SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant (X) Filed by a Party other than the Registrant ( ) Check the appropriate box: ( ) Preliminary Proxy Statement ( ) Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) (X) Definitive Proxy Statement ( ) Definitive Additional Materials ( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 HCIA Incorporated (Name of Registrant as Specified in its Charter) (Name of Person(s) Filing Proxy Statement, if other than Registrant) Payment of Filing Fee (Check the appropriate box): (X) No fee required ( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: ( ) Fee paid previously with preliminary materials. ( ) Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule, or Registration Statement No.: 3) Filing Party: 4) Date Filed: [HCIA LOGO APPEARS HERE] March 20, 1998 Dear Stockholder: You are cordially invited to attend the annual meeting of stockholders of HCIA Inc. (the "Company"), which will be held at the offices of the Company, 300 East Lombard Street, Baltimore, Maryland, on Wednesday, May 6, 1998 at 10:00 a.m., Baltimore time. Holders of the Company's common stock as of March 9, 1998 are entitled to vote at the meeting. The matters proposed for consideration at the meeting are the election of two directors and the ratification of the appointment of KPMG Peat Marwick LLP as the Company's independent public accountants. The accompanying Notice of Meeting and Proxy Statement discuss these matters in further detail. We urge you to review this information carefully. Your Board of Directors unanimously believes that the election of the nominees as directors and the ratification of the appointment of the independent accountants, are each in the best interests of the Company and its stockholders and, accordingly, recommends a vote FOR all of the Items on the enclosed form of proxy. After reviewing the enclosed materials, please complete the proxy card and return it using the enclosed envelope. If you decide to attend the meeting, you may vote in person even if you have previously sent in a proxy card. In addition to the formal business to be transacted, management will make a presentation on developments during the past fiscal year and respond to questions of interest to stockholders. On behalf of the Board of Directors and all of the employees of the Company, I wish to thank you for your continued support. Sincerely yours, /s/ George D. Pillari ----------------------- George D. Pillari Chairman & CEO [THIS PAGE INTENTIONALLY LEFT BLANK] HCIA INC. 300 East Lombard Street Baltimore, Maryland 21202 - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 6, 1998 - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS OF HCIA INC.: NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders (the "Annual Meeting") of HCIA Inc., a Maryland corporation (the "Company"), will be held at 300 East Lombard Street, Baltimore, Maryland, on Wednesday, May 6, 1998 at 10:00 a.m., Baltimore time, for the following purposes: 1. To elect two directors in Class I for a three year term ending in 2001. 2. To ratify the selection of KPMG Peat Marwick LLP as the Company's independent public accountants. 3. To act upon any other matter which may properly come before the Annual Meeting or any adjournment thereof. The Board of Directors of the Company has fixed the close of business on March 9, 1998, as the record date for determining stockholders of the Company entitled to notice of and to vote at the Annual Meeting. Your attention is directed to the attached Proxy Statement and the enclosed Annual Report of the Company for the year ended December 31, 1997. By Order of the Board of Directors, /s/ Charles A. Berardesco -------------------------- Charles A. Berardesco Secretary Baltimore, Maryland March 20, 1998 EVEN IF YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON. [THIS PAGE INTENTIONALLY LEFT BLANK] HCIA INC. 300 East Lombard Street Baltimore, Maryland 21202 - -------------------------------------------------------------------------------- PROXY STATEMENT - -------------------------------------------------------------------------------- INFORMATION CONCERNING SOLICITATION AND VOTING GENERAL The enclosed proxy is being furnished to stockholders of HCIA Inc., a Maryland corporation (the "Company"), in connection with the solicitation by the Board of Directors of the Company of proxies for use at the Annual Meeting of Stockholders (the "Annual Meeting") to be held at the offices of the Company, 300 East Lombard Street, Baltimore, Maryland, on Wednesday, May 6, 1998 at 10:00 a.m., Baltimore time, and at any adjournments thereof. SOLICITATION The solicitation is being made primarily by the use of the mail, but directors, officers and employees may also engage in the solicitation of proxies by telephone. The cost of soliciting proxies will be borne by the Company, and no compensation will be paid by the Company in connection with the solicitation of proxies, except that the Company may reimburse brokers, custodians, nominees and other recordholders for their reasonable out-of-pocket expenses in forwarding proxy material to beneficial owners. This Proxy Statement and the accompanying form of proxy are being sent to stockholders on or about March 20, 1998. REVOCATION OF PROXIES A proxy may be revoked at any time prior to its exercise by the filing of a written notice of revocation with the Secretary of the Company, by delivering to the Company a duly executed proxy bearing a later date, or by attending the Annual Meeting and voting in person. However, if you are a stockholder whose shares are not registered in your own name, you will need additional documentation from your record holder to vote personally at the Annual Meeting. VOTING RIGHTS AND OUTSTANDING SHARES The close of business on March 9, 1998 has been fixed by the Board of Directors of the Company as the record date (the "Record Date") for determining the stockholders of the Company entitled to notice of and to vote at the Annual Meeting. As of the Record Date, the Company had outstanding 11,850,094 shares of common stock, $.01 par value per share (the "Common Stock"). Each share of Common Stock entitles the holder thereof to one vote on each matter to be voted upon at the Annual Meeting. There is no cumulative voting for the election of directors. The presence, in person or by proxy, of at least a majority of the total number of shares of Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. In the event there are not sufficient votes for a quorum or to approve any proposal at the Annual Meeting, the Annual Meeting may be adjourned in order to permit the further solicitation of proxies. All outstanding shares of the Company's Common Stock represented by properly executed and unrevoked proxies received in the accompanying form in time for the Annual Meeting will be voted. A stockholder may, with respect to the election of directors (i) vote for the election of the named director nominees, (ii) withhold authority to vote for all such director nominees, or (iii) vote for the election of all such director nominees other than any nominee with respect to whom the stockholder withholds authority to vote by striking a line through such nominee's name on the proxy. A stockholder may, with respect to the ratification of the appointment of KPMG Peat Marwick LLP as the Company's independent public accountants (i) vote "FOR" the matter, (ii) vote "AGAINST" the matter, or (iii) "ABSTAIN" from voting on the matter. Shares will be voted as instructed in the accompanying proxy on each matter submitted to stockholders. If no instructions are 1 given, the shares will be voted FOR the election of the named director nominees and FOR the ratification of the appointment of KPMG Peat Marwick LLP as the Company's independent public accountants. A proxy submitted by a stockholder may indicate that all or a portion of the shares represented by such proxy are not being voted by such stockholder with respect to a particular matter. This could occur, for example, when a broker is not permitted to vote Common Stock held in street name on certain matters in the absence of instructions from the beneficial owner of the Common Stock. The shares subject to any such proxy which are not being voted with respect to a particular matter (the "non-voted shares") will be considered shares not present and entitled to vote on such matter, although such shares may be considered present and entitled to vote for other purposes and will count for purposes of determining the presence of a quorum. The affirmative vote of a plurality of the shares of Common Stock voted at the Annual Meeting is required to elect directors. Accordingly, if a quorum is present at the Annual Meeting, the two persons receiving the greatest number of votes will be elected to serve as directors. Therefore, withholding authority to vote for a director(s) and non-voted shares with respect to the election of directors will not affect the outcome of the election of directors. The ratification of the approval of KPMG Peat Marwick LLP will require the approval of a majority of the shares of Common Stock voted at the Annual Meeting. As a result, abstentions in connection with these proposals will have the effect of a vote against such proposals, while non-votes will not be considered to have voted on the proposal. The Board of Directors knows of no additional matters that will be presented for consideration at the Annual Meeting. Execution of a proxy, however, confers on the designated proxyholders discretionary authority to vote the shares in accordance with their best judgment on such other business, if any, that may properly come before the Annual Meeting or any adjournments thereof. Proxies solicited hereby will be returned to the Company's transfer agent, and will be tabulated by inspectors of election designated by the Board of Directors. PROPOSALS TO BE VOTED ON AT THE ANNUAL MEETING PROPOSAL 1. ELECTION OF DIRECTORS The Company's Bylaws provide that the Board of Directors is divided into three classes, each class consisting, as nearly as possible, of one-third of the total number of directors. Each year the directors in one class are elected to serve for a term of three years. The Board of Directors is presently composed of seven members. Directors in Class I -- Messrs. Pillari and Dulude, have a term of office scheduled to expire at the Annual Meeting. Each of Messrs. Pillari and Dulude has been nominated for a three year term expiring at the Annual Meeting of Stockholders in 2001 and until their respective successors are elected and qualify. Directors in Class II -- Mr. Berman and Dr. Rogers, have terms of office expiring at the 1999 annual meeting and until their successors are elected and qualify. Directors in Class III -- Messrs. Gregory and Lassiter and Dr. Schramm, have terms of office expiring at the 2000 annual meeting and until their successors are duly elected and qualify. THE PERSONS NAMED IN THE ENCLOSED PROXY INTEND TO VOTE PROPERLY EXECUTED AND RETURNED PROXIES FOR THE ELECTION OF ALL NOMINEES PROPOSED BY THE BOARD OF DIRECTORS UNLESS AUTHORITY TO VOTE IS WITHHELD. In the event that any of the nominees is unable or unwilling to serve, the persons named in the proxy will vote for such substitute nominee or nominees as they, in their discretion, shall determine. The Board of Directors has no reason to believe that any nominee named herein will be unable or unwilling to serve. Set forth below is information concerning the nominees for election and those directors whose term continues beyond the date of the Annual Meeting. NOMINEES FOR DIRECTOR FOR A THREE YEAR TERM EXPIRING AT THE 2001 ANNUAL MEETING. GEORGE D. PILLARI, age 35, co-founded the Company in 1985 and has served as its Chief Executive Officer since 1987, also serving as President from 1987 to April 1992 and since October 1992. He has served as Chairman of the Board since April 1992. RICHARD DULUDE, age 65, has been a director of the Company since December 1994. He retired as Vice Chairman of Corning Incorporated in April 1993, having served in that capacity since November 1990, and as Group President of Corning Incorporated from 1983 to November 1990. Mr. Dulude is a director of AMBAC Inc. ("AMBAC"), Raychem Corporation and Landec Corp. 2 DIRECTORS WHOSE TERM WILL EXPIRE AT THE 1999 ANNUAL MEETING. RICHARD A. BERMAN, age 53, has been a director of the Company since October 1995. He has served as President of Manhattanville College in New York since January 1995. Prior to that time, Mr. Berman held several positions in educational institutions, government and the private sector, including serving as President and Chief Executive Officer of Howe-Lewis International, an executive search and management consulting firm, from November 1992 to January 1995. MARK C. ROGERS, M.D., age 55, has been a director of the Company since January 1995. He has served as Senior Vice President, Corporate Development and Chief Technology Officer of The Perkin-Elmer Corporation since May 1996. From 1992 until assuming his present position, Dr. Rogers served as the Vice Chancellor for Health Affairs, Duke University Medical Center, and Executive Director and Chief Executive Officer, Duke University Hospital and Health Network. From 1990 until 1992, he was Associate Dean for Clinical Affairs at the Johns Hopkins University School of Medicine and, from 1980 until 1992, also served as Professor and Chairman of the Department of Anesthesiology and Critical Care Medicine at the Johns Hopkins University School of Medicine. DIRECTORS WHOSE TERM WILL EXPIRE AT THE 2000 ANNUAL MEETING. W. GRANT GREGORY, age 57, has been a director of the Company since December 1994. He has served as Chairman of Gregory & Hoenemeyer, Inc., merchant bankers, since 1988. Mr. Gregory retired as Chairman of the Board of Touche Ross, Inc. in 1987. He is a director of AMBAC and InaCom Corp. PHILLIP B. LASSITER, age 54, has been a director of the Company since October 1992. He has served as Chairman and Chief Executive Officer of AMBAC since April 1991, and as President since August 1992. From 1969 to July 1991, Mr. Lassiter served in various capacities with Citibank, N.A., including Deputy Section Head for North American investment, corporate banking and institutional insurance activities. He is a director of Diebold Inc. CARL J. SCHRAMM, PH.D., age 51, has served as a director of the Company since January 1995. He is presently serving as President of Greenspring Advisors, Inc., which provides strategic, financial and other advice to businesses. From January 1993 to May 1995, Dr. Schramm served as Executive Vice President of Fortis, Inc., and from May 1987 to December 1992, served as president of the Health Insurance Association of America. He was Director of the Johns Hopkins Center for Hospital Finance and Management from January 1980 to May 1987. Dr. Schramm co-founded the Company in 1985, and served as an officer and director of the Company until 1988. BOARD COMMITTEES AND MEETINGS The Board of Directors has an Audit Committee and Compensation Committee, each consisting of Messrs. Berman, Dulude, Gregory and Lassiter and Drs. Rogers and Schramm. The Board of Directors does not have a nominating committee, or a committee performing similar functions. The Audit Committee is primarily concerned with the effectiveness of the audits of the Company by the Company's independent public accountants. Its duties include recommending the selection of independent accountants, reviewing the scope and results of their audits, and reviewing the organization and scope of the Company's internal system of accounting and financial controls. The Audit Committee met four times during 1997. The Compensation Committee is responsible for the overall administration of the Company's compensation policies and practices, including the recommendation of compensation for executive officers of the Company and for matters relating to compensation plans and arrangements. In addition, the Compensation Committee approves awards under and administers the Company's 1994 Stock and Incentive Plan. The Compensation Committee met four times during 1997. The Board of Directors met six times during 1997. No director, other than Dr. Rogers, attended fewer than 75% of the total number of meetings of the Board and of the Committees of which he was a member during 1997. DIRECTOR COMPENSATION DIRECTORS' FEES. The Company pays its directors who are not officers or employees of the Company or its affiliates, an annual retainer of $12,000, fees of $1,000 for each Board meeting attended and $500 for each committee meeting attended, and an annual fee of $1,500 for service as a Board committee chair. Under the Company's Deferred Compensation Plan for Outside Directors (the "Deferred Compensation Plan"), non-employee directors may elect to defer all or part of their director compensation (including both annual fees and meeting fees) that is paid in cash. Deferrals will be credited to a bookkeeping account maintained on the director's behalf as a cash 3 credit, which periodically will be credited with interest at the 90-day United States Treasury Bill rate. The Deferred Compensation Plan is unfunded. Settlement of accounts will be made only in cash. DIRECTORS OPTION PLAN. Under the 1995 Non-Employee Directors Stock Option Plan (the "Directors Option Plan"), each director who is not an officer or employee of the Company or its affiliates (an "outside director") is granted an option at each annual meeting of stockholders to purchase 5,000 shares of Common Stock at an exercise price equal to the fair market value of the Common Stock on the date of grant. This annual award vests as of the first annual meeting of stockholders held following the date of the award, provided that the outside director continues in service as a member of the Board until the relevant vesting date. PROPOSAL 2. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors has selected the firm of KPMG Peat Marwick LLP to serve as independent public accountants for the year ending December 31, 1998, subject to the ratification of such appointment by the stockholders. Representatives of KPMG Peat Marwick LLP are expected to be present at the Annual Meeting. They will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions. UNLESS MARKED TO THE CONTRARY, THE SHARES REPRESENTED BY THE ENCLOSED PROXY, IF PROPERLY EXECUTED AND RETURNED, WILL BE VOTED FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG PEAT MARWICK LLP AS THE INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY FOR THE YEAR ENDING DECEMBER 31, 1998. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS The following table sets forth as of February 27, 1998, certain information with respect to the beneficial ownership of the Common Stock by: (i) each of the Named Executive Officers (as defined below) of the Company; (ii) each of the directors of the Company and nominees for directors; (iii) all directors and executive officers of the Company as a group; and (iv) each person known to the Company who beneficially owns 5% or more of the outstanding shares of Common Stock. The Company believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole voting and investment power with respect to such shares, except as noted below: SHARES BENEFICIALLY OWNED(1) -------------------- NAME NUMBER PERCENT - ---- --------- ------- George D. Pillari(2).................................................................................... 447,280 3.7% Richard A. Berman(3).................................................................................... 14,500 * Richard Dulude(3)....................................................................................... 15,500 * W. Grant Gregory(3)(4).................................................................................. 24,500 * Phillip B. Lassiter(3).................................................................................. 25,500 * Mark C. Rogers, M.D.(3)................................................................................. 14,500 * Carl J. Schramm, Ph.D.(3)(5)............................................................................ 15,900 * Donald S. Good, Jr.(6).................................................................................. 6,250 * Barry C. Offutt(6)...................................................................................... 55,874 * Charles A. Berardesco(6)................................................................................ 8,600 * Jean Chenoweth(6)....................................................................................... 36,149 * Massachusetts Financial Services Company(7)............................................................. 1,514,500 12.8% All directors and executive officers as a group (11 persons)(8)......................................... 664,553 5.4% - --------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Commission and includes voting or investment power with respect to the shares. Shares of Common Stock subject to options currently exercisable or exercisable within 60 days of the Record Date are deemed outstanding for computing the percentage of the person holding such options, but are not deemed outstanding for computing the percentage of any other person. (2) Includes (i) 232,830 shares as to which Mr. Pillari shares beneficial ownership with his wife, (ii) 1,950 shares held as custodian for minor children, and (iii) exercisable options to acquire 212,500 shares of Common Stock. (3) Includes 14,500 shares subject to options under the Directors Option Plan. (4) Includes 4,000 shares owned through a partnership of which Mr. Gregory is a partner. (5) Includes 1,400 shares held as custodian for minor children. (6) Includes 6,250, 55,874, 7,500 and 33,749 shares subject to options held by Messrs. Good, Offutt and Berardesco and Ms. Chenoweth, respectively. (7) Based on Schedule 13G filed by the listed entity. According to the Schedule 13G, there is sole dispositive power with respect to all shares and sole voting power with respect to 1,489,500 shares. The address of Massachusetts Financial Services Company is 500 Boylston Street, Boston, Massachusetts 02116. (8) Includes 402,873 shares subject to options held by all directors and executive officers as a group. 4 EXECUTIVE COMPENSATION AND OTHER INFORMATION The following table sets forth certain information regarding the Company's Chief Executive Officer and each of the other four most highly compensated executive officers during 1995, 1996 and 1997 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ------------ SECURITIES ANNUAL COMPENSATION UNDERLYING FISCAL ---------------------- OPTIONS/SARS OTHER NAME AND TITLE YEAR SALARY($) BONUS($)(1) (#)(2) COMPENSATION($)(3) - -------------- ---- ------- ----------- ------------ ------------------ George D. Pillari 1997 265,000 -- 120,000 4,750 Chairman, President and 1996 265,000 -- 50,000 4,500 Chief Executive Officer.................................. 1995 265,000 132,500 160,000 3,221 Donald S. Good 1997 160,471 21,844 40,000 2,711 Senior Vice President -- Operations (4).................. 1996 82,715 23,436 25,000 -- Barry C. Offutt 1997 165,000 18,563 70,000 4,750 Senior Vice President and 1996 155,000 37,500 22,500 4,500 Chief Financial Officer.................................. 1995 135,000 37,492 12,501 2,904 Charles A. Berardesco Senior Vice President and 1997 145,000 11,238 30,000 2,175 General Counsel (4)...................................... 1996 84,749 17,063 20,000 -- Jean Chenoweth 1997 150,000 -- 2,500 4,500 Senior Vice President -- 1996 150,000 21,250 10,000 4,500 Industry Relations....................................... 1995 135,000 44,263 12,501 2,896 - --------------- (1) The amounts shown in this column include bonuses accrued under the Company's management incentive program during 1995, 1996 and 1997. (2) See " -- Option Grants," and " -- Option Exercises and Year-End Values" for disclosure regarding outstanding stock options. (3) Consists of matching contributions under the Company's Savings Incentive Plan for all Named Executive Officers. (4) Messrs. Good and Berardesco each joined the Company in May 1996. OPTION GRANTS Options granted to the Named Executive Officers during 1997 are set forth in the following table. No stock appreciation rights ("SARs") were granted during 1997. OPTION GRANTS IN LAST FISCAL YEAR INDIVIDUAL GRANTS -------------------------------------------------------------------- POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER OF TOTAL ANNUAL RATES OF STOCK SHARES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(2) OPTIONS EMPLOYEES IN PRICE ---------------------- NAME GRANTED(#)(1) 1997 (%) ($/SHARE)(1) EXPIRATION DATE 5%($) 10%($) - ---- ------------- ------------ ------------ ------------------- --------- --------- George D. Pillari.................. 60,000 6.7 38.94 February 5, 2007 1,469,349 3,723,620 60,000 6.7 48.68 February 5, 2007 1,836,875 4,655,003 Donald S. Good..................... 40,000 4.5 16.1875 August 6, 2007 407,209 1,031,948 Barry C. Offutt.................... 30,000 3.7 38.94 February 5, 2007 734,675 1,861,810 40,000 4.5 16.1875 August 6, 2007 407,209 1,031,948 Charles A. Berardesco.............. 10,000 1.1 38.94 February 5, 2007 244,892 620,603 20,000 2.2 16.1875 August 6, 2007 203,605 515,974 Jean Chenoweth..................... 2,500 0.3 16.1875 August 6, 2007 25,451 64,947 - --------------- (1) The exercise price of each option was equal to at least the fair market value of the underlying Common Stock on the date of grant, as determined in accordance with the Stock Option Plan. Each option vests annually over a four year period. (2) Future value of current-year grants assuming appreciation of 5% and 10% per year over the applicable option term. The actual value realized may be greater than or less than the potential realizable values set forth in the table. 5 OPTION EXERCISES AND YEAR-END VALUES The following table sets forth certain information regarding the fiscal year-end value of unexercised options held by the Named Executive Officers. There were no options exercised by the Named Executive Officers, and no SARs outstanding, during 1997. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS NUMBER OF SECURITIES AT FISCAL UNDERLYING UNEXERCISED YEAR-END SHARES OPTIONS AT FISCAL YEAR-END (#) ($)(1) ACQUIRED ON VALUE ------------------------------ ----------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE - -------------------------------------- ----------- ----------- ----------- ------------- ----------- George D. Pillari..................... -- -- 172,500 247,500 -- Donald S. Good........................ -- -- 6,250 58,750 -- Barry C. Offutt....................... -- -- 48,374 93,126 84,309 Charles A. Berardesco................. -- -- 5,000 45,000 -- Jean Chenoweth........................ -- -- 33,749 16,251 53,120 VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR-END ($)(1) ------------- NAME UNEXERCISABLE - -------------------------------------- ------------- George D. Pillari..................... -- Donald S. Good........................ -- Barry C. Offutt....................... -- Charles A. Berardesco................. -- Jean Chenoweth........................ -- - --------------- (1) Calculated based on the last sales price of the Common Stock on December 31, 1997 of $11.875 per share, less the exercise price. EMPLOYMENT AGREEMENT Effective as of January 1, 1995, the Company entered into an employment agreement with Mr. Pillari pursuant to which the Company continued his employment as Chairman of the Board, President and Chief Executive Officer. Pursuant to the employment agreement, Mr. Pillari receives an annual base salary of $265,000 and is entitled to participate in bonus arrangement under which he is eligible to earn an annual bonus based on the Company's achieving certain performance goals to be established by the Board of Directors. The employment agreement has an initial term of two years, and unless the Board of Directors notifies Mr. Pillari otherwise, the term of the agreement automatically renews daily for succeeding two year periods. The employment agreement provides that in the event of the termination of Mr. Pillari's employment for certain reasons, including certain terminations resulting from a change in control of the Company (as defined in the employment agreement), Mr. Pillari would be entitled to receive for the remainder of the employment term contemplated in the agreement, compensation at an annualized rate equal to the sum of his base annual salary and target bonus at the time of termination (such sum being not less than 140% of such base annual salary). In addition, he would continue to participate in all Company benefit plans until the earlier of two years from the date of termination or such time as he is covered by a comparable plan of a subsequent employer. Mr. Pillari is also subject to certain restrictions under the agreement prohibiting him from competing with the Company or any of its subsidiaries and from divulging any confidential proprietary information obtained by him while in the employ of the Company and for a period of time thereafter. MANAGEMENT RETENTION AGREEMENTS The Company has entered into a management retention agreement with each of its officers (other than Mr. Pillari). These agreements provide for payments and other benefits if there is a change in control (as defined in the agreement) of the Company and, within two years of such change in control, the officer's employment is terminated by the Company or its successor other than for cause (as defined in the agreement), or the officer resigns for good reason (as defined in the agreement). Under each agreement, the officer would receive, following termination of employment under such circumstances, cash payments equal to up to two times the sum of (i) the officer's highest annual rate of base salary and (ii) the product of the officer's highest bonus percentage (as a percentage of base salary) times his highest base salary (such sum being the "Reference Amount"). The officer may elect to receive payment either in a lump sum or in the form of periodic payments following his termination of employment. For certain officers, amounts in excess of one times the Reference Amount will be made in the form of periodic payments, and will be subject to reduction, on a dollar-for-dollar basis, by any compensation the officer earns from a subsequent employer unrelated to the Company. In addition to the payments described above, the officer would be fully vested in all stock options and other Awards under the Stock Option Plan upon a change in control and receive following termination of employment a lump-sum payment equal to the amount that the Company would have contributed for the officer's account under the Company's Savings Incentive Plan during the two years following termination of employment. The officer and his family will remain eligible to participate in the Company's medical and other welfare benefits programs for two years from the officer's termination of employment (except that coverage will end to the extent the officer begins coverage under the plans of a subsequent employer). 6 SAVINGS INCENTIVE PLAN The Company maintains the Savings Incentive Plan, a profit sharing plan qualified under Section 401(a) of the Internal Revenue Code of 1986. All employees of the Company who have completed one year of service are eligible to participate in the Savings Incentive Plan. Subject to certain limitations on individual contributions and allocations and Company deductions, the Savings Incentive 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 Savings Incentive Plan also provides for discretionary contributions by the Company. All participants are fully vested in all of their accounts in the Savings Incentive Plan. The Company's contributions to the Savings Incentive Plan during 1996 and 1997 were approximately $397,000 and $624,000, respectively. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors of the Company has a Compensation Committee consisting of Messrs. Berman, Dulude, Gregory and Lassiter and Drs. Rogers and Schramm. Except for Mr. Pillari, the Company's Chairman of the Board, President and Chief Executive Officer, no officer or employee of the Company has participated in deliberations of the Board of Directors concerning executive officer compensation. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee is responsible for developing and administering the compensation program for the executive officers of the Company. The Committee's compensation recommendations with respect to salaries and bonuses are then approved by the entire Board of Directors. The Compensation Committee's executive compensation policies are designed to offer competitive compensation opportunities for all executives based on personal performance and achievement, as well as overall corporate performance. The Committee's philosophy is to establish an executive's total compensation at a level that compares favorably with overall pay levels at companies comparable in size and business operations to the Company. The Committee also bases its decisions on overall corporate results, which supports the Company's objective of creating stockholder value by encouraging and rewarding superior efforts by the Company's employees. This is primarily accomplished through the Company's incentive compensation program, which provides quarterly bonuses to executive officers, other than Mr. Pillari, based on meeting objective financial and other goals. The Compensation Committee also is of the view that stock ownership by management and stock-based compensation arrangements are beneficial in aligning management's and stockholders' interests in the enhancement of stockholder value and approves the grant of stock options to executive officers whose performance has had a significant effect on the success of the Company. Compensation paid to the Company's executive officers generally consists of the following elements -- base salary, bonuses and the grant of stock options. Mr. Pillari's base compensation and bonus arrangements are determined under his employment agreement with the Company. The compensation of the other executive officers of the Company is determined by consideration of each officer's initiative and contribution to overall corporate performance and the officer's managerial abilities and performance in any special projects that the officer may have undertaken. Competitive base salaries that reflect the individual executive's level of responsibility are important elements of the Company's executive compensation philosophy. During 1997, executive officers were also eligible to receive a quarterly bonus equal to a percentage of the executives' base salary upon achievement of specific Company-wide net income targets, the contribution of the business unit they supervised to the Company's results and, in the case of one executive officer, personal performance targets. Executive officers other than Mr. Pillari were eligible to receive a bonus of up to 50% of their base compensation for each quarter (the "incentive compensation percentage"). During 1997, executive officers had target bonuses under the incentive compensation plan ranging from 31% to 50% of annual salary and received bonuses ranging from 0% to 14% of annual salary. The difference between the target bonuses and actual bonuses paid, as well as the reduction in bonus levels from 1996 to 1997, was in recognition of the fact that the Company's total revenue and operating income fell short of the Company's targets for 1997. The Company has adopted the Stock Option Plan to provide officers and employees with stock options and other stock-based compensation. The number and terms of awards under the Stock Option Plan are determined by the Committee. The awards made to the Named Executive Officers during 1997 were deemed by the Committee to be appropriate in light of the executives' performance and responsibilities, and appropriate to provide incentives for future performance. The vesting of the 7 options commences one year after the date of the grant and is complete four years after the date of the grant. The Compensation Committee believes that the grant of options that vest over an extended period of time provides an incentive for executive officers to continue their efforts on behalf of the Company and to create long-term value for the Company's stockholders. The Committee intends to continue to recommend stock-based compensation awards as a significant part of the Company's overall compensation program. The Company has certain broad-based employee benefit plans in which all employees, including the Named Executives Officers, are permitted to participate on the same terms and limitations on amounts that may be contributed. In 1997, the Company also made matching contributions to the Savings Incentive Plan for those participants. MR. PILLARI'S 1997 COMPENSATION Mr. Pillari's compensation is determined principally by the terms of his employment agreement, which was approved by the Compensation Committee and the Board of Directors effective January 1, 1995. The employment agreement provides for a base salary of $265,000 per year, subject to increase, but not decrease, and an annual bonus. The Compensation Committee has established Mr. Pillari's base salary at a level it believes is necessary to retain Mr. Pillari in his executive position with the Company and is comparable with the base salaries of chief executive officers of comparable companies. The Compensation Committee believes that Mr. Pillari's services have been and will continue to be critical to the Company's success. Mr. Pillari received no bonus for 1996 or 1997, and has not had his base salary increased since 1995, in recognition of the fact that the Company's total revenue and operating income fell short of the Company's targets in both 1996 and 1997. The Compensation Committee generally considers option grants to Mr. Pillari in February of each year, based on prior year performance. Mr. Pillari was granted, in February 1997, options to purchase (i) 60,000 shares of the Company's Common Stock at a exercise price of $38.94 per share, which was the fair market value of the Common Stock, and (ii) 60,000 shares of the Company's Common Stock at an exercise price of $48.68, which was the fair market value plus 25%. These options were granted based on the Company's results during 1996, including the completion of several significant acquisitions, and a survey of comparable company data, and were designed to provide Mr. Pillari with additional incentives to continue his efforts on behalf of the Company and to create long-term value for the Company's stockholders. POLICY REGARDING SECTION 162(M) OF THE INTERNAL REVENUE CODE Section 162(m) of the Internal Revenue Code limits the deductibility of compensation in excess of $1.0 million paid to the Chief Executive Officer and the four most highly compensated officers of the Company (other than the Chief Executive Officer) in any fiscal year, unless the compensation qualifies as "performance based compensation." The Compensation Committee's policy with respect to Section 162(m) is to make every reasonable effort to cause compensation to be deductible by the Company while simultaneously providing executive officers of the Company with appropriate and competitive compensation. The aggregate base salaries and bonuses of the Company's executive officers have not historically exceeded, and are not in the foreseeable future expected to exceed, the $1.0 million limit, and options under the Company's Stock Option Plan are intended to qualify as performance-based compensation. COMPENSATION COMMITTEE Richard Berman Richard Dulude W. Grant Gregory Phillip B. Lassiter Mark C. Rogers, M.D. Carl J. Schramm, Ph.D. 8 PERFORMANCE MEASUREMENT COMPARISON The chart set forth below shows the value of an investment of $100.00 on February 22, 1995 (the day trading of the Company's Common Stock commenced on the Nasdaq National Market) in each of the Company's Common Stock, the Nasdaq Stock Market and the Nasdaq Computer and Data Processing index for the period February 22, 1995 to December 31, 1997. All values assume reinvestment of the pre-tax value of dividends. COMPARISON OF 34 MONTH CUMULATIVE TOTAL RETURN* AMONG HCIA INC., THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE NASDAQ COMPUTER & DATA PROCESSING INDEX [GRAPH APPEARS HERE--SEE PLOT POINTS BELOW] NASDAQ NASDAQ STOCK COMPUTER & MARKET DATA HCIA INC. (U.S.) PROCESSING --------- ------ ---------- 2/22/95 $100 $100 $100 3/95 175 104 108 6/95 223 119 128 9/95 184 133 140 12/95 334 135 146 3/96 336 141 153 6/96 450 152 170 9/96 429 158 174 12/96 246 166 180 3/97 120 157 168 6/97 239 184 215 9/97 96 217 235 12/97 85 203 222 * $100 INVESTED ON 2/22/95 IN STOCK OR INDEX - INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. CERTAIN TRANSACTIONS REGISTRATION RIGHTS The Company has granted to Mr. Pillari certain rights with respect to the registration under the Securities Act of 1933 of the shares of Common Stock currently held by Mr. Pillari and the shares issuable pursuant to Mr. Pillari's option to purchase 160,000 shares. In the event the Company proposes to register any of its securities under the Securities Act for its own account or for the account of any of its stockholders, subject to certain exceptions, Mr. Pillari shall be entitled to include his shares in such registration. Registration of Mr. Pillari's shares is subject, in an underwritten offering, to the right of the managing underwriter to exclude for marketing reasons some or all of the shares from such registration. All fees, costs and 9 expenses incurred with any such registration, except for underwriting discounts and selling concessions, will be borne by the Company. ADDITIONAL INFORMATION STOCKHOLDER PROPOSALS FOR 1997 ANNUAL MEETING The Company's Bylaws provide that a stockholder must provide written notice to the Company describing any proposal or director nomination to be brought before that meeting, even if such proposal or nomination is not to be included in the Company's proxy material. Copies of the relevant provision of the Bylaws may be obtained by writing to the Secretary, HCIA Inc., 300 East Lombard Street, Baltimore, Maryland 21202. STOCKHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING Any stockholder proposal intended for inclusion in the proxy material for the 1999 Annual Meeting of Stockholders must be received in writing by the Company, at the address set forth on the first page of this Proxy Statement, on or before January 6, 1999. Any such proposal will be subject to Rule 14a-8 promulgated under the Securities Exchange Act of 1934. OTHER MATTERS As of the date of this Proxy Statement, the Board of Directors of the Company knows of no other business which will be presented for consideration at the Annual Meeting. Execution of a proxy, however, confers on the designated proxyholders discretionary authority to vote the shares in accordance with their best judgment on such other business, if any, that may properly come before the Annual Meeting or any adjournments thereof. THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON RECEIVING THIS PROXY STATEMENT, UPON THE WRITTEN REQUEST OF SUCH PERSON, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 1997. WRITTEN REQUESTS FOR A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K SHOULD BE DIRECTED TO HCIA INC., 300 EAST LOMBARD STREET, BALTIMORE, MARYLAND 21202, ATTENTION: CHARLES A. BERARDESCO, SECRETARY. By Order of the Board of Directors, /s/ Charles A. Berardesco ----------------------------- Charles A. Berardesco Secretary March 20, 1998 10 HCIA INC. ANNUAL MEETING OF STOCKHOLDERS, MAY 6, 1998 PROXY SOLICITED BY THE BOARD OF DIRECTORS The undersigned hereby appoints BARRY C. OFFUTT and CHARLES A. BERARDESCO, and each of them, with full power of substitution as to each, as proxy, to vote all shares which the undersigned is entitled to vote at the Annual Meeting of Stockholders of HCIA Inc. to be held at 10:00 a.m., Baltimore time, on May 6, 1998, and at any adjournments thereof: 1. Election of Directors FOR the election of all nominees listed WITHHOLD AUTHORITY (except as marked to the contrary below) [ ] to vote for all nominees listed below [ ] George D. Pillari Richard Dulude (TO WITHHOLD AUTHORITY TO VOTE FOR AN INDIVIDUAL NOMINEE, STRIKE A LINE THROUGH THE NOMINEE'S NAME). 2. The ratification of the appointment of KPMG Peat Marwick LLP to serve as the Company's independent public accountants for the year ending December 31, 1998. FOR [ ] AGAINST [ ] ABSTAIN [ ] 3. In their discretion, the proxies are authorized to vote upon such other matters as may properly come before the meeting or any adjournment thereof. (CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE) (CONTINUED FROM REVERSE SIDE) THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE PERSON SIGNING IT. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF THE NOMINEES INDICATED AND FOR THE OTHER PROPOSALS. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. IT MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE BY SENDING WRITTEN NOTICE TO THE SECRETARY OF THE COMPANY, BY DELIVERING TO THE COMPANY A DULY EXECUTED PROXY BEARING A LATER DATE OR BY ATTENDING THE MEETING AND VOTING IN PERSON. Receipt of notice of the meeting and proxy statement is hereby acknowledged, and the terms of the notice and statement are hereby incorporated by reference into this proxy. The undersigned hereby revokes all proxies heretofore given for said meeting or any adjournment or adjournments thereof. (Please sign exactly as your name appears hereon. Executors, administrators, guardians, officers signing for corporations, trustees and attorneys should give full title. For joint owners, both owners should sign.) Dated: _______________ , 1998 _____________________________(SEAL) _____________________________(SEAL) Please sign, date and promptly return this proxy in the enclosed envelope. No postage is required if mailed in the United States.