-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BkDOLu881G6k2w9ALYzolhUo7usixaxWd4lgw7FQX7t3Py9nz6jQhlmG2JT5vP5o FGizzpb35mPo6DPOC5Mkjw== 0000912057-97-008001.txt : 19970307 0000912057-97-008001.hdr.sgml : 19970307 ACCESSION NUMBER: 0000912057-97-008001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970306 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HBO & CO CENTRAL INDEX KEY: 0000310377 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 370986839 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09900 FILM NUMBER: 97551842 BUSINESS ADDRESS: STREET 1: 301 PERIMETER CTR N CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 77036000 MAIL ADDRESS: STREET 1: 301 PERIMETER CTR N CITY: ATLANTA STATE: GA ZIP: 30346 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 FOR THE TRANSITION PERIOD FROM ----------------------- TO ----------------------- COMMISSION FILE NUMBER 0-9900 HBO & COMPANY (Exact name of registrant as specified in its charter) DELAWARE 37-0986839 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) No.) 301 PERIMETER CENTER NORTH ATLANTA, GEORGIA 30346 (Address of principal (Zip Code) executive office)
Registrant's telephone number, including area code: (770) 393-6000 ------------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.05 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. /X/ Aggregate market value of the voting stock held by nonaffiliates of the registrant, computed using the closing price as reported by The Nasdaq Stock Market's National Market for the Company's common stock on February 28, 1997: $5,175,940,715. Indicate the number of shares outstanding of the registrant's common stock as of the latest practicable date:
OUTSTANDING AT FEBRUARY 28, CLASS 1997 - ---------------------------------- ---------------- Common Stock, $.05 par value 90,940,957
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1996, are incorporated by reference into Parts I, II and IV of this Form 10-K. Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1997, are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1: BUSINESS GENERAL OVERVIEW. HBO & Company (HBOC or the Company), incorporated in 1974, develops integrated patient care, clinical, financial, managed care and strategic management software solutions for the healthcare industry. These open systems applications facilitate the integration of clinical, financial and administrative data from a wide range of customer systems and software. HBOC's broad product portfolio can be implemented in a variety of combinations from stand-alone to enterprisewide, enabling customers to add incremental capabilities to existing information systems without making prior capital investments obsolete. HBOC also provides a full complement of network communications technologies, including wireless capabilities, as well as outsourcing services that are offered under contract management agreements whereby its staff manages and operates data centers, information systems, organizations and business offices of healthcare institutions of various sizes and structures. In addition, the Company offers a wide range of electronic commerce services, including electronic medical claims and remittance advice services as well as statement processing. HBOC markets its products and services to integrated health delivery networks, hospitals, physicians' offices, home health providers, pharmacies, reference laboratories, managed care providers and payers. HBOC also sells its products and services internationally through subsidiaries and/or distribution agreements in the United Kingdom, Canada, Ireland, Saudi Arabia, Kuwait, Australia, Puerto Rico and New Zealand. As of December 31, 1996, HBOC had 4,404 employees worldwide. INDUSTRY. The healthcare industry continues to undergo significant and rapid change. Healthcare delivery costs have increased dramatically in recent years compared to the overall rate of inflation, while the growing influence of managed care has resulted in increased pressure on participants in healthcare systems to contain costs. Accordingly, healthcare systems are migrating toward more managed care reimbursement, including discounted fee-for-service and capitation. Under capitation, providers are paid a predetermined fee per individual to provide all healthcare services, thereby assuming the potential financial risks of escalating healthcare costs. To deliver care in a more cost-effective manner, providers are forming integrated health delivery networks that may include acute-care hospitals, physicians' offices, outpatient clinics, homecare, long-term care facilities and payer entities. The success of these comprehensive delivery networks is dependent on effectively managing and delivering information to caregivers and managers across multiple points of care. Traditionally, the acute-care hospital market has been the largest segment of healthcare information services. According to industry analysts, the healthcare industry spent approximately $12 billion in 1996 for products and services to support automated information systems. Information systems expenditures in healthcare are expected to grow to $18 billion by the year 2000 as hospitals and other providers spend a larger percentage of their operating budgets on systems that will enable them to provide caregivers and managers with access to the information needed to quantify and control costs, a key mandate of managed care. In the 1996 Annual HIMSS/HP Leadership Survey, an industry survey conducted by Hewlett-Packard at the Healthcare Information and Management Systems Society conference, 63 percent of the respondents stated that their information system investments will increase at a rate of 20 percent or more over the next two years. In addition, 32 percent of the respondents noted that their most important information system priority was upgrading information technology infrastructure. With the increasing prevalence of managed care and capitation, healthcare information systems are evolving to meet new and more complex information requirements. Initially, these systems were financially 1 oriented, focusing on the ability to capture charges and generate patient bills. However, as reimbursement has shifted more toward risk sharing and capitation, providers and payers needed to better manage risk by controlling costs, demonstrating quality, measuring outcomes and influencing utilization. Because this requires integration of clinical and financial information, systems have evolved from processing billing information to include enterprisewide systems capable of capturing, storing and analyzing both clinical and financial data across the continuum of care. While the availability of a complete, timely and cost-effective patient-focused information system is essential to providing quality care and controlling costs, the source of patient information usually covers a number of different sites. Therefore, current and historical paper records must be made available by computer at all points of care. All players in the delivery network need information systems that can capture data at the point of care, communicate data across the continuum of care and process and store large volumes of data necessary for the development of a lifelong computer-based patient record. STRATEGY HBOC's strategy is to provide a comprehensive range of computer-based information systems and services designed to meet the evolving needs of health enterprises thereby enabling customers to add incremental capabilities to existing information systems without making prior capital investments obsolete. The key elements of this strategy are as follows: LEVERAGE THE EXISTING CUSTOMER BASE. With one or more of its products installed in approximately 51 percent of the community hospitals (over 100 beds) in the United States, HBOC is a leader in the healthcare information systems marketplace. HBOC expands its customer base through sales and marketing efforts and through strategic acquisitions such as IBAX Healthcare Systems and First Data Health Systems Corporation, which had 475 and 500 hospital customers, respectively (see "Recent Acquisitions" below). This expanded customer base offers HBOC significant opportunities to sell both additional applications of its established product lines and its Pathways 2000-Registered Trademark- enterprise solutions. In addition, HBOC believes its relationships with customers and its familiarity with their existing systems give HBOC an advantage over many of its competitors in marketing applications to meet the evolving needs of these customers. HBOC also seeks to further leverage its relationships with existing customers to access additional healthcare organizations throughout newly formed health delivery networks. PROVIDE ENTERPRISEWIDE SOLUTIONS TO THE EVOLVING HEALTHCARE MARKET. HBOC offers one of the broadest product lines in the healthcare information systems industry to serve patient care, clinical, financial and strategic management needs. Through its Pathways 2000-Registered Trademark- family of enterprisewide information systems, HBOC facilitates the more efficient integration of delivery networks. HBOC's Pathways 2000-Registered Trademark- client/ server applications are designed to provide a common information infrastructure that enables organizations to collect, manage and disseminate clinically oriented information organized on the basis of a patient's entire history of care. The Pathways 2000-Registered Trademark- product line provides the capability to create longitudinal computerized patient records as well as connectivity along the entire continuum of care, enabling users to access patient data from any point within an integrated delivery system. PROVIDE SUPERIOR INTEGRATION OF PRODUCTS AND DATA. HBOC's products offer healthcare organizations open system solutions with the flexibility to add incremental capabilities, which enables them to protect their capital investments. In addition, HBOC's client/server architecture facilitates the integration of clinical data with financial and administrative data from both HBOC and non-HBOC applications for efficient resource allocation, allowing organizations to benefit from price/performance advances. HBOC believes that these features will be of key significance to its customers as they face industry consolidation and evolve as part of integrated care delivery systems. EXPAND INTO NEW MARKETS. HBOC strives to provide premier business-critical applications to every essential care setting as well as to the payer market. HBOC believes that as healthcare organizations 2 expand and decentralize, management information requirements at the point of care will increase. HBOC is developing or has acquired client/server applications to meet these needs in the physician's office, home health market, reference laboratory and the payer market. Applications for other components of the care delivery network, such as long-term care, are under consideration. CONTINUE PRODUCT DEVELOPMENT. HBOC believes that a key to its growth is an ongoing focus on research and development to ensure its product offerings will continue to strive to meet the evolving needs of its existing and potential customer base. HBOC's research efforts focus on enhancements to existing product offerings as well as new product development. In developing products, HBOC's goal is to ensure its information systems are highly flexible and quickly adaptable and can serve the information access needs of an increasingly broad range of users. HBOC's product developers use state-of-the-art application development tools such as program generators, artificial intelligence and expert systems, which decrease development time and lower the cost of new products. While HBOC's efforts focus primarily on the internal research and development of new products, HBOC has made and continues to explore strategic acquisitions of developers of niche product software to complement and diversify its product portfolio. RECENT ACQUISITIONS A substantial portion of HBOC's recent growth has resulted from acquisitions of companies that have expanded its product lines and enhanced its installed customer base. The following table outlines the majority of these acquisitions:
DATE ACQUIRED COMPANY PRIMARY SIGNIFICANCE - ------------------ ------------------------------- ------------------------------------------------------- June 1993 Biven Software, Inc. Managed care applications December 1993 Data-Med Computer Installed base of 100 hospitals in the United Kingdom Services Limited May 1994 IBAX Healthcare Systems Presence in the IBM AS/400 market, installed base of 475 hospitals September 1994 Serving Software, Inc. Enterprisewide patient and resource scheduling software December 1994 Care 2000, Inc. Case management methodologies February 1995 Advanced Laboratory Laboratory software for the healthcare and commercial Systems, Inc. marketplaces June 1995 First Data Health Installed base of 500 hospitals Systems Corporation July 1995 Pegasus Medical Ltd. Electronic patient record built by physicians for physicians September 1995 CliniCom Incorporated Multidisciplinary point-of-care clinical information systems August 1996 CyCare Systems, Inc. Physician group practice management solutions and electronic data interchange services September 1996 Management Software, Inc. Homecare information solutions December 1996 GMIS Inc. Data quality tools and decision support for payers December 1996 Gemini Ltd. Remote processing services in the United Kingdom
3 PRODUCT SUMMARY HBOC's products and services are designed to serve the information needs of all participants in the integrated health delivery system: the caregiver, in whatever discipline or capacity; the institution or enterprise, in whatever aspect of its business; and the patient (increasingly referred to by healthcare organizations as the "customer" or "member"), in whatever setting of care. Today, the health services delivery network through which these participants relate can include acute-care hospitals, outpatient clinics, physicians' offices, reference laboratories, commercial pharmacies, long-term care facilities, patients' homes and wellness centers. In addition, employers, payers and governmental agencies play a major role in directing how healthcare resources are deployed, which impacts capital spending by healthcare enterprises. To serve this wide-ranging and diverse network of health delivery, HBOC bases its offerings on a strategic mix of applications and technologies backed by implementation, support and other services. HBOC's product portfolio is organized into six components: acute-care or HIS (hospital information system), infrastructure, clinical management, practice management, access management and enterprise management. In addition, HBOC offers a suite of services that allows healthcare organizations the flexibility to select the level of resources that most effectively serves their needs. HIS -- HIS applications automate the operation of individual departments and their respective functions within the inpatient environment. These hospital-based transaction and decision support systems form the core of systems that, in conjunction with other tools designed to directly support clinical decision-making, help streamline the care process over the continuum of care. HBOC's HIS systems include applications for patient care, laboratory, pharmacy, radiology, financials and management decision-making. INFRASTRUCTURE -- Infrastructure applications are not limited to a single department or function; rather, they form the foundation of the emerging information structures of health enterprises. HBOC's wide array of networking and database applications provide the key elements for integrating and uniting providers across the continuum of care. Components include local, wide area and value-added networks, as well as wireless technology and electronic data interchange (EDI) capabilities. An interface manager coordinates the flow of information, often from disparate sources, throughout the entire system, and a data repository stores patient information for access throughout the enterprise. In bringing the enterprise together, these solutions establish the physical basis for a lifelong patient record. CLINICAL MANAGEMENT -- Clinical applications facilitate and improve the actual practice of medicine in a variety of care settings, whether hospital, physician office, home or clinic. Drawing from a common database of patient information, computer technology gives professionals immediate access to the critical information necessary to provide better quality care wherever they are in the delivery system. HBOC's point-of-care applications allow physicians and other clinicians to document patient information, establish and manage guidelines or standards of care, enter and manage orders, and view all results and clinical information. These clinical solutions support the need for collaboration among multiple disciplines and for integration with other information systems in the health delivery network. PRACTICE MANAGEMENT -- Practice management applications provide a comprehensive solution for medical groups and physician enterprises, whether they are independent or part of an integrated health network. With business office management as its cornerstone, HBOC's practice management solution gives physician groups or enterprises the flexibility to manage their business under many different organizational and reimbursement models. Also included are risk management and managed care capabilities, clinical systems for managing patient care, and scheduling that can handle multiple providers, facilities, and equipment within the enterprise. Additional capabilities to help accelerate cash flow, reduce costs, and increase productivity include decision support, data quality analysis and EDI. 4 ACCESS MANAGEMENT -- Access management solutions allow the healthcare organization's "customers" to access health services more easily and cost-effectively. Indexing applications organize the vast information collected about a person throughout the enterprise, allowing patients to be tracked and information about them to be accessed wherever they go for care. Scheduling systems instantly register and schedule patients anywhere in the enterprise, as well as the resources needed to serve them. Other system capabilities allow for information tied to specific episodes of care to be collected and managed. Besides increasing accuracy, these applications help alleviate patient frustration with having to provide duplicate information from one setting of care to another thereby enhancing "customer satisfaction." ENTERPRISE MANAGEMENT -- Enterprise management applications facilitate and improve the management and operation of all aspects of the health enterprise -- for payers as well as provider. These applications focus on providing managers with the clinical, financial and other information necessary to contain costs while ensuring high-quality care. Examples include utilization management and accounts receivable management, as well as managed care contracting and member management applications. The following table outlines the principal products in each area:
PRODUCT DESCRIPTION - ------------------------------------------------------ ------------------------------------------------------ HIS: STAR 2000, Precision 2000, Paragon RISC-based patient care, clinical and financial systems HealthQuest-Registered Trademark- 2000, Plus 2000 IBM mainframe-based patient care, clinical and financial systems Series 2000, OR Series IBM AS/400-based patient care, clinical, financial, scheduling and management systems Surgi-Server 2000, Omni-Server 2000, DME 2000 PC-based scheduling, management and equipment tracking systems Host 2000 Tandem-based patient care management systems and remote processing systems for patient financials INFRASTRUCTURE: Pathways Interface Manager Interface engine that manages network traffic and performs protocol conversion and translation Pathways Health Network Server Relational database and repository for all patient information Pathways Image Manager Electronic imaging and storage solution Networking technologies Local and wide area networks and wireless technologies Value Added Network EDI capabilities that support the movement of information among various sources
5
PRODUCT DESCRIPTION - ------------------------------------------------------ ------------------------------------------------------ CLINICAL MANAGEMENT: Pathways Coordinated Care Enterprisewide solution for longitudinal health record spanning all settings, includes results and profile viewing, orders, guidelines, and alerts and reminders Pathways Smart Medical Record-Registered Trademark- Clinical information system for physician offices Pathways Care Manager Multidisciplinary point-of-care system for hospitals and affiliated clinics Pathways Homecare Clinical, administrative and human resource management for home health Homecare Integration Architecture Full-featured homecare system for stand-alone home health agencies AdVantage Laboratory Information System Laboratory system that includes commercial, reference and hybrid laboratory capabilities PRACTICE MANAGEMENT: Practice 2000 Application suite for physician practices that includes Pathways Smart Medical Record-Registered Trademark-, Pathways Practice Manager, and Pathways Practice Director Pathways Practice Manager Physician practice system with master patient index, billing and registration capabilities Pathways Practice Risk Manager Risk management tool for the physician enterprise Pathways Practice Director Full-featured practice management system for smaller physician practices Pathways Practice Schedule Manager Scheduling tool for the physician enterprise ACCESS MANAGEMENT: Pathways Health Network Management Enterprisewide system for managing information about an enrolled population Pathways Healthcare Scheduling Enterprisewide patient and resource scheduling system Pathways Encounter Management Enterprisewide system for managing information about patients' episodes of care
6
PRODUCT DESCRIPTION - ------------------------------------------------------ ------------------------------------------------------ ENTERPRISE MANAGEMENT: Pathways Contract Management Monitoring and management of multiple varied contracts for providers with managed care focus Pathways Managed Care Full-function management of contractual agreements for providers, payers, HMOs, PPOs, PHOs and others TRENDSTAR-Registered Trademark- Decision support system, including cost accounting, budgeting and forecasting QUANTUM-Registered Trademark- Enterprise information system Pathways Decision Support Enterprisewide decision support system Autocoder-Registered Trademark-, Data quality tools for the payer market ClaimCheck-Registered Trademark- and ClaimCheck Dental Insight Comprehensive clinical and financial decision support systems for payers EC2000 Electronic commerce solutions, including claims processing, eligibility, remittances and laser statement printing
In addition to the above applications, HBOC offers software applications provided by a host of industry-leading business partners. These partnerships also include value-added reseller agreements with computer hardware manufacturers such as Data General Corp., Digital Equipment Corp., Hewlett- Packard Co., and IBM Corp. INTERNATIONAL OFFERINGS Most of the Pathways 2000-Registered Trademark- and HIS products in HBOC's product portfolio are offered internationally. In addition, products added to the HBOC product line with the acquisition of Data-Med Computer Services Limited in December 1993 are available in the United Kingdom. In most cases, the applications offered internationally have been customized or developed to meet the particular needs of the country in which they are implemented. SERVICES Installation and implementation services are provided for purchasers of all HBOC software products to assist with the smooth introduction of or transition to those products. HBOC also provides software maintenance and enhancement services, as well as custom programming and system modifications to meet special customer requirements. Equipment maintenance services are provided by HBOC or through its various hardware partners. ENTERPRISE SERVICES. HBOC provides a suite of specially developed services to serve the needs of enterprises whose dependence on information systems is growing. Those services include UNIX processing support, disaster recovery, remote system monitoring and single-point issue resolution. In addition, a line of service offerings called Service Tracks 2000 provides a flexible suite of implementation services that can include an enterprise project manager to assist in planning, installing and supporting Pathways 2000-Registered Trademark- products. CONNECT TECHNOLOGY GROUP. To support the connectivity needs of healthcare organizations, medical group practices and their affiliates, the Connect Technology Group (CTG) provides total network 7 installation and support. In addition, CTG offers a comprehensive Value Added Network, a suite of information services that extend local area networks outside of the hospital to include payers, vendors, financial institutions and the Internet. All together, HBOC's networking solutions provide customers with a complete network solution for electronic access throughout a provider enterprise. OUTSOURCING SERVICES GROUP. HBOC has been in the outsourcing business in the United States for more than 20 years and offers outsourcing services in the United Kingdom as well. With the change and uncertainty engendered by healthcare reform and resulting economic pressures, information systems outsourcing is becoming increasingly popular in the United States. Outsourcing services go beyond managing hospital data processing operations (traditionally known as facilities management) to encompass strategic management services in information systems planning, receivables management, business office administration and major system conversions. ELECTRONIC COMMERCE GROUP. With the 1996 acquisition of CyCare Systems, Inc., and its CyData subsidiary, HBOC acquired significant capabilities in EDI services, including claims processing, eligibility verification, remittance advice as well as statement printing. HBOC's Electronic Commerce Group operates the nation's 12th largest electronic clearinghouse and serves approximately 35 percent of the medical group practices in the United States. SOURCES OF REVENUE Information regarding sources of revenue is included in the table "Revenue by Business Region" on page 10 of the Company's Annual Report to Stockholders for the year ended December 31, 1996 (the Annual Report), and under the caption "Revenue Recognition" in Note 1 of "Notes to Consolidated Financial Statements" on pages 16 and 17 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. BACKLOG Information regarding backlog as of December 31, 1996, is included in the "Financial Review" section under the caption "General" on page 6 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. RESEARCH AND DEVELOPMENT The Company's product development effort applies advanced computer technology and installation methodologies to specific information processing needs of hospitals. The Company believes a substantial and sustained commitment to such research and development (R&D) is important to the long-term success of the business. Investment in software development, including both R&D expense as well as capitalized software, has increased as the Company has addressed new software applications and enhanced existing products for installed systems. The Company expensed $90 million (11% of revenue) for R&D activities during 1996, as compared to $79 million (13% of revenue) and $62 million (14% of revenue) during 1995 and 1994, respectively. The Company capitalized 29%, 31% and 31% of its R&D expenditures in 1996, 1995 and 1994, respectively. Information regarding R&D is included in the schedule "Five-Year Selected Financial Information" on page 5 of the Annual Report and under the caption "Capitalized Software" and under the caption "Nonrecurring Charges" in Note 1 of "Notes to Consolidated Financial Statements" on pages 16 and 17 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. 8 The substantial majority of technical concepts and codes embodied in the Company's computer programs and program documentation are not protected by patents or copyrights but constitute trade secrets that are proprietary to the Company. The Company and its subsidiaries are the owners of various trademarks and service marks, including the federally registered trademarks or service marks "MEDPRO," "IFAS," "CLINPRO," "MEDIPAC," "CML," "COSTREP," "TRENDSTAR," "TRENDSERVE," "TRENDPAC I," "BUDGET+," "CLINIPAC," "CLINSTAR," "HOSTS," "HSL," "PARAGON," "HEALTHQUEST," "QUANTUM," "ERS," "PATHWAYS 2000," "PATIENT VIEW," "SAINT," "SAINT PLUS," "THE PRECISION ALTERNATIVE," "WIN," "CHARISMA," "CYCARE SYSTEMS," "CYCARE," "SPECTRAMED," "CYDATA," "DOCUMENTATION PLUS," "CLAIMCHECK," "PROVIDER INSIGHT," "AUTOCODER," and the triangular design that forms the Company logo, but such registration provides limited protection as to the trademark or service mark. "First Inform" is used under license from First Data Corporation. "SMR" and "Smart Medical Record" are used under license from HBOC Medical, Ltd. COMPETITION HBOC experiences substantial competition from many firms, including other computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, and hardware vendors. Competition varies in size from small to large companies, in geographical coverage, and in scope and breadth of products and services offered. Although some of the Company's competitors are comparable in size to the Company, the Company believes that few, if any, competitors offer a comparable range of healthcare information systems and services that compare favorably with respect to all of the competitive criteria, mainly price and service. FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This report, and other reports, proxy statements and other communications to stockholders, as well as oral statements made by representatives of the Company, may contain forward-looking statements with respect to, among other things, the Company's future revenues, operating income and earnings per share, as well as plans and objectives of management. The following are some, but not necessarily all, of the factors that may cause the Company's actual results to vary materially from those which are the subject of any such forward-looking statements. An important element of HBOC's business strategy has been and will continue to be expansion through acquisitions, both to extend its customer base and to acquire strategic technology. The Company's ability to expand successfully through acquisitions depends on many factors including the identification of appropriate acquisition opportunities, negotiation of suitable terms and management's ability to effectively integrate and operate the acquired businesses. The Company competes for acquisitions with other companies, certain of which have significantly greater financial and management resources. HBOC's financial performance will be subject to the risks of the performance of the acquired businesses as well as the financial effects associated with integration of such businesses. The healthcare industry is subject to changing political, economic and regulatory influences, many of which relate to control of healthcare costs. Such changes may affect operational aspects of the healthcare industry, including procurement practices and the availability and/or allocation of capital funds, which could result in greater selectivity, thus adversely impacting HBOC's ability to sell its products. HBOC cannot predict with any certainty what impact, if any, future regulation or healthcare reform might have on its results of operations, financial condition or business. While HBOC maintains insurance protecting against certain asserted claims, there can be no assurance that its insurance coverage would adequately cover any such claims asserted against HBOC. Competition in the Company's industry is subject to continual change in not only the products and services offered but also in the manner in which vendors are selected by customers. Accordingly, HBOC's 9 continued success will be dependent on its ability to develop new products and services on a timely basis and at competitive prices. The Company must anticipate and adapt to evolving industry standards and new technological developments. The market for the Company's products is characterized by continued and rapid technological advances. HBOC's future success will depend in part on its ability to be responsive to these technological developments and challenges, which could also lower the cost of products and services or otherwise result in competitive pricing pressures. HBOC relies on a combination of trade secret, copyright and trademark laws, together with nondisclosure, other contractual provisions and technical measures to protect its proprietary rights in its products. There can be no assurance that these protections will be adequate or that HBOC competitors will not independently develop technologies that are equivalent or superior to HBOC's technology. Although the Company believes that its products and other proprietary rights do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company in the future. The stock market has, from time to time, experienced extreme price and volume fluctuations, particularly in the high technology sector, which have often been unrelated to the operating performance of particular companies. HBOC experiences fluctuations in its stock price related to these general market swings as well as announcements of technological innovations, new product introductions by HBOC or its competitors, market conditions in the computer software or hardware industries and healthcare reform measures. These fluctuations may adversely effect the Company's ability to make acquisitions utilizing its stock. ITEM 2: PROPERTIES The Company's principal administrative and research offices are located at 301 and 303 Perimeter Center North, Atlanta, Georgia. The offices consist of approximately 226,000 square feet of space under a lease that expires in 1999. The rental expense for these offices totaled approximately $3.9 million for 1996. The Company also owns two buildings and leases space in approximately 45 buildings throughout the United States, Canada, the United Kingdom and Israel. Information regarding the Company's leases is included in Note 2 of "Notes to Consolidated Financial Statements" on page 18 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. Information regarding the Company's principal offices is included on the back cover of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. ITEM 3: LEGAL PROCEEDINGS Information regarding Legal Proceedings is included in Note 9 of "Notes to Consolidated Financial Statements" on page 21 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K and is incorporated herein by reference. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the quarter ended December 31, 1996, there were no matters submitted to a vote of security holders. 10 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The Nasdaq Stock Market's National Market under the symbol HBOC. Information regarding the high and low closing prices, the number of holders of the Company's common stock and dividends is presented under the caption "Common Stock Data" on page 22 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K, and is incorporated herein by reference. ITEM 6: SELECTED FINANCIAL DATA The following is the Company's Five-Year Selected Financial Data:
(000 OMITTED EXCEPT PER SHARE DATA) 1996 1995 1994 1993 1992 - ------------------------------------------- ---------- ---------- ---------- ---------- ---------- Revenue.................................... $ 796,578 $ 607,242 $ 453,979 $ 364,697 $ 324,349 Net Income (Loss).......................... $ 73,954 $ (17,569) $ 36,469 $ 17,682 $ 20,232 Earnings (Loss) Per Share.................. $ .79 $ (.21) $ .44 $ .22 $ .26 Total Assets............................... $ 848,947 $ 649,417 $ 380,410 $ 266,394 $ 218,869 Long-Term Debt............................. $ 192 $ 3,642 $ 4,715 $ 6,133 $ 7,200 Dividends Declared Per Share............... $ .08 $ .08 $ .08 $ .075 $ .075
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included in the "Financial Review" section on pages 6 through 9 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K, is incorporated herein by reference. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information included on pages 11 through 21 of the Annual Report, a copy of which is included as an exhibit to this Form 10-K, under the captions "Condensed Consolidated Quarterly Statements of Income," "Consolidated Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" is incorporated herein by reference. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The Company has neither changed its independent public accountants nor had any disagreements on accounting and financial disclosures with such accountants. 11 PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding the executive officers of the Company as of March 1, 1997. Additional information regarding the Board of Directors is included in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 1997, under the captions "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which is incorporated herein by reference.
NAME AGE POSITION WITH THE COMPANY - ---------------------------- --- ---------------------------------------------------- Charles W. McCall 52 Director, President and Chief Executive Officer Albert J. Bergonzi 47 President, Enterprise Solutions Jay P. Gilbertson 36 Executive Vice President, Chief Financial Officer, Treasurer, Principal Accounting Officer and Secretary Jay M. Lapine 45 Vice President, General Counsel and Assistant Secretary Russell G. Overton 49 Senior Vice President-Business Development
Charles W. McCall has served as a Director, President and Chief Executive Officer of the Company since 1991. Mr. McCall is also a Director of EIS International, Inc., Physician Support Systems, Inc., and WestPoint Stevens Inc. Albert J. Bergonzi has served as President, Enterprise Solutions since 1996. He served as Executive Vice President-Sales of HBOC from 1995 to 1996. From 1985 through 1995 he served as the Vice President and General Manager of HBOC's Amherst Product Group. Jay P. Gilbertson has served as Executive Vice President and Secretary since 1996 and Senior Vice President since 1995. Since 1993 he has served as Vice President-Finance, Chief Financial Officer, Treasurer and Assistant Secretary. In 1992, he served as Vice President-Controller and Chief Accounting Officer. Mr. Gilbertson is also a Director of Anacomp, Inc. Jay M. Lapine has served as Vice President, General Counsel and Assistant Secretary since 1996. From 1994 to 1996, he served as Associate General Counsel. From 1992 to 1994, prior to joining the Company, Mr. Lapine was Executive Vice President and General Counsel of Premier Anesthesia, a publicly held contract management firm providing physician services to hospitals. From 1991 to 1992, he was Chief Executive Officer of Greater El Monte Community Hospital. Russell G. Overton has served as Senior Vice President-Business Development since 1992. 12 ITEM 11: EXECUTIVE COMPENSATION The Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1997, contains under the captions "Compensation of Directors" and "Executive Compensation," information relating to director and executive compensation for the year ended December 31, 1996, which is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1997, contains under the captions "Security Ownership of Certain Beneficial Owners and Management" information relating to security ownership of beneficial owners and management, which is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 12, 1997, under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference. 13 PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: (a)1. Financial Statements The Annual Report contains the following information on pages 11 through 21: "Condensed Consolidated Quarterly Statements of Income," "Consolidated Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements." The report of Arthur Andersen LLP on these financial statements is on page 22 of the Annual Report. These financial statements and the report of Arthur Andersen LLP are incorporated herein by reference. (a)2. Financial Statement Schedules - Report of Independent Public Accountants as to Schedules Supporting Financial Statements - Schedules Supporting Financial Statements
SCHEDULE NUMBER --------- Valuation and Qualifying Accounts for the Three Years Ended II December 31, 1996.
Schedules not listed have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (a)3. Exhibits The following exhibits filed with the Securities and Exchange Commission are incorporated by reference as shown below. Items marked with an asterisk, "*," relate to management contracts or compensatory plans or arrangements.
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- ON MAY 13, 1981, AS PART OF ITS REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NUMBER 2-72275): 4(a) --Specimen forms of certificates for Common Stock of Registrant. 10(e) --Standard Form of EPLA Agreement. ON MARCH 21, 1989, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1988: 10(a) --Standard Form of Software License Agreement. 10(b) --Standard Form of Hardware Purchase Agreement. ON FEBRUARY 15, 1991, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 2-75987): *4 --HBO & Company 1981 Incentive Stock Option Plan, as amended. ON FEBRUARY 22, 1991, AS PART OF ITS FORM 8-K: 4 --HBO & Company Rights Agreement. ON MARCH 27, 1991, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-12051): *4 --HBO & Company 1986 Employee Nonqualified Stock Option Plan, as amended. ON MARCH 27, 1991, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1990: 10(c) --Standard Form of HealthQuest Ltd. Software License and Maintenance Agreement.
14
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- ON MARCH 27, 1992, AS A PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1991: 10(a) -- Standard Form of Credit Agreement with recourse between the Company and Sanwa Business Credit Corporation. 10(b) -- Standard Form of Credit Agreement without recourse between the Company and Sanwa Business Credit Corporation. ON AUGUST 12, 1993, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-67300): *4 --HBO & Company 1993 Stock Option Plan for Nonemployee Directors. ON MARCH 23, 1994, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1993: 10(e) -- Co-ownership agreement between HTG Corp. and the Company of Falcon 20 airplane, dated July 15, 1993. ON JULY 20, 1994 AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED JULY 19, 1994, AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED AUGUST 10, 1994, AND FILED WITH THE COMMISSION ON AUGUST 11, 1994, AND FURTHER AMENDED BY AMENDMENT NO. 2 TO FORM S-4 DATED AUGUST 10, 1994, AND FILED AUGUST 11, 1994: 3 --Amended Bylaws of Registrant. 10(a) -- Receivables Purchase Agreement, dated as of June 24, 1994, among HBO & Company of Georgia, as seller, and The First National Bank of Boston and NationsBank of Georgia, N.A., as purchasers, and The First National Bank of Boston, as agent. 10(b) -- Credit Agreement, dated June 13, 1994, between the Company and Wachovia Bank of Georgia, N.A. 10(e) -- Amended and Restated Revolving Credit and Term Loan Agreement, dated as of May 27, 1994, among HBO & Company and HBO & Company of Georgia and The First National Bank of Boston and NationsBank of Georgia, N.A. and The First National Bank of Boston, as agent. 10(f) -- First Amendment to the May 27, 1994, Amended and Restated Revolving Credit and Term Loan Agreement and First Amendment to Revolving Credit Notes, dated as of June 30, 1994. ON AUGUST 11, 1994, AS PART OF ITS FORM 10-Q REPORT FOR THE QUARTER ENDED JUNE 30, 1994: 10 -- Second Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement by and among HBO & Company, HBO & Company of Georgia, The First National Bank of Boston, NationsBank of Georgia, N.A. and other lending institutions, dated as of June 30, 1994. ON AUGUST 17, 1994, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-82962): *4 --HBO & Company 1990 Executive Incentive Plan, as amended. ON SEPTEMBER 15, 1994, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-84034): *4 --1986 Incentive Stock Option Plan of Serving Software, Inc. ON NOVEMBER 10, 1994, AS PART OF ITS FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1994: 10(a) -- First Amendment to the Receivables Purchase Agreement by and among HBO & Company of Georgia, The First National Bank of Boston, NationsBank of Georgia, N.A. and other financial institutions, dated September 30, 1994. 10(b) -- Third Amendment to the May 27, 1994, Amended and Restated Revolving Credit and Term Loan Agreement by and among HBO & Company, HBO & Company of Georgia, The First National Bank of Boston, NationsBank of Georgia, N.A. and other lending institutions, dated August 31, 1994.
15
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- ON MARCH 17, 1995, AS PART OF ITS FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1994: *4 --Chief Executive Officer Incentive Plan. ON MAY 9, 1995, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-59173): *4 -- HBO & Company 1986 Nonqualified Stock Option Agreement, HBO & Company 1991 Nonqualified Stock Option Agreement 1 and HBO & Company 1991 Nonqualified Stock Option Agreement 2. ON MAY 9, 1995, AS PART OF ITS FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1995: 10 --Second Amendment to Receivables Purchase Agreement dated March 31, 1995. ON JUNE 23, 1995, AS PART OF ITS FORM 8-K DATED JUNE 23, 1995, AS AMENDED BY FORM 8-KA DATED JULY 31, 1995, AND FILED WITH THE COMMISSION ON JULY 31, 1995, AS FURTHER AMENDED BY FORM 8-KA2 DATED AUGUST 8, 1995, AND FILED WITH THE COMMISSION ON AUGUST 8, 1995: 2 -- Stock Purchase Agreement, dated as of May 16, 1995, among First Data Corporation, FDC Health, Inc., First Data Health Systems Corporation, HBO & Company, and HBO & Company of Georgia, as amended by letter agreement dated June 17, 1995. ON JULY 31, 1995, AS PART OF ITS FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1995: 10(a) -- Interim Loan and Security Agreement between General Electric Capital Corporation, HTG Corp. and HBO & Company of Georgia and letter agreement between HTG Corp. and HBO & Company of Georgia, dated June 26, 1995. ON AUGUST 17, 1995, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED AUGUST 17, 1995, AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED SEPTEMBER 1, 1995, AND FILED WITH THE COMMISSION ON SEPTEMBER 1, 1995: 2 -- Agreement of Merger dated July 14, 1995, by and among HBO & Company, HBO & Company of Georgia and CliniCom Incorporated. ON OCTOBER 5, 1995, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 33-63213): *4 --1985 Employee Stock Option Plan of CliniCom Incorporated. ON MAY 21, 1996, AS PART OF ITS FORM 8-K DATED MAY 21, 1996: 3(i) --HBO & Company Certificate of Incorporation, as amended. ON JUNE 11, 1996, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED JUNE 11, 1996, AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED JULY 18, 1996, AND FILED WITH THE COMMISSION ON JULY 18, 1996: 2 -- Agreement of Merger dated May 18, 1996, by and among HBO & Company, HBO & Company of Georgia and CyCare Systems, Inc. ON AUGUST 22, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-10603): *4 -- CyCare Systems, Inc. 1995 Long-term Incentive Plan (Including the predecessor CyCare Systems, Inc. Stock Option Plan). ON OCTOBER 18, 1996, AS PART OF ITS FORM S-4 REGISTRATION STATEMENT DATED OCTOBER 18, 1996, AS AMENDED BY AMENDMENT NO. 1 TO FORM S-4 DATED NOVEMBER 6, 1996, AND FILED WITH THE COMMISSION ON NOVEMBER 6, 1996: 2 -- Agreement of Merger dated September 23, 1996, as amended, by and among HBO & Company, HBO & Company of Georgia and GMIS Inc.
16
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17583): *4(a) -- GMIS Inc. Non-Qualified Stock Option Agreement Between GMIS Inc. and Josephine Kaple. *4(b) -- GMIS Inc. Non-Qualified Stock Option Agreement Between GMIS Inc. and Lawrence Koenig. ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17551): *4 --GMIS Inc. 1991 Stock Option Plan. ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17579): *4 --Gabrieli Medical Information Systems, Inc. 1984 Stock Option Plan. ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-17555): *4 --GMIS Inc. 1995 Stock Option Plan. ON DECEMBER 10, 1996, AS PART OF ITS FORM S-8 (REGISTRATION NUMBER 333-10479): *4 -- Gabreili Medical Information Systems, Inc. 1985 Non-Qualified Common Stock Option Plan. THE FOLLOWING EXHIBITS ARE INCLUDED IN THIS FORM 10-K: 11 -- Computation of Earnings (Loss) Per Share of Common Stock for the Years Ended December 31, 1996, 1995 and 1994. 13 --Annual Report to Stockholders for the year ended December 31, 1996. 21 --Subsidiaries of Registrant. 23 --Consent of Arthur Andersen LLP. 27a --Financial Data Schedule. 27b --Financial Data Schedule restated for September 30, 1996. 27c --Financial Data Schedule restated for June 30, 1996. 27d --Financial Data Schedule restated for March 31, 1996. 27e --Financial Data Schedule restated for December 31, 1995. 27f --Financial Data Schedule restated for September 30, 1995. 27g --Financial Data Schedule restated for June 30, 1995. 27h --Financial Data Schedule restated for March 31, 1995. 27i --Financial Data Schedule restated for December 31, 1994.
(b) Reports on Form 8-K during the quarter ended December 31, 1996, or subsequent to that date but prior to the filing date of this Form 10-K: FORM 8-K DATED DECEMBER 31, 1996: Reporting under Item 5 that on December 9, 1996, HBO & Company of Georgia, a wholly owned subsidiary of HBO & Company (HBOC), completed the acquisition, by merger, of GMIS Inc. (GMIS), a leading provider of clinical information systems for the managed care industry. GMIS stockholders voted to approve the merger at a special meeting of stockholders held on December 9, 1996. GMIS stockholders received 0.42 of a share of HBOC common stock for each share of GMIS common stock. At closing, approximately 3.7 million HBOC shares were issued for the approximately 8.8 million outstanding GMIS shares. The transaction will be accounted for as a pooling of interests. FORM 8-K DATED FEBRUARY 11, 1997: Reporting under Item 5 that on February 11, 1997, the Board of Directors of HBO & Company (the "Company" or "HBOC") declared a quarterly cash dividend of $.02 per share payable on April 22, 1997 to stockholders of record on March 31, 1997. 17 Reporting under Item 5 of the unaudited combined operations for the first full month subsequent to the December 9, 1996, pooling acquisition of GMIS Inc., as follows: revenue and net income for January 1997 was $50.7 million and $4.9 million, respectively; revenue and net income for January 1996 was $47.6 million and $2.8 million, respectively. Reporting under Item 5 that on February 11, 1997, the Company announced it had signed a definitive agreement to acquire AMISYS Managed Care Systems, Inc. (Nasdaq:AMCS), a leading provider of information systems for managed care entities and other parties that assume financial risk for healthcare populations. The acquisition, which is subject to regulatory and AMISYS stockholder approval, will be accounted for as a pooling of interests and is scheduled to close during the second quarter of 1997. Terms of the acquisition call for AMISYS stockholders to receive 0.35 of a share of HBOC Common Stock for each share of AMISYS Common Stock. 18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of HBO & Company: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in HBO & Company's annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 6, 1997. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in item 14(a)2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Atlanta, Georgia February 6, 1997 19 SCHEDULE II HBO & COMPANY AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000 OMITTED)
ADDITIONS BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND DEDUCTIONS USE END OF PERIOD EXPENSES OF RESERVE ADJUSTMENTS PERIOD ------------- ----------- --------------- ------------- ----------- YEAR ENDED DECEMBER 31, 1994: Allowance for Doubtful Accounts............... $ 2,693 $ 1,959 $ 837 $ 68 $ 3,883 Inventory Reserves............................ $ 618 $ 252 $ -- $ -- $ 870 YEAR ENDED DECEMBER 31, 1995: Allowance for Doubtful Accounts............... $ 3,883 $ 1,683 $ 1,191 $ 5,246* $ 9,621 Inventory Reserves............................ $ 870 $ 2,075 $ 233 $ -- $ 2,712 YEAR ENDED DECEMBER 31, 1996: Allowance for Doubtful Accounts............... $ 9,621 $ 1,363 $ 1,468 $ -- $ 9,516 Inventory Reserves............................ $ 2,712 $ -- $ 2,217 $ -- $ 495
- ------------------------ * Adjustment primarily associated with the purchase of First Data Health Systems Corporation. 20 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. HBO & COMPANY By: /s/ CHARLES W. MCCALL ----------------------------------------- Charles W. McCall PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: February 28, 1997
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 and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ CHARLES W. MCCALL - ------------------------------ Director, President and February 28, 1997 (Charles W. McCall) Chief Executive Officer Executive Vice President, /s/ JAY P. GILBERTSON Chief Financial Officer, - ------------------------------ Treasurer, Principal February 28, 1997 (Jay P. Gilbertson) Accounting Officer and Secretary /s/ HOLCOMBE T. GREEN, JR. - ------------------------------ Chairman of the Board of February 28, 1997 (Holcombe T. Green, Jr.) Directors /s/ ALFRED C. ECKERT III - ------------------------------ Director February 28, 1997 (Alfred C. Eckert III) /s/ PHILIP A. INCARNATI - ------------------------------ Director February 28, 1997 (Philip A. Incarnati) /s/ ALTON F. IRBY III - ------------------------------ Director February 28, 1997 (Alton F. Irby III) /s/ GERALD E. MAYO - ------------------------------ Director February 28, 1997 (Gerald E. Mayo) /s/ JAMES V. NAPIER - ------------------------------ Director February 28, 1997 (James V. Napier) /s/ CHARLES E. THOELE - ------------------------------ Director February 28, 1997 (Charles E. Thoele) /s/ DONALD C. WEGMILLER - ------------------------------ Director February 28, 1997 (Donald C. Wegmiller)
21 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------------- ------------------------------------------------------------------------------------------------- 11 --Computation of Earnings (Loss) Per Share of Common Stock for years ended December 31, 1996, 1995 and 1994.................................................................................. 13 --Annual Report to Stockholders for the year ended December 31, 1996............................. 21 --Subsidiaries of Registrant..................................................................... 23 --Consent of Arthur Andersen LLP.................................................................
EX-11 2 EX 11 EXHIBIT 11 HBO & COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS (LOSS) PER SHARE OF COMMON STOCK FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (000 OMITTED EXCEPT FOR PER SHARE DATA)
1996 1995 1994 --------- ---------- --------- Weighted Average Number of Common Shares Outstanding............................ 89,696 84,224 78,093 ADD -- Shares of common stock assumed issued upon exercise of stock options using the "treasury stock" method as it applies to the computation of primary earnings per share *.......................................................... 3,359 -- 3,634 --------- ---------- --------- Number of Common and Common Equivalent Shares Outstanding....................... 93,055 84,224 81,727 ADD -- Additional shares of common stock assumed issued upon exercise of stock options using the "treasury stock" method as it applies to the computation of fully diluted earnings per share *............................................ 107 -- 337 --------- ---------- --------- Number of Common and Common Equivalent Shares Outstanding Assuming Full Dilution...................................................................... 93,162 84,224 82,064 --------- ---------- --------- --------- ---------- --------- Net Earnings (Loss) for Primary and Fully Diluted Earnings (Loss) Per Share..................................................................... $ 73,954 $ (17,569) $ 36,469 --------- ---------- --------- --------- ---------- --------- Earnings (Loss) Per Share: Primary....................................................................... $ .79 $ (.21) $ .45 --------- ---------- --------- --------- ---------- --------- Fully Diluted................................................................. $ .79 $ (.21) $ .44 --------- ---------- --------- --------- ---------- ---------
- ------------------------ * Common Equivalent Shares are not presented for 1995 because the effect is anti-dilutive. All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. EX-13 3 EX 13 At HBOC, our people, products and services have a primary goal: To serve health enterprises by putting the right information in the right hands at the right time. In all that we do, we are committed to a continuous pursuit of quality in fact and quality in perception, so that every product and service we offer is known as the best in the industry. FROM THE HBOC MISSION STATEMENT [PHOTO] TABLE OF CONTENTS - ----------------- Financial Highlights 2 Letter to Stockholders 3 Five-Year Selected Financial Information 5 Financial Review 6 Revenue by Business Region 10 Condensed Consolidated Quarterly Statements of Income 11 Consolidated Financial Statements 12 Notes to Consolidated Financial Statements 16 Common Stock Data 22 Report of Independent Public Accountants 22 Stockholder Information 23 Board of Directors and Corporate Officers 24 HBOC Offices Back COMPANY PROFILE With more than 4,400 employees worldwide, HBOC serves the information systems needs of the health enterprise--integrated health systems, managed care organizations, physician practices and enterprises, payers, home health agencies and hospitals. HBOC develops, implements and supports patient care, financial, clinical, homecare, managed care and strategic management software that facilitates the integration of data throughout the enterprise. HBOC also provides a full complement of networking technologies and electronic commerce services as well as outsourcing services for managing business offices and information system operations. HBOC's sole focus is the healthcare market, and the Company is an industry leader in revenue and market share with products and services that are sold throughout the world. ORGANIZATIONAL HIGHLIGHTS - -- Introduced CarePoint 2000-Trademark-, HBOC's fourth generation of wireless computing solutions. CarePoint 2000 products -- a pen-enabled, hand-held PC and a cart-based, laptop PC -- are designed to facilitate point-of-care functionality. - -- Introduced Paragon-Trademark-, a Windows NT-Trademark- hospital information system for small, stand-alone acute-care hospitals. Paragon represents the next generation of HBOC's SAINT-Copyright- Express product. - -- Announced the general availability of the HBOC DeskTop, providing users with single sign-on and the ability to move easily among applications. - -- Acquired CyCare Systems, Inc., a supplier of physician group practice management software and electronic data interchange services. - -- Acquired Management Software, Inc., the No. 1 market share leader in clinical, financial and administrative homecare information solutions. - -- Acquired GMIS Inc., a leading provider of data quality tools and decision support software for the payer market. - -- Rolled out and implemented SAGE (Support Automation in a Global Environment), a companywide support automation system designed to enable HBOC employees to deliver seamless, proactive customer service and support. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Operating Income, Net Income and Fully Diluted Earnings Per Share Exclude Nonrecurring Charges) (000 Omitted Except Per Share Data and Employees) Revenue $ 796,578 $ 607,242 $ 453,979 $ 364,697 $ 324,349 Operating Income $ 179,664 $ 104,024 $ 57,103 $ 29,995 $ 29,858 Net Income $ 110,805 $ 64,320 $ 36,469 $ 17,682 $ 20,232 Fully Diluted Earnings Per Share $ 1.19 $ .73 $ .44 $ .22 $ .26 Total Assets $ 848,947 $ 649,417 $ 380,410 $ 266,394 $ 218,869 Long-Term Debt $ 192 $ 3,642 $ 4,715 $ 6,133 $ 7,200 Stockholders' Equity $ 525,343 $ 408,190 $ 203,515 $ 164,836 $ 125,882 Employees at Year-End 4,404 4,257 3,421 2,871 3,214 Revenue Per Average Number of Employees $ 184 $ 156 $ 144 $ 120 $ 104
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. 1992 amounts are shown before CliniCom Incorporated's Cumulative Effect of an Accounting Change. REVENUE [GRAPH] FULLY DILUTED EARNINGS PER SHARE [GRAPH] STOCK HIGH AND LOW CLOSING PRICES [GRAPH] All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. -2- LETTER TO STOCKHOLDERS - -------------------------------------------------------------------------------- BUILDING ON THE MOMENTUM OF THE PAST FEW YEARS, HBOC REACHED A NEW LEVEL OF INDUSTRY LEADERSHIP IN 1996 -- NOT ONLY IN FINANCIAL PERFORMANCE BUT IN CUSTOMER GROWTH AND LEADING-EDGE SOFTWARE SOLUTIONS TO ADDRESS THE BROAD CONTINUUM OF HEALTHCARE DELIVERY. Revenue grew by 31 percent last year to $797 million, and earnings per share increased 63 percent to $1.19 excluding acquisition-related nonrecurring charges. HBOC more than doubled its customer base through expansion into three new markets -- physicians, homecare and payers. We added 150 new Pathways 2000 -Registered Service Mark- enterprise solution customers. We signed five new outsourcing contracts and extended three existing engagements. We introduced Paragon -Registered Service Mark- a Windows NT - -Registered Trademark- product for the small-hospital market, and we rolled out CarePoint 2000 -Registered Service Mark-, HBOC's fourth-generation wireless technology product line. The HBOC DeskTop gave product users single sign-on and easy access to applications. And a 14-chapter HL7 standards document set the bar for internal product integration, a vital step in making integration Job No. 1 at HBOC. Those are just a few of our accomplishments last year, and we expect 1997 to be even better as the demand grows for new software solutions to address changing information requirements. Healthcare restructuring shows no signs of slowing down, and the movement from fee-for-service to managed care is driving consolidations, affiliations and alliances within and across market segments. [PHOTOGRAPH] CHARLES W. MCCALL PRESIDENT AND CHIEF EXECUTIVE OFFICER Care delivery is rapidly moving beyond the bounds of hospitals and physicians' offices to settings such as community clinics and patients' homes. The traditional lines among payers, providers and physician practices have become increasingly blurred as integrated deliver networks evolve to manage the health of populations. And the ability to capture clinical information at the point of care has taken center stage as organizations of all kinds -- hospitals, health enterprises, physician practices, home health agencies and payers -- seek to manage outcomes and lower costs. There has never been a more exciting time in healthcare or a greater opportunity for HBOC. Building on our presence in the hospital information systems market, we've systematically extended our reach into the health enterprise at large with strategic solution sets and "best-of-class" clinical practice software tools for hospital, physician office and homecare settings. Along the way, though internal growth and acquisitions, HBOC has assembled more than 225 -3- LETTER TO STOCKHOLDERS employee clinicians (including more than 40 physicians), more than 1,500 clinical customers and some 4,000 voting members in its clinical user groups. Working together with customers, HBOC employees are drawing from firsthand experience to develop new solutions that can help health enterprises make a dramatic impact on cost and quality as they arrange for care, provide care and account for care across the enterprise. HBOC's access management solutions enable organizations to re-engineer the way members access healthcare, providing them with consistent, coordinated access to services through streamlined registration and a universal identifier. Our clinical practice tools are specially designed for use at the point of care, increasing both the efficiency of caregivers and the accuracy of the information they use to make decisions. And HBOC's enterprise management solutions--from decision support to full-blown managed care--enable enterprise managers to account for resources, determine how effectively those resources have been used and set a course for the future. HBOC further strengthened its product portfolio in 1996 by expanding its presence in three market segments that offer great potential and that are relatively new to us--physicians, homecare and payers. The acquisition of CyCare Systems, Inc., places HBOC squarely in the physician market with a proven solution, while Management Software, Inc., gives HBOC market share leadership in homecare. The addition of GMIS Inc. provides HBOC with 280 payer customers-- including some of the largest and best-known insurance companies in the United States--and greater resources to address not only the needs of payers but also providers that are assuming risk for a population. Each of these additions represents a twofold opportunity for HBOC--the addition of new customers and new revenue streams, and the ability to offer new solutions to existing customers. With the increasing prevalence of managed care, a great majority of our customers are ripe for enterprisewide solutions and look to HBOC for not only broad range and rich functionality but full integration as well. In that respect, HBOC has stepped up to a challenge that few others have the ability or resources to tackle. Integration continues to be Job No. 1 at HBOC-- not only among our products but among our people and processes as well. We made steady progress last year, publishing standards that all R&D groups follow to ensure HBOC products share data at the level required for full integration. Phase II of the HBOC DeskTop is now operational at development sites, and our sales, development, service and support groups moved from a product-line, business-unit organizational structure to one focused on providing integrated solutions for the health enterprise as a whole. HBOC faces many challenges in 1997--among them rapid change, competitive pressures and the continued challenge of assimilating new products and employee groups. But we've set the bar high for ourselves and we intend to "take the lead" as never before--with a solid customer base, talented employees, a healthy balance sheet and the broadest range of products and services in the industry. /s/Charlie McCall Charles W. McCall President & CEO February 6, 1997 -4- FIVE-YEAR SELECTED FINANCIAL INFORMATION
FOR THE YEARS ENDED DECEMBER 31 --------------------------------------------------------------- 1996(1) 1995(2) 1994 1993 1992(3) -------- -------- ------- ------- -------- (000 OMITTED EXCEPT FOR %S, PER SHARE DATA, RATIOS, STOCKHOLDERS AND EMPLOYEES) Operations (Excluding Nonrecurring Charges) Revenue .............................................. $796,578 $607,242 $453,979 $364,697 $324,349 Operating Income ..................................... $179,664 $104,024 $ 57,103 $ 29,995 $ 29,858 Income Before Income Taxes ........................... $183,766 $104,564 $ 58,257 $ 34,298 $ 30,098 Net Income ........................................... $110,805 $ 64,320 $ 36,469 $ 17,682 $ 20,232 As a Percent of Revenue (Excluding Nonrecurring Charges) Operating Income ..................................... 23% 17% 13% 8% 9% Income Before Income Taxes ........................... 23% 17% 13% 9% 9% Net Income ........................................... 14% 11% 8% 5% 6% Percent Change From Prior Year (Excluding Nonrecurring Charges) Revenue .............................................. 31% 34% 24% 12% 19% Operating Income ..................................... 73% 82% 90% 0% 147% Income Before Income Taxes ........................... 76% 79% 70% 14% 185% Net Income ........................................... 72% 76% 106% (13)% 211% Share Information(4) (Excluding Nonrecurring Charges) Stockholders of Record ............................... 2,528 2,568 2,874 2,920 5,805 Weighted Average Shares Outstanding (Fully Diluted) .. 93,162 87,982 82,064 80,940 78,477 Fully Diluted Earnings Per Share ..................... $ 1.19 $ .73 $ .44 $ .22 $ .26 Cash Dividends Per Share ............................. $ .08 $ .08 $ .08 $ .075 $ .075 Book Value at Year-End Per Share ..................... $ 5.80 $ 4.59 $ 2.58 $ 2.14 $ 1.48 Closing Stock Price Per Share--High .................. $ 71.88 $ 42.88 $ 18.07 $ 11.50 $ 6.44 --Low ................... $ 32.75 $ 16.75 $ 10.38 $ 4.22 $ 2.44 Capitalized Software Research and Development Expenditures ................ $90,053 $78,539 $62,346 $54,192 $44,357 Capitalized Software Expenditures .................... $25,957 $24,692 $19,427 $17,581 $13,665 Research and Development Capitalization Rate ......... 29% 31% 31% 32% 31% Financial Ratios (Excluding Nonrecurring Charges) Return on Average Stockholders' Equity ............... 24% 20% 20% 12% 16% Current Ratio ........................................ 1.6:1 1.4:1 1.2:1 2.0:1 1.5:1 Long-Term Debt to Stockholders' Equity ............... -- .01:1 .02:1 .04:1 .06:1 Financial Position at Year-End Cash and Short-Term Investments ...................... $183,613 $ 91,771 $ 48,753 $ 86,208 $ 26,034 Working Capital ...................................... $203,405 $ 83,626 $ 39,905 $ 83,193 $ 43,842 Total Assets ......................................... $848,947 $649,417 $380,410 $266,394 $218,869 Long-Term Debt ....................................... $ 192 $ 3,642 $ 4,715 $ 6,133 $ 7,200 Stockholders' Equity ................................. $525,343 $408,190 $203,515 $164,836 $125,882 Other Financial Information Employees at Year-End ................................ 4,404 4,257 3,421 2,871 3,214 Revenue Per Average Number of Employees .............. $ 184 $ 156 $ 144 $ 120 $ 104
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. Periods prior to June 1995 do not include the purchase acquisition of First Data Health Systems Corporation. Periods prior to May 1994 do not include the purchase acquisition of IBAX Healthcare Systems. (1) 1996 Income Statement related items exclude nonrecurring charges of $61,414. The Net Income is $73,954 and Fully Diluted Earnings Per Share is $.79 including the nonrecurring charges. (2) 1995 Income Statement related items exclude nonrecurring charges of $136,481. The Net Loss is ($17,569) and Fully Diluted Loss Per Share is ($.21) including the nonrecurring charges. (3) 1992 is presented before CliniCom Incorporated's Cumulative Effect of Accounting Change. (4) All share and per share amounts have been restated to reflect the 1996 stock split effected in the form of a stock dividend. -5- FINANCIAL REVIEW GENERAL Unless stated otherwise, all expense, income and per share amounts exclude the following nonrecurring charges and include the dilutive effect of stock options: $61.4 million related primarily to the acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc., in 1996; $136.5 million related primarily to the 1995 acquisitions of First Data Health Systems Corporation (now known as the Charlotte Product Group or CPG) and CliniCom Incorporated. Each of the above 1996 acquisitions and the 1995 acquisition of CliniCom Incorporated was accounted for as a pooling of interests; therefore, all prior period financial information has been restated. Unless otherwise noted, management's discussion of financial results is based on restated figures. Once again in 1996, HBO & Company ("the Company" or "HBOC") achieved record revenue and earnings. For 1996, the Company posted earnings per share of $1.19, a 63% increase over earnings per share of $.73 for 1995. The significant increase in earnings per share resulted from strong revenue growth, $796.6 million in 1996 up from $607.2 million in 1995, an increase of 31%, and an increase in operating income as a percent of revenue to 23% in 1996 compared to 17% in 1995. Including the nonrecurring charges and excluding the dilutive effect of stock options (for 1995), earnings per share for 1996 was $.79, compared to a loss per share of ($.21) in 1995 and earnings per share of $.44 in 1994. The Company's operating expense continued to grow at a slower rate than revenue due to increased software sales, successful cost-control programs and productivity enhancements. The Company continues to make progress in the area of employee productivity, with 1996 revenue per average number of employees of $184,000, an increase from $156,000 for 1995 and $144,000 for 1994. As the healthcare industry moves from a fee-for-service environment to managed care, HBOC has evolved the focus of its products beyond hospital and acute-care settings to encompass the full spectrum of care, including physician practices, homecare and payer entities. The Company's strategic solutions sets are aimed at supporting the re-engineering of various healthcare-related activities to improve efficiencies, reduce costs and improve the quality of patient care. Because HBOC realizes that most health enterprises and integrated delivery networks must integrate diverse technologies from disparate systems, the Company continues to focus on data and product integration. The Company's revenue growth is the result of its ability to develop, implement and support patient care, clinical, financial, homecare, managed care, payer and strategic management software that facilitates the integration of data throughout the enterprise and across the continuum of care. In 1996, the Company completed the acquisitions of CyCare Systems, Inc. (CyCare), Management Software, Inc. (MSI), and GMIS Inc. (GMIS). These strategic acquisitions have expanded the Company's product and customer base into markets that had previously been largely untapped by the Company. Revenue and operating income for all three of the acquired business groups increased significantly in 1996 compared to 1995, demonstrating HBOC's ability to leverage its strong sales and distribution network and quickly introduce new products into its broad portfolio of product and service offerings. The Company ended 1996 with a strong backlog. At December 31, 1996, there were 172 units of system sales not yet delivered and installed totaling $57.9 million in revenue along with $42.7 million of future recurring software revenue. Future contracted outsourcing fees totaled $120.6 million, and future payments under monthly service fee agreements totaled $3.3 million. In addition, the Company derives significant revenue from maintenance and support contracts that are automatically renewable unless canceled, as well as recurring revenue from multiyear remote and electronic processing contracts. The Company continues to maintain a strong liquidity position. Cash and short-term investments grew to $183.6 million at December 31, 1996, from $91.8 million at December 31, 1995. Cash flow from operations was $136.9 million for 1996, $73.8 million of cash was utilized in investing activities and $10.7 million of cash was provided by net financing activities. HBOC financed all 1996 acquisitions through equity or with cash from operations and had no bank debt as of year-end. RESULTS OF OPERATIONS The following table presents, as a percent of revenue, certain categories included in the consolidated statements of income for 1994 through 1996.
1996 1995 1994 ---- ---- ---- Revenue ............................... 100% 100% 100% Operating Expense:* Cost of Operations ................. 44% 47% 50% Marketing .......................... 14% 15% 14% Research and Development ........... 8% 9% 9% General and Administrative ......... 11% 12% 14% ---- ---- ---- Operating Income* ..................... 23% 17% 13% ---- ---- ---- Net Income* ........................... 14% 11% 8% ---- ---- ----
*Excluding nonrecurring charges for 1996 and 1995. -6- YEARS ENDED DECEMBER 31, 1996 AND 1995 Revenue increased 31% to $796.6 million in 1996 from $607.2 million in 1995. This growth was mainly due to significant increases in sales of enterprise client/server systems, HIS (hospital information systems), hardware and services. One-time software license fee revenue grew 51% to $204.8 million in 1996, compared to $135.3 million in 1995. One-time software revenue as a percent of total revenue increased to 26% in 1996 compared to 22% in 1995. These increases were primarily due to the continuing strong demand for the Pathways 2000-Registered Trademark- line of enterprise solutions. In addition, the Company recognized strong sales of STAR 2000 and decision support products. GMIS recurring software revenue increased due to strong sales of data quality products to the payer market. Hardware revenue increased 46% to $126.0 million for 1996 compared to $86.2 million for 1995. As a percent of total revenue, hardware revenue increased to 15% in 1996 compared to 14% in 1995. These increases were primarily from the strong sales of RISC-based processors sold in conjunction with software, sales of network equipment through the Connect Technology Group, demand for the Company's CarePoint 2000-SM- wireless solution and a continuing effort to increase add-on hardware sales to existing customers through an expanded sales center. The Company continues to support an open systems approach with the ability to support multiple networking options as well as the leading hardware platforms. Implementation and other services revenue increased 24% in 1996 over 1995 and represented 15% of total revenue in 1996 compared to 16% in 1995. The revenue increase primarily reflects the increase in implementations resulting from strong system sales and the full-year results of CPG, which was acquired by purchase in June of 1995. The Company continues to invest in programs designed to streamline the implementation process by giving customer organizations more control over their implementations and the extent of HBOC involvement. As a result, the productivity of the Company's implementation personnel has continued to improve. Maintenance and support revenue increased 19% in 1996 over 1995 and represented 23% of total revenue in 1996 compared to 25% in 1995. The increase for 1996 was primarily due to growth in existing product lines, expansion of the customer base and the inclusion of CPG maintenance for a full year in 1996. To manage this growth, the Company introduced a companywide support system, SAGE, in the second quarter of 1996 and is in the process of implementing it for the entire employee and customer base. Remote and electronic processing revenue increased 31% in 1996 compared to 1995 due to the full-year impact of CPG. In addition, outsourcing services revenue increased 16% in 1996, due to the addition of new outsourcing sites. Cost of operations as a percent of revenue decreased to 44% in 1996 from 47% in 1995. This percentage decrease was mostly in the area of personnel expense resulting from employee productivity enhancements. Total hardware cost as a percent of revenue increased to 12% in 1996 from 11% in 1995. In conjunction with decreases in cost of operations as a percent of revenue, the gross margin for 1996 grew to 56% from 53% in 1995. Cost of operations expense increased 23% in 1996 primarily due to increased hardware costs associated with the growth in hardware sales, increased software royalties expense due to increases in software sales and increased personnel expense due to the overall growth of the Company. In addition, cost of operations expense increased due to 1995 acquisitions, including costs associated with the CPG remote processing data center, software and hardware maintenance expense and amortization of intangibles. Marketing expense as a percent of revenue decreased slightly to 14% for 1996 from 15% for 1995. Marketing expense increased 27% in 1996 over 1995, primarily due to higher personnel and commission expense directly related to the growth in size and revenue of the Company. Research and development (R&D) expense as a percent of revenue decreased slightly to 8% in 1996 compared to 9% in 1995. The R&D capitalization rate decreased to 29% in 1996 from 31% in 1995. The R&D capitalization rate decreased due to a reduction in the use of consultants and efforts to capitalize projects acquired with CyCare, MSI, and GMIS under more conservative HBOC policies. Actual R&D expense increased 19%, mainly due to R&D related to 1995 acquisitions and additional personnel for new product development. General and administrative (G&A) expense as a percent of revenue decreased to 11% for 1996 compared to 12% for 1995, as the Company continued to leverage its fixed costs against its growing revenue. Actual G&A expense increased in 1996 primarily due to increased facilities costs and increased personnel expense due to acquisitions and growth of the Company. -7- Total operating income as a percent of revenue increased significantly to 23% in 1996 from 17% in 1995. This is the result of increased sales of high-margin software and services, and a continuing effort to increase the efficiency of operations and personnel. YEARS ENDED DECEMBER 31, 1995 AND 1994 Revenue in 1995 increased 34% over 1994 due to increases in revenue from maintenance contracts, software license fees and the addition of remote processing revenue from the purchase of CPG. For 1995, cost of operations expense as a percent of revenue decreased to 47% from 50% in 1994. This decrease was mainly due to the shift in revenue mix from lower-margin hardware revenue to higher-margin software and services revenue. Total cost of operations expense increased over 1994 primarily due to higher personnel expense, higher hardware costs and software royalty fees, and increased facilities expense. Cost of operations expense also increased due to costs associated with acquisitions such as increased amortization and the costs of the CPG remote data processing center. Marketing expense as a percent of revenue increased to 15% for 1995 from 14% for 1994. Marketing expense increased in 1995 over 1994, primarily due to higher personnel and commission expense directly related to the growth in size and revenue of the Company. R&D expense as a percent of revenue remained constant at 9% for 1995 and 1994. The R&D capitalization rate remained stable at 31% for 1995 and 1994. Actual R&D expense increased in 1995 mainly due to higher personnel expense related to acquisitions. G&A expense as a percent of revenue decreased to 12% for 1995 compared to 14% for 1994, as the Company continued to realize synergies from acquisitions. Actual G&A expense increased in 1995 primarily due to increased facilities costs and increased personnel expense due to acquisitions and growth of the Company. Total operating income as a percent of revenue increased significantly to 17% in 1995 from 13% in 1994. This is the result of increased sales of high-margin software and a continuing effort to increase efficiency of operations and personnel. NONRECURRING CHARGES HBOC recorded nonrecurring charges of $61.4 million in 1996 related to the pooling acquisitions of CyCare, MSI and GMIS, and the purchase acquisition of Gemini Ltd., in the United Kingdom. In the third quarter, a $26.2 million charge was taken for CyCare and MSI, and in the fourth quarter, a $34.4 million charge was taken for GMIS. These charges consisted mainly of the write-down of long-lived assets of $30.0 million, transaction costs of $11.4 million, severance and employee-related costs of $6.3 million and other product-related costs of $12.9 million. In 1995, the Company recorded nonrecurring charges totaling $136.5 million primarily related to the purchase acquisition of CPG and the pooling acquisition of CliniCom Incorporated. These charges consisted mainly of purchased research and development costs related to the purchase of CPG, severance and other acquisition costs. TAXES Including the nonrecurring charges, the effective tax rate for 1996 was 40% compared to 45% for 1995 and 37% for 1994. A comparison of the 1995 and 1994 effective rates is affected by the pooling acquisition of MSI, which was a Subchapter S corporation and therefore did not provide for corporate taxes on a historical basis. SHARES Fully diluted weighted average shares outstanding increased in 1996 from 1995 due to shares issued under employee stock option and purchase programs and the dilutive effect of stock options. Weighted average shares outstanding increased in 1995 from 1994 due to the issuance of shares in connection with the purchase of CPG and shares issued under employee stock option and purchase programs. INFLATION HBOC is affected by inflation through increased salaries, benefits and other operating and administrative expenses. To the extent permitted by the marketplace, the Company attempts to pass on increasing costs by periodically increasing prices of products and services. Standard software maintenance and support agreements contain clauses allowing the Company to increase fees annually to reflect changes in costs. Other products and services are generally contracted for short periods and are therefore not exposed to inflationary pressure. LIQUIDITY AND CAPITAL RESOURCES The Company continues to improve the strength and quality of its balance sheet. At December 31, 1996, HBOC had $183.6 million in cash and short-term investments compared to $91.8 million at December 31, 1995. With strong cash and liquid assets, no bank debt and an improving current ratio, the Company remains well-positioned for continued growth. -8- During 1996, the Company generated $136.9 million in cash flow from operations, used $73.8 million in investing activities and provided $10.7 million from net financing activities. As a result of this cash activity, the Company's cash balance increased 85% to $160.4 million at December 31, 1996, from $86.6 million at December 31, 1995. During 1996, the Company paid off all pre-acquisition, long-term debt of CyCare and MSI. The Company's current ratio increased to 1.64:1 at December 31, 1996, from 1.37:1 at December 31, 1995. Current assets increased $209.3 million, mainly reflecting increases in receivables and cash. The Company's management places a high priority on the area of receivables, and the Company continues to maintain a low delinquency rate. Current liabilities increased $89.5 million due to an increase in customer deposits, deferred revenue, income taxes payable and acquisition accruals related to the nonrecurring charges. The Company has access to several financing sources, including a $5 million line of credit and a $30 million revolving credit agreement. As of December 31, 1996, there were no outstanding balances on either. Management believes that the Company's cash flow from operations and amounts available under existing credit arrangements are sufficient to meet ongoing operational and capital expenditure requirements, as well as to fund costs associated with future equity acquisitions and small acquisitions for cash. -9- REVENUE BY BUSINESS REGION
1996 --------------------------------------------------------------- NORTH AMERICA INTERNATIONAL TOTAL REVENUE PERCENT ------------- ------------- ------------- -------- (000 OMITTED EXCEPT %S) Systems Revenue One-Time Software .................... $199,996 $ 4,785 $204,781 26% Recurring Software ................... 38,595 -- 38,595 5% -------- ------- -------- --- Total Software ................... 238,591 4,785 243,376 31% Hardware ............................. 124,016 1,943 125,959 15% -------- ------- -------- --- Total Systems Revenue ........ 362,607 6,728 369,335 46% Services Revenue One-Time Services .................... 115,008 3,735 118,743 15% Recurring Services ................... 295,083 13,417 308,500 39% -------- ------- -------- --- Total Services Revenue ....... 410,091 17,152 427,243 54% -------- ------- -------- --- Total Revenue ........................... $772,698 $23,880 $796,578 100% -------- ------- -------- --- -------- ------- -------- ---
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions.
1995 --------------------------------------------------------------- NORTH AMERICA INTERNATIONAL TOTAL REVENUE PERCENT ------------- ------------- ------------- -------- (000 OMITTED EXCEPT %S) Systems Revenue One-Time Software .................... $132,476 $ 2,846 $135,322 22% Recurring Software ................... 33,551 -- 33,551 6% -------- ------- -------- --- Total Software .................... 166,027 2,846 168,873 28% Hardware ............................. 83,840 2,386 86,226 14% -------- ------- -------- --- Total Systems Revenue .......... 249,867 5,232 255,099 42% Services Revenue One-Time Services .................... 93,439 2,350 95,789 16% Recurring Services ................... 242,554 13,800 256,354 42% -------- ------- -------- --- Total Services Revenue ......... 335,993 16,150 352,143 58% -------- ------- -------- --- Total Revenue ........................... $585,860 $21,382 $607,242 100% -------- ------- -------- --- -------- ------- -------- ---
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. -10- CONDENSED CONSOLIDATED QUARTERLY STATEMENTS OF INCOME (UNAUDITED)
1996 QUARTER -------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL -------- -------- -------- -------- --------- (000 OMITTED EXCEPT FOR PER SHARE DATA) Revenue ............................................. $172,515 $193,279 $206,443 $224,341 $796,578 Operating Expense ................................... 137,487 151,453 157,536 170,438 616,914 Nonrecurring Charge ................................. -- -- 26,214 35,200 61,414 -------- -------- -------- -------- --------- Operating Income .................................... 35,028 41,826 22,693 18,703 118,250 Other Income, Net ................................... 918 865 895 1,424 4,102 -------- -------- -------- -------- --------- Income Before Income Taxes .......................... 35,946 42,691 23,588 20,127 122,352 Provision for Income Taxes .......................... 14,079 16,831 9,437 8,051 48,398 -------- -------- -------- -------- --------- Net Income .......................................... $ 21,867 $ 25,860 $ 14,151 $ 12,076 $ 73,954 -------- -------- -------- -------- --------- -------- -------- -------- -------- --------- Earnings Per Share:(1) Primary .......................................... $ .24 $ .28 $ .15 $ .13 $ .79 Fully Diluted .................................... $ .24 $ .28 $ .15 $ .13 $ .79 Weighted Average Shares Outstanding: Primary .......................................... 92,573 93,406 93,331 93,851 93,055 Fully Diluted .................................... 92,678 93,596 93,638 93,877 93,162 Cash Dividends Declared Per Share ................... $ .02 $ .02 $ .02 $ .02 $ .08
1995 QUARTER -------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL -------- -------- -------- -------- --------- (000 OMITTED EXCEPT FOR PER SHARE DATA) Revenue ............................................. $126,261 $136,519 $166,320 $178,142 $607,242 Operating Expense ................................... 104,535 113,528 135,983 149,172 503,218 Nonrecurring Charge ................................. -- 125,520 10,961 -- 136,481 -------- -------- -------- -------- --------- Operating Income (Loss) ............................. 21,726 (102,529) 19,376 28,970 (32,457) Other Income (Expense), Net ......................... 194 (104) 135 315 540 -------- -------- -------- -------- --------- Income (Loss) Before Income Taxes ................... 21,920 (102,633) 19,511 29,285 (31,917) Provision (Credit) for Income Taxes ................. 8,551 (41,483) 7,352 11,232 (14,348) -------- -------- -------- -------- --------- Net Income (Loss) ................................... $ 13,369 $(61,150) $ 12,159 $ 18,053 $(17,569) -------- -------- -------- -------- --------- -------- -------- -------- -------- --------- Earnings (Loss) Per Share:(1) Primary .......................................... $ .16 $ (.76) $ .13 $ .20 $ (.21) Fully Diluted .................................... $ .16 $ (.76) $ .13 $ .20 $ (.21) Weighted Average Shares Outstanding: Primary .......................................... 82,901 80,985 91,986 92,152 84,224 Fully Diluted .................................... 83,189 80,985 92,173 92,191 84,224 Cash Dividends Declared Per Share ................... $ .02 $ .02 $ .02 $ .02 $ .08
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. (1) The total of the four quarterly amounts for earnings (loss) per share for the year may not equal the earnings (loss) per share amount for the year in total. Differences can result from the use of a weighted average to compute the weighted average shares outstanding for each quarter and the year. Differences are also caused by the exclusion of common stock equivalents from the calculation of primary and fully diluted weighted average shares outstanding in periods in which there is a loss. In the case of 1995, the common stock equivalents are anti-dilutive. -11- CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 (000 Omitted Except for Per Share Data) 1996 1995 1994 -------- -------- -------- REVENUE: Systems $369,335 $255,099 $209,555 Services 427,243 352,143 244,424 -------- -------- -------- Total Revenue 796,578 607,242 453,979 OPERATING EXPENSE: Cost of Operations 351,139 285,756 225,546 Marketing 115,660 90,852 64,127 Research and Development 64,096 53,847 42,919 General and Administrative 86,019 72,763 64,284 Nonrecurring Charge 61,414 136,481 -- -------- -------- -------- Total Operating Expense 678,328 639,699 396,876 -------- -------- -------- OPERATING INCOME (LOSS) 118,250 (32,457) 57,103 Other Income, Net 4,102 540 1,154 -------- -------- -------- Income (Loss) Before Income Taxes 122,352 (31,917) 58,257 Provision (Credit) for Income Taxes 48,398 (14,348) 21,788 -------- -------- -------- NET INCOME (LOSS) $ 73,954 $(17,569) $ 36,469 -------- -------- -------- EARNINGS (LOSS) PER SHARE: Primary $ .79 $ (.21) $ .45 Fully Diluted $ .79 $ (.21) $ .44 -------- -------- -------- WEIGHTED AVERAGE SHARES OUTSTANDING: Primary 93,055 84,224 81,727 Fully Diluted 93,162 84,224 82,064 -------- -------- --------
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc. Management Software, Inc. and GMIS Inc. in pooling transactions. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -12- CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 1995 -------- ------- (000 OMITTED) ASSETS Current Assets: Cash and Cash Equivalents ......................................... $160,363 $ 86,612 Short-Term Investments ............................................ 23,250 5,159 Receivables, Net of Allowance For Doubtful Accounts of $9,516 and $9,621 in 1996 and 1995 .......................... 291,351 182,484 Current Deferred Income Taxes ..................................... 25,020 17,836 Inventories ....................................................... 6,993 7,782 Prepaids and Other Current Assets ................................. 12,786 10,620 -------- -------- Total Current Assets ........................................... 519,763 310,493 Intangibles Net of Accumulated Amortization of $31,691 and $17,882 in 1996 and 1995 ........................................................ 177,911 200,861 Capitalized Software Net of Accumulated Amortization of $36,039 and $42,373 in 1996 and 1995 ........................................................ 58,338 59,254 Property and Equipment Net of Accumulated Depreciation of $104,244 and $98,969 in 1996 and 1995 ........................................................ 49,419 49,049 Deferred Income Taxes ................................................. 34,998 21,682 Other Noncurrent Assets, Net .......................................... 8,518 8,078 -------- -------- Total Assets .......................................................... $848,947 $649,417 -------- -------- -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Deferred Revenue ................................................... $ 91,978 $ 74,524 Other Current Liabilities .......................................... 224,380 152,343 -------- -------- Total Current Liabilities ................................. 316,358 226,867 -------- -------- Long-Term Debt ........................................................ 192 3,642 Other Long-Term Liabilities ........................................... 7,054 10,718 -------- -------- Total Liabilities ............................................... 323,604 241,227 -------- -------- Commitments and Contingencies.......................................... Stockholders' Equity: Preferred Stock, 1,000 Shares Authorized and No Shares Issued in Both 1996 and 1995 ........................... -- -- Common Stock, $.05 Par Value, 250,000 Shares Authorized and 122,136 and 66,134 Shares Issued in 1996 and 1995 ............ 6,107 3,307 Additional Paid-in Capital ......................................... 427,324 392,701 Retained Earnings .................................................. 168,793 101,965 -------- -------- 602,224 497,973 Treasury Stock, at Cost (31,535 and 33,819 Shares in 1996 and 1995) ....................................................... (76,881) (89,783) -------- -------- Total Stockholders' Equity ...................................... 525,343 408,190 -------- -------- Total Liabilities and Stockholders' Equity ............................ $848,947 $649,417 -------- -------- -------- --------
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -13- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 --------------------------------------------------------------------------------- | | Common Stock Shares Additional Total Common Paid-In Retained Treasury Stockholders' Issued Treasury Outstanding| Stock Capital Earnings Stock Equity ------ -------- ----------- ----- ------- -------- ----- ------ (000 OMITTED) | | Balance, December 31, 1993 .................. 61,696 18,683 43,013 | $3,084 $155,573 $ 99,502 $(93,323) $164,836 Common Stock Issued: | Stock Options Exercised--Including | Related Tax Benefits ............... 284 (713) 997 | 15 10,875 -- 4,005 14,895 Employee Stock Purchase Plan .......... 10 (191) 201 | -- 925 -- 1,028 1,953 Purchase of Treasury Stock ............ -- 699 (699) | -- -- -- (7,576) (7,576) Other ................................. -- (48) 48 | -- 160 142 -- 302 Net Change in Unrealized Gain/Loss on | Investments Available-for-Sale ..... -- -- -- | -- -- (8) -- (8) Cash Dividends Declared ($.08 Per Share).. -- -- -- | -- -- (7,356) -- (7,356) Net Income for the Year .................. -- -- -- | -- -- 36,469 -- 36,469 -------------------------- |------------------------------------------------- Balance, December 31, 1994 .................. 61,990 18,430 43,560 | 3,099 167,533 128,749 (95,866) 203,515 Common Stock Issued | Business Combination .................. 4,000 (19) 4,019 | 200 199,906 -- 490 200,596 Stock Options Exercised--Including | Related Tax Benefits ............... 122 (1,018) 1,140 | 8 23,879 (928) 6,791 29,750 Employee Stock Purchase Plan .......... 22 (114) 136 | -- 1,374 -- 727 2,101 Purchase of Treasury Stock ............ -- 69 (69) | -- -- -- (1,925) (1,925) Other ................................. -- (7) 7 | -- 9 (252) -- (243) Net Change in Unrealized Gain/Loss on | Investments Available-for-Sale ..... -- -- -- | -- -- 8 -- 8 Cash Dividends Declared ($.08 Per Share).. -- -- -- | -- -- (8,043) -- (8,043) Net (Loss) for the Year ............... -- -- -- | -- -- (17,569) -- (17,569) -------------------------- |------------------------------------------------- Balance, December 31, 1995 .................. 66,134 17,341 48,793 | 3,307 392,701 101,965 (89,783) 408,190 Common Stock Issued | Stock Options Exercised--Including | Related Tax Benefits ............... 268 (1,222) 1,490 | 13 27,394 -- 3,292 30,699 Employee Stock Purchase Plan .......... 14 (198) 212 | 1 3,251 -- 481 3,733 Purchase of Treasury Stock ............ -- 38 (38) | -- -- -- (1,026) (1,026) Retirement of Treasury Stock .......... (885) (885) -- | (44) (10,111) -- 10,155 -- Other ................................. 8 (17) 25 | -- 251 956 -- 1,207 Net Change in Unrealized Gain/Loss on | Investments Available-for-Sale ..... -- -- -- | -- -- 900 -- 900 Tax Adjustment for MSI Acquisition ....... -- -- -- | -- 16,668 -- -- 16,668 Cash Dividends Declared ($.08 Per Share).. -- -- -- | -- -- (8,982) -- (8,982) Effect of Two-for-One Stock Split ........ 56,597 16,478 40,119 | 2,830 (2,830) -- -- -- Net Income for the Year .................. -- -- -- | -- -- 73,954 -- 73,954 -------------------------- |------------------------------------------------- Balance, December 31, 1996 .................. 122,136 31,535 90,601 | $6,107 $427,324 $168,793 $(76,881) $525,343 -------------------------- |------------------------------------------------- -------------------------- |-------------------------------------------------
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -14- CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 -------------------------------------- 1996 1995 1994 -------- -------- -------- (000 OMITTED) Cash Flows from Operating Activities: Net Income (Loss) for the Period .............................. $ 73,954 $ (17,569) $ 36,469 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Nonrecurring Charges ....................................... 61,414 136,481 -- Depreciation and Amortization .............................. 49,179 41,800 28,684 Provision (Credit) for Noncurrent Deferred Income Taxes .... 4,964 (2,285) 2,103 Changes in Assets and Liabilities, Net of Acquisitions: Receivables ............................................. (108,661) (24,548) (54,974) Current Deferred Income Taxes ........................... (6,367) (12,643) 1,147 Inventories ............................................. 767 (5,220) (163) Prepaids and Other Current Assets ....................... 7,688 8,186 1,259 Noncurrent Deferred Income Tax .......................... (1,612) (25,044) -- Other Noncurrent Assets ................................. (789) (148) 757 Deferred Revenue ........................................ 16,078 19,062 12,467 Other Current Liabilities ............................... 39,163 (17,600) 31,582 Other, Net ................................................. 1,102 325 (213) ------- ------- ------- Total Adjustments .................................... 62,926 118,366 22,649 ------- ------- ------- Net Cash Provided by Operating Activities ............ 136,880 100,797 59,118 Cash Flows from Investing Activities: Sale of Property and Equipment ................................ 1,262 823 254 Purchase of Facility .......................................... -- -- (2,698) Capital Expenditures .......................................... (20,779) (15,765) (12,575) Capitalized Software .......................................... (25,957) (25,415) (19,588) Purchases of Businesses, Net of Cash Acquired ................. (7,970) (12,694) (63,968) Proceeds from Sale or Maturity of Investments ................. 17,526 5,622 33,626 Purchase of Investments ....................................... (39,788) (8,890) (14,175) Other ......................................................... 1,890 -- (1,950) ------- ------- ------- Net Cash Used in Investing Activities ................ (73,816) (56,319) (81,074) ------- ------- ------- Net Cash Provided (Used) Before Financing Activities .............................. 63,064 44,478 (21,956) Cash Flows from Financing Activities: Proceeds from Long-Term Debt .................................. -- 70,500 67,100 Repayment of Long-Term Debt and Capital Leases ................ (5,181) (73,082) (68,255) Net Repayment of Short-Term Debt .............................. -- (10,000) -- Proceeds from Issuance of Common Stock ........................ 25,668 17,344 9,143 Purchase of Treasury Stock .................................... (1,026) (1,925) (7,576) Payment of Dividends .......................................... (8,774) (7,710) (7,193) ------- ------- ------- Net Cash Provided by (Used in) Financing Activities .............................. 10,687 (4,873) (6,781) ------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents ................. 73,751 39,605 (28,737) Cash and Cash Equivalents at Beginning of Year ................... 86,612 47,007 75,744 ------- ------- ------- Cash and Cash Equivalents at End of Year ......................... $160,363 $ 86,612 $ 47,007 ------- ------- ------- ------- ------- ------- Cash Paid During the Year For: Interest ...................................................... $ 923 $ 3,793 $ 3,231 Income Taxes .................................................. $ 31,387 $ 15,320 $ 11,503
All prior period amounts have been restated to reflect the 1996 acquisitions of CyCare Systems, Inc., Management Software, Inc., and GMIS Inc. in pooling transactions. The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated financial statements. -15- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The consolidated financial statements include the accounts of HBO & Company and its wholly owned subsidiaries, collectively referred to as "the Company" or "HBOC." All significant intercompany transactions and balances have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to current presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION HBO & Company delivers enterprisewide patient care, clinical, financial, managed care, payer and strategic management software solutions, as well as networking technologies, electronic data interchange, outsourcing and other services to healthcare organizations throughout the world. Systems -- Information systems are marketed under equipment purchase and software license agreements, as well as service agreements. One-time software and hardware revenue is generally recognized at the time of delivery. The Company also licenses software under multiyear agreements for which revenue is recognized on an annual basis. There are no significant vendor obligations remaining, and collection is probable when revenue is recognized. Services -- Implementation fees are recognized as the work is performed or on a percentage-of-completion basis. Maintenance and support agreements are marketed under annual and multiyear agreements and are recognized ratably over the period covered by the agreements. Electronic data interchange and remote processing services are recognized monthly as the work is performed. Outsourcing services are recognized as the work is performed or on a percentage-of-completion basis. The American Institute of Certified Public Accountants has issued an exposure draft concerning revenue recognition in the software industry that seeks to clarify certain issues under Statement of Position (SOP) 91-1. The draft SOP is expected to become effective during 1998. The Company has reviewed the exposure draft and, as it is currently written, does not anticipate any change to its revenue recognition policy as a result of the adoption of the new SOP. NONRECURRING CHARGES During the third quarter of 1996, the Company recorded nonrecurring charges of $26.2 million related to the acquisitions of CyCare Systems, Inc. (CyCare) and Management Software, Inc. (MSI). The charges consisted of transaction costs of $5.2 million, a write-down of long-lived assets of $7.4 million, severance and employee-related costs of $3.7 million and other product-related costs of $9.9 million. During the fourth quarter of 1996, the Company recorded nonrecurring charges of $35.2 million primarily related to the acquisition of GMIS Inc. (GMIS). These charges consisted of transaction costs of $6.2 million, a write-down of long-lived assets of $22.6 million, severance and employee-related costs of $3.4 million and other product-related costs of $3.0 million. During the second quarter of 1995, the Company recorded $126 million of nonrecurring charges including $115 million of purchased research and development related to the acquisition of First Data Health Systems Corporation (now known as CPG), $8 million of severance and other acquisition-related costs and a $3 million mainframe capitalized research and development net book value adjustment. During the third quarter of 1995, the Company recorded a nonrecurring charge of $11 million related to the acquisition of CliniCom Incorporated, primarily consisting of severance and acquisition costs. OTHER INCOME, NET Other income, net, consists primarily of interest income on cash, cash equivalents, investments, notes receivable and financed customer receivables; interest expense on long-term debt, short-term line of credit borrowings and the sale of customer receivables; and miscellaneous expense related primarily to foreign exchange transaction gains and losses. EARNINGS PER SHARE Earnings per share is based upon the weighted average number of shares and the dilutive effect of stock options outstanding. Loss per share is based only upon the weighted average number of shares outstanding, since the effect of stock options is anti-dilutive. -16- CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less from the date of purchase to be cash equivalents. INVESTMENTS Investments at December 31, 1996, and 1995 consist of debt securities and marketable equity securities. Pursuant to the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has classified its investment portfolio as available-for-sale. Such securities are recorded at fair value, and unrealized gains and losses, net of the related tax effect, are recorded as a component of retained earnings until realized. Realized gains and losses are determined on the specific identification method and are reflected in the income statement. INVENTORIES Inventories are valued at lower of cost or market. Cost is determined either by the specific identification or first-in, first-out valuation methods. INTANGIBLES Intangibles consist of certain items related to the Company's acquisitions as follows:
DECEMBER 31, -------------------------------------------------- 1996 1995 ---------------------- ---------------------- GROSS NET GROSS NET -------- -------- -------- -------- (000 OMITTED) Series Customer Lists ............................ $ 53,815 $ 44,264 $ 53,815 $ 48,105 CPG Customer Lists ............................... 101,812 91,223 103,927 100,232 Goodwill ......................................... 48,447 40,838 54,826 49,944 Other ............................................ 5,528 1,586 6,175 2,580 -------- -------- -------- -------- Total ............................................ $209,602 $177,911 $218,743 $200,861 -------- -------- -------- -------- -------- -------- -------- --------
The Series and CPG customer lists are being amortized over 15 years beginning in June 1994 and June 1995, respectively. Goodwill relates to 10 acquisitions and is being amortized over periods ranging from five to 15 years from the various acquisition dates. CAPITALIZED SOFTWARE The Company capitalizes costs to develop software products once the project has reached the point of technological feasibility. Management monitors the net realizable value of all software development investments to ensure that the investment will be recovered through future sales. Completed projects are amortized after reaching the point of general availability using the straight-line method based on an estimated useful life of three years. HBOC capitalized software development costs of $26.0 million, $24.7 million and $19.4 million in 1996, 1995 and 1994, respectively. Acquisitions completed in 1996 increased capitalized software $8.8 million in 1996, $10.1 million in 1995 and $9.0 million in 1994. The Company's nonrecurring charges include capitalized software net realizable value adjustments of $13.8 million in 1996 and $4.7 million in 1995. Amortization of capitalized software costs totaled $13.2 million, $15.9 million and $12.3 million in 1996, 1995 and 1994, respectively. Royalty fees of $21.5 million, $13.5 million and $9.1 million were expensed in 1996, 1995 and 1994, respectively for third-party business partners and customers that assisted in the Company's development efforts. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Computer equipment is depreciated over useful lives of two to five years using the straight-line method. Office furniture and equipment is depreciated over useful lives of two to 10 years using the straight-line method. Real property is depreciated using the straight-line method over various lives of up to 39 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term. OTHER NONCURRENT ASSETS Other noncurrent assets consist primarily of the long-term portion of notes receivable, the long-term balance in a compensation trust and accumulated amounts for long-term capital projects. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments classified as current assets or liabilities, including cash and cash equivalents, receivables and accounts payable, approximate carrying value due to the short-term maturity of the instruments. The fair value of short-term and long-term debt approximate carrying value based on their effective interest rates compared to current market rates. LONG-LIVED ASSETS The Company periodically reviews the values assigned to long-lived assets, such as intangibles, capitalized software, and property and equipment, to determine if any impairments are other than temporary. Management believes long-lived assets in the accompanying balance sheets are appropriately valued. -17- 2. INDEBTEDNESS AND COMMITMENTS: The Company entered into a long-term revolving credit agreement in June 1994. The amount available under this agreement was increased to $30 million in 1996. As of December 31, 1996, there was no outstanding balance. Interest is payable at the Company's option of prime or LIBOR plus a margin determined by certain of the Company's financial ratios (6.3125% as of December 31, 1996). A variable commitment fee on the revolving credit agreement is payable quarterly on the unused portion of the commitment (0.1875% for 1996). The agreement, which expires June 30, 1997, contains certain financial covenants. The Company was in compliance with these covenants at December 31, 1996. During 1996, the Company canceled its $5 million committed, unsecured line of credit. The Company still has a $5 million uncommitted, unsecured line of credit available. No facility fees or compensating balances are associated with this line. The Company has extended until June 30, 1997, its agreement with a financial institution whereby the Company can sell on an ongoing basis, with partial recourse, an undivided interest in a pool of customer receivables. As of December 31, 1996, the amount available to be sold was $30 million and the amount sold was $10 million. Interest is payable at the Company's option of prime or LIBOR plus a margin determined by certain of the Company's financial ratios (6.3125% as of December 31, 1996). The Company, as agent for the purchaser, retains collection and administrative responsibilities for the receivables sold. The Company occupies leased facilities and leases customer and other equipment under noncancelable leases that expire through 2011. Most of the leases contain certain options to renew. The future minimum lease commitments under the terms of the Company's noncancelable leases with terms in excess of one year, as of December 31, 1996, were as follows:
(000 OMITTED) 1997 ............................................ $23,610 1998 ............................................ 18,863 1999 ............................................ 10,957 2000 ............................................ 6,050 2001 and thereafter ............................. 10,931 ------- Total ........................................... $70,411 ------- -------
3. CAPITAL STOCK: In May 1996, the Company declared a two-for-one stock split of all common stock outstanding and in the treasury, effected in the form of a stock dividend that was paid on June 10, 1996, to all stockholders of record on May 27, 1996. All per share and share amounts (except for stockholders' equity) have been restated for this stock split. In addition, stockholders approved an increase in the number of shares of authorized common stock from 60 million to 250 million, effective May 15, 1996. On February 12, 1991, the Company designated 20,000 shares of its 1,000,000 shares of authorized preferred stock with no par value as Series A Junior Participating Preferred Stock with no par value and declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. Due to the 1994 and 1996 stock splits, each such outstanding share is entitled to one-fourth of a Right. Each Right, when exercisable, entitles its holder to buy one-thousandth of a share of the newly authorized preferred stock at an exercise price of $35, subject to adjustment. The Rights initially will trade together with the Company's common stock and will not be exercisable unless certain triggering events occur. Until exercisable, the Rights will not have a dilutive effect on earnings per share. Following certain events, including the acquisition of 15% of the Company's common stock, the Board of Directors may elect to exchange each outstanding whole Right for four shares of the Company's common stock, subject to adjustment. In certain other circumstances, including the acquisition of 20% or more of the Company's common stock, the Rights may become exercisable for common stock of the Company having a market value of two times the Right's exercise price. The Company will be entitled to redeem the Rights at one cent per Right at any time prior to the time the Rights become exercisable. If the Company is acquired in a merger or other business combination transaction and the Rights have not been redeemed, each Right will entitle its holder to purchase, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value at the time of two times the Right's exercise price. The Rights will expire on February 22, 2001. 4. EMPLOYEE BENEFIT PLANS: STOCK PURCHASE PLAN The Company has an employee discount stock purchase plan for all eligible employees of HBO & Company and designated subsidiaries. Participants may use up to 10% of their compensation to purchase through payroll deductions the Company's common stock at the end of each plan year for 85% of the lower of the beginning or ending stock price in the plan year. The weighted average fair value of shares sold under the plan in 1996 was $16.42. At December 31, 1996, there were 1,235,056 shares of stock reserved for issuance under this plan. -18- STOCK OPTION PLANS The Company has nonqualified and incentive stock option plans to provide key employees and directors with an increased incentive to work for the success of the Company. The option price for all stock options is the market value at the date of grant and thus, the plans are non-compensatory. The options expire 10 years after the dates of their respective grants. The Company accounts for the stock purchase and stock option plans under APB Opinion No. 25, which requires compensation costs to be recognized only when the option price differs from the market price at the grant date. FASB Statement No. 123 allows a company to follow APB Opinion No. 25 with the following additional disclosure that shows what the Company's net income (loss) and earnings (loss) per share would have been using the compensation model under FASB Statement No. 123:
1996 1995 ------- -------- (000 OMITTED) Net Income (Loss): As Reported............................ $73,954 $(17,569) Pro Forma ............................. $60,927 $(24,240) Earnings (Loss) Per Share: Primary As Reported.................... $ .79 $ (.21) Pro Forma ..................... $ .65 $ (.29) Fully Diluted As Reported ............. $ .79 $ (.21) Pro Forma ............... $ .65 $ (.29)
Because the Statement 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: risk-free interest rate of 6.25% and 6.65%; expected dividend yield of 0.18% and 0.36%; expected term of 8.8 years and 7.3 years; expected forfeiture of 4.5% and 7.8%; and volatility of 36% for both years. A summary of the status of the Company's stock options plans at December 31, 1996, 1995 and 1994 and changes during the years then ended is presented in the following table:
WEIGHTED AVG. OPTIONS EXERCISE PRICE --------- -------------- Balance -- December 31, 1993 ............ 6,644,353 $ 5.47 Granted .............................. 1,944,705 $17.22 Exercised ............................ 1,839,246 $ 4.96 Forfeited ............................ 274,131 $ 9.83 ------------------------ Balance -- December 31, 1994 ............ 6,475,681 $ 8.96 Granted .............................. 2,459,328 $25.91 Exercised ............................ 1,969,389 $ 7.42 Forfeited ............................ 837,460 $14.99 ------------------------ Balance -- December 31, 1995 ............ 6,128,160 $15.43 Granted .............................. 2,564,890 $52.00 Exercised ............................ 1,489,626 $ 9.94 Forfeited ............................ 489,228 $31.71 ------------------------ Balance -- December 31, 1996 ............ 6,714,196 $28.35 ------------------------ Exercisable at December 31, 1996 ........ 2,457,819 $43.64 ------------------------ Reserved for Future Options ............. 1,596,914
PROFIT SHARING AND SAVINGS PLAN The Company has a qualified profit sharing and savings plan covering all employees with more than six months of service. Participants, except for certain highly paid employees who are subject to certain limitations, may contribute up to 15% of their compensation to the plan. The Company matches these contributions at a rate determined annually by its Board of Directors (75% of the first 4% of compensation contributed in 1996, 1995 and 1994). In addition, the Company's Board may, at its discretion, authorize within prescribed limits a profit sharing contribution to all eligible participants. Total plan expense was $4.1 million in 1996, $3.1 million in 1995 and $2.6 million in 1994. 5. INCOME TAXES: The provision (credit) for income taxes consists of the following components:
1996 1995 1994 ------- -------- ------- (000 OMITTED) Current Portion -- Federal ............................................. $42,369 $ 24,037 $16,761 State ............................................... 6,053 2,165 2,428 ------- -------- ------- 48,422 26,202 19,189 ------- -------- ------- Deferred Portion ....................................... (24) (40,550) 2,599 ------- -------- ------- Total Provision (Credit) for Income Taxes .............. $48,398 $(14,348) $21,788 ------- -------- ------- ------- -------- -------
-19- A reconciliation from the federal statutory rate to the total provision (credit) for income taxes is as follows:
1996 1995 1994 ------- -------- ------- (000 OMITTED) Tax at Statutory Rate .................................. $42,824 $(11,171) $20,390 State Income Taxes, Net of Federal Taxes ................................ 6,119 (1,595) 2,912 Non-Taxable S Corp Earnings ............................ (545) (1,582) (1,514) ------- -------- ------- Provision (Credit) for Income Taxes ........................................ $48,398 $(14,348) $21,788 ------- -------- ------- ------- -------- -------
NOTE: MSI qualified as an S Corporation prior to acquisition, and the tax impact was borne by the former stockholders of MSI. Due to the taxable nature of the acquisition, deferred tax assets of $16.7 million were recorded reflecting the excess of acquired tax basis over book basis. The components of the Company's net deferred tax asset are as follows:
DECEMBER 31, -------------------- 1996 1995 -------- -------- (000 OMITTED) Deferred Tax Liabilities: Capitalized Software ..................................... $(20,152) $(20,228) Deferred Revenue ......................................... (3,580) (4,313) -------- -------- Total Deferred Tax Liabilities ........................ (23,732) (24,541) Deferred Tax Assets: Intangibles .............................................. 46,448 32,021 Accruals ................................................. 16,271 11,840 Net Operating Loss Carryforward .......................... 2,690 10,461 Inventory ................................................ 2,007 2,961 Other .................................................... 16,334 6,776 -------- -------- Total Deferred Tax Assets ............................. 83,750 64,059 -------- -------- Net Deferred Tax Asset ...................................... $ 60,018 $ 39,518 -------- -------- -------- --------
6. INVESTMENTS: Short-term investments consisted of the following:
DECEMBER 31, ----------------------------------------------- 1996 1995 --------------------- --------------------- COST FAIR VALUE COST FAIR VALUE ------- ---------- ------- ---------- (000 OMITTED) Marketable Equity Securities ........................ $21,750 $23,250 $ -- $ -- Debt Securities ..................................... -- -- 5,159 5,159 ------- ------- ------ ------ Total Short-Term Investments ........................ $21,750 $23,250 $5,159 $5,159 ------- ------- ------ ------ ------- ------- ------ ------
Unrealized gain on investments available-for-sale was $900,000, net of tax, at December 31, 1996. 7. OTHER CURRENT LIABILITIES: The following significant items are included in other current liabilities:
DECEMBER 31, ------------------- 1996 1995 -------- -------- (000 OMITTED) Accounts Payable .......................................... $ 39,888 $ 31,978 Customer Deposits ......................................... 38,277 21,117 Accrued Commissions and Incentives ........................ 34,595 21,941 Income Taxes Payable ...................................... 16,489 2,991 Accrued Royalties ......................................... 14,546 6,510 Current Portion of Debt ................................... 309 2,040 Other ..................................................... 80,276 65,766 -------- -------- $224,380 $152,343 -------- -------- -------- --------
8. ACQUISITIONS: On August 21, 1996, the Company completed the acquisition of CyCare Systems, Inc. (CyCare), a provider of physician practice management software systems and electronic data interchange services for medical group practices, faculty practice plans and medical enterprises. CyCare stockholders received 0.86 of a share of HBOC Common Stock for each share of outstanding CyCare Common Stock, or an aggregate of approximately 4.4 million shares. Because the acquisition was accounted for as a pooling of interests, all prior period amounts have been restated. On September 19, 1996, the Company completed the acquisition of Management Software, Inc. (MSI), a privately held provider of software solutions for the homecare industry. MSI stockholders received approximately 895,000 shares of HBOC Common Stock in the transaction. Because the acquisition was accounted for as a pooling of interests, all prior period amounts have been restated. On December 9, 1996, the Company completed the acquisition of GMIS Inc. (GMIS), a developer of data quality and decision support software for the payer marketplace. GMIS stockholders received 0.42 of a share of HBOC Common Stock for each share of GMIS Common Stock, or an aggregate of approximately 3.7 million shares. Because the acquisition was accounted for as a pooling of interests, all prior period amounts have been restated. -20- A reconciliation between revenue and net income as previously reported and as restated follows:
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 -------- -------- (000 OMITTED) Revenue: As Previously Reported .................................. $495,595 $357,436 CyCare, MSI & GMIS ...................................... 113,727 98,275 Adjustments ............................................. (2,080) (1,732) -------- -------- As Restated ............................................. $607,242 $453,979 -------- -------- -------- -------- Net Income (Loss): As Previously Reported .................................. $(25,235) $ 31,555 CyCare, MSI & GMIS ...................................... 7,829 4,612 Adjustments ............................................. (163) 302 -------- -------- As Restated ............................................. $(17,569) $ 36,469 -------- -------- -------- --------
On December 31, 1996, the Company completed the acquisition of Gemini Ltd., the National Health Service (NHS) business unit of Cap Gemini UK PLC, for approximately $3.5 million. Gemini Ltd., runs remote processing operations in the South Thames region of the NHS organization in the United Kingdom. The transaction was accounted for as a purchase. In June, 1995, the Company acquired First Data Health Systems Corporation (CPG) in exchange for 4 million shares of HBOC Common Stock valued at approximately $200 million. The transaction was accounted for as a purchase. The results of operations of CPG are included in the accompanying financial statements since the date of acquisition. The following unaudited pro forma information was prepared assuming the transaction was consummated on January 1 of each year presented and excludes the effect of the 1995 nonrecurring charges.
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1995 1994 -------- -------- (000 OMITTED) Revenue .................................................... $675,437 $607,324 Net Income ................................................. $ 68,255 $ 43,863 Earnings per Share ......................................... $ .76 $ .51
This pro forma information is not necessarily indicative of the results of operations that would have been attained had the acquisition been consummated on January 1 of each year presented or that may be attained in the future. 9. LEGAL PROCEEDINGS: The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of potential liability with respect to these actions will not materially affect the Company's financial position or results of operations. 10. SUBSEQUENT EVENT: (UNAUDITED) On February 11, 1997, the Company announced it had signed a definitive agreement to acquire AMISYS Managed Care Systems, Inc. (AMISYS), a leading provider of information systems for managed care entities and other parties that assume financial risk for healthcare populations. The acquisition, which is subject to regulatory and AMISYS stockholder approval, will be accounted for as a pooling of interest and is scheduled to close during the second quarter of 1997. Terms of the acquisition call for AMISYS stockholders to receive 0.35 of a share of HBOC Common Stock for each of the approximately 8.8 milion shares and rights to acquire shares of AMISYS Common Stock. -21- COMMON STOCK DATA (UNAUDITED) The tables below present the quarterly high and low closing sales prices and dividend information for the Company's Common Stock as furnished by The Nasdaq Stock Market's National Market. There were 2,528 holders of record of the Company's Common Stock as of December 31, 1996.
1996 1995 ---------------------------- ---------------------------- Dividends Dividends Declared Declared Quarter High Low Per Share Quarter High Low Per Share First ................ $50.97 $32.75 $.02 First ................ $21.88 $16.75 $.02 Second ............... $68.75 $49.38 $.02 Second ............... $27.25 $20.25 $.02 Third ................ $68.63 $50.50 $.02 Third ................ $32.00 $26.41 $.02 Fourth ............... $71.88 $52.25 $.02 Fourth ............... $42.88 $31.13 $.02 ---- ---- Total ................................ $.08 Total................................. $.08
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of HBO & Company: We have audited the accompanying consolidated balance sheets of HBO & Company (a Delaware Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These 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 financial statements referred to above present fairly, in all material respects, the financial position of HBO & Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 6, 1997 -22- STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS HBO & Company 301 Perimeter Center North Atlanta, Georgia 30346 (770) 393-6000 FAX: (770) 393-6092 http://www.hboc.com STOCK LISTING HBO & Company's common stock is traded on The Nasdaq Stock Market's National Market (symbol: HBOC). Put and call options on HBO & Company are traded on the Pacific Stock Exchange. ANNUAL MEETING HBO & Company's annual meeting will be held on Monday, May 12, 1997, at 9:00 a.m. Eastern time at its Corporate Headquarters. You are cordially invited to attend. TRANSFER AGENT AND REGISTRAR SunTrust Bank, Atlanta Corporate Trust Department P.O. Box 4625 Atlanta, Georgia 30302 (800) 568-3476 (404) 588-7815 Communications regarding transfers, lost certificates, dividends or change of address should be directed to SunTrust Bank at the above address. INVESTOR INFORMATION The Company routinely sends its annual and quarterly reports to interested investors. To receive information, please write the Company or call: (800) HBOC-411 [(800) 426-2411] INVESTOR RELATIONS Security analysts and other investor inquiries should be directed to: Monika Brown Investor Relations HBO & Company (800) HBOC-411 [(800) 426-2411] SEC FORM 10-K Copies of the 10-K report filed with the Securities and Exchange Commission are available without charge, except for exhibits. To request a copy, please write the Company or call: (800) HBOC-411 [(800) 426-2411] AUDITORS Arthur Andersen LLP 133 Peachtree Street, N.E. Atlanta, Georgia 30303 (404) 658-1776 CORPORATE COUNSEL Jones, Day, Reavis & Pogue 3500 One Peachtree Center 303 Peachtree Street, N.E. Atlanta, Georgia 30308-3242 (404) 521-3939 -23- BOARD OF DIRECTORS HOLCOMBE T. GREEN, JR. - Chairman Chairman and Chief Executive Officer WestPoint Stevens Inc. CHARLES W. MCCALL President and Chief Executive Officer HBO & Company ALFRED C. ECKERT III President Greenwich Street Capital Partners, Inc. PHILIP A. INCARNATI President and Chief Executive Officer McLaren Health Care Corporation ALTON F. IRBY III Deputy Chairman NatWest Market Investment Banking GERALD E. MAYO Chairman Midland Financial Services, Inc. JAMES V. NAPIER Chairman Scientific-Atlanta, Inc. CHARLES E. THOELE Consultant Sisters of Mercy Health System DONALD C. WEGMILLER President and Chief Executive Officer Management Compensation Group/HealthCare Compensation CORPORATE OFFICERS CHARLES W. MCCALL* President and Chief Executive Officer ALBERT J. BERGONZI* President, Enterprise Solutions JAY P. GILBERTSON* Executive Vice President, Chief Financial Officer, Treasurer, Principal Accounting Officer and Secretary JAY M. LAPINE* Vice President, General Counsel and Assistant Secretary RUSSELL G. OVERTON* Senior Vice President - Business Development RALPH C. CAPASSO Senior Vice President - Enterprise Services DOMINICK A. DEROSA Senior Vice President - Sales TIMOTHY S. HEYERDAHL Vice President - Controller, Accounting Officer MICHAEL L. KAPPEL Senior Vice President - Strategic Product Planning and Marketing GLENN N. ROSENKOETTER Senior Vice President - Strategic Business Units E. CHRISTINE RUMSEY Senior Vice President - Human Resources DAVID A. SCHENK Senior Vice President - Outsourcing Services Group * Executive Officer -24- HBOC OFFICES CORPORATE HEADQUARTERS Atlanta, GA 301 Perimeter Center North Atlanta, GA 30346 1-800-981-8601 http://www.hboc.com SALES AND REGIONAL OFFICES Amherst, Mass. Los Angeles Boston Malvern, Pa. Boulder, Colo. Minneapolis, Minn. Charlotte, N.C. Mission Viejo, Calif. Chicago Philadelphia Dallas Pittsburgh, Pa. Dubuque, Iowa Rockville, Md. Eugene, Ore. Salt Lake City Hauppuge, N.Y. San Francisco Lexington, Mass. Scottsdale, Ariz. Longwood, Fla. Springfield, Mo. Tampla, Fla. INTERNATIONAL LOCATIONS Canada United Kingdom Puerto Rico Israel HBOC - -------- INFORMATION FOR THOSE WHO CARE- -------------------- 301 PERIMETER CENTER NORTH ATLANTA, GEORGIA 30346 1-800-981-8601 http://www.hboc.com - -Copyright-1997. HBO & Company, Atlanta, GA. All rights reserved. Printed in the U.S.A. Pathways 2000 and TRENDSTAR are registered trademarks of HBO & Company. CarePoint 2000 and Paragon are service marks of HBO & Company. AR2/97-Copyright-1997 Designed by Crawford/Mikus Design, Inc., Atlanta, Ga. Nelda Mays Photography, Atlanta, Ga. Printed by Color Graphics, Inc., Atlanta, Ga. EX-21 4 EX 21 EXHIBIT 21 HBO & COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the Company are as follows:
JURISDICTION OF INCORPORATION --------------------- HBO & Company of Georgia 100% Delaware, USA HBO & Company (UK) Limited 100% United Kingdom HBO & Company (VI), Inc. 100% U.S. Virgin Islands HBO & Company Canada Ltd. 100% Canada Data-Med Computer 100% owned by HBO & Company United Kingdom HBOC Medical, Ltd. 100% owned by HBO & Company Israel First Data Health Systems (Australia) Pty. Ltd. 100% owned by HBO & Company of Georgia Australia First Data Health Systems (U.K.), Ltd. 100% owned by HBO & Company of Georgia United Kingdom First Data Health Systems (Ireland), Ltd. 100% owned by HBO & Company of Georgia Ireland First Data Health Systems Training Services Ltd. 100% owned by HBO & Company of Georgia Ireland HBO & Company (ST & SW), Ltd. 100% owned by HBO & Company United Kingdom (formerly Gemini Ltd.)
EX-23 5 EX 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K into the Company's previously filed Registration Statements on Form S-8, which are listed in Part IV, Item 14(a)3 of this Form 10-K. ARTHUR ANDERSEN LLP Atlanta, Georgia March 3, 1997 EX-27.A 6 EX 27.A
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED 12/31/96 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 160,363 23,250 300,867 (9,516) 6,993 519,763 153,663 (104,244) 848,947 316,358 192 0 0 6,107 519,236 848,947 369,335 796,578 351,139 616,914 57,312 0 0 122,352 48,398 73,954 0 0 0 73,954 0.79 0.79
EX-27.B 7 EX 27.B
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/96 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 111,653 27,266 239,300 (8,913) 6,642 404,465 158,886 (111,434) 744,444 234,849 213 0 0 6,100 493,326 744,444 256,268 572,237 253,687 446,476 23,536 0 0 102,225 40,347 61,878 0 0 0 61,878 0.67 0.66
EX-27.C 8 EX 27.C
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED 6/30/96 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 6/30/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 110,386 5,544 222,251 (8,846) 5,835 362,739 153,559 (106,847) 692,542 217,391 2,708 0 0 6,139 458,823 692,542 155,908 365,794 162,804 288,940 (1,783) 0 0 78,637 30,910 47,727 0 0 0 47,727 0.51 0.51
EX-27.D 9 EX 27.D
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED 3/31/96 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 3/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 87,262 5,699 201,023 (9,082) 9,241 319,238 150,331 (102,660) 659,775 214,298 3,160 0 0 3,308 431,700 659,775 67,575 172,515 76,773 137,487 (918) 0 0 35,946 14,079 21,867 0 0 0 21,867 0.24 0.24
EX-27.E 10 EX 27.E
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/95 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 12/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 86,612 5,159 192,105 (9,621) 7,782 310,493 148,018 (98,969) 649,417 226,867 3,642 0 0 3,307 404,883 649,417 255,099 607,242 285,756 503,218 135,941 0 0 (31,917) (14,348) (17,569) 0 0 0 (17,569) (0.21) (0.21)
EX-27.F 11 EX 27.F
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED 9/30/95 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 9/30/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1995 JAN-01-1995 SEP-30-1995 42,727 3,132 186,771 (11,666) 3,730 249,280 144,781 (95,982) 597,999 200,130 4,123 0 0 3,306 374,805 597,999 178,140 429,100 202,374 354,046 136,256 0 0 (61,202) (25,580) (35,622) 0 0 0 (35,622) (0.43) (0.43)
EX-27.G 12 EX 27.G
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED 6/30/95 AND HOB & COMPANY CONSOLIDATED BALANCE SHEET AT 6/30/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 39,123 3,152 168,512 (4,789) 6,103 237,098 142,479 (91,922) 584,215 192,868 4,630 0 0 3,303 359,978 584,215 111,206 262,780 123,412 218,063 125,430 0 0 (80,713) (32,932) (47,781) 0 0 0 (47,781) (0.60) (0.60)
EX-27.H 13 EX 27.H
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED 3/31/95 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 3/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 39,834 2,011 137,181 (3,897) 5,727 199,031 135,899 (91,978) 386,137 143,550 6,031 0 0 3,102 219,490 386,137 53,580 126,261 60,607 104,535 (194) 0 0 21,920 8,551 13,369 0 0 0 13,369 0.16 0.16
EX-27.I 14 EX 27.I
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMRATION EXTRACTED FROM HBO & COMPANY CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED 12/31/94 AND HBO & COMPANY CONSOLIDATED BALANCE SHEET AT 12/31/94 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 47,007 1,746 138,642 (3,883) 4,286 205,072 132,407 (88,305) 380,410 165,167 4,715 0 0 3,099 200,416 380,410 209,555 453,979 225,546 396,876 (1,154) 0 0 58,257 21,788 36,469 0 0 0 36,469 0.45 0.44
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