SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to _______
Commission file number 0-25378
HCIA Inc.
(Exact name of registrant as specified in its charter)
Maryland 52-1407998
(State or other jurisdiction of
incorporation or organization) (I.R.S. employer identification no.)
300 East Lombard Street, Baltimore, MD 21202
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 895-7470
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock, $.01 par value, held by
non-affiliates of the registrant based on the closing sales price of the Common
Stock as quoted on the National Association of Securities Dealers, Inc. National
Market System as of February 28, 1997 was $396,075,220.
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of February 28, 1997 was 11,833,656.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III.
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PART I
Item 1. Business.
Background
HCIA Inc. ("HCIA" or the "Company") was incorporated in
Maryland in 1985. In 1988, all of the then outstanding capital stock of the
Company was acquired by Citicorp Financial Guaranty Holdings, Inc. which
subsequently transferred the stock to AMBAC Inc. ("AMBAC"). AMBAC is a publicly
held holding company that through its affiliates provides financial guarantee
insurance and financial services to both public and private clients. From 1988
until HCIA's initial public offering, AMBAC provided additional capital and
financing for the growth of the Company. In March 1992, HCIA acquired
substantially all of the assets of the Information Strategies division of
McGraw-Hill, Inc. and certain assets of the commercial products division of the
SysteMetrics subsidiary of McGraw-Hill, Inc. (collectively, "MHI"). The business
of MHI acquired by the Company had revenue for the fiscal year ended December
31, 1991 of approximately $4.8 million. In April 1992, the Company acquired all
of the outstanding capital stock of Healthcare Knowledge Resources, Inc.
("HKR"), a health care information company with revenue for the fiscal year
ended June 30, 1991 of approximately $12.2 million. The acquisition of HKR
provided the Company with a perpetual and exclusive license (subject to certain
conditions) to the International Classification of Clinical Services System (the
"ICCS System"), a proprietary classification system for tracking and measuring
the use of medical resources, and the database developed by the Commission on
Professional and Hospital Activities ("CPHA"). See "-- Decision Support
Systems." During the first quarter of 1995, HCIA completed an initial public
offering of approximately 2.0 million newly issued shares of Common Stock.
Subsequent to the offering, in April 1995, the Company acquired all of the
outstanding capital stock of Datis Corporation, a health care information
company with revenue for the twelve months ended December 31, 1994 of
approximately $6.9 million. In August 1995, HCIA sold 1.5 million newly issued
shares and AMBAC sold approximately 1.1 million shares of Common Stock at $28.50
per share in a combined public offering.
In December 1995, the Company acquired the assets constituting
the CHAMP unit of William M. Mercer, Incorporated ("CHAMP"), which provides a
database service for the analysis of health care costs to employers, for $17.5
million in cash. In May 1996, the Company acquired Response Healthcare
Information Management, Inc. ("Response"), a patient-centered data collection
company, for approximately $6.3 million in cash. In August 1996, the Company
acquired LBA Health Care Management, Inc. ("LBA"), a health care information
company combining data collection, benchmarking and decision support tools with
a clinical implementation management team, for approximately $128.8 million,
$100.1 million of which was paid in cash and $28.7 million of which was paid by
the delivery of Common Stock. In December 1996, the Company acquired all of the
capital stock of HealthChex, Inc. ("HealthChex"), which provides physician
profiling and medical claims review systems to health care providers and payors,
for $11.5 million in cash. In addition to the acquisitions described above, the
Company has also acquired a number of smaller companies and business lines,
including several acquisitions in Europe. During 1996, the Company completed two
additional public offerings. In May 1996, AMBAC sold the remaining shares of
Common Stock it held, and the Company sold an additional 261,951 shares of
Common Stock, at a per share price of $51.00. In August 1996, the Company sold
approximately 2.0 million shares of Common Stock, at a per share price of
$54.125, to repay bank indebtedness incurred in connection with the acquisition
of LBA.
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General
HCIA is a leading health care information content company that
develops and markets integrated clinical information systems and products. The
Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. HCIA currently sells its
decision support systems to more than 470 customers, including hospitals,
integrated delivery systems, self-insured employers, pharmaceutical companies
and managed care organizations. The Company's syndicated products are sold to
over 7,000 customers. During 1996, revenue from the sale of decision support
systems represented 82% of revenue and syndicated products represented the
remaining 18% of revenue. As a result of its unique ability to integrate health
care data collected from numerous sources and across varied treatment settings,
the Company believes that it is well positioned to offer the information systems
and products necessary to continue to increase average revenue per customer
through the sale of more sophisticated and comprehensive decision support
systems.
By utilizing its core collection of proprietary data
standardization methodologies, value-added clinical measurement tools and
databases, including the ICCS System(TM), HCIA creates clinical information
systems and products from its many large and disparate data streams. The ICCS
System(TM) allows for the standardization and comparison of detailed clinical
data across a broad range of data sources. The Company's proprietary disease
management methodologies link the costs, quality, utilization and outcomes of
medical services delivered to patients in various clinical settings. These
methodologies and technical resources permit the Company to provide a level of
clinical information which is substantially more detailed and useful in
modifying clinical practice patterns than information derived from traditional
health care data sources.
Decision Support Systems
HCIA offers a range of decision support systems, which are
utilized by each of the three major health care market constituencies.
Providers, such as hospitals, physician groups and integrated delivery systems,
use the Company's decision support systems to measure and analyze the cost and
quality of medical interventions. The Company's entry-level systems provide
customers with competitor specific information such as market share by
specialty, local market utilization rates compared with regional and national
norms and customer specific analyses of product line and physician level
resource consumption. High-end decision support systems incorporate benchmarks
for specific medical resource consumption and are designed to help providers
understand the best practice for a medical intervention. Buyers, such as managed
care organizations, indemnity insurers and self-insured employers, utilize the
information and analyses on medical resource usage and outcomes derived from the
Company's decision support systems to select and monitor the performance of
network providers, channel specific types of patients towards the most
clinically effective providers, and negotiate fair prices and appropriate
utilization criteria, as well as to manage the overall health status of a
covered population. Suppliers, such as pharmaceutical, biotechnology and medical
supply and device companies, utilize the Company's decision support systems in
market analysis, product positioning and pharmacoeconomic analysis.
Pharmacoeconomic analysis provides suppliers with information needed to measure
the specific benefit/cost and outcome of an individual product against those of
competing products, alternative therapies or, in the case of a new drug or
product, the status quo therapy.
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The Company's entry-level systems are generally priced from
$25,000 annually, while high-end systems are generally priced from $250,000 to
more than $1.0 million annually. HCIA has also entered into a number of
strategic relationships with state hospital associations, business partners such
as HBO & Company ("HBOC") and Cerner Corporation ("Cerner"), and large users of
data such as Cigna Healthcare, Amgen Inc. and Columbia/HCA.
Most of HCIA's decision support systems are based on a
combination of the Company's Databridge(TM) collection of databases and data
handling technologies, Solesource(TM) desktop analytical software, and clinical
implementation management team.
Databridge(TM). Databridge(TM) is HCIA's collection of
proprietary databases and data-handling technologies. A typical decision support
system customer submits data in an electronic, computer-readable format. In
creating the interface for the customer's data stream, HCIA enables the transfer
of customer data and the subsequent application of the Company's proprietary
software algorithms and data-standardization technologies to the incoming data,
transforming the data into HCIA's proprietary standardized formats.
Databridge(TM) has several components, including:
Database. A large number of the Company's customers are also
its data suppliers. Most of the Company's decision support system contracts
provide that as the Company extracts data from the customer (as part of the
process of delivering a system to the customer), the data become part of the
Company's database. The Company supplements its database with data it purchases
or licenses from federal and state governments, trade groups and other industry
sources. The Company maintains more than a terabyte of live health care data,
including data from medical records, laboratory, pharmacy, imaging, outpatient
clinics, physician's offices, insurance claims, managed care encounters and
point-of-care member patient surveys. The Company's database resides in a
relational database structure that utilizes a network of large Sun Microsystems
servers. The Company believes that its current software and hardware platforms
are scaleable and provide it with a cost and flexibility advantage. The Company
has made a significant investment in an open-network architecture which links
its several geographical locations and provides customers with leased-line and
dial-up access. The Company supports most of the major relational database
platforms. The Company has personnel drawn from several key health care
disciplines (e.g., pharmacists, clinical nurses and medical technologists) who
are responsible for the auditing, editing and standardizing of its database, as
well as the upgrading and maintaining of its core methodologies. The Company
believes that its database provides more clinical detail and better outcomes
measurement capabilities than competitive systems. Furthermore, the detailed
medical content of the data and HCIA's experience in collecting and
standardizing this information provide additional competitive advantages. The
acquisitions of the CHAMP and Response databases have significantly expanded the
Company's outpatient and episode-of-care capabilities. As a result of
acquisitions and its internal growth, the Company believes that it has built one
of the largest and most sophisticated collections of integrated clinical,
financial and labor/productivity data in the health care industry.
ICCS System(TM). The Company holds a perpetual and exclusive
license to the ICCS System(TM), subject only to the Company's obligation to use
all commercially reasonable efforts to maintain and upgrade the system. The ICCS
System(TM) assigns a discrete and clinically detailed 12-digit code to every
product and service consumed in the treatment of patients. The Company believes
that the ICCS System(TM) is the health care industry's most widely implemented
uniform classification system for tracking and measuring the use of medical
resources (e.g., drugs, devices, laboratory tests, blood units, diagnostic
imaging and clinical services) across health care providers. The ICCS System(TM)
allows for the standardization and comparison of detailed clinical data,
regardless of the original source of the data (e.g., medical records, insurance
claims, laboratory or pharmacy systems). The ICCS System(TM) is used
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by the Company to create the most clinically detailed portion of its
database. The Company develops a set of proprietary software interfaces with
each customer who is a supplier of such data. The interfaces are built by a
series of proprietary "data-mapping" applications that incorporate the ICCS
System(TM) and a series of algorithms that allow the mapping applications
to "learn" each time a new clinical item is encountered. In doing so,
the applications are able to automatically standardize more data each time
a new interface is created. Set forth below is an illustration of the
application of the ICCS System(TM) to the delivery of a common anti-infective
drug.
ICCS Code ICCS Structure Example
4 Service Type Pharmacy
41 General Therapeutic Category Anti-infective
412 Specific Therapeutic Category Cephalosporin
412020 Generic Drug Type Cefazolin
412020.2 Route of Administration Parenteral
412020.232 Dosage Form IV Piggy Back
412020.23279 Dosage Strength 500
412020.232792 Dosage Unit Milligrams
SoleSource(TM). SoleSource(TM) is the Company's workstation
that provides customers with access to and analyses of information obtained with
a decision support system. SoleSource(TM) utilizes Microsoft Foundation Classes
Software and accesses a variety of database configurations, including Microsoft
SQL Server, Microsoft Access and Informix. As the Company has worked with a
variety of different health care organizations during the last several years
(e.g., hospitals, managed care organizations and pharmaceutical companies), it
has developed an extensive library of proprietary health care database
applications. In addition, as a result of its recent acquisitions, the Company
has expanded, and will continue to expand, the scope of its database
applications. Depending on the customer, the size of the database and the
sophistication of the decision support system, the Company licenses various
SoleSource(TM) applications to customers as part of a decision support system.
Clinical Improvement Methodology and Management. In addition
to providing databases and application software, the Company, utilizing
proprietary methodologies, assists customers with the implementation of clinical
solutions. The Company's knowledge-based clinical improvement methodologies
allow HCIA to leverage its ICCS-level information and enable clients to realize
improved clinical outcomes and lower costs through the modification of medical
and behavioral practice patterns. The Company's methodologies link the costs,
quality, utilization and outcomes of medical services delivered to patients in
various clinical settings and focus on episodes of illness that offer the
greatest opportunity for improving outcomes and reducing costs. The Company
utilizes database analyses, clinical improvement methodologies and an
implementation management team to assist customers in reducing clinical resource
consumption and improving outcomes in major specialties, including:
o invasive cardiovascular o vascular
o orthopaedics o neurosciences
o oncology o pulmonary
o medical cardiology o women's services
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Syndicated Products
Syndicated products include publications and standardized
databases which are generally priced between $100 to $2,000, with certain
products priced up to $25,000. The products are developed from specific portions
of the Company's database, and feature particular industry niches. Most
syndicated products are sold as annually renewable subscriptions or as
multi-year contracts. Syndicated products range from database directories (e.g.,
health care industry professionals, nursing homes and managed care
organizations) to more complex analyses (e.g., cost and outcome summaries for
each U.S. hospital). HCIA also markets to managed care clients a number of more
sophisticated syndicated products containing national and regional normative
data on length of stay, costs and medical necessity. The Company markets these
products directly to managed care organizations, and through alliances with
information systems vendors, third-party administrators and other entities that
process data streams for managed care organizations and payors. These syndicated
products generally are used for utilization management, claims adjudication and
actuarial forecasting and generally result in annual revenue of $100,000 or more
per customer.
Customers
The Company's customers include numerous health care industry
participants located throughout the United States, United Kingdom and Spain,
including major provider and provider groups, managed care organizations, and
pharmaceutical, biotechnology and medical device companies. As of December 31,
1996, the Company had more than 470 decision support system customers and more
than 7,000 syndicated product customers. In 1995 and 1996, no single customer
accounted for 10% or more of the Company's revenue. HCIA's ten largest customers
accounted for approximately 36% and 28% of its revenue during 1995 and 1996,
respectively.
Sales and Marketing
HCIA markets its information systems and products through a
variety of means that are designed to enhance its name recognition and
facilitate the marketing of additional systems and products to its customer
base. The Company's marketing personnel are organized into market focused units.
The Company utilizes a direct sales approach with the existing customer base to
market its decision support systems and seeks to present proposals to both
existing and potential clients in face-to-face meetings at the executive level.
The Company's field sales force is highly specialized and frequently draws on
the Company's clinical implementation management team. In addition, HCIA has
entered into agreements with companies such as HBOC, Cerner and Transition
Systems, whereby the Company's systems are marketed through their respective
sales forces. The Company also approaches each of the major market
constituencies through the sale of lower-priced syndicated products. Many of
these products, such as the 100 Top Hospitals study, are specifically designed
to increase the visibility of the Company as an industry-leading source of
health care information. The Company uses both telemarketing and direct-mail
efforts in the sales of its syndicated products. HCIA continually seeks
opportunities to create name recognition as a leading provider of health care
information. As part of this strategy, the Company is widely quoted in the
media, including publications such as The Wall Street Journal and Modern
Healthcare, and its senior officers are frequently asked to speak at industry
conferences and serve on the editorial boards of industry newsletters and
publications.
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Competition
The market for health care information products and services
is intensely competitive. The Company believes that the principal competitive
factors in the health care information market are the breadth and quality of
system and product offerings, access to proprietary data, proprietary
methodologies and technical resources, price and the effectiveness of marketing
and sales efforts. In addition, the Company believes that the speed with which
information companies can anticipate and respond to the evolving health care
industry structure and identify information needs is an important competitive
factor. The Company believes that it competes favorably with respect to each of
these factors. Competitors vary in size and in the scope and breadth of products
and services offered, and the Company competes for the sale of systems and
products and the resulting access to data with different companies in each of
its target markets. Many of the Company's competitors have significantly greater
financial, technical, product development, marketing and other resources than
the Company. Furthermore, other major information companies not presently
offering clinical health care information services may enter the markets in
which the Company competes. The Company's potential competitors include
specialty health care information companies, health care information system and
software vendors and large data processing and information companies. Many of
these competitors have substantial installed customer bases in the health care
industry and the ability to fund significant product development and acquisition
efforts.
Intellectual Property
HCIA considers its methodologies, computer software and
databases to be proprietary. The Company seeks to protect its proprietary
information through confidentiality agreements with its employees. The Company's
policy is to have employees enter into confidentiality agreements containing
provisions prohibiting the disclosure of confidential information to anyone
outside the Company, requiring employees to acknowledge, and, if requested,
assist in confirming the Company's ownership of any new ideas, developments,
discoveries or inventions conceived during employment, and requiring assignment
to the Company of proprietary rights to such matters that are related to the
Company's business. The Company also relies on a combination of trade secret,
copyright and trademark laws, contractual provisions in agreements with
customers and technical measures to protect its rights in various methodologies,
systems and products and databases. The Company has only filed one patent
application, and no copyright registration applications, covering its software
technology. Due to the nature of its software applications, the Company believes
that patent, trade secret and copyright protection are generally less
significant than the Company's ability to further develop, enhance and modify
its current systems and products.
Government Regulation
The FDA has promulgated a draft policy for the regulation of
certain computer products as medical devices. Although it is not possible to
anticipate the final form of the FDA's policy with regard to computer software,
the Company expects that, whether or not the draft policy is finalized, the FDA
is likely to become increasingly active in regulating computer software that is
intended for use in health care settings. The Company's products and product
development activities, therefore, could become subject to extensive regulation
by the FDA. The FDA regulates the introduction of new medical devices as well as
activities such as manufacturing, labeling and recordkeeping for such products.
To the extent that computer software is a medical device under FDA regulations
or policy, the Company would be required, depending on the product, to comply
with regulations, to (i) register and list the product with
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the FDA, (ii) notify the FDA and demonstrate substantial equivalence to other
products on the market before marketing such products or (iii) obtain FDA
approval by demonstrating safety and effectiveness before marketing a product.
In addition, such products would be subject to the FDA's general controls,
including those relating to good manufacturing practices and adverse experience
reporting.
The process of obtaining clearance from the FDA can be costly and time
consuming, and there can be no assurance that, if required, such clearance would
be granted for the Company's existing and future systems and products on a
timely basis, if at all, or that FDA review will not include delays that would
adversely affect the Company's ability to market new systems and products or to
expand permitted uses of existing systems and products. The FDA could also limit
or prevent the manufacture or distribution of the Company's systems and products
and has the power to require the recall of such systems and products. FDA
regulations depend heavily on administrative and scientific interpretation, and
there can be no assurance that future interpretations made by the FDA or other
regulatory bodies, with possible prospective and retroactive effects, will not
adversely affect the Company.
The confidentiality of patient records and the circumstances under
which records may be released for inclusion in the Company's databases is
subject to substantial regulation by state governments. These state laws and
regulations govern both the disclosure and use of confidential patient medical
record information. Although compliance with these laws and regulations is
principally the responsibility of the hospital, physician or other health care
provider supplying the data to the Company, the Company's databases have been
designed to enable health care providers to comply with the confidentiality
requirements of state law. The Company believes that its procedures comply with
the laws and regulations regarding the collection of patient data in
substantially all jurisdictions. However, additional legislation governing the
dissemination of medical record information has been proposed at both the state
and federal level. This legislation may require holders of such information to
implement security procedures that may result in substantial costs to the
Company. There can be no assurance that changes to state or federal laws will
not materially restrict the ability of health care providers to submit
information from patient records to the Company.
Employees
As of December 31, 1996, the Company had 820 employees, including 100
in sales and marketing, 408 in health care data, 178 in technology and 134 in
finance and administration. None of the Company's employees are represented by a
union or other collective bargaining group. The Company believes its
relationships with its employees to be satisfactory.
Risk Factors; Forward-Looking Statements
CERTAIN STATEMENTS CONTAINED HEREIN REGARDING MATTERS THAT ARE NOT HISTORICAL
FACTS ARE FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND BECAUSE SUCH STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW.
Acquisitions. The Company has, in large part, expanded its
systems and products through the acquisition of health care information
companies, product lines and data resources. The Company intends to continue the
acquisition of methodological, analytical and technical resources that will
further enhance and expand the Company's systems and products.
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Acquisitions involve numerous risks, including difficulties in
the assimilation of operations and products, the ability to manage
geographically remote units, the diversion of management's attention from other
business concerns, the risks of entering markets in which the Company has
limited or no direct expertise and the potential loss of key employees of the
acquired companies. In addition, acquisitions may involve the expenditure of
significant funds and the incurrence of significant charges associated with the
amortization of goodwill or other intangible assets, write-offs of acquired
in-process research and development costs and/or future write-downs of the
recorded values of assets acquired. There can be no assurance that any
acquisition will result in long-term benefits to the Company or that management
will be able to manage effectively the resulting business.
Management of Growth. The Company is currently experiencing a
period of rapid growth and expansion which could place a significant strain on
the Company's personnel and resources. The Company's growth has resulted in an
increase in the level of responsibility for both existing and new management
personnel. Many of the Company's management personnel have had limited or no
experience in managing companies as large as the Company. The Company has sought
to manage its current and anticipated growth through the recruitment of
additional management and technical personnel and the implementation of internal
systems and controls. However, the failure to manage growth effectively could
materially and adversely affect the Company's operating results.
Dependence on Key Personnel. The Company depends to a
significant extent on key management, technical and marketing personnel. The
Company's growth and future success will depend in large part on its ability to
attract, motivate and retain highly qualified personnel, including management
personnel of acquired companies. Except for an agreement with George D. Pillari,
its Chairman of the Board, President and Chief Executive Officer, the Company
does not have employment agreements with any of its executive officers. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company.
Variations in Quarterly Results. The Company has experienced
and expects to continue to experience variations in quarterly results. Recent
quarterly variations are primarily due to the effect of one-time charges related
to acquired in-process research and development costs and the timing of contract
executions. Quarterly results are also influenced by the timing of release of
certain systems and products as a result of the annual release of certain
external data sources. The Company's operating results for any particular
quarterly or annual period may not be indicative of results for future periods.
Dependence on Intellectual Property Rights. The Company has
made significant investments in the development and maintenance of its core
collection of proprietary data standardization methodologies, value-added
clinical measurement tools and technical resources that are used to transform
its many large and disparate data streams into clinically relevant information
products. The Company relies largely on its license agreements with customers
and its own security systems, confidentiality procedures and employee
nondisclosure agreements to maintain the trade secrecy of its proprietary
information. There can be no assurance that the legal protections and
precautions taken by the Company will be adequate to prevent misappropriation of
the Company's proprietary information. In addition, these protections do not
prevent independent third-party development of functionally equivalent or
superior systems, products or methodologies.
Competition. The health care information market is intensely
competitive and rapidly changing. The Company competes for the sale of systems
and products and the resulting access to data with different companies in each
of its target markets. Competitors vary in size and in the scope and breadth of
the products and services offered. Many of the Company's competitors have
significantly
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greater financial, technical, product development and marketing resources than
the Company. There can be no assurance that future competition, or any
significant loss of access to data resulting therefrom, will not have a
material adverse effect on the Company.
Major Customers. During 1995 and 1996, the Company's ten
largest customers accounted for approximately 36% and 28%, respectively, of the
Company's revenue. Many of the Company's contractual arrangements with its
customers are subject to annual renewal. The loss of one or more of the
Company's largest customers could have a material adverse effect on the Company.
Integrity and Reliability of Data. The Company's success
depends significantly on the integrity of its data. Although the Company tests
data for completeness and consistency, it does not conduct independent audits of
the information provided by its customers. Moreover, while the Company believes
that the benchmarking and other clinical, cost and performance information
contained in its database is representative of the operational aspects of
various types of health care industry participants, there can be no assurance
that such information is appropriate for comparative analysis in all cases or
that the databases accurately reflect general or specific trends in the health
care market. If the information contained in the data were found, or were
perceived, to be inaccurate, or if such information were generally perceived to
be unreliable, the Company's business and operating results could be materially
and adversely affected.
Potential Cost of Performance Guarantees. As part of certain
of its decision support systems, the Company guarantees that a customer will
achieve or identify a certain level of cost savings at least equal to the fees
the customer pays for the system. To the extent such cost savings are not
achieved, the Company may be subject to claims related to such guarantees.
Although the Company has never incurred a claim under these guarantees, there
can be no assurance that this will continue to be the case. Liabilities related
to such claims could have a material adverse effect on the Company's business
and operating results.
Volatility of Stock Price. The stock market historically has
experienced volatility which has affected the market price of securities of many
companies and which has sometimes been unrelated to the operating performance of
such companies. The trading price of the Common Stock may be subject to
significant fluctuations in response to general market conditions and to factors
specific to the Company, such as variations in quarterly results of operations,
announcements of acquisitions, new systems or products by the Company or its
competitors, governmental regulatory action, other developments or disputes with
respect to proprietary rights, general trends in the industry and overall market
conditions, and other factors.
Changes in the Health Care Industry. The health care industry
is subject to changing political, economic and regulatory influences that may
affect the procurement practices and operation of health care industry
participants generally. During the past several years, the U.S. health care
industry has been subject to an increase in governmental regulation of, among
other things, reimbursement rates and certain capital expenditures. Various
programs have been proposed to reform the U.S. health care system. Many of these
programs contain proposals to increase governmental involvement in health care,
lower reimbursement rates and otherwise change the operating environment for the
Company's customers. Health care industry participants may react to these
proposals and the uncertainty surrounding such proposals by curtailing or
deferring investments, including those for the Company's systems and products.
The Company cannot predict what impact, if any, such factors might have on its
business, financial condition and results of operations. In addition, many
health care providers are consolidating to create larger health care delivery
enterprises with greater regional market power. As a
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result, the remaining enterprises could have greater bargaining power, which
may lead to price erosion of the Company's systems and products.
Government Regulation. The U.S. Food and Drug Administration
(the "FDA") has promulgated a draft policy addressing the regulation of certain
computer products as medical devices under the Federal Food, Drug, and Cosmetic
Act. The FDA could determine in the future that certain applications of the
Company's systems and products are clinical decision tools subject to FDA
regulation as medical devices. In addition, the Company could become subject to
future regulation of the manufacture and marketing of medical devices and health
care software systems, or to legislation or regulation regarding the use of
patient records or of access to health care data. Compliance with such
legislation and regulation could be burdensome, time consuming and expensive.
The Company cannot predict the effect of possible future legislation and
regulation.
WHEN USED IN THIS FORM 10-K, IN ANY FUTURE FILINGS BY HCIA WITH THE SECURITIES
AND EXCHANGE COMMISSION, IN THE COMPANY'S PRESS RELEASES AND IN ORAL STATEMENTS
MADE WITH THE APPROVAL OF AN AUTHORIZED EXECUTIVE OFFICER, THE WORDS OR PHRASES
"WILL LIKELY RESULT," "ARE EXPECTED TO," "WILL CONTINUE," "IS ANTICIPATED,"
"ESTIMATE," "PROJECTED" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT. SUCH
STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL EARNINGS AND THOSE PRESENTLY
ANTICIPATED OR PROJECTED. HCIA WISHES TO CAUTION READERS NOT TO PLACE UNDUE
RELIANCE ON ANY SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE
MADE. HCIA UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Item 2. Properties.
The Company's executive offices are located in Baltimore,
Maryland, in approximately 65,000 square feet of leased office space, under a
lease that expires on December 31, 2002, and which includes an option for an
additional term of up to five years. The Company also leases approximately
46,500 square feet of office space in Ann Arbor, Michigan, under leases that
expire on March 31, 2000, and 42,000 square feet of office space in Denver,
Colorado, under a lease that expires on August 31, 2001. The Company also
maintains offices in Fairport, New York, Waltham, Massachusetts, Louisville,
Kentucky, Concord, California, Olympia, Washington, East Greenwich, Rhode
Island, Windsor, Connecticut, Deerfield, Illinois, Alcester, England and
Barcelona, Spain. The Company believes that its facilities are adequate for its
current operations.
Item 3. Legal Proceedings.
The Company is a defendant from time to time in lawsuits
incidental to its business. The Company is not currently a party to, and none of
its properties is subject to, any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-12-
Item 4A. Executive Officers of the Company.
Executive officers are elected annually by the Board of
Directors and serve at the discretion of the Board of Directors. Information
regarding the executive officers of the Company who are not directors is as
follows:
Name Age Position
---- --- --------
Sachi J. Morishige 30 Senior Vice President-Corporate Development
Barry C. Offutt 35 Senior Vice President and Chief Financial
Officer
Jean Chenoweth 50 Senior Vice President-Industry Relations
Charles A. Berardesco 38 Senior Vice President, General Counsel and
Secretary
Donald S. Good, Jr. 34 Senior Vice President-Commercial Markets
EJay Lockwood 34 Senior Vice President-Managed Care Markets
Kevin J. Hicks 37 Senior Vice President-Provider Markets
Ms. Morishige has been employed by the Company in various
capacities since its founding in 1985, and currently serves as Senior Vice
President-Corporate Development.
Mr. Offutt served as a Vice President from April 1992 until
September 1995, when he was appointed a Senior Vice President, and has served as
Chief Financial Officer since October 1992. He is a certified public accountant
and was employed by Arthur Andersen & Co. in various capacities from 1984 to
March 1992.
Ms. Chenoweth served as Vice President - Industry Relations
from April 1992 until her appointment as Senior Vice President in September
1995. She served in various senior management positions, including President,
with HKR and its predecessor from 1989 through April 1992.
Mr. Berardesco served as Vice President, General Counsel and
Secretary from May 1996 until September 1996, when he was appointed a Senior
Vice President. Prior to May 1996, he was a partner with the law firm of
Whiteford, Taylor & Preston L.L.P., counsel to the Company.
Mr. Good served as a Vice President from May 1996 until
September 1996, when he was appointed Senior Vice President-Commercial Markets.
Prior to May 1996, he was a healthcare consultant with Arthur Andersen & Co.
Mr. Lockwood has been employed by the Company since January
1996, having served as Vice President-Commercial Markets until his appointment
as a Senior Vice President in February 1996. Prior to January 1996, he was
employed by CIGNA Healthcare in various capacities.
-13-
Mr. Hicks has served as Senior Vice President-Provider
Markets, since joining the Company in August 1996. Prior to that time, he served
in various senior management positions, including chief executive officer, with
LBA.
-14-
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
The Company's Common Stock has been publicly traded on the
NASDAQ National Market System since February 22, 1995 under the symbol "HCIA."
The following table sets forth, for the quarterly period indicated, the high and
low closing sale price per share of Common Stock as reported by NASDAQ:
1995 1996
High Low High Low
------------------- ----------------------
First Quarter $25 $17-5/8 $55-3/4 $41-7/8
Second Quarter 31-5/8 21 67-7/8 45-5/8
Third Quarter 31-1/4 24-1/2 67-3/8 50-1/16
Fourth Quarter 46-3/4 22-3/4 36-1/8 23-1/4
As of February 28, 1997, there were 72 holders of record of
the Company's Common Stock. The number of record holders is not representative
of the number of beneficial holders since many shares are held by depositories,
brokers or other nominees.
Dividends
The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends on the Common Stock for
the foreseeable future. The Company currently intends to retain future earnings,
if any, to fund the development and growth of its business.
Sales of Unregistered Securities
In connection with the acquisition of LBA, the Company issued
a total of 492,961 shares of Common Stock to the then stockholders of LBA's
parent company. The foregoing issuances were exempt from registration pursuant
to Section 4(2) of the Securities Act as they did not involve a public offering.
In issuing the shares, the Company relied upon the status of the stockholders
(or their representatives) as officers or directors of LBA and that each had
such knowledge and experience in financial and business matters that such
stockholder was capable of evaluating the merits and risks of an investment in
the Company's Common Stock.
Item 6. Selected Financial Data.
Year Ended December 31,
1992 1993 1994 1995(1) 1996(1)
------- ------- ------- -------- --------
(in thousands, except per share data)
STATEMENTS OF OPERATIONS DATA:
Revenue $19,470 $28,111 $30,711 $ 48,015 $ 73,520
Salaries, wages and benefits 9,431 14,168 15,457 21,932 32,688
Other operating expenses 7,499 8,611 8,625 12,055 17,058
Depreciation and amortization 3,204 4,595 4,826 6,864 12,670
Write-off of acquired in-process research and development costs -- -- -- 12,152 48,065
------- ------- ------- -------- --------
Operating income (loss) (664) 737 1,803 (4,988) (36,961)
Interest income -- -- 111 1,290 1,110
Interest expense 625 111 131 187 530
------- ------- ------- -------- --------
Income (loss) before income taxes, minority interest in
loss (income) of consolidated subsidiaries and cumulative
effect of change in accounting for income taxes (1,289) 626 1,783 (3,885) (36,381)
Provision (benefit) for income taxes (330) 362 759 (1,554) 5,886
Minority interest in loss (income) of consolidated subsidiaries (45) 90 (3) (74) --
------- ------- ------- -------- --------
Income (loss) before cumulative effect of change in
accounting for income taxes (1,004) 354 1,021 (2,405) (42,267)
Cumulative effect of change in accounting for income taxes -- (142) -- -- --
------- ------- ------- -------- --------
Net income (loss) $(1,004) $ 212 $ 1,021 $ (2,405) (42,267)
======= ======= ======= ======== ========
Net income (loss) per share $ 0.19 $ (0.31) $ (4.19)
Shares used in per share calculation 5,518 7,733 10,096
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Working capital $ 454 $ 3,852 $ 5,620 $ 35,671 $ 36,996
Total assets 37,643 41,122 40,865 108,401 223,196
Long-term liabilities, excluding current installments 1,298 2,136 1,835 699 2,305
Stockholders' equity 28,907 32,762 34,371 98,044 202,407
(1) In connection with various acquisitions, the Company has recorded charges
related to acquired in-process research and development costs. Exclusive of such
charges and related income tax effects, net income per share would have been
$0.60 and $0.68 for 1995 and 1996, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
OVERVIEW
HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations. In 1991, HCIA began a series of
acquisitions of health care information companies, product lines and data
resources. In connection with certain of these acquisitions, the Company has
recorded one-time charges related to acquired in-process research and
development costs. Such charges totaled approximately $12.2 million and $48.1
million during 1995 and 1996, respectively. As a result of these charges, the
Company recorded net losses for each of these years. The Company has accounted
for all of its acquisitions using the purchase method of accounting and,
accordingly, has included the results of the acquired entities since the date of
acquisition. See Note 1 of the Notes to Consolidated Financial Statements.
The Company has made a substantial investment in the acquisition and development
of its core collection of methodologies, clinical measurement tools and
technical resources. The Company's strategy is to leverage these resources
across substantially all of its systems and products, thereby giving it the
ability to increase revenue generated from these resources without a
commensurate increase in expenses. In addition to its internal product
development efforts, the Company seeks to continue the acquisition of other
health care information companies, product lines and data resources, and intends
to integrate and leverage these assets into product-line extensions across its
markets. The Company does not track profitability by product line since many of
the Company's resources are utilized throughout its systems and products.
The Company's internal product development efforts are generally in connection
with customer contracts, and the related costs are included as a component of
operating expenses in the year incurred. The Company capitalizes costs related
to internal product development which is not in connection with a specific
customer contract from the point of technological feasibility to the point of
general availability.
As a result of its acquisitions of health care information companies, product
lines and data resources, the Company has acquired intangible assets, the cost
of which it amortizes over various useful lives. In addition, the Company has
capitalized internal development costs and acquired assets relating to the
development of methodologies, clinical measurement tools and technical
resources, including its database, of $3.4 million, $6.9 million and $14.4
million during 1994, 1995 and 1996, respectively. Consequently, the Company has
recorded amortization expense of $3.9 million, $5.2 million and $10.1 million
during 1994, 1995 and 1996, respectively. See Notes 1, 2, and 4 of the Notes to
Consolidated Financial Statements.
As a result of its unique ability to integrate health care data collected from
numerous sources and across varied treatment settings, the Company believes that
it is well positioned to offer the information systems and products necessary to
continue to increase average revenue per customer through the sale of more
sophisticated and comprehensive systems and products. With respect to
entry-level systems and products, pricing is relatively fixed and is influenced
by competitive systems and products. With respect to high-end systems and
products, pricing is often negotiated with the customer and is based on a number
of factors, including the value attributed by the customer to the system.
8
The Company's revenue is comprised of both recurring revenue from the Company's
installed customer base as well as from first-time sales. The Company seeks to
generate recurring revenue from decision support systems through multi-year
agreements (typically two to three years) and through renewals of its syndicated
products, which are updated annually. The Company defines its recurring revenue
percentage as revenue recognized during the period from a sale of a system or
product to a customer who purchased a similar system or product in the prior
period, divided by the Company's total revenue in the prior period. In
determining its recurring revenue percentage, the Company includes in its
revenue the revenue of entities acquired during the period as if such
acquisitions had occurred at the beginning of the prior period. The Company does
not classify revenue as recurring to the extent that it exceeds the revenue from
a similar system or product purchase in the prior period. The Company's
recurring revenue percentage was 69% and 66% in 1995 and 1996, respectively.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, certain items
from the statements of operations of the Company expressed as a percentage of
revenue:
YEAR ENDED DECEMBER 31,
1994 1995 1996
----- ------ ------
Revenue 100% 100% 100%
Salaries, wages and benefits 50 46 45
Other operating expenses 28 25 23
Depreciation and amortization 16 14 17
Write-off of acquired in-process research and development costs -- 25 65
Operating income (loss) 6 (10) (50)
Net interest income -- 2 1
Income (loss) before income taxes and minority interest in loss (income)
of consolidated subsidiaries 6 (8) (49)
Provision (benefit) for income taxes 3 (3) 8
Net income (loss) 3% (5)% (57)%
9
1996 Compared to 1995
Revenue
Revenue for 1996 was $73.5 million, an increase of $25.5 million or 53% over
1995. The increase was the result of increased sales of the Company's decision
support systems. Revenue from the sales of decision support systems
represented 82% of revenue for 1996 and syndicated products represented the
remaining 18% of revenue.
The decision support systems revenue increase was primarily the result of
increased sales to providers and managed care customers, particularly as a
result of acquisitions, as well as increased penetration of the supplier market.
Salaries, Wages and Benefits
Salaries, wages and benefits decreased to 45% of revenue for 1996 from 46% for
1995. This decrease was a result of the continued leveraging of the Company's
historical investments in technology and basic infrastructure as revenue
increased.
Other Operating Expenses
Other operating expenses, which include occupancy, travel and marketing
expenses, decreased to 23% of revenue for 1996 from 25% for 1995. This decrease
was a result of certain of these expenses growing at a slower rate than revenue.
Depreciation and Amortization
Depreciation and amortization increased to 17% of revenue for 1996 from 14% for
1995. This increase was a result of the additional amortization associated with
certain acquisitions and capitalized internal development costs as well as
depreciation of other acquired assets.
Write-Off of Acquired In-Process Research and Development Costs
In connection with four acquisitions completed during 1995 and 1996, the Company
acquired ongoing research and development activities. The Company recorded
one-time charges totaling $12.2 million and $48.1 million during 1995 and 1996,
respectively, resulting from the write-off of the acquired in-process research
and development costs. The amount of the one-time charges was equal to the
estimated current fair value, based on the discounted risk-adjusted cash flows,
of specifically identified technologies for which technological feasibility had
not yet been established pursuant to Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," ("SFAS No. 86") and for which future alternative uses did
not exist.
Interest Income and Expense
Net interest income was $580,000 for 1996 compared with net interest income of
$1.1 million for 1995. The decrease was the result of higher interest expense in
1996 related to debt incurred in connection with certain acquisitions.
Income Taxes
The Company's effective tax rate was 16% for 1996 compared with (39)% for 1995.
The change was primarily the result of non-deductible goodwill and the
non-deductible write-off of the in-process research and development costs
resulting from certain acquisitions during 1996.
10
1995 Compared to 1994
Revenue
Revenue for 1995 was $48.0 million, an increase of $17.3 million or 56% over
1994. The increase was primarily the result of a 77% increase in revenue from
the sale of decision support systems. Revenue from the sale of decision support
systems represented 80% of revenue for 1995 and Syndicated Products represented
the remaining 20% of revenue.
The decision support systems revenue increase was primarily the result of
increased sales of decision support systems to providers, particularly as a
result of acquisitions during the year, and to a lesser extent, due to increased
sales through CHKS Ltd., the Company's English subsidiary. Sales of the
Company's systems to the supplier market also increased. In particular, the
Company met several performance milestones pursuant to its contract with CIGNA
Healthcare during the year.
Salaries, Wages and Benefits
Salaries, wages and benefits decreased to 46% of revenue for 1995 from 50% for
1994. This decrease was a result of the leveraging of the Company's historical
investments in technology and basic infrastructure as revenue increased.
Other Operating Expenses
Other operating expenses, which include occupancy, travel and marketing
expenses, decreased to 25% of revenue for 1995 from 28% for 1994. This decrease
was a result of certain of these expenses growing at a slower rate than revenue.
Depreciation and Amortization
Depreciation and amortization decreased to 14% of revenue for 1995 from 16% of
revenue for 1994. The decrease was the result of the fixed nature of a large
component of the depreciation and amortization, which was the result of prior
acquisitions, being measured against a larger revenue base.
Write-Off of Acquired In-Process Research and Development Costs
In connection with an acquisition during 1995, the Company acquired ongoing
research and development activities. At the time of the acquisition, the Company
recorded a one-time $12.2 million charge resulting from the write-off of the
acquired in-process research and development costs. The amount of the one-time
charge was equal to the estimated current fair value, based on the risk-adjusted
cash flows, of specifically identified technologies for which technological
feasibility had not yet been established pursuant to SFAS No. 86 and for which
future alternative uses did not exist.
Interest Income and Expense
Net interest income was $1.1 million for 1995 compared with net interest expense
of $20,000 for 1994. The increase in net interest income was the result of a
portion of the proceeds of the Company's public offerings being utilized to
repay the amount due under the Company's credit agreement with the Company's
former majority stockholder, AMBAC Inc. (approximately $1.9 million), with the
balance being invested in cash equivalents and short-term investments.
Income Taxes
The Company's effective income tax rate was (39)% for 1995 compared with 43% for
1994. The change was a result of the Company recording a net loss in 1995.
11
LIQUIDITY AND CAPITAL RESOURCES
During 1995 and 1996, the Company completed several public offerings of its
Common Stock. The net proceeds to the Company from the offerings were
approximately $182.3 million.
In August 1996, the Company obtained from First Union National Bank of North
Carolina ("First Union") a credit facility totaling $100 million, consisting of
a $50 million term loan and a $50 million revolving line of credit. The Company
incurred a one-time facility fee of $520,000. The Company borrowed the entire
$50 million term loan and approximately $36 million of the revolving line of
credit in connection with the acquisition of LBA Healthcare Management, Inc.
("LBA") and repaid such borrowings with a portion of the net proceeds to the
Company from a public offering of the Company's common stock.
The Company currently maintains the $50 million (subject to certain borrowing
limitations) revolving line of credit for general corporate purposes, including
future acquisitions and working capital requirements. Borrowings are
collateralized by substantially all of the Company's assets. The Company is
required to pay a commitment fee on the average daily unused portion of the
facility at a rate ranging from 0.25% to 0.375% per annum, depending on the
Company's debt/cash flow ratio. Borrowings bear interest at varying rates based
on an index tied to First Union's prime rate or LIBOR (6.25% at December 31,
1996). The credit facility also contains financial covenants applicable to HCIA,
including a debt/cash flow ratio and ratios of debt to capital. As of December
31, 1996, the Company was in compliance with all such financial covenants and
had a maximum borrowing capacity of $50 million, and there were no borrowings
outstanding under the facility. The credit facility reduces to $37.5 million in
July 1999, $25 million in July 2000 and expires on July 31, 2001.
During 1994, 1995 and 1996, the Company generated net cash from operations of
approximately $4.4 million, $3.1 million and $11.4 million, respectively. During
1995 and 1996, approximately $7.1 million and $12.1 million of cash generated
from operations was used to fund the increase in accounts receivable. The
increases in accounts receivable were primarily the result of revenue growth, as
well as the timing of receipt of payments from certain major customers. Net cash
provided by financing activities during 1994, 1995 and 1996 was approximately
$568,000, $66.2 million and $143.6 million, respectively, primarily as a result
of the Company's public offerings of its common stock. The net cash provided by
operations and financing activities has been utilized primarily for acquisitions
and capital expenditures.
The Company made capital expenditures (including capitalized leases) totaling
$1.6 million, $3.1 million and $6.4 million during 1994, 1995 and 1996,
respectively. As of December 31, 1996, the Company had net working capital of
$37.0 million, including cash, cash equivalents and short-term investments in
the amount of $13.8 million, and did not have any material commitments for
capital expenditures.
12
In April 1995, the Company completed the acquisition of all of the outstanding
capital stock of Datis Corporation ("Datis"). The purchase price for the capital
stock of Datis was approximately $14.6 million in cash, which included
approximately $14.25 million funded by the Company and $386,000 funded with the
proceeds received from the exercise of certain options to purchase Datis stock.
In addition, the Company repaid approximately $900,000 of outstanding debt of
Datis. In December 1995, the Company acquired the CHAMP unit of William M.
Mercer, Incorporated ("CHAMP") for $17.5 million in cash and, in May 1996, the
Company completed the acquisition of Response Healthcare Information Management,
Inc. ("Response") for approximately $6.3 million in cash. In August 1996, the
Company acquired LBA for a total purchase price of approximately $128.8 million,
$100.1 million of which was paid in cash and $28.7 million of which was paid by
the delivery of HCIA common stock. The Company utilized $86 million in
borrowings under the First Union credit facility discussed above to fund the
cash portion of the purchase price, which was subsequently repaid from the
proceeds of a public offering of Common Stock. In December 1996, the Company
acquired HealthChex, Inc. ("HealthChex") from Equifax Inc. for $11.5 million in
cash. Each of these acquisitions has been accounted for using the purchase
method of accounting and, accordingly, the assets have been valued at their
estimated fair market value.
The Company expects to incur additional costs of $6 to $9 million to complete
the development efforts related to systems and products obtained in connection
with the acquisitions of CHAMP, Response, LBA and HealthChex, and to integrate
these products with the Company's other products. Such costs are expected to
consist of direct labor and contracted labor costs and are expected to be
incurred over the next two to three years.
13
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
HCIA INC.:
We have audited the accompanying consolidated balance sheets of HCIA Inc. and
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HCIA Inc. and
subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 23, 1997
14
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands, except per share data)
HCIA INC. AND SUBSIDIARIES
1994 1995 1996
------- ------- --------
Revenue $30,711 $48,015 $ 73,520
Salaries, wages and benefits 15,457 21,932 32,688
Other operating expenses 8,625 12,055 17,058
Depreciation 957 1,619 2,567
Amortization 3,869 5,245 10,103
Write-off of acquired in-process research and development costs -- 12,152 48,065
------- ------- --------
Operating income (loss) 1,803 (4,988) (36,961)
Interest income 111 1,290 1,110
Interest expense 131 187 530
------- ------- --------
Income (loss) before income taxes and minority interest in income of consolidated
subsidiaries 1,783 (3,885) (36,381)
Provision (benefit) for income taxes 759 (1,554) 5,886
Minority interest in income of consolidated subsidiaries (3) (74) --
------- ------- --------
Net income (loss) $ 1,021 $(2,405) $(42,267)
======= ======= ========
Net income (loss) per share $ 0.19 $ (0.31) $ (4.19)
======= ======= ========
Shares used in per share calculation 5,518 7,733 10,096
======= ======= ========
See accompanying notes to consolidated financial statements.
15
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
1995 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,190 $ 13,302
Short-term investments 23,280 510
Trade accounts receivable, net of allowance for doubtful accounts
of $454 in 1995 and $1,042 in 1996 16,623 32,122
Prepaid expenses and other current assets 2,236 3,886
Income tax receivable -- 339
Deferred compensation funds held in trust -- 5,321
-------- --------
Total current assets 45,329 55,480
Furniture and equipment, net 6,576 12,188
Computer software costs, net 11,012 20,425
Other intangible assets, net 42,338 115,601
Net deferred tax asset 3,090 17,074
Other 56 123
Deferred compensation funds held in trust -- 2,305
-------- --------
Total assets $108,401 $223,196
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 732 $ 1,315
Accrued salaries, benefits and other liabilities 4,222 7,957
Capital lease obligations 174 121
Notes payable 2,265 1,718
Income taxes payable 1,098 --
Deferred revenue 1,167 2,052
Acquired deferred compensation liability -- 5,321
-------- --------
Total current liabilities 9,658 18,484
Notes payable 699 --
Acquired deferred compensation liability -- 2,305
-------- --------
Total liabilities 10,357 20,789
-------- --------
Stockholders' equity:
Preferred stock--$0.01 par value; authorized 500,000 shares; no shares issued and outstanding -- --
Common stock--$0.01 par value; authorized 50,000,000 shares; issued and
outstanding 8,955,932 as of December 31, 1995 and 11,781,458 as of December 31, 1996 90 118
Additional paid-in capital 102,882 249,591
Accumulated deficit (4,953) (47,220)
Cumulative unrealized appreciation of short-term investments 44 4
Cumulative effect of currency translation adjustment (19) (86)
-------- --------
Total stockholders' equity 98,044 202,407
-------- --------
Total liabilities and stockholders' equity $108,401 $223,196
======== ========
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
Cumulative
Unrealized
Appreciation/
Preferred Preferred Preferred Total Additional (Depreciation)
Stock Stock Stock Preferred Common Paid-In Accumulated of Short-Term
Series A Series B Series C Stock Stock Capital Deficit Investments
--------- --------- --------- --------- ------ ---------- ----------- --------------
BALANCE AT
DECEMBER 31, 1993 $ 10,662 $ 5,500 $ 6,400 $ 22,562 $ 30 $ 11,319 $ (1,155) --
Capital contributions -- -- -- -- -- 605 -- --
Conversion of preferred stock (10,662) (5,500) (6,400) (22,562) 24 24,952 (2,414) --
Net income -- -- -- -- -- -- 1,021 --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1994 -- -- -- -- 54 36,876 (2,548) --
Sale of common stock
to the public -- -- -- -- 36 66,006 -- --
Net loss -- -- -- -- -- -- (2,405) --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
Unrealized appreciation of
short-term investments -- -- -- -- -- -- -- 44
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1995 -- -- -- -- $ 90 $102,882 $ (4,953) $ 44
Exercise of stock options -- -- -- -- -- 638 -- --
Sale of common stock to
the public -- -- -- -- 23 116,233 -- --
Tax benefits related to exercise
of stock options -- -- -- -- -- 1,128 -- --
Issuance of stock in connection
with an acquisition -- -- -- -- 5 28,710 -- --
Net loss -- -- -- -- -- -- (42,267) --
Effect of currency
translation adjustment -- -- -- -- -- -- -- --
Unrealized depreciation of
short-term investments -- -- -- -- -- -- -- (40)
-------- ------- ------- -------- ---- -------- -------- ----
BALANCE AT
DECEMBER 31, 1996 $ -- $ -- $ -- $ -- $118 $249,591 $(47,220) $ 4
======== ======= ======= ======== ==== ======== ======== ====
Cumulative
Effect of
Currency Total
Translation Stockholders'
Adjustment Equity
----------- -------------
BALANCE AT
DECEMBER 31, 1993 $ 6 $ 32,762
Capital contributions -- 605
Conversion of preferred stock -- --
Net income -- 1,021
Effect of currency
translation adjustment (17) (17)
---- --------
BALANCE AT
DECEMBER 31, 1994 (11) 34,371
Sale of common stock
to the public -- 66,042
Net loss -- (2,405)
Effect of currency
translation adjustment (8) (8)
Unrealized appreciation of
short-term investments -- 44
---- --------
BALANCE AT
DECEMBER 31, 1995 $(19) $ 98,044
Exercise of stock options -- 638
Sale of common stock to
the public -- 116,256
Tax benefits related to exercise
of stock options -- 1,128
Issuance of stock in connection
with an acquisition -- 28,715
Net loss -- (42,267)
Effect of currency
translation adjustment (67) (67)
Unrealized depreciation of
short-term investments -- (40)
---- --------
BALANCE AT
DECEMBER 31, 1996 $(86) $202,407
==== ========
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands)
HCIA INC. AND SUBSIDIARIES
1994 1995 1996
-------- --------- ----------
Cash flows from operating activities:
Net income (loss) $ 1,021 $ (2,405) $ (42,267)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,826 6,864 12,670
Write-off of acquired in-process research and development costs -- 12,152 48,065
Income tax benefit related to stock options -- -- 1,128
Deferred tax provision (338) (3,625) 5,606
Changes in operating assets and liabilities:
Accounts receivable (349) (7,078) (12,057)
Income taxes payable/receivable 1,097 973 (1,637)
Prepaid expenses (234) (1,505) (328)
Accounts payable (853) 215 (1,247)
Accrued salaries, benefits and other liabilities (771) (816) 812
Deferred revenue 40 (1,714) 674
Minority interest 3 75 --
------- -------- ---------
Net cash provided by operating activities 4,442 3,136 11,419
------- -------- ---------
Cash flows from investing activities:
Purchases of furniture and equipment (1,568) (3,145) (6,357)
Cost of acquisitions, net of cash acquired -- (35,271) (146,765)
Computer software costs purchased or capitalized (2,603) (6,151) (12,671)
Other intangible assets purchased or capitalized (779) (716) (1,742)
Purchases of short-term investments -- (69,312) (59,640)
Proceeds from disposals of short-term investments -- 46,077 82,370
Payments on note receivable 108 1,551 --
Other (40) 104 (67)
------- -------- ---------
Net cash used in investing activities (4,882) (66,863) (144,872)
------- -------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options -- -- 638
Proceeds from public offerings -- 66,042 116,256
Proceeds from issuance of preferred stock 605 -- --
Issuance of stock in connection with an acquisition -- -- 28,715
Acquisition related borrowings -- -- 86,000
Repayment of acquisition related borrowings -- -- (86,000)
Fees paid to establish credit facilities -- -- (520)
Borrowing from related party 1,400 2,915 --
Repayments of notes payable -- (513) (1,246)
Repayments of related party borrowings (1,250) (1,900) --
Principal payments on capital leases (187) (315) (211)
------- -------- ---------
Net cash provided by financing activities 568 66,229 143,632
------- -------- ---------
Impact of currency fluctuations on cash and cash equivalents (17) (8) (67)
------- -------- ---------
Increase in cash and cash equivalents 111 2,494 10,112
Cash and cash equivalents -- beginning of year 585 696 3,190
Cash and cash equivalents -- end of year $ 696 $ 3,190 $ 13,302
======= ======== =========
Supplemental cash flow information
-- cash paid during the year for interest $ 137 $ 89 $ 461
======= ======== =========
-- cash paid during the year for income taxes $ -- $ 1,088 $ 790
======= ======== =========
See accompanying notes to consolidated financial statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
HCIA INC. AND SUBSIDIARIES
(1) BACKGROUND
(a) Description of Business
HCIA Inc. ("HCIA" or the "Company") is a health care information content company
that develops and markets integrated clinical information systems and products.
The Company's systems and products range from standardized databases to highly
focused decision support systems that assist its customers in evaluating the
efficacy and economics of health care delivery. The Company's customers include
hospitals, integrated delivery systems, self-insured employers, pharmaceutical
companies and managed care organizations.
(b) Public Offerings
During February 1995, the Company completed an initial public offering of
approximately 2.0 million shares of common stock at $14.00 per share.
In August 1995, the Company completed a public offering of approximately 2.6
million shares at $28.50 per share, consisting of 1.5 million shares issued by
the Company and approximately 1.1 million shares sold by the Company's then
largest stockholder, AMBAC Inc. ("AMBAC").
In May 1996, approximately 4.2 million shares of the Company's common stock were
sold by AMBAC in a public offering. In connection with the offering the Company
sold 261,951 shares of common stock at $51.00 per share.
In August 1996, approximately 2.2 million shares of the Company's common stock
were sold at $54.125 per share in a public offering. Of these shares, 216,696
were sold by certain stockholders. The Company did not receive any of the
proceeds from the sale of shares by the selling stockholders.
Net proceeds to the Company from the offerings discussed above were
approximately $182.3 million.
(c) Acquisitions
Certain information regarding the Company's major acquisitions in the periods
covered by these financial statements is summarized below:
Datis CHAMP Response LBA
---------------------- --------------------- --------------------- -----------------------
Life of Life of Life of Life of
Asset Asset Asset Asset
------- ------- ------- -------
Purchase Price $14,250,000 $17,500,000 $6,261,000 $128,829,000
Assets Acquired
Current Assets $ 1,338,000 $ 175,000 $1,274,000 $ 4,681,000
Furniture & Equipment $ 1,092,000 3-5 years -- $ 293,000 3-5 years $ 1,533,000 3-5 years
Other Assets $25,000 -- -- --
Deferred tax asset -- -- $ 221,000 $ 18,534,000
Software $ 233,000 5 years $ 859,000 5 years $ 255,000 5 years --
Trade Name -- $ 1,266,000 12 years -- --
Customer base -- $ 595,000 12 years $ 393,000 12 years $ 5,135,000 10 years
Methodologies -- -- -- $ 12,843,000 6 years
Assembled Workforce -- $ 1,102,000 12 years $ 133,000 12 years $ 4,080,000 10 years
Goodwill $16,503,000 20 years $ 1,351,000 12 years $ 304,000 15 years $ 43,859,000 20 years
In-process research
& development -- $12,152,000 $ 4,309,000 $ 41,507,000
Liabilities assumed $ 4,941,000 -- $ 921,000 $ 3,343,000
HealthChex
----------------------
Life of
Asset
-------
Purchase Price $11,503,000
Assets Acquired
Current Assets $ 508,000
Furniture & Equipment $ 590,000 3-5 years
Other Assets --
Deferred tax asset $ 835,000
Software --
Trade Name --
Customer base $ 599,000 10 years
Methodologies $ 1,628,000 5 years
Assembled Workforce $ 715,000 10 years
Goodwill $ 5,107,000 20 years
In-process research
& development $ 2,249,000
Liabilities assumed $ 728,000
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HCIA INC. AND SUBSIDIARIES
On April 28, 1995, the Company acquired all of the capital stock of Datis
Corporation ("Datis") for $14,250,000 in cash. Datis provided databases and
related analyses to hospitals and hospital systems. The goodwill amortization
period is based on the nature of Datis' products and markets and the historical
rates of change in the products and markets.
On December 15, 1995, the Company acquired the assets constituting the CHAMP
unit of William M. Mercer, Incorporated ("CHAMP") for $17,500,000 in cash. CHAMP
provides database and analytical reporting services to large employers to assist
them in the management of their healthcare costs.
On May 15, 1996, the Company acquired all of the outstanding stock of Response
Healthcare Information Management, Inc. ("Response") for $6,261,000 in cash.
Response develops and markets information products which capture and analyze
point-of-care, patient-centered data relating to disease-specific outcomes
measurement and member/patient satisfaction.
On August 9, 1996, the Company acquired all of the capital stock of LBA
Holdings, Inc. (formerly HealthVision, Inc.) and its operating subsidiary LBA
Health Care Management, Inc. ("LBA"). The purchase price including acquisition
expenses was $128,829,000, of which $100,114,000 was paid in cash and
$28,715,000 was paid through the delivery of 492,961 shares of the Company's
common stock. LBA develops and markets information products that analyze and
benchmark detailed clinical and productivity outcomes. The cash portion of the
purchase price was funded primarily through a credit facility obtained from
First Union National Bank of North Carolina ("First Union") consisting of a
$50,000,000 term loan and a $36,000,000 draw on a $50,000,000 revolving line of
credit (see note 9). These loans were repaid with a portion of the proceeds from
the Company's August 1996 public offering.
On December 2, 1996, the Company purchased all of the capital stock of Equifax
Health Analytical Services, Inc. ("HealthChex") for $11,503,000 in cash. The
parties have agreed to make an election under Internal Revenue Code Sec.
338(h)(10) to treat this acquisition as an asset purchase for tax purposes.
HealthChex provides physician profiling and medical claims review systems to
health care providers and payors.
The values and lives of the intangible assets and in-process research and
development costs obtained in the CHAMP, Response, LBA and HealthChex
acquisitions were determined by an independent appraiser. The lives and values
of the intangible assets were based on, among other things, employee retention
rates, customer retention rates and the historical rates of change in the
products and markets. The current fair value of in-process research and
development costs was determined, based on the risk-adjusted cash flows (at
discount rates of 19% to 22%), of specifically identified technologies for which
technological feasibility had not yet been established pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86") and for which
future alternative uses did not exist. Consideration of technological
feasibility for purposes of these calculations was given on a basis consistent
with that normally utilized by the Company (see note 2d). Non-recurring charges
to write off these costs were recorded on the date of each acquisition. These
charges are recorded as operating expenses on the accompanying consolidated
statements of operations.
During November 1995, the Company acquired an additional 36% interest in CHKS
Limited ("CHKS"). As a result of this acquisition, CHKS became a wholly owned
subsidiary of the Company. The Company issued notes payable to the former
shareholders in the principal amount of $2,795,000. This acquisition was
accounted for using the purchase method of accounting and resulted in additional
goodwill of $2,709,000. The goodwill is being amortized over its estimated
useful life of 15 years. The estimate of the amortization period is based on the
nature of the products and markets of CHKS and the historical rate of change in
the products and markets.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HCIA INC. AND SUBSIDIARIES
Also during 1995, the Company acquired certain assets and assumed certain
liabilities of John Froehlich Associates, MetriCor Inc. and MetaGenerics. The
aggregate purchase price for these acquisitions was $1,677,000, consisting of
cash of $1,166,000 and notes payable of $511,000. These acquisitions resulted in
increases in furniture and equipment of $75,000, increases in other intangible
assets of $1,938,000 and increases in current liabilities of $336,000. The other
intangible assets consist of goodwill which is being amortized on a
straight-line basis over estimated useful lives of 10 to 15 years. The estimate
of each amortization period is based on the nature of the products and markets
of the acquired entities and the historical rate of change in the products and
markets.
During 1996 the Company also acquired all of the stock of IASIST S.A. and all of
the interests in Managed Marketing LLC. The aggregate purchase price for these
acquisitions was $2,713,000 and was paid in cash. These acquisitions resulted in
increases in current assets of $496,000, furniture and equipment of $85,000,
software of $303,000 and goodwill of $2,159,000, offset by increased current
liabilities of $330,000. The goodwill is being amortized on a straight-line
basis over its estimated useful life of 15 years. The estimate of each
amortization period is based on the nature of the products and markets of the
acquired entities and the historical rates of change in the products and
markets.
Unless otherwise noted, funding for the acquisitions discussed above was
provided from the proceeds of the Company's public offerings. All of these
acquisitions were accounted for using the purchase method of accounting.
Unaudited pro forma combined results of the operations of the Company for the
years ended December 31, 1995 and 1996 are presented below and have been
prepared assuming that the acquisitions discussed above had been made as of
January 1, 1995.
1995 1996
------- -------
(unaudited)
Revenue $79,456 $93,568
Net income $ 2,146 $ 7,192
Net income per share $ 0.20 $ 0.59
The pro forma results include the historical accounts of the Company and the
acquired entities adjusted to reflect the effects of the depreciation and
amortization of the acquired identifiable tangible and intangible assets based
on the new cost basis of the assets acquired, additional interest expense
related to notes payable issued in connection with certain acquisitions, the
reversal of the non-recurring write-off of acquired in-process research and
development costs recorded in connection with certain acquisitions and related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management of
the Company and the acquired entities been combined in 1995 and 1996.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its subsidiaries. The minority interest of CHKS for the periods before it became
wholly owned is stated separately on the financial statements. All significant
intercompany transactions have been eliminated in consolidation.
(b) Cash Equivalents and Short-Term Investments
Cash equivalents consist of highly liquid securities with original maturities of
three months or less at the date acquired by the Company. At December 31, 1995
and 1996, the Company's short-term investments, which are classified as an
available for sale securities portfolio, consist of the following:
1995 1996
----------------------------- -------------------------
Fair Value Cost Fair Value Cost
------------- ----------- ---------- --------
Auction Market Preferred Stock $ 7,000,000 $ 7,000,000 $ -- $ --
Variable Rate Debentures 5,500,000 5,500,000 -- --
Municipal Bonds 10,780,000 10,736,000 510,000 506,000
----------- ----------- -------- --------
Total $23,280,000 $23,236,000 $510,000 $506,000
=========== =========== ======== ========
The portfolio is carried at fair value in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." All securities mature within one year. Realized gains and
losses are recorded using the specific identification basis to determine costs.
During 1995 and 1996, proceeds from sales of the securities totaled $46,077,000
and $82,370,000, respectively. Gross realized gains and losses on sales of the
securities were immaterial in 1995 and 1996.
(c) Furniture and Equipment
Furniture and equipment are stated at cost. Included in furniture and equipment
are computer hardware, furniture and fixtures and leasehold improvements. These
costs are being depreciated on the straight-line method over their estimated
useful lives of three to five years.
(d) Computer Software Costs
Computer software costs include the cost of internally developed software and
the fair market value assigned to computer software obtained in purchase
transactions. Costs for internally developed software are capitalized in
accordance with SFAS No. 86. These costs relate primarily to the building of
production systems and extending existing applications to new markets or
platforms using existing technologies and programming methods. The Company
capitalizes only those costs incurred after a detailed program design or, in the
absence of such, a working prototype has been developed. The Company generally
develops its applications in connection with customer contracts and includes the
related costs as a component of operating expenses in the period incurred. The
Company capitalized or purchased a total of $2,603,000, $7,260,000 and
$13,229,000 of computer software costs in 1994, 1995 and 1996, respectively,
including $1,092,000 in 1995 and $558,000 in 1996 related to business
acquisitions.
Capitalized costs are amortized, beginning with market availability, over the
economic useful life of the product. Typically, this life is five years. The
annual amortization expense is the greater of the amount computed using (a) the
ratio that current gross revenues for a product bears to the total of current
and anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product including the
period being reported. Amortization expense for computer software was
$1,456,000, $2,048,000 and $3,816,000 during 1994, 1995 and 1996, respectively.
Accumulated amortization for computer software was $6,510,000 and $10,326,000 at
December 31, 1995 and 1996, respectively.
The Company evaluates, on a quarterly basis, the recoverability of capitalized
software costs on the basis of whether such costs are fully recoverable from
projected undiscounted cash flows of individual system and product lines.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) Revenue Recognition
Revenue from license fees for access to the Company's databases is
recognized when access to the database is made available to the customer.
Revenue from custom system or database development and implementation contracts
is recognized on a percentage of completion basis using the
cost-to-cost method. This method of accounting has resulted in unbilled accounts
receivable of $3,073,000 and $3,686,000 at December 31, 1995 and 1996,
respectively. On a quarterly basis, the Company assesses whether the current
estimate of total contract costs for each of these contracts indicates a loss is
expected and accrues any such losses on the entire contract in that quarter.
Where the Company has contracted to provide both access to a Company database
and development of a custom database, the contract value is segmented into its
discrete elements according to their relative values, and revenue is recognized
separately on each element in accordance with the above.
Revenue from group data contracts, which obligate the Company to process data,
produce reports and update databases on periodic intervals, is recognized as the
contracted obligations are fulfilled.
Revenue from licensing of software products is recognized upon shipment,
provided that no vendor obligations remain outstanding. While the Company has no
significant post-contract support ("PCS") obligations, any revenue related to
insignificant PCS obligations on software licenses is deferred and recognized
over the contract term. The Company determines the component of revenue
applicable to PCS obligations based upon its experience in fulfilling such
obligations.
Revenue on all other products is recognized when the product is shipped.
During 1994, one customer accounted for 12% of the Company's revenue. At
December 31, 1994, receivables from that customer represented 12% of the
Company's trade accounts receivable. Consistent with Company policy, no
collateral or other security was held with respect to such trade accounts
receivable. During 1995 and 1996, no single customer accounted for 10% or more
of the Company's revenue or trade accounts receivable.
(f) Foreign Currency Translation
The assets and liabilities of the Company's foreign operations are translated at
year-end exchange rates, while revenue and expenses are translated at rates
prevailing during the period. Accordingly, translation adjustments that arise
due to fluctuations in exchange rates are excluded from operations and are
reported as a separate component of stockholders' equity.
(g) Income Taxes
Prior to the completion of the Company's initial public offering in February
1995, the Company was party to a federal tax-sharing agreement with AMBAC and
was included in AMBAC's consolidated federal income tax return. The tax-sharing
agreement provided for the determination of tax expense or benefit based on the
contribution of the Company to AMBAC's tax liability, computed substantially as
if the Company filed a separate income tax return. The tax liability due AMBAC
was settled quarterly, with a final settlement taking place after the filing of
the consolidated federal tax return. Commencing February 22, 1995, the Company
was no longer included on a consolidated basis for tax purposes with AMBAC and
is responsible for filing its own federal income tax return.
The Company uses the asset and liability method required by Statement of
Financial Accounting Standards No. 109, "Accounting For Income Taxes," to
account for deferred income taxes. Under this method, deferred income taxes are
recognized for temporary differences between the financial reporting bases of
assets and liabilities and their respective tax bases and for operating loss and
tax credit carryforwards based on enacted rates expected to be in effect when
such amounts are realized or settled. The effects of changes in tax laws or
rates on deferred tax assets and liabilities are recognized in the period that
includes the enactment date.
(h) Earnings Per Share
Earnings per share has been calculated based upon the weighted average number of
shares outstanding and using the treasury stock method for outstanding stock
options. The number of shares used in this calculation has been adjusted to
reflect a one-for-three reverse stock split and the conversion of Class A and
Class B common stock into a single class of common stock (see note 10). For
1994, the fair market value per share for the purpose of the calculation of the
weighted average shares outstanding was assumed to be $11.00, which was the
mid-point of the Company's initial public offering price range.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Accounting for Stock Options
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25") in accounting for its stock options.
Additional information required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") is
discussed in Note 10.
(j) Use Of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(k) Reclassifications
Certain amounts for 1994 and 1995 have been reclassified to conform to the
presentation for 1996.
(3) FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31:
1995 1996
------------ ------------
Computer equipment $ 8,629,000 $15,274,000
Office furniture and equipment 1,398,000 1,881,000
Other 392,000 516,000
----------- -----------
10,419,000 17,671,000
Less accumulated depreciation (3,843,000) (5,483,000)
----------- -----------
$ 6,576,000 $12,188,000
=========== ===========
(4) OTHER INTANGIBLE ASSETS
Other intangible assets at December 31, 1996 consist of the following:
Capitalized Accumulated Carrying Weighted
Cost Amortization Value Average Life
------------- ------------ ------------- ------------
Databases $ 7,788,000 $ 4,778,000 $ 3,010,000 5
CPHA license and prepaid royalties 14,031,000 3,886,000 10,145,000 17
Goodwill 79,467,000 4,777,000 74,690,000 19
Customer bases 6,722,000 290,000 6,432,000 10
Methodologies 14,471,000 919,000 13,552,000 6
Assembled workforce 6,030,000 276,000 5,754,000 10
Other 2,274,000 256,000 2,018,000 13
------------ ----------- ------------
$130,783,000 $15,182,000 $115,601,000
============ =========== ============
Other intangible assets at December 31, 1995 consist of the following:
Capitalized Accumulated Carrying Weighted
Cost Amortization Value Average Life
------------- ------------ ------------- ------------
Databases $ 5,888,000 $3,711,000 $ 2,177,000 5
CPHA license and prepaid royalties 14,031,000 3,061,000 10,970,000 17
Goodwill 27,536,000 2,231,000 25,305,000 17
Customer bases 595,000 -- 595,000 12
Assembled workforce 1,102,000 -- 1,102,000 12
Other 2,274,000 85,000 2,189,000 13
----------- ---------- -----------
$51,426,000 $9,088,000 $42,338,000
=========== ========== ===========
Databases consist of the fair market value of various acquired databases, the
cost of acquiring data and internal development costs (direct labor and related
overhead) incurred in standardizing data for use in internally developed
databases. These assets are being amortized on a straight-line basis over their
estimated useful lives of five years. Amortization expense for databases was
approximately $839,000, $962,000 and $1,067,000 during 1994, 1995 and 1996,
respectively.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1992, the Company acquired an exclusive license to access and sell the
databases and certain other assets of the Commission on Professional
and Hospital Activities ("CPHA"). This license was recorded at its estimated
fair value of $8,073,000 at the date of acquisition and is being amortized
on a straight-line basis over 17 years. The amortization period was
determined to be the estimated economic life cycle of the licensed properties,
as corroborated by an independent appraisal, and reflected the remainder of the
existing term of the license at the date of acquisition plus one renewal term
provided under the terms of the agreement. Under the terms of the license, the
Company paid royalties to CPHA based on revenues earned utilizing the licensed
assets. Subsequent to the acquisition, the Company and CPHA entered into a new
license agreement. Under the terms of the new agreement, the Company paid
$5,958,000 to CPHA in lieu of future royalty obligations. The payment is
recorded as prepaid CPHA royalties and is being amortized on a straight-line
basis over 17 years, consistent with the estimated economic life of the licensed
properties.
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. Goodwill is being amortized on a straight-line basis over 10 to
20 years. Such amortization periods are estimated based on the nature of the
products and markets of the acquired companies and the historical rates of
changes in these products and market areas.
Customer bases, methodologies and assembled workforces were obtained through the
CHAMP, Response, LBA and HealthChex acquisitions. The values and lives of these
assets were determined by an independent appraiser based on factors such as
going concern value, employee turnover and historical customer retention rates.
Other intangibles consist of a trade name obtained in the CHAMP acquisition and
certain non-competition agreements. The value and life of the tradename was
determined by an independent appraiser. The non-competition agreements are
amortized over their 1 to 2 year terms commencing with the date the employees
are no longer employed by the Company.
(5) ACCRUED SALARIES, BENEFITS AND OTHER LIABILITIES
Accrued salaries, benefits and other liabilities consist of the following at
December 31:
1995 1996
---------- ----------
Accrued salaries $1,108,000 $2,220,000
Accrued benefits 304,000 477,000
Accrued vacation 562,000 681,000
Other 2,248,000 4,579,000
---------- ----------
$4,222,000 $7,957,000
========== ==========
(6) LEASES
The Company leases office space and certain equipment under operating leases.
Rent expense for these leases was $1,527,000, $2,286,000 and 3,563,000 net of
rental income of $0, $0 and $412,000 during 1994, 1995 and 1996, respectively.
The minimum rental commitments under noncancelable operating leases as of
December 31, 1996, are as follows:
Year Ending December 31:
1997 $ 4,619,000
1998 4,042,000
1999 3,910,000
2000 2,906,000
2001 2,274,000
Thereafter 1,400,000
-----------
Gross minimum payments required $19,151,000
Sublease Income (949,000)
-----------
Net minimum payments required $18,202,000
===========
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) SAVINGS INCENTIVE PLAN
The Company maintains the HCIA Inc. Savings Incentive Plan, a profit sharing
plan qualified under Section 401(a) of the Internal Revenue Code. All employees
of the Company who have completed one year of service are eligible to
participate in the Plan. Subject to certain limitations on individual
contributions and allocations and Company deductions, the Plan allows
participants to defer up to 15% of their pay on a pre-tax basis and up to 10% of
their pay on an after-tax basis. The Company also makes matching contributions
equal to 50% of the amount a participant defers up to 6% of the participant's
pay. The Plan also provides for discretionary contributions by the Company. All
participants are fully vested in all of their accounts in the Plan. The
Company's contributions to the Plan during 1994, 1995 and 1996 were
approximately $167,000, $194,000 and $397,000, respectively.
(8) INCOME TAXES
The income tax expense (benefit) relating to the operations of the Company
consists of the following:
1994 1995 1996
----------- ------------ ----------
Federal and state:
Current $1,097,000 $ 2,071,000 $ 280,000
Deferred (338,000) (3,625,000) 5,606,000
---------- ----------- ----------
Total income tax expense (benefit) $ 759,000 $(1,554,000) $5,886,000
========== =========== ==========
The tax provisions in the accompanying financial statements differ from
prevailing federal corporate rates. A reconciliation of this difference follows:
1994 1995 1996
Amount % Amount % Amount %
----------------- ----------------------- ------------------------
Computed expected tax expense
(benefit) at statutory rate $623,000 35.0% $(1,346,000) (34.0)% $(12,370,000) (34.0)%
Goodwill amortization 44,000 2.5 220,000 5.6 637,000 1.8
Tax-exempt interest -- -- (234,000) (5.9) (216,000) (0.6)
State tax, net of federal benefit 93,000 5.2 (224,000) (5.7) (1,609,000) (4.4)
Acquired in-process research and development -- -- -- -- 19,226,000 52.8
Other, net (1,000) -- 30,000 0.7 218,000 0.6
---------------- --------------------- ----------------------
Provision (benefit) for income taxes $759,000 42.7% $(1,554,000) (39.3)% $ 5,886,000 16.2%
================ ===================== ======================
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liabilities and deferred tax assets at December 31, 1995 and
1996, are presented below:
1995 1996
---------- -----------
Deferred tax assets:
Operating accruals $ 403,000 $ 881,000
Basis difference in intangibles 6,297,000 10,091,000
Bonus accrual -- 2,005,000
Net operating loss carryforwards -- 11,457,000
---------- -----------
Gross deferred tax assets 6,700,000 24,434,000
Valuation allowance -- --
---------- -----------
Net deferred tax assets 6,700,000 24,434,000
---------- -----------
Deferred tax liabilities:
Capitalized software 3,005,000 6,226,000
Fixed assets 605,000 1,134,000
---------- -----------
Total deferred tax liabilities 3,610,000 7,360,000
---------- -----------
Net deferred tax assets $3,090,000 $17,074,000
========== ===========
The valuation allowance for deferred tax assets as of January 1, 1995 and
December 31, 1995 and 1996 was $0. Therefore, there was no net change in the
valuation allowance for 1995 and 1996.
The Company has net operating loss carryforwards of $41,600,000 at December 31,
1996, which expire between 2002 and 2011.
(9) CREDIT AGREEMENT
In August 1996 the Company obtained a credit facility from First Union totaling
$100,000,000, consisting of a $50,000,000 term loan and a $50,000,000 revolving
line of credit. The Company incurred a one-time facility fee and related
expenses of $520,000 which is being amortized over the five year term of the
line of credit. The Company borrowed the entire $50,000,000 term loan and
approximately $36,000,000 of the line of credit in connection with the LBA
acquisition (see note 1(c)). These borrowings were repaid by August 31, 1996
with a portion of the proceeds from the Company's August 1996 public offering of
its common stock (see note 1(b)). The Company currently maintains the
$50,000,000 line of credit (subject to borrowing limitations) and made no
additional borrowings against it during 1996.
The line of credit bears interest at rates ranging from First Union's prime rate
to prime plus 0.5% or LIBOR (5.5% at December 31, 1996) plus 0.75% to LIBOR plus
1.75%, depending on the Company's debt to cash flow ratio. The Company pays a
commitment fee on the unused portion of the line of credit at rates ranging from
0.25% to 0.375% depending on the Company's debt to cash flow ratio. The line of
credit is subject to financial covenants including debt to cash flow and debt to
capital ratios. As of December 31, 1996, the Company was in compliance with all
such covenants and had a maximum borrowing capacity of $50,000,000. The credit
facility reduces to $37,500,000 in July 1999, $25,000,000 in July 2000 and
expires on July 31, 2001.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) STOCKHOLDERS' EQUITY
(a) Capital Amendment
Effective February 14, 1995, the Company filed an amendment to its articles of
incorporation which effected: (i) a one-for-three reverse stock split; (ii) the
conversion of the Class A and Class B common stock into a single class of common
stock; and (iii) the authorization of a total of 15,000,000 shares of common
stock and 500,000 shares of preferred stock, each having a par value of $.01 per
share. All references to common stock and stock options in these financial
statements have been adjusted to reflect the one-for-three reverse stock split
as if it had occurred prior to January 1, 1994. Effective August 12, 1996, the
Company filed an amendment to its articles of incorporation increasing the
authorized number of shares of common stock to 50,000,000.
(b) Common and Preferred Stock
The preferred stock may be issued from time to time by the board of directors as
shares of one or more series. The description of the shares of each series of
preferred stock is established by the board of directors prior to the issuance
of the series of shares.
During 1994, the Company issued 2,378,672 shares of common stock to AMBACin
exchange for the 225,621 shares of preferred stock then outstanding.
During 1995, the Company issued 3,512,500 shares of common stock in connection
with its public offerings.
During 1996, the Company issued 2,261,591 shares of common stock in connection
with its public offerings and 492,961 shares in connection with its acquisition
of LBA.
(c) Options
At December 31, 1994, 1995 and 1996, the Company had outstanding stock options
as follows:
Stock options outstanding pursuant to:
1994 1995 1996
------- ------- ---------
HCIA Stock Option Plan -- 169,933 956,266
Directors' Option Plan -- 22,500 57,000
Other options 374,226 507,800 451,111
------- ------- ---------
Total stock options outstanding 374,226 700,233 1,464,377
======= ======= =========
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The HCIA Stock Option Plan provides that up to 1,350,000 options may be issued
to employees of the Company. Options granted to date under this plan vest over a
period of three or four years and expire ten years from date of grant. The
Directors' Option Plan provides that up to 200,000 options may be issued to
outside directors of the Company. Options granted to date under this plan vest
over periods of one to two years and expire ten years from the date of grant.
The Company has also issued non-plan options which generally vest over periods
of two or three years and expire six to ten years from date of grant. In
February 1995, the Company issued a non-plan option to its chief executive
officer which was fully vested on the date of grant and expires ten years from
date of grant. All stock options issued by the Company have been granted with
exercise prices equal to or greater than the estimated fair market value of the
common stock on the date of grant. Stock option transactions are summarized as
follows:
1994 1995 1996
----------------- ----------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- --------- --------
Outstanding at beginning of year 164,997 $ 6.00 374,226 $ 8.62 700,233 $13.80
Granted 217,563 $10.50 357,433 $18.99 1,524,000 $45.61
Exercised -- -- (6,427) $10.50 (62,605) $ 9.27
Cancelled (8,334) $ 6.00 (24,999) $11.20 (697,251) $58.35
Outstanding at end of year 374,226 $ 8.62 700,233 $13.80 1,464,377 $25.89
Options exercisable at end of year -- -- 186,867 $13.50 345,215 $13.13
The following summarizes information about stock options outstanding as of
December 31, 1996:
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Number Weighted Avg. Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$6 126,097 3.5 $ 6.00 47,766 $ 6.00
$10 to $15 367,848 7.8 12.43 265,215 12.83
$25 to $30 797,932 9.7 28.30 32,234 26.17
$48 to $51 29,500 9.1 48.65 -- --
$59.88 143,000 9.6 59.88 -- --
--------- --- ------ ------- ------
1,464,377 8.7 $25.89 345,215 $13.13
========= === ====== ======= ======
The Company applies APB No. 25 and related interpretations in accounting for its
stock options. Accordingly, no compensation expense has been recognized in
connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFASNo. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
1994 1995 1996
------ -------- ---------
Net Income As reported $1,021 $(2,405) $(42,267)
Pro forma $ 812 $(2,996) $(43,795)
Earnings per share As reported $ 0.19 $ (0.31) $ (4.19)
Pro forma $ 0.15 $ (0.39) $ (4.34)
The fair value of the options for purposes of the above pro forma disclosure was
calculated using the Black-Scholes option pricing model and the following
assumptions: a risk-free interest rate of 6.58%, weighted average expected life
of six to seven years, no dividend payments and a volatility of 31.29% based on
the annualized 10 year industry average. The effects of applying SFAS No. 123 in
the pro forma net income and earnings per share for 1994, 1995 and 1996 may not
be representative of the effects on such pro forma information for future years.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, trade accounts receivable,
other current assets, accounts payable, accrued expenses and capital lease
obligations approximates fair value because of the short-term maturity of these
instruments. The fair value of short-term investments is estimated based on
quoted market prices for these or similar investments. The Company has notes
payable to individuals relating to certain of its business acquisitions. It is
not practicable to estimate the fair value of these notes since they are not
traded, no quoted values are readily available for similar financial instruments
and the Company believes it is not cost-effective to have valuations performed.
However, management believes that there has been no permanent change in the
value of such notes.
30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
Not applicable.
-16-
PART III
Item 10. Directors and Executive Officers.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
headings "Election of Directors" and "Additional Information -- Section 16(a)
Beneficial Ownership Reporting Compliance," and in Item 4A of this Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Executive Compensation and Other Information."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Security Ownership of Management and Certain Beneficial Owners."
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is contained in the
Company's Proxy Statement for the 1997 Annual Meeting of Stockholders under the
heading "Certain Transactions."
-17-
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.
(a) The following documents are filed as a part of this Report:
1. The following report and financial statements are included
in Item 8 of this Report:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Form 8-Ks:
1. On October 1, 1996, the Company filed a Form 8-K enclosing
a press release announcing the preliminary results for the quarter ended
September 30, 1996.
2. On October 23, 1996, the Company filed a Form 8-K/A-2 (i)
enclosing a press release announcing the results for the quarter ended June 30,
1996 and (ii) including the following financial statements relating to the
previously announced acquisition of LBA:
Financial Statements of Datis Corporation
Financial Statements of William M. Mercer, Incorporated
National Health Analysis Unit (CHAMP)
Financial Statements of HealthVISION, Inc.
Financial Statements of LBA Health Care Management, Inc.
Pro Forma Financial Statements
(c) Financial Statement Schedules:
Independent Auditors' Report on Schedule
Schedule II -- Valuation and Qualifying Accounts
All other schedules to the financial statements for which
provision is made in the accounting regulations of the Commission are not
applicable, not required or the information is included in the financial
statements or notes thereto and therefore have been omitted.
(d) Exhibits:
-18-
Exhibit
Number Description
------- -----------
3.1 *** Articles of Incorporation of the Registrant, as amended to date.
3.2 Bylaws of the Registrant, as amended to date.
10.1 * Employment Agreement dated as of January 1, 1995 by and between the
Registrant and George D. Pillari.
10.1.1 First Amendment to Employment Agreement.
10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date.
10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge
Resources, Inc., the Registrant and the Commission on Professional and
Hospital Activities.
10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to
date.
10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity
Corporation, American Municipal Bond Holding
Company and the Registrant dated as of July 18,
1991.
10.6 *** Form of Management Retention Agreement.
10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the
Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity
Corporation.
10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the
Registrant and certain stockholders.
10.9 *** Credit Agreement, dated August 8, 1996, by and
between First Union National Bank of North
Carolina, as Agent, and the Registrant.
11.1 Statement regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
- ------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-94946).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-88226).
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-3. (File No. 333-08639).
-19-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HCIA INC.
By: /s/ George D. Pillari
----------------------------------
George D. Pillari
Chairman of the Board, President &
CEO
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George D. Pillari Chairman of the Board, March 28, 1997
- --------------------------- President and Chief
George D. Pillari Executive Officer
(principal executive
officer)
/s/ Barry C. Offutt Senior Vice President March 28, 1997
- --------------------------- and Chief Financial Officer
Barry C. Offutt (principal financial and]
accounting officer)
/s/ Phillip B. Lassiter Director March 28, 1997
- ---------------------------
Phillip B. Lassiter
/s/ Richard Dulude Director March 28, 1997
- ---------------------------
Richard Dulude
/s/ Richard Berman Director March 28, 1997
- ---------------------------
Richard Berman
/s/ W. Grant Gregory Director March 28, 1997
- ---------------------------
W. Grant Gregory
/s/ Mark C. Rogers Director March 28, 1997
- ---------------------------
Mark C. Rogers
/s/ Carl J. Schramm Director March 28, 1997
- ---------------------------
Carl J. Schramm
Exhibit Index
Page No.
3.1 *** Articles of Incorporation of the Registrant, as amended to date................
3.2 Bylaws of the Registrant, as amended to date...................................
10.1 * Employment Agreement dated as of January 1, 1995 by and between the
Registrant and George D. Pillari...............................................
10.1.1 First Amendment to Employment Agreement........................................
10.2 HCIA Inc. 1994 Stock and Incentive Plan, as amended to date....................
10.3 ** Agreement dated December 4, 1992 by and among Healthcare Knowledge
Resources, Inc., the Registrant and the Commission on Professional and
Hospital Activities............................................................
10.4 HCIA Inc. 1995 Non-Employee Directors Stock Option Plan, as amended to date....
10.5 ** Tax Sharing Agreement by and among AMBAC Inc., AMBAC Indemnity
Corporation, American Municipal Bond Holding Company and the
Registrant dated as of July 18, 1991...........................................
10.6 *** Form of Management Retention Agreement.........................................
10.7 * Registration Rights Agreement, dated August 10, 1995, by and among the
Registrant, George D. Pillari, AMBAC Inc. and AMBAC Indemnity Corporation......
10.8 *** Registration Rights Agreement, dated August 9, 1996, by and among the
Registrant and certain stockholders............................................
10.9 *** Credit Agreement, dated August 8, 1996, by and between First Union National
Bank of North Carolina, as Agent, and the Registrant...........................
11.1 Statement regarding Computation of Per Share Earnings..........................
21.1 Subsidiaries of the Registrant.................................................
23.1 Consent of KPMG Peat Marwick LLP...............................................
27.1 Financial Data Schedule........................................................
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-94946).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1. (File No. 33-88226).
*** Incorporated by reference to the Registrant's Registration Statement on
Form S-3. (File No. 333-08639).
Independent Auditors' Report
The Board of Directors and Stockholders
HCIA Inc.:
Under date of January 23, 1997, we reported on the consolidated balance sheets
of HCIA Inc. and Subsidiaries (the Company) as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1996, as contained in the annual report on Form 10-K for the year 1996. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this consolidated financial statement schedule based on our
audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
January 23, 1997
SCHEDULE II --- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Deductions Balance
Beginning Costs and at
Description of Period Expenses End of
Period
Allowance for Doubtful Accounts
Year ended December 31, 1994..... $499 $87 $(227)(A) $359
Year ended December 31, 1995..... 359 214 (119)(A) 454
Year ended December 31, 1996..... 454 560 28 (A) 1,042
(A) Accounts receivable write-offs and recoveries