SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange act of 1934 For the Quarterly Period Ended June 30, 1999
-------------
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________________________
to ____________________________
Commission File Number 0-25378
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HCIA Inc.
---------
(Exact name of registrant as specified in its charter)
Maryland 52-1407998
---------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
300 East Lombard Street, Baltimore, Maryland 21202
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 895-7470
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
------------- -------------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, at August 1, 1999:
Class: Common Stock Number of Shares: 11,851,125
----------
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
(Unaudited)
<S><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
----------- -----------
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.
Page 1
<PAGE>
HCIA INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30, 1999 and 1998
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
<S><C>
Revenue............................................................. $ 16,657 $ 16,363
Salaries, wages and benefits........................................ 7,561 8,138
Other operating expenses............................................ 5,193 5,505
Depreciation........................................................ 845 940
Amortization........................................................ 1,867 1,523
------------- ------------
Operating income.............................................. 1,191 257
Interest income..................................................... 137 119
Interest expense ................................................... 75 44
------------- ------------
Income from continuing operations before income taxes........ 1,253 332
Provision for income taxes.......................................... 574 44
------------- ------------
Income from continuing operations............................ 679 288
Loss from discontinued operations, net of tax....................... - (219)
------------- ------------
Net income .................................................. $ 679 $ 69
============= ============
Income per share from continuing operations:
Basic net income per share $ 0.06 $ 0.02
============= ============
Basic shares used in per share calculation 11,851 11,851
============= ============
Diluted net income per share $ 0.06 $ 0.02
============= ============
Diluted shares used in per share calculation 11,947 11,872
============= ============
Income (loss) per share from discontinued operations:
Basic net income (loss) per share $ 0.00 $ (0.02)
============= ============
Basic shares used in per share calculation 11,851 11,851
============= ============
Diluted net income (loss) per share $ 0.00 $ (0.02)
============= ============
Diluted shares used in per share calculation 11,947 11,872
============= ============
Net income per share:
Basic net income per share $ 0.06 $ 0.01
============= ============
Diluted net income per share $ 0.06 $ 0.01
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<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>
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 tax.... 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.
Page 3
<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>
Accumulated Other
Additional Paid-in Comprehensive Comprehensive
Common Stock Capital Accumulated Deficit Income(Loss) Income (Loss)
--------------- ------------------- ------------------- ------------------ -------------
<S><C>
BALANCE AT DECEMBER 31, 1997 $ 118 $ 250,892 $ (84,179) $ (117)
--------------- ------------------- ------------------- ------------------
Exercise of stock options - 12 - - -
Comprehensive loss
Net loss - - (48,647) - (48,647)
Other comprehensive loss
Foreign currency translation - - - - 20
--------------
Other comprehensive loss 20 20
--------------
Comprehensive loss $ (48,627)
==============
--------------- ------------------- ------------------- ------------------
BALANCE AT DECEMBER 31, 1998 $ 118 $ 250,904 $ (132,826) $ (97)
=============== =================== =================== ==================
Exercise of stock options - - - - -
Comprehensive income
Net income - - 1,250 - 1,250
Other comprehensive loss
Foreign currency translation - - - - (187)
--------------
Other comprehensive loss (187) (187)
--------------
Comprehensive income $ 1,063
==============
--------------- ------------------- ------------------- ------------------
BALANCE AT JUNE 30, 1999
(Unaudited) $ 118 $ 250,904 $ (131,576) $ (284)
=============== ==================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
Total Stockholders'
Equity
-------------------
<S><C>
BALANCE AT DECEMBER 31, 1997 $ 166,714
-------------------
Exercise of stock options 12
Comprehensive loss
Net loss (48,647)
Other comprehensive loss
Foreign currency translation 20
Other comprehensive loss
Comprehensive loss
-------------------
BALANCE AT DECEMBER 31, 1998 $ 118,099
===================
Exercise of stock options -
Comprehensive income
Net income 1,250
Other comprehensive loss
Foreign currency translation (187)
Other comprehensive loss
Comprehensive income
-------------------
BALANCE AT JUNE 30, 1999
(Unaudited) $ 119,162
===================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<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>
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 assets and restructuring charges
of discontinued operations - 25,754
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.
Page 5
<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:
Post-Charge
Pre-Charge Net Book Value
Asset Net Book Value Write Down as of 3/31/98
- --------------------------------------------------------------------------
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
===================================================
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.
(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
Page 6
<PAGE>
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>
Three months ended June 30, 1999
Revenue $ 7,443,943 $ 7,612,691 $ 1,600,310 - $16,656,944
Contribution 3,230,946 3,426,926 579,103 (6,045,669) 1,191,306
Accounts Receivable 13,792,189 9,272,848 1,531,723 - 24,596,760
Three months ended June 30, 1998
Revenue 8,375,161 6,312,648 1,675,184 - 16,362,993
Contribution 4,301,000 2,188,000 502,855 (6,734,440) 257,415
Accounts Receivable 15,500,488 7,261,970 1,266,504 - 24,028,962
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. For the three months ended June
30, 1999 and 1998, the calculation of earnings per share is summarized as
follows:
Page 7
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the three months ended
June 30, 1999 June 30, 1998
Income Shares Per Share Income Shares Per Share
(Numerator)(Denominator) Amount (Numerator)(Denominator) Amount
<S><C>
Basic EPS 679 11,851 0.06 69 11,851 0.01
--------------------------------- ---------------------------------
Incremental shares
from assumed
exercise of dilutive
options and warrants - 96 - - 21 -
--------------------------------- ---------------------------------
Diluted EPS 679 11,947 0.06 69 11,872 0.01
--------------------------------- ---------------------------------
</TABLE>
(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-HCTA, L.L.C. and VS&A-HCIA, Inc.
Page 8
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUE. Revenue for the three months ended June 30, 1999 was $16.7 million, an
increase of $300,000 or 1.8% over the three months ended June 30, 1998. The
increase was the result of a $1.3 million increase in revenue from the Company's
Managed Care Unit, which was partially offset by a $1.0 million decrease in
revenue from the Company's Content Unit. The revenue increase was the result of
the expansion of the Company's services to the employer and pharmaceutical
markets. The revenue decrease was the result of the timing of certain product
releases as well as lower levels of sales to the Company's hospital customers.
SALARIES, WAGES AND BENEFITS. Salaries, wages and benefits were $7.6 million or
45% of revenue for the three months ended June 30, 1999 as compared to $8.1
million or 50% of revenue for three months ended June 30, 1998. This decrease
was primarily the result of the Company'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
$5.2 million or 31% of revenue for the three months ended June 30, 1999 as
compared to $5.5 million or 34% of revenue for the three months ended June 30,
1998. The decrease in other operating expenses was the result of lower occupancy
and employee related costs as the result of the Company's restructuring of
operations in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization were $2.7 million
or 16% of revenue for the three months ended June 30, 1999, as compared to $2.5
million or 15% of revenue for the three months ended June 30, 1998. This
increase was a result of a higher capitalized software base in 1999, partially
offset by the effect of the write-off of certain equipment in 1998.
INTEREST INCOME AND EXPENSE. Net interest income was $62,000 for the three
months ended June 30, 1999 compared with net interest income of $75,000 for the
three months ended June 30, 1998. This decrease was the result of increased
interest expense, partially offset by an increase in interest income associated
with a higher invested balance in 1999.
INCOME TAXES. The Company's effective tax rate was 45.8% for the three months
ended June 30, 1999, compared with 13.3% for the three months ended June 30,
1998. 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 the Company's 1999 tax provision.
Page 9
<PAGE>
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 the Company'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 the Company's Content
Unit. Revenue increases were the result of the expansion of the Company's
service to the employer and pharmaceutical markets. The revenue decreases were
the result of lower levels of sales to the Company'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 six months ended June 30, 1998. This decrease was
primarily the result of the Company'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 the Company'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, the Company 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 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 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, 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. Exclusive of this valuation allowance, the Company'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 the Company's
1999 tax provision.
DISCONTINUED OPERATIONS. The Company decided to discontinue operations of its
Implementation Unit during the quarter ended December 31, 1998 and as of March
31, 1999, the Company 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.
Page 10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains a $25 million revolving line of credit (subject to certain
borrowing limitations) with First Union National Bank ("First Union") for
general corporate purposes including working capital requirements and
acquisitions. Borrowings under this line are collateralized by substantially all
of the Company's assets and bear interest at varying rates based on an index
tied to First Union's prime rate or LIBOR. The Company is required to pay a
commitment fee on the average daily unused portion of the facility at a rate
from 0.25% to 0.375% per annum, depending on the Company's debt/cash flow ratio.
The credit facility also contains financial covenants applicable to the Company,
including debt/cash flow ratios and ratios of debt to capital. As of June 30,
1999, the Company 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 COMPUTER SOFTWARE
The Company has created a Year 2000 Program Office to review its exposure to
Year 2000 computer software 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
the Company's senior management. In addition, senior management reports to the
Audit Committee of the Board of Directors on a regular basis regarding the
Company's progress in its Year 2000 remediation efforts. While the Company 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 Company personnel not directly involved in the remediation.
The Company 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, the
Company 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 the Company's
offices are located.
The Company has substantially completed the evaluation of its own data
processing systems and software products, and has begun remediation of these
systems and products. The Company has also substantially completed its
evaluation of third-party software products used by the Company. The Company
believes that as of June 30, 1999, it has completed approximately 95% of its
total expected efforts and has certified as Year 2000 compliant approximately
73% of its data processing systems, software products and third-party software,
and that it will complete remediation of substantially all of these systems,
products and software by September 30, 1999. It is the Company's goal, and the
Company's Year 2000 work plans have been scheduled, to finish Year 2000
remediation and certification of all of its data processing, software products
and third-party software by no later than October 31, 1999.
The Company has not undertaken a substantial effort to certify the Year 2000
compliance on non-information technology systems, but intends to focus on these
systems during the second half of 1999.
Through June 30, 1999, the Company has expended approximately $675,000 on Year
2000 remediation efforts, primarily as the result of allocation of personnel to
evaluation, remediation and certification efforts, that it would not have
otherwise expended but for the Year 2000 remediation process. The Company
believes that it will expend an additional $75,000 on such Year 2000 remediation
efforts through 1999. The Company 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. The Company intends to have completed the development of all systems
which will replace existing non compliant systems by September 30, 1999.
Page 11
<PAGE>
In the event the Company 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 the Company 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 the Company in default of
many of its agreements, and also threaten the Company's right to payment from
many of its clients. The Company 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 the Company'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 the Company, in the process of making its data processing systems Year
2000 compliant, intends to design algorithms to test data received from its
customers and covert it to a usable format, there can be no assurances that the
Company's customers will not experience difficulties in actually providing data
produced by their systems to the Company as a result of Year 2000-related
difficulties. It is not currently possible to estimate the effect on the
Company's results of operations from any such difficulties.
The Company is in the process of finalizing contingency plans for its
"mission-critical" systems and products which were not certified as Year 2000
compliant as of June 30, 1999. The Company plans to finalize contingency plans
for non-"mission-critical" systems and products by December 31, 1999. It should
be noted that because most of the Company'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 the Company'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 Form 10-Q contain forward-looking
statements, including statements regarding the intent, belief or current
expectations of the Company and its management. These statements are not
guarantees of future performance and involve a number of risks and uncertainties
that are difficult to predict. Therefore, actual outcomes and results could
differ materially from those indicated by such forward-looking statements. The
Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
Among the important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements are (i) variations in
quarterly results, (ii) the assimilation of acquisitions, (iii) the management
of the Company's growth and expansion, (iv) dependence on key personnel, (v)
development by competitors of new or superior products or entry into the market
of new competitors, (vi) dependence on major customers, (vii) dependence on
intellectual property rights, (viii) integrity, availability and reliability of
the Company's data, (ix) volatility of the Company's stock price, (x) changes in
the health care industry from both a regulatory and financial perspective, (xi)
implementation of required changes to computer systems and software for the year
2000, and (xii) other risks identified from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
Page 12
<PAGE>
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 5, 1999 at
the corporate headquarters of the Company. The stockholders elected all of the
Company's nominees for director and approved the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for 1999. The votes were as
follows:
1. ELECTION OF DIRECTORS
NOMINEE FOR WITHHELD
Richard A. Berman 9,076,698 152,037
Phillip B. Lassiter 9,076,548 149,187
2. APPOINTMENT OF KPMG PEAT MARWICK LLP
FOR AGAINST ABSTAIN
9,127,669 70,963 30,103
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(B) REPORTS ON FORM 8-K
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.
Page 13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCIA Inc.
(Registrant)
Date: August 13, 1999
By: Barry C. Offutt
----------------------------
Barry C. Offutt
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Page 14
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