC issued and
outstanding immediately prior to the Closing Date shall remain an issued
and outstanding unit or other equity interest of Acquiror and the LLC and
shall not be affected by the Merger.
(d) OPTIONS. Except as otherwise agreed to in writing between HCIA and
the holder of any option to purchase shares of HCIA Common Stock
(collectively, the "HCIA Stock Options"), and as consented to by Acquiror,
in its sole discretion, as of the Effective Time, each outstanding Option
granted under the HCIA Stock Plans (as defined in Section 3.2(c)), whether
or not then exercisable, shall be canceled by HCIA, and as of the Effective
Time, the former holder thereof shall be entitled to receive from HCIA in
consideration for such cancellation an amount in cash equal to the product
of (i) the number of shares of HCIA Common Stock previously subject to such
HCIA Stock Option (whether or not vested or exercisable) and (ii) the
excess, if any, of the Merger Consideration per share over the exercise
price per share of such HCIA Stock Option, such payments to be made at the
option of the Acquiror on the Closing Date or as promptly as practicable
following the Effective Time and in no event later than ten days following
the Closing Date and to be reduced by the amount of withholding or other
taxes required by law to be withheld by the Surviving LLC. Except as
provided herein or as otherwise agreed by the parties, the HCIA Stock Plans
shall terminate as of the Effective Time, and the provisions in any other
plan, program or arrangement providing for the issuance or grant of any
other interest in respect of the capital stock of HCIA or any of its
subsidiaries shall be terminated as of the Effective Time so that on and
after the Effective Time no holder of HCIA Stock Options shall have any
option to purchase shares of capital stock or any other equity interest in
HCIA and HCIA shall exercise its commercially reasonable best efforts to
ensure that following the Effective Time, no current or former employee or
director shall have any HCIA Stock Option to purchase shares of the HCIA
Common Stock under any HCIA Stock Plan or otherwise. Prior to the Effective
Time, the Board of Directors (or, if appropriate, any committee
administering the HCIA Stock Plans) shall adopt such resolutions or take
such actions as are necessary, subject if necessary, to obtaining consents
of the holders of HCIA Stock Options, to carry out the terms of this
Section 2.1(d).
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, Acquiror shall deposit, or
shall cause to be deposited, with such bank or trust company as may be
designated by Acquiror (the "Exchange Agent") for the benefit of the
holders of HCIA Common Stock, cash in the aggregate amount equal to the
product of (i) the number of shares of HCIA Common Stock outstanding
immediately prior to the Effective Time (other than shares to be canceled
pursuant to Section 2.1(a)) multiplied by (ii) the Merger Consideration
(the "Exchange Fund").
(b) EXCHANGE PROCEDURES. As soon as practicable after the Effective Time,
the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of HCIA Common Stock (the "Certificates") whose shares
were converted into the right to receive the Merger Consideration pursuant
to Section 2.1, (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent,
and shall otherwise be in customary form) and (ii) instructions for use in
surrendering the Certificates in exchange for the Merger Consideration.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder
of such Certificate shall be entitled to receive in exchange therefor the
amount of the Merger Consideration into which the number of shares of HCIA
Common Stock previously represented by such Certificate(s) so surrendered
shall have been converted pursuant to this Agreement, and the Certificate
so surrendered shall forthwith be canceled. The Exchange Agent shall mail a
check to such holder as soon as practicable after receipt of the
appropriate documents. In the event of a surrender of a Certificate
representing shares of HCIA Common Stock which are not registered in the
transfer records of HCIA under the name of the person surrendering such
Certificate, the Merger Consideration may be
A-3
<PAGE>
paid to a person other than the person in whose name the Certificate so
surrendered is registered if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and if the person requesting such
surrender shall pay any transfer or other taxes required by reason of the
payment of the Merger Consideration to a person other than the registered
holder of such Certificate or establish to the satisfaction of Acquiror, in
its sole discretion, that such tax has been paid or is not applicable.
Until surrendered as contemplated by this Section 2.2, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the Merger Consideration which the
holder thereof has the right to receive in respect of such Certificate
pursuant to the provisions of this Article II. No interest shall be paid or
will accrue on the Merger Consideration payable to holders of Certificates
pursuant to the provisions of this Article II.
(c) NO FURTHER OWNERSHIP RIGHTS IN HCIA COMMON STOCK. The Merger
Consideration paid upon the surrender for exchange of Certificates in
accordance with the terms of this Article II shall be deemed to have been
issued (and paid) in full satisfaction of all rights pertaining to the
shares of HCIA Common Stock theretofore represented by such Certificates,
and there shall be no further registration of transfers on the stock
transfer books of the Surviving Corporation of the shares of HCIA Common
Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to Acquiror, the
Surviving LLC or the Exchange Agent for any reason, they shall be canceled
and exchanged as provided in this Article II.
(d) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund which
remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to Acquiror, upon demand, and
any holders of the Certificates who have not theretofore complied with this
Article II shall thereafter look only to Acquiror for payment of their
claim for Merger Consideration,
(e) NO LIABILITY. None of HCIA, Acquiror, the LLC, the Surviving LLC or
the Exchange Agent shall be liable to any person in respect of any cash or
other distribution payable from the Exchange Fund, in each case delivered
to a public official pursuant to any applicable abandoned property, escheat
or similar law.
(f) INVESTMENT OF EXCHANGE FUND. The Exchange Agent shall invest cash
included in the Exchange Fund, as directed by Acquiror, on a daily basis.
Any interest and other income resulting from such investments shall be paid
to Acquiror.
(g) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and; the posting
by such person of a bond in such amount as the Surviving LLC may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration with respect to
the shares of HCIA Common Stock formerly represented thereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND THE LLC .
Except as disclosed in the Disclosure Schedule delivered by Acquiror and to
HCIA on August 11, 1999 in accordance with the Original Merger Agreement (the
"Acquiror Disclosure Schedule"), Acquiror and the LLC jointly and severally
represent and warrant to HCIA as follows as of August 11, 1999 (unless another
date is specified, in which case as of such other date):
(a) ORGANIZATION, STANDING AND CORPORATE POWER. Each of Acquiror and its
subsidiaries (as defined in Section 8.3) is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is organized and has the requisite
corporate or other power, as the case may be, and authority to carry on its
business as now being conducted, except, as to subsidiaries, for those
jurisdictions where the failure to be so organized, existing or in good
standing individually or in the aggregate would not have a material adverse
effect on Acquiror. Each of Acquiror and its subsidiaries is duly qualified
or licensed to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership, leasing or operation of
its properties makes such qualification or licensing necessary, except for
those jurisdictions where the failure to be so qualified or licensed or to
be in good standing individually or in the aggregate would not have a
material adverse effect on Acquiror.
(b) AUTHORITY; NONCONTRAVENTION. Each of Acquiror, the LLC and the Merger
Sub has or will have all requisite power and authority to enter into this
Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by each of Acquiror, the LLC and
the Merger Sub, and the consummation by Acquiror and the LLC of the
transactions contemplated hereby, have been or will be duly authorized by,
all necessary action on the part of Acquiror, the LLC and the Merger Sub.
This Agreement has been or will be duly executed and
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delivered by Acquiror, the LLC and the Merger Sub and, assuming the due
authorization, execution and delivery thereof by HCIA, constitutes (or will
constitute, as the case may be) the legal, valid and binding obligation of
Acquiror, the LLC and the Merger Sub, enforceable against Acquiror, the LLC
and the Merger Sub in accordance with its terms. The execution and delivery
of this Agreement by the Acquiror, the LLC and the Merger Sub does not, and
the consummation of the transactions contemplated hereby and compliance
with the provisions of this Agreement will not, conflict with, or result in
any violation of, or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a benefit under, or result in the
creation of any lien, security interest or encumbrance ("Liens") upon any
of the properties or assets of Acquiror or any of its subsidiaries or in
any restriction on the conduct of Acquiror's business or operations under,
(i) the certificate of limited partnership and the limited partnership
agreement of Acquiror (the "Acquiror Certificate") or the comparable
organizational documents of any of its subsidiaries, (ii) any loan or
credit agreement, note, bond, mortgage, indenture, trust document, lease or
other agreement, instrument, permit, concession, franchise, license or
similar authorization applicable to Acquiror or any of its subsidiaries or
their respective properties or assets or (iii) subject to the governmental
filings and other matters referred to in the following sentence, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Acquiror or any of its subsidiaries or their respective
properties or assets, other than, in the case of clauses (ii) and (iii),
any such conflicts, violations, defaults, rights, losses, restrictions or
Liens that individually or in the aggregate would not (x) have a material
adverse effect on Acquiror or (y) reasonably be expected to impair the
ability of Acquiror or the LLC to perform its obligations under this
Agreement. No consent, approval, order or authorization of, action by or in
respect of, or registration, declaration or filing with, any federal,
state, local or foreign government, any court, administrative, regulatory
or other governmental agency, commission or authority or any
nongovernmental self-regulatory agency, commission or authority (a
"Governmental Entity") is required by or with respect to Acquiror or any of
its subsidiaries in connection with the execution and delivery of this
Agreement by Acquiror, or the consummation by Acquiror or the LLC of the
transactions contemplated hereby, except for: (1) the filing of a
pre-merger notification and report form by Acquiror under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), or filings or notifications under the antitrust, competition or
similar laws of any foreign jurisdiction; (2) the filing with the SEC of
such reports under Sections 13(a), 13(d), 15(d) or 16(a) of the Exchange
Act, as may be required in connection with this Agreement and the
transactions contemplated hereby; (3) the filing of the Certificates of
Merger with the Maryland State Department of Assessments and Taxation and
the Secretary of State of the State of Delaware appropriate documents with
the relevant authorities of other states in which Acquiror is qualified to
do business and such filings with Governmental Entities as may be necessary
to satisfy the applicable requirements of state securities or "blue sky"
laws; and (4) such consents, approvals, orders or authorizations the
failure of which to be made or obtained individually or in the aggregate
would not (x) have a material adverse effect on Acquiror or (y) reasonably
be expected to impair the ability of Acquiror or the LLC to perform its
obligations under this Agreement.
(c) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION. As of August 11, 1999,
no action, demand, requirement or investigation by any Governmental Entity
and no suit, action or proceeding by any person, in each case with respect
to Acquiror or any of its subsidiaries or any of their respective
properties, is pending or, to the best knowledge (as defined in Section
8.3) of Acquiror, threatened, other than, in each case, those the outcome
of which individually or in the aggregate would not (A) have a material
adverse effect on Acquiror or (B) reasonably be expected to impair the
ability of Acquiror or the LLC to perform its obligations under this
Agreement or prevent or materially delay the consummation of any of the
transactions contemplated hereby or thereby.
(d) BROKERS. Except for Veronis, Suhler & Associates Inc., no broker,
investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement based
upon arrangements made by or on behalf of Acquiror.
(e) OWNERSHIP OF HCIA COMMON STOCK. To the knowledge of Acquiror, as of
August 11, 1999 or at any time within twelve months prior to August 11,
1999, neither Acquiror nor any subsidiary thereof, other than pursuant to
the Voting Agreement, (i) beneficially owns (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, or (ii) is party to any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, in each case, shares of capital stock of
HCIA.
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(f) FULL DISCLOSURE. None of the representations or warranties made by
Acquiror herein or in any schedule hereto, including the Acquiror
Disclosure Schedule, or any certificate furnished by Acquiror pursuant to
this Agreement, contains or will contain at the Effective Time any untrue
statement of a material fact, or omits or will omit at the Effective Time,
to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading.
SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF HCIA. Except as disclosed in
the Disclosure Schedule delivered by HCIA to Acquiror on August 11, 1999 in
accordance with the Original Merger Agreement (the "HCIA Disclosure Schedule"),
HCIA represents and warrants to Acquiror as follows as of August 11, 1999
(unless another date is specified, in which case as of such other date):
(a) ORGANIZATION, STANDING AND CORPORATE POWER. Each of HCIA and its
subsidiaries (as defined in Section 8.3) is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is organized and has the requisite
corporate or other power, as the case may be, and authority to carry on its
business as now being conducted, except, as to subsidiaries, for those
jurisdictions where the failure to be so organized, existing or in good
standing individually or in the aggregate would not have a material adverse
effect on HCIA. Each of HCIA and its subsidiaries is duly qualified or
licensed to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership, leasing or operation of
its properties makes such qualification or licensing necessary, except for
those jurisdictions where the failure to be so qualified or licensed or to
be in good standing individually or in the aggregate would not have a
material adverse effect on HCIA. HCIA has delivered to Acquiror true,
correct and complete copies of the minute books of HCIA and each of its
subsidiaries.
(b) SUBSIDIARIES. The HCIA Disclosure Schedule includes all the
subsidiaries of HCIA. All the outstanding shares of capital stock of, or
other equity interests in, each such subsidiary have been validly issued
and are fully paid and nonassessable and are owned directly or indirectly
by HCIA, free and clear of all Liens and free of any other restriction
(including any restriction on the right to vote, sell or otherwise dispose
of such capital stock or other ownership interests). Except as set forth in
the HCIA Disclosure Schedule, HCIA does not own any equity interest in any
person.
(c) CAPITAL STRUCTURE. The authorized capital stock of HCIA consists of
50,000,000 shares of HCIA Common Stock, and 500,000 shares of preferred
stock, par value $.01 per share ("HCIA Preferred Stock"). As of August 11,
1999: (i) 11,851,125 shares of HCIA Common Stock were issued and
outstanding; (ii) no shares of HCIA Common Stock were held by HCIA in its
treasury; (iii) no shares of HCIA Preferred Stock were issued and
outstanding; (iv) 2,927,038 shares of HCIA Common Stock were reserved for
issuance pursuant to all stock option, restricted stock or other
stock-based compensation, benefits or savings plans, agreements or
arrangements in which current or former employees, consultants or directors
of HCIA or its subsidiaries participate as of the date hereof, complete and
correct copies of which, in each case as amended as of the date hereof,
have been made available to Acquiror (such plans, collectively, the "HCIA
Stock Plans"); and (v) 118,511.25 shares of HCIA Preferred Stock designated
as Series A Junior Participating Preferred Stock were reserved for issuance
upon the exercise of preferred stock purchase rights (the "HCIA Rights")
issued pursuant to the Stockholders Rights Agreement, dated as of April 23,
1997, between HCIA and Chase Mellon Shareholder Services, L.L.C., as rights
agent (the "HCIA Rights Agreement"). The HCIA Disclosure Schedule sets
forth a complete and correct list, as of August 11, 1999, of the number of
shares of HCIA Common Stock subject to HCIA Stock Options, including,
without limitation, the number of employee stock options or other rights to
purchase or receive HCIA Common Stock granted under the HCIA Stock Plans
(collectively, "HCIA Employee Stock Options"). All outstanding shares of
capital stock of HCIA are, and all shares which may be issued pursuant to
this Agreement or otherwise will be, when issued, duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights.
Except as set forth in this Section 3.2(c), and except for changes
resulting from the issuance of shares of HCIA Common Stock pursuant to the
exercise after August 11, 1999 of HCIA Employee Stock Options which were
issued prior to August 11, 1999, (x) there are not issued, reserved for
issuance or outstanding (A) any shares of capital stock or other voting
securities of HCIA, (B) any securities of HCIA or any HCIA subsidiary
convertible into or exchangeable or exercisable for shares of capital stock
or voting securities of HCIA, (C) any warrants, calls, options or other
rights to acquire from HCIA or any HCIA subsidiary, and any obligation of
HCIA or any HCIA subsidiary to issue, any capital stock, voting securities
or securities convertible into or exchangeable or exercisable for capital
stock or voting securities of HCIA, and (y) there are no outstanding
obligations of HCIA or any HCIA subsidiary to repurchase, redeem or
otherwise acquire any such securities or to issue, deliver or sell, or
cause to be issued, delivered or sold, any such securities. There are no
outstanding (A) securities of HCIA or any HCIA subsidiary convertible into
or exchangeable or exercisable for shares of capital stock or other voting
securities or ownership interests in any HCIA subsidiary, (B) warrants,
calls, options or other rights to acquire from HCIA or any HCIA subsidiary,
or obligations of
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HCIA or any HCIA subsidiary to issue, any capital stock, voting securities
or other ownership interests in, or any securities convertible into or
exchangeable or exercisable for any capital stock, voting securities or
ownership interests in, any HCIA subsidiary or (C) obligations of HCIA or
any HCIA subsidiary to repurchase, redeem or otherwise acquire any such
outstanding securities of HCIA subsidiaries or to issue, deliver or sell,
or cause to be issued, delivered or sold, any such securities. Neither HCIA
nor any HCIA subsidiary is a party to any agreement restricting the
purchase or transfer of, relating to the voting of, requiring registration
of, or granting any preemptive or, except as provided by the terms of the
HCIA Employee Stock Options, antidilutive rights with respect to, any
securities of the type referred to in the two preceding sentences. Other
than as set forth on the HCIA Disclosure Schedule, all outstanding shares
of capital stock of the subsidiaries of HCIA are owned free and clear of
all Liens, and HCIA does not directly or indirectly beneficially own any
securities or other beneficial ownership interests in any other entity.
(d) AUTHORITY; NONCONTRAVENTION. HCIA has all requisite corporate power
and authority to enter into this Agreement and, subject to the HCIA
Stockholder Approval (as defined in Section 3.2(l)), to consummate the
transactions contemplated hereby. The execution and delivery of this
Agreement by HCIA and the consummation by HCIA of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of HCIA, subject, in the case of the Merger, to the HCIA
Stockholder Approval. This Agreement has been duly executed and delivered
by HCIA and, assuming the due authorization, execution and delivery thereof
by Acquiror, constitutes the legal, valid and binding obligation of HCIA,
enforceable against HCIA in accordance with its terms. The execution and
delivery of this Agreement by HCIA does not, and the consummation of the
transactions contemplated hereby and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give
rise to a right of termination, cancellation or acceleration of any
obligation or loss of a benefit under, or result in the creation of any
Lien upon any of the properties or assets of HCIA or any of its
subsidiaries or any restriction on the conduct of HCIA's, or any of its
subsidiaries' business or operations under, (i) the articles of
incorporation of HCIA, as amended (the "HCIA Articles"), or bylaws or the
comparable organizational documents of any of its subsidiaries, (ii) except
for such conflicts, violations or defaults, or rights of termination,
cancellation or acceleration that may arise solely as a result of the
merger of HCIA with and into the LLC, rather than the merger of the Merger
Sub with and into HCIA, any loan or credit agreement, note, bond, mortgage,
indenture, trust document, lease or other agreement, instrument, permit,
concession, franchise, license or similar authorization applicable to HCIA
or any of its subsidiaries or their respective properties or assets or
(iii) subject to the governmental filings and other matters referred to in
the following sentence, any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to HCIA or any of its subsidiaries
or their respective properties or assets, other than, in the case of
clauses (ii) and (iii), any such conflicts, violations, defaults, rights,
losses, restrictions or Liens that individually or in the aggregate would
not (x) have a material adverse effect on HCIA or any of its subsidiaries
or (y) reasonably be expected to impair the ability of HCIA to perform its
obligations under this Agreement. No consent, approval, order or
authorization of, action by, or in respect of, or registration, declaration
or filing with, any Governmental Entity is required by or with respect to
HCIA or any of its subsidiaries in connection with the execution and
delivery of this Agreement by HCIA or the consummation by HCIA of the
transactions contemplated hereby, except for (1) the filing of a pre-merger
notification and report form by HCIA under the HSR Act or filings or
notifications under the antitrust, competition or similar laws of any
foreign jurisdiction; (2) the filing with the SEC of (A) the Proxy
Statement relating to the HCIA Stockholders' Meeting, and (B) such reports
under Sections 13(a), 13(d), 15(d) or 16(a) of the Exchange Act as may be
required in connection with this Agreement and the transactions
contemplated hereby; (3) the filing of the Certificates of Merger with the
Maryland State Department of Assessments and Taxation and the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which HCIA is qualified to do business and
such filings with Governmental Entities as may be necessary to satisfy the
applicable requirements of state securities or "blue sky" laws; and (4)
such consents, approvals, orders or authorizations the failure of which to
be made or obtained individually or in the aggregate would not (x) have a
material adverse effect on HCIA or any of its subsidiaries or (y)
reasonably be expected to impair the ability of HCIA to perform its
obligations under this Agreement. The HCIA Disclosure Schedule sets forth a
list of all third party consents and approvals required to be obtained by
HCIA in connection with this Agreement under the Material Contracts prior
to the consummation of the transactions contemplated by this Agreement,
except for such consents and approvals that may be required solely as a
result of the merger of HCIA with and into the LLC, rather than the merger
of the Merger Sub with and into HCIA.
(e) SEC DOCUMENTS; UNDISCLOSED LIABILITIES. HCIA has filed all required
registration statements, prospectuses, reports, schedules, forms,
statements and other documents (including exhibits and all other
information incorporated therein) with the SEC since December 31, 1996 (as
such documents have been amended since the time of their filing
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collectively the "HCIA SEC Documents"). As of their respective dates, the
HCIA SEC Documents complied in all material respects with the requirements
of the Securities Act of 1933, as amended ("the Securities Act"), or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
promulgated thereunder applicable to such HCIA SEC Documents, and none of
the HCIA SEC Documents when filed contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. None of
HCIA's subsidiaries is required to file any forms, reports or other
documents with the SEC. The consolidated financial statements of HCIA and
its subsidiaries included in the HCIA SEC Documents have been prepared from
and are in accordance with the books and records of HCIA and its
consolidated subsidiaries, comply as to form, as of their respective dates
of filing with the SEC, in all respects with applicable accounting
requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly present the consolidated financial position
of HCIA and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments which are not material). Except (i) as reflected
in such financial statements or in the notes thereto or (ii) for
liabilities incurred in connection with this Agreement or the transactions
contemplated hereby, neither HCIA nor any of its subsidiaries has any
liabilities or obligations of any nature which, individually or in the
aggregate, would have a material adverse effect on HCIA.
(f) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by HCIA specifically for inclusion or incorporation by reference
in the Proxy Statement will, at the date it is first mailed to HCIA's
stockholders or at the time of the HCIA Stockholders' Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement will comply as to form in all respects with
the requirements of the Exchange Act and the rules and regulations
thereunder, except that no representation or warranty is made by HCIA with
respect to statements made or incorporated by reference therein based on
information supplied by Acquiror specifically for inclusion or
incorporation by reference in the Proxy Statement.
(g) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby,
and except as permitted by Section 4.1(a), since December 31, 1998, HCIA
and its subsidiaries have conducted their business only in the ordinary
course consistent with past practice and there has not been (i) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to any of HCIA's capital
stock or any redemption or other acquisition by HCIA of any shares of its
capital stock, (ii) any split, combination or reclassification of any of
HCIA's capital stock or any issuance or the authorization of any issuance
of any other securities in respect of, in lieu of or in substitution for
shares of HCIA's capital stock, except for issuances of HCIA Common Stock
upon exercise or conversion of HCIA Employee Stock Options, in each case
awarded prior to the date hereof in accordance with their present terms,
(iii) except as set forth in the HCIA Disclosure Schedule, (A) any granting
by HCIA or any of its subsidiaries to any current or former director,
officer, consultant or other key employee of HCIA or its subsidiaries of
any increase in compensation, bonus, insurance or other benefits, except
for normal increases as a result of promotions, normal increases of base
pay or target bonuses in the ordinary course of business or as was required
under any employment agreements in effect as of December 31, 1998, (B) any
granting by HCIA or any of its subsidiaries to any such current or former
director, officer, consultant or employee of any increase in severance or
termination pay, or (C) any entry by HCIA or any of its subsidiaries into,
or any amendment of, any employment, deferred compensation, consulting
(other than those for annual compensation of $100,000 or less), severance,
termination or indemnification agreement with any such current or former
director, officer, consultant or key employee, (iv) except insofar as may
have been required by a change in GAAP, any change in accounting methods,
principles or practices by HCIA materially affecting its assets,
liabilities or business, (v) any tax election that individually or in the
aggregate would have a material adverse effect on HCIA or any of its tax
attributes or any settlement or compromise of any material income tax
liability, (vi) any entry into or any amendment to any agreement,
commitment or transaction by HCIA or any subsidiary thereof which is
material to HCIA or any subsidiary thereof other than agreements entered
into in the ordinary course of business with person or entities not
affiliated with HCIA or (vii) any action taken by HCIA or any of the HCIA
subsidiaries during the period from January 1, 1999 through August 11, 1999
that, if taken during the period from August 11, 1999 through the Effective
Time, would constitute a breach of Section 4.1(a). From August 11, 1999
through the date of this Agreement, neither HCIA nor any of its
subsidiaries, nor the Board of Directors of HCIA nor any committee thereof
has taken or permitted any action that, if taken or permitted during the
period from August 11, 1999 through the Effective Time, would constitute a
breach of Section 4.2.
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(h) COMPLIANCE WITH APPLICABLE LAWS; LITIGATION.
(i) HCIA, its subsidiaries and employees hold all permits, licenses,
variances, exemptions, orders, registrations and approvals of all
Governmental Entities which are required for the operation of the
businesses of HCIA and its subsidiaries (the "HCIA Permits") except where
the failure to have any such HCIA Permits individually or in the
aggregate would not have a material adverse effect on HCIA.
(ii) Except as specifically disclosed in the HCIA Disclosure Schedule,
HCIA and its subsidiaries are in compliance with the terms of the HCIA
Permits and all applicable local, state, federal and foreign laws, rules,
regulations, and ordinances (collectively "Applicable Laws") relating to
HCIA and its subsidiaries or their businesses or properties, except where
the failure to be in compliance with such Applicable Laws individually or
in the aggregate would not have a material adverse effect on HCIA or any
of its subsidiaries. As of August 11, 1999, except as disclosed in the
HCIA Disclosure Schedule, no action, demand, requirement or investigation
by any Governmental Entity and no suit, action or proceeding by any
person, in each case with respect to HCIA or any of its subsidiaries or
any of their respective properties, is pending or, to the best knowledge
of HCIA, threatened, other than, in each case, those the outcome of which
individually or in the aggregate would not (A) have a material adverse
effect on HCIA or (B) reasonably be expected to impair the ability of
HCIA to perform its obligations under this Agreement or prevent or delay
the consummation of any of the transactions contemplated hereby.
(iii) Neither HCIA nor any HCIA subsidiary is subject to any
outstanding order, injunction, judgment or decree which has had or,
insofar as can be reasonably foreseen, individually or in the aggregate
will have, a material adverse effect on HCIA.
(i) ABSENCE OF CHANGES IN BENEFIT PLANS. The HCIA Disclosure Schedule
lists the following employee benefit plans sponsored or maintained by HCIA
and or its subsidiaries: (1) pension, profit sharing, deferred
compensation, incentive compensation (other than agreements with 50
salespersons entered into in the ordinary course of business, copies of
which have been provided to Acquiror), bonus, stock option, stock purchase,
phantom stock, vacation, severance, disability, medical, hospitalization,
dental, life insurance or other plans, arrangements or understandings
providing pension, welfare or incentive compensation benefits, or (2)
employment agreements, consulting agreements, management retention and
severance agreements with any current or former officers, key employees,
consultants or directors of HCIA or any subsidiary thereof (collectively,
the "HCIA Benefit Plans"). HCIA has delivered to Acquiror or provided to
Acquiror for review true and complete copies of (i) plan documents (as
applicable) and summary plan descriptions with respect to all "employee
welfare benefit plans" and "employee pension benefit plans" (within the
meaning of Sections 3(1) or 3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) sponsored or maintained by HCIA or its
subsidiaries ("ERISA Plans"), (ii) plan documents or summary descriptions
of all bonus or incentive compensation plans, programs and arrangements for
employees of HCIA and/or its subsidiaries including, without limitation,
stock option and stock purchase plans, (iii) all severance and employment
agreements of HCIA with directors, consultants, officers or employees, (iv)
all written and unwritten severance programs and policies of each of HCIA
and each HCIA subsidiary, and (v) all plans or arrangements of HCIA and
each HCIA subsidiary relating to its employees which contain change in
control provisions. HCIA has or will deliver to Acquiror true and complete
copies of the IRS Form 5500 filed in the most recent plan year with respect
to any ERISA Plan, including, as applicable, all schedules thereto and
financial statements with attached opinions of independent auditors. Except
as set forth in the HCIA Disclosure Schedule, since December 31, 1998,
there has not been any adoption or amendment in any respect by HCIA or any
of its subsidiaries of any HCIA Benefit Plan, or any change in the manner
in which contributions to any HCIA deferred compensation plan is made or
the basis on which such contributions are determined. Since December 31,
1998, neither HCIA nor any HCIA subsidiary has amended any stock option or
stock bonus plan to accelerate the vesting of, or release restrictions on,
awards thereunder, or to provide for such acceleration in the event of a
change in control.
(j) BENEFIT PLANS.
(i) The HCIA Benefit Plans have been operated, and are, in substantial
compliance with the applicable provisions of ERISA, the Internal Revenue
Code of 1986, as amended (the "Code") and all other Applicable Laws and
the terms of such benefit plans, except for any failures to be in such
compliance that individually or in the aggregate would not have a
material adverse effect on HCIA. Each HCIA Benefit Plan that is intended
to be qualified under Section 401(a) or 401(k) of the Code has received a
favorable determination letter from the IRS that it is so qualified and
each trust established in connection with any HCIA Benefit Plan that is
intended to be exempt from federal income taxation under Section 501(a)
of the Code has received a determination letter from
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the IRS that such trust is so exempt. To the best knowledge of HCIA, no
fact or event has occurred since the date of any determination letter
from the IRS which is reasonably likely to affect adversely the qualified
status of any such HCIA Benefit Plan or the exempt status of any such
trust.
(ii) No HCIA Benefit Plan is subject to Title IV of ERISA or is a
"multi-employer plan" within the meaning of Section 3(37) of ERISA, and
neither HCIA nor any other organization which is a member of a
"controlled group" of organizations (within the meaning of Sections
414(b), (c), (m) or (o) of the Code) of which HCIA is a member, has ever
maintained, or been obligated to contribute to, a plan subject to Title
IV of ERISA or a multi-employer plan.
(iii) No HCIA Benefit Plan provides medical benefits (whether or not
insured), with respect to current or former employees after retirement or
other termination of service (other than coverage mandated by applicable
law or benefits, the full cost of which is borne by the current or former
employee) other than individual arrangements the amounts of which are not
material.
(iv) Neither HCIA nor any of its subsidiaries is a party to any
collective bargaining agreement or other labor union contract. As of
August 11, 1999, there is no labor dispute, strike or work stoppage
against HCIA or any of its subsidiaries pending or, to the best knowledge
of HCIA, threatened which may interfere with the respective business
activities of HCIA or any of its subsidiaries. As of August 11, 1999,
none of HCIA, any of its subsidiaries or any of their respective
representatives or employees has committed any unfair labor practice in
connection with the operation of the respective businesses of HCIA or any
of its subsidiaries, and there is no charge or complaint against HCIA or
any of its subsidiaries by the National Labor Relations Board or any
comparable governmental agency pending or, to the best knowledge of HCIA,
threatened against HCIA or any of its subsidiaries.
(v) Except as set forth in the HCIA Disclosure Schedule, no employee
of HCIA will be entitled to any payment (whether severance pay or
otherwise), additional benefits or any acceleration of the time of
payment or vesting of any benefits under any HCIA Benefit Plan as a
result of the transactions contemplated by this Agreement (either alone
or in conjunction with any other event such as a termination of
employment).
(vi) There are no material unresolved claims or disputes under the
terms of, or in connection with, any HCIA Benefit Plan (other than
routine undisputed claims for benefits), and no action, legal or
otherwise, has been commenced with respect to any material claim.
(vii) To the best knowledge of HCIA, no non-exempt "prohibited
transaction" (within the meaning of Section 4975(c) of the Code)
involving any HCIA Benefit Plan has occurred that could subject HCIA to
any tax penalty or other cost or liability (by indemnification or
otherwise). All contributions required to be made under the terms of any
HCIA Benefit Plan have been timely made.
(k) TAXES.
(i) Except as set forth in the HCIA Disclosure Schedule each of HCIA
and its subsidiaries has filed all federal, state, foreign, local,
income, sales and other tax returns and reports required to be filed by
it (taking into account applicable extensions) and all such returns and
reports are complete and correct in all material respects, or requests
for extensions to file such returns or reports have been timely filed,
granted and have not expired. HCIA and each of its subsidiaries has paid
(or HCIA has paid or caused to be paid on its behalf) all taxes shown as
due on such returns, and the most recent financial statements contained
in the HCIA SEC Documents reflect an adequate reserve in accordance with
GAAP for all taxes payable by HCIA and its subsidiaries for all taxable
periods and portions thereof accrued through the date of such financial
statements.
(ii) No deficiencies for any taxes have, to the best knowledge of
HCIA, been proposed, asserted or assessed against HCIA or any of its
subsidiaries that are not adequately reserved for, except for
deficiencies that individually or in the aggregate would not have a
material adverse effect on HCIA. Except as provided in the HCIA
Disclosure Schedule, all of the federal income tax returns of the
affiliated group of which HCIA is the common parent have closed by virtue
of the applicable statute of limitations.
(iii) Except as set forth in the HCIA Disclosure Schedule, neither
HCIA nor any HCIA subsidiary has made any parachute payments as such term
is defined in Section 280G of the Code, neither is obligated to make any
parachute payments, and neither is a party to any agreement that under
certain circumstances could obligate it, or any successor in interest, to
make any parachute payments that will not be deductible under Section
280G of the
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Code. Neither HCIA nor any HCIA subsidiary is obligated to make
reimbursement or gross-up payments to any person in respect to excess
parachute payments.
(iv) No federal, state, local or foreign audits, examinations or other
administrative proceedings have been commenced or, to the best knowledge
of HCIA, are pending with regard to any taxes or tax returns of HCIA or
of any of its subsidiaries. No written notification has been received by
HCIA or by any of its subsidiaries that such an audit, examination or
other proceeding is pending or threatened with respect to any taxes due
from or with respect to or attributable to HCIA or any of its
subsidiaries or any tax return filed by or with respect to HCIA or any of
its subsidiaries. To the best of HCIA's knowledge, there is no dispute or
claim concerning any tax liability of HCIA or any of its subsidiaries
either claimed or raised by any United States or foreign taxing authority
in writing.
(v) During their most recent five taxable years, respectively, neither
HCIA nor any of its subsidiaries has made a change in tax accounting
methods, received a ruling from any taxing authority or signed an
agreement with any taxing authority which has or would be reasonably
likely to have a material adverse effect on HCIA or any of its
subsidiaries. Neither HCIA nor any of its subsidiaries is required to
include in income any adjustment pursuant to Section 481(a) of the Code
or any similar provision of foreign, state or local law, by reason of a
voluntary change in tax accounting method (nor has any taxing authority
proposed in writing any such adjustment or change of accounting method).
(vi) Neither HCIA nor any of its subsidiaries is a party to, is bound
by or has any obligation under any tax sharing agreement, tax
indemnification agreement or similar contract or arrangement. Neither
HCIA nor any of its subsidiaries is aware of any potential liability or
obligation to any person as a result of, or pursuant to, any such
agreement, contract or arrangement. Neither HCIA nor any of its
subsidiaries has any liability for taxes of another person by contract or
otherwise.
(l) VOTING REQUIREMENTS. The affirmative vote at the HCIA Stockholders'
Meeting (the "HCIA Stockholder Approval") of the holders of a majority of
all outstanding shares of HCIA Common Stock entitled to vote at a duly
convened and held meeting of HCIA stockholders is the only vote of the
holders of any class or series of HCIA's capital stock necessary to approve
and adopt this Agreement and the transactions contemplated hereby,
including the Merger.
(m) STATE TAKEOVER STATUTES. On August 11, 1999, the Board of Directors
of HCIA adopted a resolution or resolutions approving this Agreement and
the transactions contemplated hereby and, assuming the accuracy of
Acquiror's representation and warranty contained in Section 3.1(e), such
approval constitutes approval of the Merger and the other transactions
contemplated hereby by the HCIA Board of Directors under the provisions of
Sections 3-602 and 3-701 ET SEQ. of the MGCL such that Sections 3-602 and
3-701 ET SEQ. of the MGCL do not apply to this Agreement or the
transactions contemplated hereby. No state takeover statute other than
Sections 3-602 and 3-701 ET SEQ. of the MGCL (which have been rendered
inapplicable) is applicable to the Merger or the other transactions
contemplated hereby.
(n) BROKERS. Except as set forth in the HCIA Disclosure Schedule, no
broker, investment banker, financial advisor or other person is entitled to
any broker's, finder's, financial advisor's or other similar fee or
commission in connection with the transactions contemplated by this
Agreement based upon arrangements made by or on behalf of HCIA.
(o) OPINION OF FINANCIAL ADVISOR. The Board of Directors of HCIA has
received the opinion of Deutsche Bank Securities Inc., dated August 11,
1999, to the effect that, as of such date, the Merger Consideration is fair
from a financial point of view to the holders of HCIA Common Stock, a
signed copy of which opinion has been delivered to Acquiror.
(p) OWNERSHIP OF ACQUIROR EQUITY INTERESTS. To the best knowledge of
HCIA, as of August 11, 1999 or at any time within twelve months prior to
August 11, 1999 neither HCIA nor, to its knowledge without independent
investigation, any of its affiliates, (i) beneficially owns (as defined in
Rule 13d-3 under the Exchange Act) or owned, directly or indirectly, or
(ii) is or was party to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, in each case, equity
interests of Acquiror.
(q) INTELLECTUAL PROPERTY.
(i) HCIA or its subsidiaries own or have a valid right to use all of
the trademarks, copyrights, service marks, trade names, Internet domain
names, designs, slogans, and general intangibles of like nature, together
with all applications, registrations and goodwill related to the
foregoing (collectively, "Trademarks"); patents; Software (as
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defined below); confidential information, know-how, proprietary
processes, formulae, algorithms, models, methodologies and other trade
secrets (collectively, "Trade Secrets") used in or necessary for the
conduct of HCIA's and each of its subsidiary's business as currently
conducted, except where the failure to possess such right would not have
a material adverse effect on HCIA's and its subsidiaries' business as
currently conducted considered as a whole (all such intellectual property
being referred to herein as the "Intellectual Property"). For purposes of
this Section 3.2(q), "Software" means any and all (a) computer programs,
including any and all software implementations of algorithms, models and
methodologies, whether in source code or object code, (b) databases and
compilations, including any and all data and collections of data, whether
machine readable or otherwise, (c) descriptions, flowcharts and other
work product used to design, plan, organize and develop any of the
foregoing, (d) the technology supporting any Internet site(s) operated by
or on behalf of HCIA or any of its subsidiaries and (e) all
documentation, including user manuals and training materials, relating to
any of the foregoing.
(ii) HCIA and its subsidiaries own or have a valid right to use all
items of Intellectual Property set forth in the HCIA Disclosure Schedule
and own or have the right to use all items of Intellectual Property
necessary to provide, produce, sell and license the services and products
currently provided, produced, sold and licensed by HCIA and its
subsidiaries and to conduct the business of HCIA and its subsidiaries as
presently conducted or as currently proposed to be conducted. The
Intellectual Property owned by HCIA or any subsidiary is free and clear
of all Liens.
(iii) The Intellectual Property owned by HCIA or any of its
subsidiaries and, to HCIA's best knowledge, any Intellectual Property
used by HCIA, is valid and subsisting, in full force and effect, and has
not been rescinded, canceled, expired, or abandoned. There is no pending
or, to HCIA's best knowledge, threatened opposition, interference or
cancellation proceeding before any court or registration authority in any
jurisdiction against any registrations in respect of the Intellectual
Property owned by HCIA or any of its subsidiaries, or, to HCIA's best
knowledge, against any Intellectual Property licensed to HCIA or any of
its subsidiaries.
(iv) To the best knowledge of HCIA or any of its subsidiaries, the
conduct of the business of HCIA and its subsidiaries as currently
conducted does not infringe upon (either directly or indirectly such as
through contributory infringement or inducement to infringe) any patent,
copyright, trademark, service mark, trade secret or other intellectual
property rights owned or controlled by any third party. There are no
claims or suits pending or, to the best knowledge of HCIA, threatened,
and neither HCIA nor any of its subsidiaries has received any notice of a
third-party claim or suit, (a) alleging that its activities or the
conduct of its business infringes upon, violates, or constitutes the
unauthorized use of the intellectual property rights of any third party
or (b) challenging the ownership, use, validity or enforceability of any
Intellectual Property.
(v) There are no settlements, forbearances to sue, consents,
judgments, or orders or similar obligations which in any respect (a)
restrict the right of HCIA or its subsidiaries to use any Intellectual
Property, or (b) restrict the business of HCIA or its subsidiaries in
order to accommodate a third party's intellectual property rights.
(vi) All of HCIA's and its subsidiaries' patents, trademarks and
copyrights issued by, registered with or filed with the United States
Patent and Trademark Office or Register of Copyrights or the
corresponding offices or governmental agencies of other countries have
been so duly registered, filed in or issued, as the case may be, have
been properly maintained and renewed in accordance with all applicable
provisions of law and administrative regulations, and HCIA and its
subsidiaries, as the case may be, are the record owners thereof. There
have been no acts or omissions by HCIA or its subsidiaries, the result of
which would be to compromise the rights of HCIA or its subsidiaries to
apply for or enforce appropriate legal protection of such Intellectual
Property.
(vii) HCIA and each of its subsidiaries have adopted reasonable
measures in accordance with normal industry practice to protect the
confidentiality of Trade Secrets and other confidential Intellectual
Property, including (a) requiring all of its employees, officers, agents,
consultants, directors and independent contractors having access thereto
to execute written nondisclosure agreements and (b) requiring all
licensees to maintain the confidentiality of its Trade Secrets. To the
best knowledge of HCIA or its subsidiaries, no Trade Secret has been
knowingly disclosed or authorized to be disclosed to any third party
other than pursuant to a nondisclosure agreement or other appropriate
instrument that adequately protects HCIA and the applicable subsidiary's
proprietary interests in and to such Trade Secrets. To the best knowledge
of HCIA, no party to any nondisclosure agreement or nondisclosure
obligation relating to its Trade Secrets is in breach or default thereof.
No former employees, officers, agents, consultants, directors or
independent contractors of HCIA or any of its subsidiaries have asserted
any claim, or have
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any, valid claim or valid right to any of HCIA's or any of its
subsidiaries' Intellectual Property used in or necessary for the conduct
of HCIA's or its subsidiaries' business as now conducted or as currently
proposed to be conducted. To HCIA's best knowledge, no employee, officer,
agent, independent contractor, consultant or director of HCIA or any of
its subsidiaries is a party to or otherwise bound by any agreement with
any other person (including, any former employer) which conflicts with
any obligation or commitment of such employee to HCIA or any of its
subsidiaries under any agreement to which he or she is a party.
(viii) To the best knowledge of HCIA, no third party is
misappropriating, infringing, diluting, or violating any Intellectual
Property owned by HCIA or any of its subsidiaries.
(ix) The consummation of the transactions contemplated hereby shall
not result in the loss or impairment of HCIA's or of any subsidiary's
right to own or use any of the Intellectual Property, and will not
require the consent of any governmental authority.
(x) The computer systems of HCIA and its subsidiaries (including all
Software, hardware, workstations and related components, automated
devices, embedded chips and other date sensitive equipment) are Year 2000
Compliant or will be Year 2000 Compliant by December 31, 1999. "Year 2000
Compliant" means that the computer systems: (i) are capable of
recognizing, processing, managing, representing, interpreting and
manipulating correctly date-related data for dates earlier and later than
January 1, 2000, including calculating, comparing, sorting, storing,
tagging and sequencing, without resulting in or causing logical or
mathematical errors or inconsistencies in any user-interface
functionalities or otherwise, including data input and retrieval, data
storage, data fields, calculations, reports, processing or any other
input or output; (ii) have the ability to provide date recognition for
any data element without limitation (including date-related data
represented without a century designation, date-related data whose year
is represented by only two digits and date fields assigned special
values); (iii) have the ability to function automatically into and beyond
the year 2000 without human intervention and without any change in
operations associated with the advent of the year 2000; (iv) have the
ability to interpret data, dates and time correctly into and beyond the
year 2000; (v) have the ability not to produce noncompliance in existing
information, nor otherwise corrupt such data into and beyond the year
2000; (vi) have the ability to process correctly after January 1, 2000
data containing dates before that date; and (vii) have the ability to
recognize all "leap years," including February 29, 2000.
(r) CERTAIN CONTRACTS. The HCIA Disclosure Schedule sets forth a complete
and correct list as of August 11, 1999 of the following types of agreements
to which HCIA or any subsidiary thereof is a party to or bound by: (i) any
non-competition agreement or any other agreement or obligation which
purports to limit in any material respect the manner in which, or the
localities in which, all or any material portion of the business of HCIA
and its subsidiaries (including, for purposes of this Section 3.2(r),
Acquiror and its subsidiaries, assuming the Merger has taken place), taken
as a whole, is or would be conducted; (ii) exclusive supply or purchase
contracts or any exclusive requirements contracts; (iii) agreements filed
as an exhibit to the HCIA SEC Documents and each agreement that would have
been required to be filed as an exhibit to the HCIA SEC Documents had such
agreement been entered into as of the date of filing of any such HCIA SEC
Document; (iv) employment, severance, termination, consulting (other than
those for annual compensation of $50,000 or less) and retirement
agreements; (v) loan agreements, indentures, letters of credit, mortgages,
notes and other debt instruments evidencing indebtedness in excess of
$50,000; (vi) agreements that require aggregate future payments to or by
HCIA or any subsidiary thereof of more than $100,000 per annum (other than
purchase orders and other transactions entered into in the ordinary course
of business consistent with past practice with a term not exceeding one
year); (vii) agreements containing any "change of control" provisions
which, if triggered, would involve payments by HCIA or any subsidiary in
excess of $50,000 or other material rights or obligations; (viii) material
agreements with any key employee, director, officer, or person known to
HCIA to be a direct or indirect stockholder of HCIA; (ix) joint venture,
partnership and similar agreements involving a sharing of profits; (x)
acquisition or divestiture agreements relating to (A) the sale of assets or
stock of HCIA or any subsidiary or (B) the purchase of assets or stock of
any other person, specifying any earn-out or other payments required to be
made after the date hereof; (xi) brokerage, finder's or financial advisory
agreements; (xii) guarantees of indebtedness for borrowed money of any
person; or (xiii) contracts or other agreements which would prohibit or
delay the consummation of the Merger or any of the transactions
contemplated by this Agreement, other than solely as a result of the merger
of HCIA with and into the LLC, rather than the merger of the Merger Sub
with and into HCIA (all contracts of the type described in the foregoing
clauses being collectively referred to herein as "Material Contracts").
HCIA has delivered to Acquiror or made available to Acquiror for review,
prior to the execution of this Agreement, complete and correct copies of
all Material Contracts. Each Material Contract constitutes the legal, valid
and binding obligation of HCIA enforceable against HCIA
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in accordance with its terms (or, to the extent a HCIA subsidiary is a
party, such subsidiary) and is in full force and effect, and HCIA and each
HCIA subsidiary have in all respects performed all obligations required to
be performed by them to date under each Material Contract, except where
such noncompliance, individually or in the aggregate, would not have a
material adverse effect on HCIA or any of its subsidiaries. Except for such
violations or defaults that may arise solely as a result of the merger of
HCIA with and into the LLC, rather than the merger of the Merger Sub with
and into HCIA, neither HCIA nor any HCIA subsidiary knows of, or has
received notice of, any violation or default under (nor, to the best
knowledge of HCIA, does there exist any condition which with the passage of
time or the giving of notice or both would result in such a violation or
default under) any Material Contract.
(s) HCIA RIGHTS AGREEMENT. HCIA has taken all action (including, if
required, redeeming all of the outstanding preferred stock purchase rights
issued pursuant to the HCIA Rights Agreement or amending or terminating the
HCIA Rights Agreement) so that the entering into of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
result in the grant of any rights to any person under the HCIA Rights
Agreement or enable or require the HCIA Rights to be exercised, distributed
or triggered.
(t) ENVIRONMENTAL LIABILITY. Except as set forth in the HCIA Disclosure
Schedule and except for matters which, individually or in the aggregate,
would not have or be reasonably likely to have a material adverse effect on
HCIA or any of its subsidiaries, (i) HCIA and each subsidiary is in
compliance with all applicable Environmental Laws (as defined below); (ii)
all permits and other governmental authorizations currently held by HCIA
and each subsidiary pursuant to the Environmental Laws are in full force
and effect, HCIA and each subsidiary is in compliance with all of the terms
of such permits and authorizations, and no other permits or authorizations
are required by HCIA or any subsidiary for the conduct of their respective
businesses; and (iii) the management, handling, storage, transportation,
treatment, and disposal by HCIA and each subsidiary of any Hazardous
Materials (as defined below) has been in compliance with all applicable
Environmental Laws. Neither HCIA nor any subsidiary has received any
written communication that alleges that HCIA or any subsidiary is not in
compliance in all material respects with all applicable Environmental Laws.
Except as set forth in the HCIA Disclosure Schedule, there are no legal,
administrative, arbitral or other proceedings, claims, actions, causes of
action, private environmental investigations or remediation activities or
governmental investigations of any nature pending or, to the best knowledge
of HCIA, threatened against HCIA or any of its subsidiaries seeking to
impose, or that could reasonably be expected to result in the imposition,
on HCIA or any of its subsidiaries, of any liability or obligation arising
under common law or under any local, state or federal environmental
statute, regulation or ordinance, including, without limitation, the
Comprehensive Environmental Response Compensation and Liability Act of
1980, as amended. To the best knowledge of HCIA, there is no reasonable
basis for any such proceeding, claim, action or governmental investigation
that would impose any liability or obligation or any of its subsidiaries on
HCIA. As used in this Agreement, these terms shall have the following
meanings:
(i) "Environmental Claim" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, directives, claims,
Liens, investigations, proceedings or notices of noncompliance or
violation (written or oral) by any person or governmental authority
alleging potential liability against HCIA or any of its subsidiaries
arising out of, based on or resulting from the presence, or release or
threatened release into the environment, of any Hazardous Materials at
any location owned or leased by HCIA or any subsidiary thereof or other
circumstances forming the basis of any violation or alleged violation of
any Environmental Law.
(ii) "Environmental Laws" means all applicable foreign, federal, state
and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including, without
limitation, ambient air, surface water, ground water, land surface or
subsurface strata) or protection of human health as it relates to the
environment including, without limitation, laws and regulations relating
to releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials or relating to management of
asbestos in buildings.
(iii) "Hazardous Materials" means wastes, substances or materials
(whether solids, liquids or gases) that are deemed hazardous, toxic,
pollutants or contaminants, including, without limitation, substances
defined as "hazardous substances," "toxic substances," "radioactive
materials," or other similar designations in, or otherwise subject to
regulation under, any Environmental Laws.
(u) INSURANCE. HCIA and each of its subsidiaries have policies of
insurance of the type and in amounts customarily carried by persons
conducting businesses or owning assets similar to those of HCIA and its
subsidiaries. There is no material claim pending under any of such policies
as to which coverage has been questioned, denied or disputed by the
underwriters of such policies, except questioned, denied or disputed claims
the failure to provide coverage for which
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would not, individually or in the aggregate, have a material adverse effect
on HCIA. All premiums due and payable under all such policies have been
paid and HCIA and its subsidiaries are otherwise in compliance in all
material respects with the terms of such policies. HCIA has no knowledge of
any threatened termination of, or material premium increase with respect
to, any of such policies.
(v) TRANSACTIONS WITH AFFILIATES. Except as disclosed in the HCIA
Disclosure Schedule, since December 31, 1998, there have been no
transactions, agreements, arrangements or understandings between HCIA and
its affiliates that would be required to be disclosed under Item 404 of
Regulation S-K under the Securities Act.
(w) EMPLOYMENT MATTERS. Except as set forth in the HCIA Disclosure
Schedule, to the best knowledge of HCIA, no vice president or key group of
employees has any plans to terminate their employment with HCIA or any of
its subsidiaries as a result of the transactions contemplated hereby or
otherwise. HCIA and each subsidiary is in compliance with all laws relating
to the employment or the workplace, including, without limitation,
provisions relating to wages, hours, collective bargaining, safety and
health, work authorization, equal employment opportunity, immigration and
the withholding of income taxes, unemployment compensation, worker's
compensation, employee privacy and right to know and social security
contributions, except where noncompliance would not, individually or in the
aggregate, have or be reasonably likely to have a material adverse effect
on HCIA or any of its subsidiaries.
(x) TITLE AND CONDITION OF PROPERTIES. Except as set forth in the HCIA
Disclosure Schedule, HCIA and its subsidiaries own good and marketable
title, free and clear of all Liens, to all of their real and personal
property and assets shown on the December 31, 1998 audited consolidated
financial statements of HCIA and its consolidated subsidiaries, except for
(i) assets which have been disposed of to nonaffiliated third parties since
December 31, 1998 in the ordinary course of business, (ii) Liens reflected
in such financial statements or in the notes thereto, (iii) Liens or
imperfections of title which are not, individually or in the aggregate,
material in character, amount or extent and which do not materially detract
from the value or materially interfere with the present or presently
contemplated use of the assets subject thereto or affected thereby, and
(iv) Liens for current taxes not yet due and payable. All of the machinery,
equipment and other tangible personal property and assets owned or used by
HCIA and its subsidiaries are in good condition and repair, except for
ordinary wear and tear not caused by neglect, and are useable in the
ordinary course of business. The personal property and assets of HCIA and
its subsidiaries which are shown in the December 31, 1998 audited
consolidated financial statements of HCIA and its consolidated subsidiaries
or which were acquired after December 31, 1998, and the Intellectual
Property owned or used by HCIA and its subsidiaries collectively include
all assets necessary to provide, produce, sell and license the services and
products currently provided, produced, sold and licensed by HCIA and its
subsidiaries and to conduct the business of HCIA and its subsidiaries as
presently conducted or as currently contemplated to be conducted.
(y) NET OPERATING LOSS CARRYFORWARDS. To the best knowledge of HCIA,
after consulting with its outside tax accountants, the net operating loss
carryforwards of HCIA and its subsidiaries as of August 11, 1999 are in
excess of $107,000,000 and constitute valid net carryforwards which have
been properly and accurately recorded on the consolidated financial
statements of HCIA in accordance with GAAP applied on a consistent basis.
(z) FULL DISCLOSURE. None of the representations or warranties made by
HCIA herein or in any schedule hereto, including the HCIA Disclosure
Schedule, or any certificate furnished by HCIA pursuant to this Agreement,
contains or will contain at the Effective Time any untrue statement of a
material fact, or omits or will omit at the Effective Time, to state any
material fact necessary in order to make the statements contained herein or
therein, in the light of the circumstances under which made, not
misleading.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 4.1 CONDUCT OF BUSINESS.
(a) CONDUCT OF BUSINESS BY HCIA. Except as set forth in the HCIA
Disclosure Schedule, as otherwise expressly contemplated by this Agreement
or as consented to by Acquiror in writing, during the period from August
11, 1999 to the Effective Time, HCIA has carried on and shall continue to
carry on, and its subsidiaries have carried on and HCIA shall continue to
cause them to carry on, their respective businesses in the ordinary course
consistent with past practice and in compliance in all material respects
with all applicable laws and regulations and, to the extent consistent
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therewith, use commercially reasonable best efforts to preserve intact
their current business organizations, use commercially reasonable best
efforts to keep available the services of their current officers and other
key employees and preserve their relationships with those persons having
business dealings with them so that their goodwill and ongoing businesses
shall be unimpaired at the Effective Time. Without limiting the generality
of the foregoing (but subject to the above exceptions), during the period
from August 11, 1999 to the Effective Time, HCIA has not and shall not, and
has not permitted and shall not permit any of its subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, make any other
distributions payable in cash, stock, or property in respect of, or enter
into any agreement with respect to the voting of, any of its capital
stock, (y) split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, except for
issuances of HCIA Common Stock upon the exercise of HCIA Employee Stock
Options outstanding as of August 11, 1999 in accordance with their
present terms (including cashless exercises) or (z) purchase, redeem or
otherwise acquire any shares of capital stock of HCIA or any of its
subsidiaries or any other securities thereof or any rights, warrants or
options to acquire any such shares or other securities (except, in the
case of clause (z), for the deemed acceptance of shares upon cashless
exercises of HCIA Employee Stock Options, or in connection with
withholding obligations relating thereto);
(ii) issue, deliver, sell, pledge or otherwise encumber or subject to
any Lien any shares of its capital stock, any other voting securities or
any securities convertible into, or any rights, warrants or options to
acquire, any such shares, voting securities or convertible securities
(other than the issuance of shares of HCIA Common Stock upon the exercise
of HCIA Employee Stock Options outstanding as of August 11, 1999 in
accordance with their present terms);
(iii) except as contemplated hereby, amend its articles of
incorporation, bylaws or other comparable organizational documents;
(iv) acquire or agree to acquire by merging or consolidating with, or
by purchasing a substantial portion of the assets of, or by any other
manner, any business or any person, or, except for transactions in the
ordinary course of business consistent with past practice pursuant to
contracts or agreements in force as of August 11, 1999 make any
investment either by purchase of stock or securities, contributions to
capital, property transfers, or purchase of any property or assets of any
other individual, corporation or other entity other than a subsidiary of
HCIA provided however, that in no event shall any such investments exceed
$50,000 in any single case or $150,000 in the aggregate.
(v) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or otherwise dispose of any of its properties or assets
(including securitizations), other than in the ordinary course of
business consistent with past practice, including, without limitation, in
connection with consolidation of acquired businesses or as would not have
a material adverse effect on HCIA or any of its subsidiaries;
(vi) take any action that would cause the representations and
warranties set forth in Section 3.2(g) to be no longer true and correct
or that would impair or delay the ability of HCIA to consummate the
Merger in accordance with the terms hereof;
(vii) other than in the ordinary course of business, make any loans or
advances to any person (other than wholly owned subsidiaries of HCIA),
incur any indebtedness for borrowed money or issue any debt securities or
assume, guarantee or endorse, or otherwise as an accommodation become
responsible for the obligations of any person for borrowed money, other
than pursuant to a credit facility in effect as of the date hereof
(including any replacement facilities), in the ordinary course of
business consistent with past practice;
(viii) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(ix) other than in the ordinary course of business, enter into or
terminate any material contract or agreement (including, without
limitation, any of the Material Contracts), or make any change in any of
its material leases or contracts (including, without limitation, any of
the Material Contracts), other than amendments or renewals of contracts
and leases without material adverse changes of terms or waive, release or
assign any claims with respect thereto;
(x) except for increases in accordance with normal past practice,
increase in any manner the compensation or fringe benefits of any of its
officers, directors or key employees, or materially increase the
foregoing in respect of
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any other employees; enter into any commitment to pay any pension, stay
bonus, retirement, termination or severance benefit to any such officers,
employees, or directors, or make any material commitment to pay any of
the foregoing to any employees; adopt or commit itself to any new
benefit, compensation or stock option plan or arrangement; or amend,
supplement, or accelerate the timing of payments or vesting under, or
otherwise materially amend or supplement any existing benefit, stock
option, profit sharing, insurance or compensation plan or arrangement
(other than as may be required by applicable law);
(xi) change any of the accounting methods used by HCIA or any of its
subsidiaries unless required by generally accepted accounting principles;
(xii) permit any material insurance policy naming it as a beneficiary
or a loss payable payee to be canceled or terminated without notice to
the Acquiror;
(xiii) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice, of claims,
liabilities or obligations reflected or reserved against in, or
contemplated by, the consolidated financial statements (or the notes
thereto) of HCIA and its consolidated subsidiaries;
(xiv) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other
reorganization of HCIA or any of its subsidiaries (other than the
Merger); or
(xv) authorize, or commit or agree to take, any of the foregoing
actions or recommend, propose or announce an intention to do any of the
foregoing
(b) OTHER ACTIONS. Except as required by law, from August 11, 1999 to the
Effective Time, Acquiror and HCIA have not and shall not, and have not
permitted and shall not permit any of their respective subsidiaries to,
voluntarily take any action that would, or that could reasonably be
expected to, result in (i) any representation or warranty made by it
contained in this Agreement that is qualified as to materiality becoming
untrue or inaccurate in any respect or any such representation or warranty
that is not so qualified becoming untrue or inaccurate in any material
respect, (ii) the failure by it to comply in any material respect with or
satisfy in any material respect any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement or (iii) any of the
conditions to the Merger set forth in Article VI not being satisfied.
(c) ADVICE OF CHANGES. From August 11, 1999 to the Effective Time,
Acquiror and HCIA have promptly advised, and shall promptly advise, the
other party orally and in writing to the extent it has knowledge of (i) any
representation or warranty made by it contained in this Agreement that is
qualified as to materiality becoming untrue or inaccurate in any respect or
any such representation or warranty that is not so qualified becoming
untrue or inaccurate in any material respect, (ii) the failure by it to
comply in any material respect with or satisfy in any respect any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement and (iii) any change or event having, or which, insofar as can
reasonably be foreseen, could reasonably be expected to have a material
adverse effect on such party or on the truth of such party's
representations and warranties or the ability of the conditions set forth
in Article VI to be satisfied; provided, however, that no such notification
shall affect the representations, warranties, covenants or agreements of
the parties (or remedies with respect thereto) or the conditions to the
obligations of the parties under this Agreement.
SECTION 4.2 NO SOLICITATION BY HCIA.
(a) Neither HCIA nor any of its subsidiaries shall (and HCIA shall not
permit its officers, directors, employees, representatives and agents,
including, but not limited to, its investment bankers, attorneys and
accountants) directly or indirectly, encourage, solicit, participate in or
initiate discussions or negotiations with, or provide any information to,
any corporation, partnership, person or other entity or group (other than
the Acquiror, the LLC or any of their representatives) concerning any
proposal or offer to acquire 10% or more of the assets of HCIA or any of
its subsidiaries or any capital stock of HCIA or any of its subsidiaries,
whether by merger, tender offer, exchange offer, sale of assets or similar
transaction involving HCIA or any subsidiary, or any division or operating
or principal business unit of HCIA (an "Acquisition Proposal"), except that
nothing contained in this Section 4.2 or any other provision hereof shall
prohibit HCIA or HCIA's Board of Directors from (i) taking and disclosing
to HCIA's stockholders a position with respect to a tender or exchange
offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under
the Exchange Act, or (ii) making such disclosure to HCIA's stockholders as,
in the good faith judgment of the Board, after receiving written advice
from legal counsel to HCIA, is required under applicable law, provided that
HCIA may not, except as permitted by Section 4.2(b), withdraw or modify, or
propose to withdraw or modify, its position with respect to the Merger
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or approve or recommend, or propose to approve or recommend, any
Acquisition Proposal, or enter into any agreement with respect to any
Acquisition Proposal. HCIA and its representatives shall immediately cease
any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing. Notwithstanding
the foregoing, (a) HCIA may furnish information concerning its business,
properties or assets to any corporation, partnership, person or other
entity or group pursuant to appropriate confidentiality agreements if in
the opinion of the Board of Directors, after receipt of written advice from
legal counsel to HCIA, the failure to provide such information would result
in a significant possibility that the Board of Directors would breach or
violate its fiduciary duties to HCIA's stockholders under applicable law,
and (b) HCIA may negotiate and participate in discussions and negotiations
with such entity or group concerning an Acquisition Proposal if (x) such
entity or group has on an unsolicited basis submitted a bona fide written
proposal to the Board of Directors of HCIA relating to any such transaction
which the Board of Directors determines in good faith, after consultation
with its financial advisors, represents a superior transaction to the
Merger and is reasonably likely to be consummated, taking into account all
legal, financial and regulatory aspects of the proposal and (y) in the
opinion of the Board of Directors of HCIA, after receipt of written advice
from legal counsel to HCIA, the failure to engage in such discussions or
negotiations would result in a significant possibility that the Board of
Directors would breach or violate its fiduciary duties to HCIA's
stockholders under applicable law (an Acquisition Proposal which satisfies
clauses (x) and (y) being referred to herein as a "Superior Proposal").
HCIA shall immediately notify the Acquiror in writing of the existence of
any proposal or inquiry received by HCIA and the identity of the party
making such proposal or inquiry which it may receive in respect of any such
transaction and thereafter shall keep the Acquiror fully informed on a
current basis of any changes in the status and content of any such
proposals.
(b) Except as set forth herein, neither the Board of Directors of HCIA
nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to the Acquiror or the LLC, the
approval or recommendation by the Board of Directors or any such committee
of this Agreement or the Merger, (ii) approve or recommend, or propose to
approve or recommend, any Acquisition Proposal or (iii) enter into any
agreement with respect to any Acquisition Proposal. Notwithstanding the
foregoing, prior to the Closing Date, the Board of Directors of HCIA may
(subject to the terms of this and the following sentence) withdraw or
modify its approval or recommendation of this Agreement or the Merger,
approve or recommend a Superior Proposal, or enter into an Agreement with
respect to a Superior Proposal, in each case at any time after the tenth
business day following the Acquiror's receipt of written notice from HCIA
advising the Acquiror that the Board of Directors has received a Superior
Proposal, specifying the material terms and conditions of such Superior
Proposal and identifying the person making such Superior Proposal;
PROVIDED, HOWEVER, that HCIA shall not enter into an agreement with respect
to a Superior Proposal unless HCIA shall have furnished the Acquiror with
written notice not later than ten business days in advance of any date that
it intends to enter into such agreement and shall have caused its financial
and legal advisors to negotiate in good faith with the Acquiror during such
ten business day period to make such adjustments in the terms and
conditions of this Agreement as would enable HCIA to proceed with the
transactions contemplated hereby on such adjusted terms.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.1 ACCESS TO INFORMATION; CONFIDENTIALITY. Subject to the
Non-Disclosure Agreement, dated April 27, 1999, entered into by HCIA and the
Acquiror (the "Non-Disclosure Agreement") and subject to applicable law, HCIA
shall, and shall cause its respective subsidiaries to, afford to Acquiror and
its officers, employees, accountants, counsel, financing sources, financial
advisors and other representatives, reasonable access during normal business
hours during the period prior to the Effective Time to all their respective
properties, books, contracts, commitments, personnel and records (provided that
such access shall not materially interfere with the business or operations of
HCIA) and, during such period, HCIA shall, and shall cause each of its
subsidiaries to, furnish promptly to Acquiror (a) a copy of each report,
schedule, registration statement and other document filed by it during such
period pursuant to the requirements of federal or state securities laws and (b)
all other information concerning its business, properties and personnel as
Acquiror and its representatives may reasonably request. No review pursuant to
this Section 5.1 shall affect any representation or warranty given by HCIA
hereunder. Acquiror will hold, and will cause its officers, employees,
accountants, counsel, financial advisors and other representatives and
affiliates to hold, any nonpublic information in accordance with the terms of
the Non-Disclosure Agreement.
SECTION 5.2 BEST EFFORTS.
(a) Upon the terms and subject to the conditions set forth in this
Agreement, each of the parties agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, and to
assist and cooperate with
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the other parties in doing, all things necessary, proper or advisable to
consummate and make effective, in the most expeditious manner practicable,
the Merger and the other transactions contemplated by this Agreement,
including (i) the obtaining of all necessary actions or nonactions,
waivers, consents and approvals from Governmental Entities and the making
of all necessary registrations and filings and the taking of all steps as
may be necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity, (ii) at the request of
Acquiror, the obtaining of all necessary consents, approvals or waivers,
and any necessary or appropriate financing arrangements, from third parties
(it being understood and agreed that the failure to obtain any consent,
approval or waiver after using reasonable efforts to attempt to obtain such
consent, approval or waiver shall not be deemed a breach of this Agreement;
provided, however, that the obligation of Acquiror to effect the Merger is
subject to satisfaction or waiver of the condition to obtain the consents
referred to in Section 6.3(f)), (iii) the defending of any lawsuits or
other legal proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions contemplated by this
Agreement, including seeking to have any stay or temporary restraining
order entered by any court or other Governmental Entity vacated or
reversed, and (iv) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by, and to fully
carry out the purposes of, this Agreement. Notwithstanding anything to the
contrary in this Agreement, neither HCIA nor Acquiror shall be required to
hold separate (including by trust or otherwise) or divest any of their
respective businesses or assets, or enter into any consent decree or other
agreement that would materially restrict either HCIA or Acquiror in the
conduct of its business as heretofore conducted.
(b) HCIA and the Acquiror shall respond as promptly as practicable to all
inquiries and requests received from any State Attorney General or other
Governmental Entity in connection with antitrust matters.
(c) In connection with and without limiting the foregoing, Acquiror and
HCIA shall (i) take all action necessary to ensure that no state takeover
statute or similar statute or regulation is or becomes applicable to this
Agreement or any of the transactions contemplated hereby and (ii) if any
state takeover statute or similar statute or regulation becomes applicable
to such agreements or transactions, take all action necessary to ensure
that such transactions may be consummated as promptly as practicable on the
terms contemplated by this Agreement and otherwise to minimize the effect
of such statute or regulation on the Merger and the other transactions
contemplated by this Agreement.
SECTION 5.3 INDEMNIFICATION, EXCULPATION AND INSURANCE.
(a) For three years after the Effective Time, Acquiror agrees to maintain
in effect in accordance with their terms all rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to
the Effective Time existing as of August 11, 1999 in favor of the current
or former directors or officers of HCIA and its subsidiaries as provided in
their respective certificates or articles of incorporation or bylaws (or
comparable organizational documents) and any indemnification agreements of
HCIA.
(b) In the event that Acquiror or any of its successors or assigns (i)
consolidates with or merges into any other person and is not the continuing
or surviving corporation or entity of such consolidation or merger or (ii)
transfers or conveys all or substantially all of its properties and assets
to any person, then, and in each such case, proper provision will be made
so that the successors and assigns of Acquiror assume the obligations set
forth in this Section 5.3.
(c) Acquiror shall provide to HCIA's current directors and officers, for
a period of at least two years after the Effective Time, liability
insurance covering acts or omissions occurring prior to the Effective Time
with respect to those persons who are currently covered by HCIA's
directors' and officers' liability insurance policy on terms with respect
to such coverage and amount no less favorable in any material respect than
those of such policy in effect on August 11, 1999.
(d) The provisions of this Section 5.3 (i) are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her
heirs and his or her representatives and (ii) are in addition to, and not
in substitution for, any other rights to indemnification or contribution
that any such person may have by contract or otherwise.
SECTION 5.4 FEES AND EXPENSES. Except as set forth in this Section 5.4,
Section 7.2 and Section 8.11, all fees and expenses incurred in connection with
the Merger, this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such fees or expenses, whether or not the Merger is
consummated. Acquiror and HCIA shall each bear and pay fifty percent (50%) of
the costs, fees and expenses incurred in connection with (i) the filing,
printing and mailing of the Proxy Statement and (ii) the filings of the
premerger notification and report forms under the HSR Act (including filing
fees).
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SECTION 5.5 PUBLIC ANNOUNCEMENTS. HCIA and Acquiror will consult with each
other before issuing, and provide each other with the opportunity to review,
comment upon and concur with, and use commercially reasonable best efforts to
agree on, any press release or other public statements with respect to the
transactions contemplated by this Agreement, including the Merger, and shall
not issue any such press release or make any such public statement prior to
such consultation, except as either party may determine is required by
applicable law, court process or by obligations pursuant to any listing
agreement with any national securities exchange or stock market.
SECTION 5.6 CONVEYANCE TAXES. HCIA and Acquiror shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any real property transfer or gains, sales, use,
transfer, value added, stock transfer and stamp taxes, any transfer, recording,
registration and other fees or any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time.
SECTION 5.7 EMPLOYEE BENEFITS. Acquiror shall be responsible for
perpetuating the group health plan continuation coverages pursuant to Section
4980B of the Code and Sections 601 through 609 of ERISA ("COBRA") for all
employees of HCIA and their eligible dependents, including such individuals who
experienced a qualifying event under the COBRA rules prior to the Effective
Time.
ARTICLE VI
CONDITIONS PRECEDENT
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) STOCKHOLDER APPROVAL. The HCIA Stockholder Approval shall have been
obtained.
(b) GOVERNMENTAL, REGULATORY AND OTHER APPROVALS. (i) Other than the
filing of the Certificates of Merger provided for under Section 1.3 and
filings pursuant to the HSR Act, all consents, approvals and actions of,
filings with and notices to any Governmental Entity required of Acquiror,
HCIA or any of their subsidiaries to consummate the Merger and the other
transactions contemplated hereby (the "Requisite Regulatory Approvals")
shall have been obtained and (ii) except as would not have a material
adverse effect on any of Acquiror, HCIA or the Surviving LLC, the consents
and approvals set forth in Sections 3.1(b) and Section 3.2(d) hereof shall
have been obtained or shall no longer be required.
(c) NO INJUNCTIONS OR RESTRAINTS. No judgment, order, decree, statute,
law, ordinance, rule or regulation, entered, enacted, promulgated, enforced
or issued by any court or other Governmental Entity of competent
jurisdiction or other legal restraint or prohibition (collectively,
"Restraints") shall be in effect (i) declaring this Agreement to be
unenforceable in any material respect or preventing the consummation of the
Merger, or (ii) which otherwise is reasonably likely to have a material
adverse effect on Acquiror or HCIA, as applicable; provided, however, that
each of the parties shall have used the best efforts required by Section
5.2(a) to prevent the entry of any such Restraints and to appeal as
promptly as possible any such Restraints that may be entered. There shall
not be any threatened or pending suit, action or proceeding by any
Governmental Entity against the LLC, the Acquiror, HCIA or any subsidiary
of HCIA (A) seeking to prohibit or impose any material limitations on the
Acquiror's or the LLC's ownership or operation (or that of any of their
respective subsidiaries or affiliates) of all or a material portion of
their or HCIA's businesses or assets, or to compel HCIA or the LLC or their
respective subsidiaries and affiliates to dispose of or hold separate any
material portion of the business or assets of HCIA or the Acquiror and
their respective subsidiaries, (B) seeking to restrain or prohibit the
consummation of the Merger or the performance of any of the other
transactions contemplated by this Agreement or the Voting Agreement, or
seeking to obtain from HCIA, the Acquiror or the LLC any damages that are
material in relation to HCIA and its subsidiaries taken together as a
whole, (C) seeking to impose material limitations on the ability of the
LLC, or render the LLC unable, to accept for payment, pay for or purchase
some or all of the shares of HCIA Common Stock pursuant to the Merger or
(D) which otherwise would prohibit the consummation of the Merger.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF HCIA. The obligation of HCIA to
effect the Merger is further subject to satisfaction or waiver of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Acquiror set forth herein shall be true and correct in all respects, both
when made and at and as of the Closing Date, as if made at and as of such
time (except
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to the extent expressly made as of an earlier date, in which case as of
such date), except where the failure of such representations and warranties
to be so true and correct (without giving effect to any limitation as to
"materiality" or "material adverse effect" set forth therein) does not
have, and is not likely to have, individually or in the aggregate, a
material adverse effect on the Acquiror.
(b) PERFORMANCE OF OBLIGATIONS OF ACQUIROR. Acquiror shall have performed
in all material respects all obligations required to be performed by it
under this Agreement at or prior to the Closing Date.
(c) OPINION. HCIA shall have received an opinion of Proskauer Rose LLP,
counsel to the Acquiror and the LLC, or from the in-house general counsel
of such entities, substantially in the form of Exhibit 6.2(c).
(d) CERTIFICATE. The Acquiror shall have delivered a certificate, dated
as of the Closing, to HCIA executed on its behalf by its Managing Member to
the effect that the conditions set forth in Sections 6.2(a) and (b) have
been satisfied by the Acquiror.
SECTION 6.3 CONDITIONS TO OBLIGATIONS OF ACQUIROR. The obligation of
Acquiror to effect the Merger is further subject to satisfaction or waiver of
the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
HCIA set forth herein shall be true and correct in all respects both when
made and at and as of November 19, 1999 , as if made at and as of such time
(except to the extent expressly made as of an earlier date, in which case
as of such date), except where the failure of such representations and
warranties to be so true and correct (without giving effect to any
limitation as to "materiality," or "material adverse effect" set forth
therein) does not have, and is not likely to have, individually or in the
aggregate, a material adverse effect on HCIA and any of its subsidiaries
taken as a whole.
(b) PERFORMANCE OF OBLIGATIONS OF HCIA. HCIA shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date.
(c) HCIA RIGHTS AGREEMENT. The HCIA Rights issued pursuant to the HCIA
Rights Agreement shall have been terminated or shall not have become
nonredeemable, exercisable, distributed or triggered pursuant to the terms
of such agreement.
(d) OPINION. The Acquiror shall have received an opinion of Whiteford,
Taylor & Preston L.L.P., counsel to HCIA and its subsidiaries,
substantially in the form of Exhibit 6.3(d); and
(e) MATERIAL ADVERSE CHANGE. From August 11, 1999 through November 19,
1999, there shall not have occurred any changes, events or occurrences that
would or would reasonably be expected to result, individually or in the
aggregate, in a material adverse effect on HCIA and its subsidiaries taken
as a whole (other than any material adverse changes, events or
circumstances resulting solely from the failure to obtain any consent,
approval or waiver referred to in Section 5.2 (a)(ii), if HCIA shall have
complied with all its obligations therein).
(f) CONSENTS. All consents required under the December 6, 1995 Informix
Software, Inc. contract to keep such contract in full force and effect
following the consummation of the Merger shall have been obtained without
any terms or conditions that the Acquiror determines in its sole discretion
to be unreasonably burdensome to the Acquiror or the LLC or the operations
of HCIA on a going forward basis, and shall be in effect as of the
Effective Time.
(g) CERTIFICATE. HCIA shall have delivered a certificate, dated as of the
Closing, to the Acquiror executed on its behalf by its President to the
effect that the conditions set forth in Sections 6.3(a), (b), (c) and (e)
have been satisfied by HCIA.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
SECTION 7.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, and except in the case of Sections 7.1(e) or
7.1(g) whether before or after the HCIA Stockholder Approval:
(a) by mutual written consent of HCIA and the Acquiror;
(b) by either HCIA or the Acquiror:
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(i) if the Merger shall not have been consummated by December 31,
1999; provided however, that the right to terminate this Agreement
pursuant to this Section 7.1(b)(i) shall not be available to any party
whose failure to perform any of its obligations under this Agreement
results in the failure of the Merger to be consummated by such time;
(ii) if the HCIA Stockholder Approval shall not have been obtained at
an HCIA Stockholders' Meeting duly convened therefor or at any
adjournment or postponement thereof;
(iii) if any Restraint having any of the effects set forth in Section
6.1(d) shall be in effect and shall have become final and nonappealable,
or if any Governmental Entity that must grant a Requisite Regulatory
Approval has denied approval of the Merger and such denial has become
final and nonappealable; provided, that the party seeking to terminate
this Agreement pursuant to this Section 7.1(b)(iii) shall have used the
best efforts required by Section 5.2(a) to prevent the entry of and to
remove such Restraint or to obtain such Requisite Regulatory Approval, as
the case may be;
(c) by HCIA (provided that HCIA is not then in breach of any
representation, warranty, covenant or other agreement contained herein), if
Acquiror shall have breached or failed to perform any of its
representations, warranties, covenants or other agreements contained in
this Agreement, which breach or failure to perform (A) would give rise to
the failure of a condition set forth in Section 6.2(a) or (b), and (B) is
incapable of being cured by Acquiror or is not cured within 30 days of
written notice thereof from HCIA;
(d) by the Acquiror (provided that Acquiror is not then in breach of any
representation, warranty, covenant or other agreement contained herein), if
HCIA shall have breached or failed to perform any of its representations,
warranties, covenants or other agreements contained in this Agreement,
which breach or failure to perform (A) would give rise to the failure of a
condition set forth in Section 6.3(a) or (b), and (B) is incapable of being
cured by HCIA or is not cured within 30 days of written notice thereof from
the Acquiror;
(e) by the Acquiror, at any time prior to the HCIA Stockholders' Meeting,
if the HCIA Board of Directors shall have (A) failed to include in the
Proxy Statement sent to the stockholders of HCIA its recommendation without
modification or qualification that such stockholders approve this Agreement
and the transactions contemplated hereby, or (B) subsequently withdrawn
such recommendation or (C) modified or qualified such recommendation in a
manner adverse to the interests of Acquiror;
(f) by the Acquiror if the Board of Directors of HCIA shall have failed
to take any of the actions contemplated by Section 1.6 as a result of the
exercise of its rights under Section 1.6(e); or
(g) by HCIA if it enters into a definitive agreement in connection with a
Superior Proposal in accordance with Section 4.2(b).
SECTION 7.2 EFFECT OF TERMINATION.
(a) In the event of termination of this Agreement as provided in Section
7.1 hereof, and subject to the provisions of Section 8.1 hereof, this
Agreement shall forthwith become void and there shall be no liability on
the part of any of the parties, except (i) as set forth in this Section 7.2
and in Sections 3.1(d), 3.2(n), 5.3 and 5.4 hereof, and (ii) nothing herein
shall relieve any party from liability for fraud, or any willful breach
hereof.
(b) If this Agreement is terminated (i) by Acquiror pursuant to Section
7.1(e) hereof, (ii) by Acquiror pursuant to Section 7.1(d) hereof,
including, without limitation, as a result of HCIA's breach of Sections 4.2
or 1.6 hereof which, in the case of Section 1.6 only, is not cured within
30 days after notice thereof to HCIA, (iii) by Acquiror pursuant to Section
7.1(f) hereof, or (iv) by HCIA pursuant to Section 7.1(g) hereof, and, (1)
prior to the termination of this Agreement, an Acquisition Proposal at a
price and on terms at least as favorable to the stockholders of HCIA as the
Merger shall have been made, and within one year of such termination HCIA
consummates such Acquisition Proposal or (2) within 18 months of such
termination HCIA enters into an agreement for a different Acquisition
Proposal (whether or not with a party that had previously made an
Acquisition Proposal to HCIA), in either case at a price and on terms at
least as favorable to the stockholders of HCIA as the Merger, then HCIA
shall pay to the Acquiror (concurrently with such termination, in the case
of a termination pursuant to Section 7.1(g) hereof), and not later than the
consummation of such Acquisition Proposal in any other event) a fee (the
"Termination Fee") in an amount equal to 3 1/2% of the aggregate Merger
Consideration payable to all of the stockholders of HCIA pursuant to the
terms hereof plus an amount up to $1,000,000 to reimburse the Acquiror for
all of its costs, fees and expenses (including, without limitation,
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all legal, investment banking and accounting costs, fees and expenses) in
connection with the Merger and this Agreement (the "Expense Reimbursement
Payment").
(c) If the Agreement shall terminate for any reason, other than as
provided in Sections 7.1(a), 7.1(c) or 7.2(b) hereof, then HCIA shall pay
to the Acquiror up to $1,000,000 to reimburse the Acquiror for all of its
costs, fees and expenses (including, without limitation, all legal,
investment banking and accounting costs, fees and expenses) incurred in
connection with this Agreement, such payment to be made no later than one
business day following the date of delivery of the notice of termination to
the other party.
(d) HCIA and Acquiror agree that the agreements contained in Section
7.2(b) and Section 7.2(c) above (i) shall be the sole and exclusive
remedies of Acquiror against HCIA for termination of the Agreement and
Acquiror's remedies against HCIA shall be limited to the sums stipulated in
Section 7.2(b) and Section 7.2(c) regardless of the circumstances giving
rise to such termination and (ii) are an integral part of the transactions
contemplated by this Agreement and constitute liquidated damages and not a
penalty. If HCIA fails to promptly pay any payments due to the Acquiror
under Sections 7.2(b) or 7.2(c), it shall pay all of the costs, fees and
expenses (including all legal costs, fees and expenses) in connection with
any action, including the filing of any lawsuit or other legal action,
taken to collect payment.
SECTION 7.3 AMENDMENT. Subject to compliance with applicable law, this
Agreement may be amended by the parties at any time before or after the HCIA
Stockholder Approval; provided, however, that after any such approval, there
may not be, without further approval of the stockholders of HCIA, any amendment
of this Agreement that changes the amount or the form of the consideration to
be delivered to the holders of HCIA Common Stock hereunder, or which by law
otherwise expressly requires the further approval of such stockholders. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties hereto and duly approved by each of the parties'
hereto.
SECTION 7.4 EXTENSION; WAIVER. At any time prior to the Effective Time, a
party may, subject to the proviso of Section 7.3 (and for this purpose treating
any waiver referred to below as an amendment), (a) extend the time for the
performance of any of the obligations or other acts of the other parties, (b)
waive any inaccuracies in the representations and warranties of the other
parties contained in this Agreement or in any document delivered pursuant to
this Agreement or (c) waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. Any extension or
waiver given in compliance with this Section 7.4 or failure to insist on strict
compliance with an obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
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ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. None of the
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Effective Time. This Section 8.1
shall not limit any covenant or agreement of the parties which by its terms
contemplates performance after the Effective Time.
SECTION 8.2 NOTICES. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given if delivered personally, telecopied (which is confirmed) or sent by
overnight courier (providing proof of delivery) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to HCIA, to: HCIA Inc.
300 East Lombard Street
Suite 1700
Baltimore, Maryland 21202
Telecopy No.: (410) 837-0681
Attention: Charles A. Berardesco, Esq.
Senior Vice President and
General Counsel
with a copy to: Whiteford, Taylor & Preston L.L.P.
Seven Saint Paul Street
Baltimore, Maryland 21202
Telecopy No.: (410) 347-9478
Attention: D. Scott Freed, Esq.
and to: Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Suite 1300
Washington D.C. 20004
Telecopy No.: (202) 637-2201
Attention: Bruce E. Rosenblum, Esq.
(b) if to Acquiror, the LLC or the Merger Sub to:
c/o VS&A Communications Partners III, L.P.
350 Park Avenue
New York, N.Y. 10022
Telecopy No.: (212) 935-0877
Attention: Jeffrey Stevenson,
Senior Managing Member
with a copy to: VS&A Communications Partners III, L.P.
350 Park Avenue
New York, N.Y. 10022
Telecopy No.: (212) 935-0877
Attention: Jonathan Drucker, Esq.,
General Counsel
and to: Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Telecopy No.: (212) 969-2900
Attention: Bertram A. Abrams, Esq. and Edward W. Kerson, Esq.
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SECTION 8.3 DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person, where "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management policies of a person, whether through the
ownership of voting securities, by contract, as trustee or executor, or
otherwise;
(b) "best knowledge" of any person which is not an individual means the
knowledge of such person's directors and executive officers after due
inquiry with respect thereto;
(c) "material adverse effect" when used in connection with Acquiror or
HCIA means any change or effect that is materially adverse to the financial
condition, results of operations, business, properties, assets or
liabilities of such party and its subsidiaries taken as a whole.
(d) "person" means an individual, corporation, partnership, limited
liability company, joint venture, association, trust, unincorporated
organization or other entity; and
(e) a "subsidiary" of any person means another person, an amount of the
voting securities, other voting ownership or voting partnership interests
of which is sufficient to elect at least a majority of its Board of
Directors or other governing body (or, if there are no such voting
interests, 50% or more of the equity interests of which) which is owned
directly or indirectly by such first person.
SECTION 8.4 INTERPRETATION. When a reference is made in this Agreement to
an Article, Section or Exhibit, such reference shall be to an Article or
Section of, or an Exhibit to, this Agreement unless otherwise indicated.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms defined in this
Agreement shall have the defined meanings used herein when used in any
certificate or other document made or delivered pursuant hereto unless
otherwise defined therein. The definitions contained in this Agreement are
applicable to the singular as well as the plural forms of such terms and to the
masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument or statute defined or referred to herein or in any
agreement or instrument that is referred to herein means such agreement,
instrument or statute as from time to time amended, modified or supplemented,
including (in the case of agreements or instruments) by waiver or consent and
(in the case of statutes) by succession of comparable successor statutes and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
SECTION 8.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
SECTION 8.6 ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES. This Agreement
(including the documents, exhibits, disclosure schedules and the other
documents and instruments referred to herein) and the Non-Disclosure Agreement
(a) constitute the entire agreement among the parties hereto, and supersede all
prior agreements and understandings, both written and oral, between the parties
with respect to the subject matter of this Agreement and (b) except for the
provisions of Section 5.3 are not intended to confer upon any person other than
the parties any rights or remedies.
SECTION 8.7 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Maryland, regardless of
the laws that might otherwise govern under applicable principles of conflict of
laws thereof.
SECTION 8.8 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or in
part, by operation of law or otherwise by any of the parties hereto without the
prior written consent of the other parties, except that HCIA may assign, in its
sole discretion, any or all of its rights, interests and obligations hereunder
to the Acquiror, the LLC or to any indirect or direct wholly owned subsidiary
or parent of the LLC. Any assignment in violation of the preceding sentence
shall be void. Subject to the preceding two sentences, this Agreement will be
binding upon, inure to the benefit of, and be enforceable by, the parties and
their respective successors and assigns.
SECTION 8.9 HEADINGS, ETC. The headings and table of contents contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 8.10 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain
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in full force and effect, insofar as the foregoing can be accomplished without
materially affecting the economic benefits anticipated by the parties to this
Agreement. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall promptly
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible to the fullest extent permitted by
applicable law in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the fullest extent possible.
SECTION 8.11 TRANSFER AND SIMILAR TAXES. Notwithstanding any other
provision of this Agreement to the contrary, each of the stockholders of HCIA
shall be solely responsible for the payment of any sales, use, privilege,
transfer, documentary, gains, stamp, duties, recording and similar taxes and
fees (including any penalties, interest and additions to such fees) incurred in
connection with the conversion of shares of HCIA Common Stock pursuant to this
Agreement and for the accurate filing of all necessary tax returns and other
documentation with respect to any transfer tax.
IN WITNESS WHEREOF, HCIA, Acquiror, LLC and Merger Sub have caused this
Agreement to be signed by their respective officers thereunto duly authorized,
all as of the date first written above.
HCIA INC.
By: /s/ GEORGE D. PILLARI
-------------------------------------
GEORGE D. PILLARI
CHAIRMAN OF THE BOARD OF DIRECTORS AND
CHIEF EXECUTIVE OFFICER
VS&A COMMUNICATIONS PARTNERS III, L.P.
By: VS&A Equities III, L.L.C., its
General Partner
By: /s/ JEFFREY T. STEVENSON
-------------------------------------
JEFFREY T. STEVENSON
SENIOR MANAGING MEMBER
VS&A-HCIA, L.L.C.
By: /s/ JEFFREY T. STEVENSON
-------------------------------------
JEFFREY T. STEVENSON
MANAGING MEMBER
VS&A-HCIA, INC.
By: /s/ JEFFREY T. STEVENSON
-------------------------------------
JEFFREY T. STEVENSON
PRESIDENT
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APPENDIX B
[LETTERHEAD OF DEUTSCHE BANK SECURITIES INC.]
August 11, 1999
The Board of Directors
HCIA Inc.
300 East Lombard
Baltimore, Maryland 21202
Members of the Board:
Deutsche Bank Securities Inc. ("Deutsche Bank") has acted as financial
advisor to HCIA Inc. ("HCIA") in connection with the proposed transaction
involving HCIA and VS&A Communications Partners III, L.P., VS&A-HCIA, L.L.C.
and VS&A-HCIA, Inc. (collectively, "VS&A") pursuant to an Agreement and Plan of
Reorganization, dated as of August 11, 1999 (the "Agreement"), between VS&A and
HCIA, which provides, among other things, for the merger of VS&A-HCIA, Inc.
("Merger Sub") with and into HCIA (the "Merger"). As set forth more fully in
the Agreement, as a result of the Merger, each outstanding share of the common
stock, par value $0.01 per share, of HCIA (the "HCIA Common Stock") will be
converted into the right to receive $11.00 in cash, without interest (the
"Merger Consideration").
You have requested Deutsche Bank's opinion as to the fairness, from a
financial point of view, of the Merger Consideration to the holders of HCIA
Common Stock.
In connection with Deutsche Bank's role as financial advisor to HCIA, and
in arriving at its opinion, Deutsche Bank has reviewed certain publicly
available financial and other information concerning HCIA and certain internal
analyses and other information furnished to or discussed with it by HCIA and
its advisors. Deutsche Bank has also held discussions with members of the
senior management of HCIA and VS&A regarding the business and prospects of
HCIA. In addition, Deutsche Bank has (i) reviewed the reported prices and
trading activity for HCIA Common Stock, (ii) compared certain financial and
stock market information for HCIA with similar information for certain other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which it deemed comparable in
whole or in part, (iv) reviewed the terms of the Agreement, and (v) performed
such other studies and analyses and considered such other factors as it deemed
appropriate. In connection with its engagement, Deutsche Bank was authorized to
approach, and held discussions with, third parties to solicit indications of
interest with respect to the acquisition of HCIA.
Deutsche Bank has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning HCIA, including, without limitation,
any financial information, forecasts or projections considered in connection
with the rendering of its opinion. Accordingly, for purposes of its opinion,
Deutsche Bank has assumed and relied upon the accuracy and completeness of all
such information and Deutsche Bank has not conducted a physical inspection of
any of the properties or assets, and has not prepared or obtained any
independent evaluation or appraisal of any of the assets or liabilities, of
HCIA. With respect to the financial forecasts and projections made available to
Deutsche Bank and used in its analyses, Deutsche Bank has assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of HCIA as to the matters covered thereby. In rendering
its opinion, Deutsche Bank expresses no view as to the reasonableness of such
forecasts and projections or the assumptions on which they are based. Deutsche
Bank's opinion is necessarily based upon economic, market and other conditions
as in effect on, and the information made available to it as of, the date
hereof.
For purposes of rendering its opinion, Deutsche Bank has assumed that, in
all respects material to its analysis, the representations and warranties of
HCIA and VS&A contained in the Agreement are true and correct, HCIA and VS&A
will each perform all of the covenants and agreements to be performed by it
under the Agreement and all conditions to the obligations of each of HCIA and
VS&A to consummate the Merger will be satisfied without any waiver thereof.
Deutsche Bank has also assumed that all
<PAGE>
Board of Directors
HCIA Inc.
August 11, 1999
Page 2
material governmental, regulatory or other approvals and consents required in
connection with the consummation of the Merger will be obtained and that in
connection with obtaining any necessary governmental, regulatory or other
approvals and consents, or any amendments, modifications or waivers to any
agreements, instruments or orders to which either HCIA or VS&A is a party or is
subject or by which it is bound, no limitations, restrictions or conditions will
be imposed or amendments, modifications or waivers made that would have a
material adverse effect on HCIA or materially reduce the contemplated benefits
of the Merger to HCIA.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of HCIA and is not a recommendation to any stockholder as to how such
stockholder should vote with respect to matters relating to the proposed
Merger. This opinion is limited to the fairness, from a financial point of
view, of the Merger Consideration to the holders of HCIA Common Stock, and
Deutsche Bank expresses no opinion as to the merits of the underlying decision
by HCIA to engage in the Merger.
Deutsche Bank, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for estate, corporate and other purposes. We have acted as financial
advisor to HCIA in connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon the consummation of
the Merger and a portion of which is payable upon delivery of this opinion.
Deutsche Bank and its predecessors and affiliates have in the past provided
financial services to HCIA and affiliates of VS&A unrelated to the proposed
Merger, for which services Deutsche Bank and its predecessors and affiliates
have received compensation. An affiliate of Deutsche Bank also is a limited
partner of VS&A Communications Partners III, L.P. Deutsche Bank maintains a
market in HCIA Common Stock and, in the ordinary course of business, Deutsche
Bank and its affiliates also may actively trade or hold the securities and
other instruments and obligations of HCIA for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities, instruments or obligations.
Based upon and subject to the foregoing, it is Deutsche Bank's opinion
that, as of the date of this letter, the Merger Consideration is fair, from a
financial point of view, to the holders of HCIA Common Stock.
Very truly yours,
/s/ DEUTSCHE BANK SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
<PAGE>
APPENDIX C
AMENDED AND RESTATED
AGREEMENT WITH STOCKHOLDERS OF HCIA INC.
October 11, 1999
The parties to this agreement are VS&A Communications Partners III, L.P.,
a Delaware limited partnership ("VS&A"), and the undersigned individuals, who
collectively constitute all of the executive officers of HCIA Inc., a Maryland
corporation (the "Company") and are collectively referred to herein as the
"Stockholders."
An amended and restated agreement and plan of reorganization (the "Merger
Agreement") among the Company, VS&A, a Delaware limited liability company of
which VS&A is the sole member (the "LLC"), and a subsidiary of the LLC, has
been entered into as of the date hereof, pursuant to which the Company would be
merged (the "Merger") with and into the LLC and the Company's stockholders
would be entitled to receive, upon the consummation of the Merger, the sum of
$11.00 a share for the Company's Common Stock. A copy of the Merger Agreement
is attached to this agreement.
The parties previously entered into an agreement dated August 11, 1999
(the "Original Voting Agreement") with respect to certain matters relating to
shares of the Company's Common Stock beneficially owned by the Stockholders.
The parties wish to amend and restate that earlier agreement.
It is therefore agreed as follows:
1. THE STOCKHOLDERS' OBLIGATIONS RELATING TO THE MERGER.
(a) NO SOLICITATION. Upon execution of this agreement, each of the
Stockholders immediately shall cease any activities, discussions or
negotiations with other parties with respect to any Acquisition Proposal
(as defined below) or with respect to any arrangement (including, but not
limited to, any "equity rollover" arrangement or employment arrangement)
between the Stockholder and any third party that has made or is considering
making any Acquisition Proposal to the Company, and none of the
Stockholders shall, directly or indirectly, encourage, solicit, participate
in or initiate discussions or negotiations with, or provide any information
to, any corporation, partnership, person or other entity or group (other
than VS&A and any of its affiliates or representatives) concerning any
Acquisition Proposal or any such other arrangement, except that the
Stockholders may negotiate and participate in negotiations with any entity
or group concerning an Acquisition Proposal to the extent that the Company
is permitted to do so under the Merger Agreement. Each of the Stockholders
immediately shall communicate to VS&A in writing the terms of any inquiry
or proposal he receives, or any discussion that he has, in his capacity as
a stockholder or executive employee of the Company, and shall inform VS&A
in writing of the identity of the party making such inquiry or proposal or
with whom he has such a discussion. As used in this agreement, the term
"Acquisition Proposal" means any proposal or offer with respect to a
merger, reorganization, share exchange, tender offer, consolidation or
similar transaction involving, or any purchase of 10% or more of the assets
or any equity securities of, the Company or any of its subsidiaries.
(b) BEST EFFORTS. Subject to the terms and conditions of this agreement
and any fiduciary duties each Stockholder may have in his capacity as a
director or officer of the Company, each of the Stockholders shall use his
best efforts to cause the consummation of the transactions contemplated by
this agreement and the Merger Agreement. Without limiting the generality of
the foregoing, each of the Stockholders shall use his best efforts to (a)
cause the Company to perform all of its obligations under the Merger
Agreement, and (b) cause the fulfillment at the earliest practicable date
of all of the conditions to the obligations of the parties to consummate
the Merger pursuant to the Merger Agreement.
(c) VOTING AGREEMENT. Each of the Stockholders shall, at any meeting of
the holders of the Company's Common Stock or in connection with any written
consent of the holders of the Company's Common Stock, vote (or cause to be
voted) all of the shares in the Company then owned of record or
beneficially by him or which he otherwise has the right to vote (or direct
the vote) (i) in favor of the Merger, the approval of the terms of the
Merger Agreement and each of the other actions contemplated by the Merger
Agreement and by this agreement, and any actions required in furtherance of
the Merger Agreement, and (ii) against any Acquisition Proposal and against
any other action or agreement that would impede, frustrate, prevent or
nullify this agreement or the transactions contemplated by this agreement
or the Merger Agreement. None of the Stockholders shall be required to take
any action in accordance with this provision, however, to the extent that
he or the Board of Directors of the Company shall have been advised by
counsel in writing that, in the opinion of such counsel, the taking of any
such action would result in a significant possibility that the Stockholder
would breach his fiduciary duty to the Company's stockholders under
applicable law, but if the Company enters into a definitive agreement with
respect to a Superior Proposal, each of the Stockholders shall use his best
efforts
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to cause the Company to promptly pay to VS&A the Termination Fee and any
required Expense Reimbursement Payment pursuant to the terms of the Merger
Agreement. The terms "Acquisition Proposal," "Superior Proposal" and
"Termination Fee" are defined in the Merger Agreement.
(d) NO TRANSFER OF SHARES OR INCONSISTENT ARRANGEMENTS. Except as
contemplated by this agreement or the Merger Agreement none of the
Stockholders shall (i) transfer (which term shall include, without
limitation, any sale, gift, pledge or other disposition), or consent to any
transfer of, any or all of the shares in the Company (or any options to
acquire shares) held by him of record or beneficially on the date of this
agreement or hereafter acquired by him, (conversion of shares upon a merger
resulting from a Superior Proposal not being considered a violation of this
covenant), (ii) enter into any contract, option or other agreement or
understanding with respect to any transfer of any or all of those shares
(or options) or any interest therein, (iii) grant any proxy,
power-of-attorney or other authorization in or with respect to those
shares, (iv) deposit any of those shares into a voting trust or enter into
a voting agreement or arrangement with respect to any of those shares, or
(v) take any other action that would in any way restrict, limit or
interfere with the performance of the Stockholder's obligations under this
agreement or with the transactions contemplated by this agreement or the
Merger Agreement. None of the Stockholders shall request that the Company
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of the shares in the Company that
he owns of record or beneficially, unless such transfer is made in
compliance with this agreement.
(e) FURTHER ASSURANCES. Each of the Stockholders shall from time to time,
at VS&A's reasonable request and without further consideration, take such
further lawful action and execute and deliver such additional documents as
may be necessary or desirable to carry out the terms of this agreement and
to consummate, in the most expeditious manner practicable, the transactions
contemplated by this agreement and the Merger Agreement.
2. AUTHORIZATION TO DISCLOSE. Each of the Stockholders authorizes VS&A,
the Company, and the LLC to publish and disclose in the documents relating to
the Merger, including the Proxy Statement (and all documents and schedules
filed with the SEC), his identity and ownership of the common stock of the
Company and the nature of his commitments, arrangements and understandings
under this agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. Each of the
Stockholders represents and warrants to VS&A, as to himself only, as follows:
(a) POWER; BINDING AGREEMENT. The Stockholder has the full right, power
and authority to enter into and perform all of his obligations under this
agreement. The execution, delivery and performance of this agreement by the
Stockholder will not violate any other agreement to which the Stockholder
is a party or by which the Stockholder is bound (including, but not limited
to, any voting agreement, proxy arrangement, pledge agreement, shareholders
agreement or voting trust) or violate any order, writ, injunction, decree,
judgment, statute, rule or regulation applicable to the Stockholder or any
of his properties or assets. This agreement has been duly and validly
executed and delivered by the Stockholder and constitutes a legal, valid
and binding obligation of the Stockholder, enforceable against the
Stockholder in accordance with its terms. There is no beneficiary or holder
of a voting trust certificate or other interest of any trust of which the
Stockholder is a trustee whose consent is required for the execution and
delivery of this agreement or the consummation by the Stockholder of the
transactions contemplated by this agreement.
(b) NO APPROVALS. Except for filings under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and any
filings under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that may be required in connection with the Merger
Agreement, no filing with, and no permit, authorization, consent or
approval of, any governmental entity is required for the execution and
delivery of this agreement by the Stockholder and the consummation by the
Stockholder of the transactions contemplated by this agreement.
(c) OWNERSHIP OF SHARES. The Stockholder is the record and beneficial
owner of the number of shares of Common Stock of the Company and options to
purchase the number of shares of Common Stock of the Company set forth
opposite the Stockholder's name on schedule 3(c) to this agreement, and
those shares constitute all of the shares of the Company's Common Stock
owned of record or beneficially by the Stockholder (or which the
Stockholder is entitled to purchase pursuant to the exercise of options).
Except as set forth on schedule 3(c), subject to applicable securities laws
and the terms of this agreement, the Stockholder has sole voting power and
sole power to issue instructions with respect to the matters set forth in
section 1 of this agreement, sole power of disposition, sole power of
conversion, sole power to demand appraisal rights, and sole power to agree
to all of the matters set forth in this agreement, in each case with
respect to all of the shares in the Company beneficially owned by him, with
no limitations, qualifications or restrictions on those rights.
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(d) TITLE TO SHARES. Except as set forth on schedule 3(c), the shares in
the Company owned by the Stockholder of record or beneficially and all
options held by the Stockholder are now, and at all times prior to the
consummation of the Merger will be, owned by the Stockholder, or by a
nominee or custodian for the benefit of the Stockholder, free and clear of
all liens, claims and encumbrances, except as set forth in schedule 3(c)
and such Stockholder has good and marketable title thereto with no
restrictions on such Stockholder's rights of disposition pertaining thereto.
All shares in the Company hereafter acquired by the Stockholder upon
exercise of options will at all times from the date of acquisition to the
date of consummation of the Merger be owned by the Stockholder, or by a
nominee or custodian for the benefit of the Stockholder, free and clear of
any claims, liens and encumbrances.
(e) LITIGATION. Except as previously disclosed to VS&A pursuant to the
Merger Agreement, there is no litigation, proceeding or governmental
investigation pending or, to the best of the knowledge of the Stockholder,
threatened, or any order, injunction or decree outstanding, against the
Company or the Stockholder that would prevent or interfere with the
consummation of the Merger and the transactions contemplated by this
agreement.
(f) NO FINDER'S FEES. No broker, investment banker, financial advisor or
other person is entitled to any fee or commission in connection with the
transactions contemplated by this agreement based upon arrangements made by
or on behalf of the Stockholder.
4. REPRESENTATIONS AND WARRANTIES OF VS&A. VS&A represents and warrants to
each of the Stockholders as follows:
(a) POWER; BINDING AGREEMENT. VS&A has the corporate power and authority
to enter into and perform all of its obligations under this agreement and
the execution, delivery and performance of this agreement by VS&A has been
duly authorized by all necessary partnership action. The execution,
delivery and performance of this agreement by VS&A will not violate any
other agreement to which VS&A is a party or by which VS&A is bound or
violate any order, writ, injunction, decree, judgment, statute, rule or
regulation applicable to VS&A or any of its properties or assets. This
agreement has been duly and validly executed and delivered by VS&A and
constitutes a legal, valid and binding agreement of VS&A, enforceable
against it in accordance with its terms.
(b) NO APPROVALS. Except for filings under the HSR Act and the Exchange
Act that may be required in connection with the Merger Agreement, no filing
with, and no permit, authorization, consent or approval of, any
governmental entity is necessary for the execution of this agreement by
VS&A and the consummation by VS&A of the transactions contemplated by this
agreement.
5. TERM.
This agreement shall continue in full force and effect until the
consummation of the Merger pursuant to the Merger Agreement or the termination
of the Merger Agreement in accordance with its terms. The termination of this
agreement pursuant to this provision shall not relieve any party of liability
for any prior breach of its or his obligations under this agreement.
6. INVESTMENT BANKING FEE; ADVISORY SERVICES.
(a) Upon the consummation of the Merger, the LLC shall pay to Veronis,
Suhler & Associates Inc. ("VS&A Inc."), or any affiliate thereof, for
investment banking rendered to the LLC in connection with the Merger, an
investment banking fee in an amount equal to 1% of the sum of (i) the
aggregate amount payable for the shares of Common Stock pursuant to the
Merger Agreement and (ii) the aggregate amount of the Company's outstanding
debt immediately prior to the Merger.
(b) After the consummation of the Merger, for as long as VS&A, Inc.
maintains a direct or indirect ownership interest in the Company, VS&A Inc.
shall be retained by the Company to provide investment banking advisory
services for the Company for a fee of $200,000 a year. In addition, VS&A
Inc. shall be the exclusive advisor to the Company with respect to
acquisitions, divestitures, private equity or debt issuances, mergers, or
consolidations or similar transactions, and VS&A Inc. shall be entitled to
its customary fees for services in connection with each such transaction.
7. DEFINITIONS.
(a) SHARES. Any reference in this agreement to the shares owned of record
or beneficially by a Stockholder shall be deemed to include shares
hereafter acquired by the Stockholder upon any stock dividend or
distribution or any change in the Company's Common Stock by reason of any
split-up, recapitalization, combination, exchange of shares or similar
corporate action or upon the exercise of any options.
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(b) BENEFICIAL OWNERSHIP. For the purpose of this agreement, beneficial
ownership with respect to any shares means beneficial ownership as
determined pursuant to Rule 13d-3 under the Exchange Act, including
pursuant to any agreement, arrangement or understanding, whether or not in
writing.
8. MISCELLANEOUS.
(a) RELIANCE BY VS&A. Each of the Stockholders acknowledges that he
understands that VS&A will enter into, and cause the LLC to enter into, the
Merger Agreement in reliance upon the Stockholders' performance of their
respective obligations under this agreement.
(b) ENTIRE AGREEMENT; NO ORAL CHANGE. This agreement contains a complete
statement of all of the arrangements among the parties with respect to its
subject matter, supersedes all prior agreements and understandings, written
and oral, among the parties with respect to that subject matter, and cannot
be changed or terminated except by an agreement in writing signed by all
parties.
(c) BINDING AGREEMENT. This agreement and the obligations under this
agreement shall attach to the shares owned of record and beneficially by
each of the Stockholders and shall be binding upon any person or entity to
which legal or beneficial ownership of those shares shall pass, whether by
operation of law or otherwise, including, but not limited to, each of the
Stockholders' guardians, heirs, executors, administrators or successors.
The transferee of any shares shall remain liable for the performance of all
of the obligations of the transferor under this agreement.
(d) ASSIGNMENT. None of the parties may assign any of its or his rights
or delegate any of its or his duties under this agreement without the prior
written consent of the other parties.
(e) NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied
(which has been confirmed) or sent by an overnight courier service, such as
Federal Express, to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(i) if to VS&A, to:
VS&A Communications Partners III, L.P.
350 Park Avenue
New York, New York 10022
Telecopy No.: (212) 935-0877
Att: Jeffrey T. Stevenson, President and
Jonathan D. Drucker, General Counsel
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Telecopy No.: (212) 969-2900
Att: Bertram A. Abrams, Esq. and Edward W. Kerson, Esq.
(ii) if to the Stockholders, to:
Charles A. Berardesco, Esq.
c/o HCIA Inc.
300 East Lombard Street
Baltimore, Maryland 21202
Telecopy No.: (410) 837-0681
(f) SEVERABILITY. Whenever possible, each provision or portion of any
provision of this agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision or portion
of any provision of this agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not
affect any other provision or portion of any provision in such
jurisdiction, and this agreement shall be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision
or portion of any provision had not been contained in this agreement.
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(g) SPECIFIC PERFORMANCE. Each of the Stockholders acknowledges that the
Company's business is of a special, unique and extraordinary character, and
that any default in the performance of his obligations under this agreement
could not be adequately compensated for by damages. Accordingly, if a
Stockholder defaults in the performance of his obligations under this
agreement, VS&A shall be entitled, in addition to any other remedies that
it may have, to enforcement of this agreement by a decree of specific
performance requiring the Stockholder to fulfill those obligations, without
the necessity of showing actual damages and without any bond or other
security being required.
(h) REMEDIES CUMULATIVE. All rights, powers and remedies provided under
this agreement or otherwise available in respect of this agreement at law
or in equity shall be cumulative and not alternative, and the exercise of
any right, power or remedy by any party shall not preclude the simultaneous
or later exercise by that party of any other right, power or remedy.
(i) NO WAIVER. The failure of any party to exercise any right, power or
remedy provided under this agreement or otherwise available at law or in
equity, or to insist upon compliance by any other party with its
obligations under this agreement, and any custom or practice of the parties
at variance with the terms of this agreement, shall not constitute a waiver
by that party of its right to exercise any such right, power or remedy.
(j) NO THIRD PARTY BENEFICIARIES. This agreement is not intended to be
for the benefit of, and shall not be enforceable by, any person or entity
who or which is not a party to this agreement.
(k) GOVERNING LAW. This agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements
made and to be performed in New York.
(l) JURISDICTION. The United States District Court for the Southern
District of New York shall have jurisdiction over the parties with respect
to any dispute or controversy among them arising under or in connection
with this agreement and, by execution and delivery of this agreement, each
of the parties to this agreement submits to the jurisdiction of those
courts, including, but not limited to, the IN PERSONAM and subject matter
jurisdiction of those courts, waives any objection to such jurisdiction on
the grounds of venue or FORUM NON CONVENIENS, the absence of IN PERSONAM or
subject matter jurisdiction and any similar grounds, and consents to
service of process by mail (in accordance with section 8(e)) or any other
manner permitted by law, and irrevocably agrees to be bound by any judgment
rendered thereby in connection with this agreement. These consents to
jurisdiction shall not be deemed to confer rights on any person other than
the parties to this agreement.
(m) HEADINGS. The headings in this agreement are for convenience of
reference only and are not intended to be part of or to affect the meaning
or interpretation of this agreement.
(n) COUNTERPARTS. This agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed
by each of the parties and delivered to the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
signed as of the date first written above.
VS&A COMMUNICATIONS PARTNERS III, L.P.
By: VS&A Equities III, L.L.C., its
General Partner
By: /s/ JEFFREY T. STEVENSON
-------------------------------------
JEFFREY T. STEVENSON
TITLE: SENIOR MANAGING MEMBER
By: /s/ GEORGE D. PILLARI
-------------------------------------
GEORGE D. PILLARI
By: /s/ DONALD S. GOOD
-------------------------------------
DONALD S. GOOD
By: /s/ BARRY C. OFFUTT
-------------------------------------
BARRY C. OFFUTT
By: /s/ CHARLES A. BERARDESCO
-------------------------------------
CHARLES A. BERARDESCO
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<PAGE>
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HCIA INC.
300 East Lombard Street
Baltimore, Maryland 21202
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints GEORGE D. PILLARI and CHARLES A. BERARDESCO as
proxies, each with full powers of substitution, and hereby authorizes them to
represent and vote, as designated below, all shares of Common Stock, $0.01 par
value, of HCIA Inc. (the "Company") held of record by the undersigned on October
8, 1999, at the Special Meeting of Stockholders of the Company to be held on
November 17, 1999, and at any adjournments or postponements thereof.
This Proxy, when properly executed and returned in a timely manner, will be
voted at the Special Meeting and any adjournments thereof in the manner
described herein. If no contrary indication is made, the proxy will be voted FOR
Proposal 1 and in accordance with the judgment of the persons named as proxies
herein on any matters that may properly come before the Special Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(CONTINUED, AND TO BE SIGNED AND DATED ON REVERSE SIDE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
PLEASE MARK YOUR VOTES [X]
AS INDICATED IN THIS EXAMPLE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
The Board of Directors unanimously recommends
that you vote FOR Proposal 1.
FOR AGAINST ABSTAIN In accordance with their judgment, the proxies are
1. Proposal to approve the merger of HCIA Inc. [ ] [ ] [ ] authorized to vote upon such other matters as may
with and into VS&A-HCIA, L.L.C. pursuant to properly come before the Special Meeting or any
the Amended and Restated Agreement and Plan adjournment thereof.
of Reorganization among HCIA Inc., VS&A
Communications Partners III. L.P., and
VS&A-HCIA, L.L.C.
This Proxy must be signed exactly as your name appears
hereon. If more than one name appears, all persons so
designated should sign. Attorneys, executors
administrators trustees and guardians should indicate
their capacities. If the signer is a corporation,
please print full corporate name and indicate capacity
of duly authorized officer executing on behalf of the
corporation. If the signer is a partnership, please
print full partnership name and indicate capacity of
duly authorized person executing on behalf of the
partnership.
Date:__________________________________________, 1999
_____________________________________________________
Signature
_____________________________________________________
Signature
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THIS PROXY CARD AND RETURN IT PRIOR TO THE MEETING IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
