-----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, PPZgr1LhPPZcP2dK3dGpKFb61+pcyN8xoTNEaS/ZdQpYmYYrijFqvEE3JwUBwt8i fjt/nlBzAxjBHFSEjIqjGA== 0000950168-99-002964.txt : 19991117 0000950168-99-002964.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950168-99-002964 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HCIA INC CENTRAL INDEX KEY: 0000935001 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 521407998 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25378 FILM NUMBER: 99755574 BUSINESS ADDRESS: STREET 1: 1300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4103327532 MAIL ADDRESS: STREET 1: 1300 EAST LOMBARD ST CITY: BALTIMORE STATE: MD ZIP: 21202 10-Q 1 HCIA INC. 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934 For the Quarterly Period Ended September 30, 1999 ------------------ OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________________________ to ___________________ Commission File Number 0-25378 HCIA INC. --------- (Exact name of registrant as specified in its charter) Maryland 52-1407998 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 300 East Lombard Street, Baltimore, Maryland 21202 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 895-7470 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s)), and (2) has been subject to such filing requirements for the past 90 days. YES NO X ---------- ---------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, at November 1, 1999: Class: Common Stock Number of Shares: 11,857,725 ---------- HCIA INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (in thousands)
Part 1 Item 1. Financial Statements 1999 1998 (Unaudited) ASSETS Current assets: Cash and cash equivalents.................................................. $ 10,262 $ 7,343 Trade accounts receivable, net of allowance for doubtful accounts of $1,414 in 1999 and $1,816 in 1998....................................... 25,911 23,677 Prepaid expenses and other current assets.................................. 3,702 2,619 -------------- -------------- Total current assets.................................................. 39,875 33,639 Furniture and equipment, net.................................................... 6,605 8,325 Computer software costs, net.................................................... 13,568 10,525 Other intangible assets, net.................................................... 36,264 38,366 Net deferred tax asset.......................................................... 35,581 36,719 Other assets.................................................................... 1,321 556 Net assets of discontinued operations........................................... - 1,363 -------------- ------------- Total assets.......................................................... $ 133,214 $ 129,493 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable................................................................ $ 1,417 $ 1,219 Accrued salaries, benefits and other liabilities................................ 8,609 8,879 Deferred revenue................................................................ 1,549 1,296 Net liabilities of discontinued operations...................................... 1,969 - -------------- ------------- Total current liabilities............................................. 13,544 11,394 -------------- ------------- Stockholders' equity: Common stock-$.01 par value; 50,000,000 shares authorized; issued and outstanding 11,857,725 shares.............................................. 118 118 Additional paid-in capital...................................................... 250,945 250,904 Accumulated deficit............................................................. (131,236) (132,826) Accumulated other comprehensive loss............................................ (157) (97) --------------- ------------- Total stockholders' equity............................................ 119,670 118,099 --------------- ------------- Total liabilities and stockholders equity....................................... $ 133,214 $ 129,493 =============== =============
See accompanying notes to consolidated financial statements. Page 1 HCIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended September 30, 1999 and 1998 (in thousands, except per share data) (Unaudited)
1999 1998 Revenue......................................................................... $ 16,150 $ 15,859 Salaries, wages and benefits.................................................... 7,293 8,481 Other operating expenses........................................................ 5,368 5,939 Depreciation.................................................................... 827 924 Amortization.................................................................... 2,009 1,598 ----------------- ------------- Operating income (loss) .................................................. 653 (1,083) Interest income................................................................. 129 97 Interest expense ............................................................... 94 86 ------------------ ------------- Income (loss) from continuing operations before income taxes............. 688 (1,072) Provision (benefit) for income taxes............................................ 348 (144) ------------------ -------------- Income (loss) from continuing operations................................. 340 (928) Income from discontinued operations, net of tax................................. - 288 ------------------ -------------- Net income (loss)........................................................ $ 340 $ (640) ================== ============== Income (loss) per share from continuing operations: Basic net income (loss) per share $ 0.03 $ (0.08) ================== ============== Basic shares used in per share calculation 11,851 11,851 ================== ============== Diluted net income (loss) per share $ 0.03 $ (0.08) ================== ============== Diluted shares used in per share calculation 12,199 11,851 ================== ============== Income per share from discontinued operations: Basic net income per share $ 0.00 $ 0.02 ================== ============== Basic shares used in per share calculation 11,851 11,851 ================== ============== Diluted net income per share $ 0.00 $ 0.02 ================== ============== Diluted shares used in per share calculation 12,199 11,851 ================== ============== Net income (loss) per share: Basic net income (loss) per share $ 0.03 $ (0.05) ================== ============== Diluted net (loss) income per share $ 0.03 $ (0.05) ================== ==============
See accompanying notes to consolidated financial statements. Page 2 HCIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Nine months ended September 30, 1999 and 1998 (in thousands, except per share data) (Unaudited)
1999 1998 Revenue......................................................................... $ 48,979 $ 47,160 Salaries, wages and benefits.................................................... 22,601 24,616 Other operating expenses........................................................ 15,857 16,598 Depreciation.................................................................... 2,521 2,813 Amortization.................................................................... 5,645 6,021 Impairment loss on intangible assets and restructuring charges.................. - 25,067 ------------- ------------ Operating income (loss) .................................................. 2,355 (27,955) Interest income................................................................. 335 299 Interest expense ............................................................... 224 211 ------------- ------------ Income (loss) from continuing operations before income taxes............. 2,466 (27,867) Provision (benefit) for income taxes............................................ 1,147 (3,733) ------------- ------------ Income (loss) from continuing operations................................. 1,319 (24,134) Loss from discontinued operations, net of tax................................... (336) (18,488) Gain on sale of discontinued operations, net of tax............................. 607 - ------------- ------------ Income (loss) from discontinued operations............................... 271 (18,488) Net income (loss)........................................................ $ 1,590 $ (42,622) ============= ============ Income (loss) per share from continuing operations: Basic net income (loss) per share $ 0.11 $ (2.04) ============= =========== Basic shares used in per share calculation 11,851 11,851 ============= =========== Diluted net income (loss) per share $ 0.11 $ (2.04) ============= ============ Diluted shares used in per share calculation 11,965 11,851 ============= ============ Income (loss) per share from discontinued operations: Basic net income (loss) per share $ 0.02 $ (1.56) ============= =========== Basic shares used in per share calculation 11,851 11,851 ============= =========== Diluted net income (loss) per share $ 0.02 $ (1.56) ============= =========== Diluted shares used in per share calculation 11,965 11,851 ============= =========== Net income (loss) per share: Basic net income (loss) per share $ 0.13 $ (3.60) ============= =========== Diluted net income (loss) per share $ 0.13 $ (3.60) ============= ===========
See accompanying notes to consolidated financial statements. Page 3
HCIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS Year ended December 31, 1998 and the nine months ended September 30, 1999 (in thousands) ADDITIONAL ACCUMULATED OTHER PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE TOTAL STOCKHOLDERS' COMMON STOCK CAPITAL DEFICIT INCOME (LOSS) INCOME (LOSS) EQUITY ------------ ---------- ------------ ----------------- ------------- -------------------- BALANCE AT DECEMBER 31, 1997 $ 118 $ 250,892 $ (84,179) $ (117) $ 166,714 --------------------------------------------------------- ------------------- Exercise of stock options - 12 - - - 12 Comprehensive loss Net loss - - (48,647) - (48,647) (48,647) Other comprehensive loss Foreign currency translation - - - - 20 20 ------------ Other comprehensive loss 20 20 ------------ Comprehensive loss $ (48,627) ============ ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $ 118 $ 250,904 $(132,826) $ (97) $ 118,099 ============================================================================================== Exercise of stock options - 41 - - 41 Comprehensive income Net income - - 1,590 - 1,590 1,590 Other comprehensive loss Foreign currency translation - - - - (60) (60) ------------ Other comprehensive loss (60) (60) ------------ Comprehensive income $ 1,530 ============ -------------------------------------------------------------- -------------------- BALANCE AT SEPTEMBER 30, 1999 (Unaudited) $ 118 $ 250,945 $ (131,236) $ (157) $ 119,670 ============================================================== ====================
See accompanying notes to consolidated financial statements. Page 4 HCIA INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended September 30, 1999 and 1998 (in thousands) (Unaudited)
1999 1998 Cash flows from operating activities: Net income (loss)......................................................... $ 1,590 $ (42,622) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Gain on sale of discontinued operations............................. (1,041) - Depreciation and amortization....................................... 8,166 8,834 Impairment loss on intangible assets and restructuring charges...... - 25,067 Impairment loss on intangible assets and restructuring charges...... of discontinued operations - 25,754 Deferred tax provision.............................................. 1,138 (12,074) Changes in operating assets and liabilities: Accounts receivable.............................................. (2,234) 5,250 Prepaid expenses and other current assets........................ (970) (158) Accounts payable................................................. 198 55 Accrued salaries, benefits and other liabilities................. (270) (681) Deferred revenue................................................. 253 (1,160) ------------- ------------ Net cash provided by operating activities................... 6,830 8,265 ------------- ------------ Cash flows from investing activities: Purchases of furniture and equipment...................................... (801) (639) Computer software purchased or capitalized................................ (5,785) (5,407) Other intangible assets purchased or capitalized.......................... (801) (866) Proceeds from sale of discontinued operations............................. 7,500 - Investment in net assets of discontinued operations....................... - (7) Net liabilities of discontinued operations................................ (3,240) - Other..................................................................... (765) (40) ------------- ------------ Net cash used in investing activities....................... (3,892) (6,959) ------------- ------------ Cash flows from financing activities: Proceeds from exercise of stock options................................... 41 12 ------------- ------------ Net cash provided by financing activities.................. 41 12 ------------- ------------ Impact of currency fluctuations on cash and cash equivalents.................... (60) (9) ------------- ------------ Increase in cash and cash equivalents .......................................... 2,919 1,309 Cash & cash equivalents - beginning of period................................... 7,343 5,580 ------------- ------------ Cash & cash equivalents - end of period......................................... $ 10,262 $ 6,889 ============= ============ Supplemental cash flow information - cash paid during period for interest $ 114 $ 111 ============= ============ - cash paid during period for income taxes $ 181 $ 80 ============= ============
See accompanying notes to consolidated financial statements. Page 5 HCIA INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) (1) Basis of Presentation The accompanying unaudited interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles. In the opinion of management, these statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial condition, results of operations, changes in stockholders' equity and comprehensive loss and cash flows for the periods presented. The results of operations for the period ended September 30, 1999 may not be indicative of the results that may be expected for the full year ending December 31, 1999. These financial statements and notes should be read in conjunction with the financial statements and notes included in the audited consolidated financial statements of the Company for the year ended December 31, 1998 as contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (1934 Act File No. 0-25378). (2) Impairment Loss on Intangible Assets and Restructuring Charges During the three months ended March 31, 1998, the Company recorded an impairment loss on intangible assets and restructuring charges of approximately $50.8 million. Approximately $50.0 million of the charges represented the write-down of certain intangible assets. This write-down arose primarily due to the failure of the Company's Content Unit to execute agreements with customers for large-scale custom solutions and the Company's determination that the Unit's revenue which could be anticipated from future agreements of this type, was significantly less than had been previously anticipated. As the products marketed by the Content Unit were intended to integrate the products and technologies of the Company's other business units, this determination resulted in a reduced expectation of future cash flows from the Company's intangible assets across most of its business units and, accordingly, an impairment in value of these intangible assets. The remainder of the charges, totaling approximately $800,000, related primarily to accruals for the cost of employee severance and facilities reductions. As of September 30, 1999, substantially all of the accruals had been used. The following table summarizes the impairment loss on intangible assets and computer software costs: Pre-Charge Post-Charge Asset Net Book Value Write Down Net Book Value as of 3/31/98 - -------------------------------------------------------------------------------- Databases $ 2,871,000 $ 1,649,000 $ 1,222,000 CPHA License 9,113,000 ---- 9,113,000 Goodwill 46,326,000 20,644,000 25,682,000 Customer Bases 2,987,000 2,028,000 959,000 Methodologies 3,549,000 2,355,000 1,194,000 Assembled Workforce 3,266,000 1,751,000 1,515,000 Tradename 1,029,000 1,029,000 ---- Software 28,106,000 20,567,000 7,539,000 ====================================================== $ 97,247,000 $ 50,023,000 $ 47,224,000 ====================================================== The charges have been allocated to continuing operations ($25.1 million) and discontinued operations ($25.7 million) based on the nature of the assets and operations incurring the charge. (3) Income Taxes During the quarters ended March 31, 1998 and September 30, 1998, the Company recorded valuation allowances of $5.0 million and $1.4 million, respectively to reduce the carrying value of its deferred tax asset to Page 6 an amount management believed was realizable through future taxable income. As of September 30, 1999, the total valuation allowance was $8.4 million. Page 7 (4) Segment Information Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which requires that the Company report information about its operating segments. The Company's three operating segments, Content, Managed Care/Pharmaceutical and HCIA Europe, each have separate management teams and offer different products and services. The Content Unit builds, manages and maintains comparative databases. The Managed Care/ Pharmaceutical Unit helps pharmaceutical companies, employers, managed care organizations and indemnity insurers better manage the overall health status and costs of a covered population by providing medical resource usage and outcomes information. HCIA Europe provides clinical, financial, and operational efficiency analyses to hospitals and health care purchasers outside of the United States. The Company evaluates the performance of its operating segments based on contribution margin. Contribution margin includes direct payroll costs and other direct costs, but does not include any corporate allocations of overhead costs, nonrecurring items, interest income, interest expense, amortization or depreciation. Certain 1998 amounts have been reclassified to conform with the 1999 presentation. Summarized financial information regarding the Company's operating segments is shown in the following table. The "Corporate Costs" column includes corporate related items, results of insignificant operations and income and expense not allocated to operating segments. There are no material inter-segment revenues or receivables.
Managed Care/ Content Pharmaceutical HCIA Europe Corporate Costs Consolidated ------- -------------- ----------- --------------- ------------ Three months ended September 30, 1999 Revenue $ 6,516,000 $ 7,925,000 $ 1,709,000 $ - $ 16,150,000 Contribution 2,453,000 3,695,000 222,000 (5,717,000) 653,000 Accounts Receivable 13,569,000 10,896,000 1,446,000 - 25,911,000 Three months ended September 30, 1998 Revenue 7,676,000 6,757,000 1,426,000 - 15,859,000 Contribution 3,333,000 2,559,000 385,000 (7,360,000) (1,083,000) Accounts Receivable 18,789,000 6,237,000 1,248,000 26,274,000 Nine months ended September 30, 1999 Revenue 22,170,000 21,981,000 4,828,000 - 48,979,000 Contribution 9,588,000 9,404,000 1,253,000 (17,890,000) 2,355,000 Nine months ended September 30, 1998 Revenue 23,614,000 18,700,000 4,846,000 - 47,160,000 Contribution 11,320,000 6,687,000 1,380,000 (22,275,000) (2,888,000)
(5) New Accounting Pronouncements The American Institute of Certified Public Accountants (AICPA) has issued Statement of Position 98-9, Modifications of SOP 97-2 "Software Revenue Recognition" (SOP 98-9), with respect to certain transactions. The new SOP will have a limited impact on certain revenue recognition practices of the Company. The new SOP will be effective for the Company's 2000 quarterly and annual financial statements. The new SOP delays the definition of Vendor Specific Objective Evidence as stipulated in SOP 97-2 until fiscal years beginning after March 31, 1999. The Company is currently evaluating the effect of this pronouncement. (6) Earnings Per Share The Company calculates earnings per share in accordance with SFAS No.128, "Earnings Per Share". Basic EPS Page 8 is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the applicable period. Diluted EPS is calculated after adjusting the numerator and the denominator of the basic EPS calculation for the effect of all potential dilutive common shares outstanding during the period. For the three months ended September 30, 1999 and 1998, the calculation of earnings per share is summarized as follows:
For the three months ended For the three months ended September 30, 1999 September 30, 1998 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------- ------------------------------------------ Basic EPS $340 11,851 $0.03 $(640) 11,851 $(0.05) Incremental shares from assumed exercise of dilutive options and warrants 348 --------------------------------------------- ------------------------------------------ Diluted EPS $340 12,199 $0.03 $(640) 11,851 $(0.05) --------------------------------------------- ------------------------------------------ For the nine months ended September 30, 1999 and 1998, the calculation of earnings per share is summarized as follows: For the nine months ended For the nine months ended September 30, 1999 September 30, 1998 Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------------------------------------- ------------------------------------------- Basic EPS $1,590 11,851 $0.13 $(42,622) 11,851 $(3.60) Incremental shares from assumed exercise of dilutive options and warrants 114 --------------------------------------------- ------------------------------------------- Diluted EPS $1,590 11,965 $0.13 $(42,622) 11,851 $(3.60) --------------------------------------------- -------------------------------------------
(7) Other Matters The Company has entered into an Amended and Restated Agreement and Plan of Reorganization with VS&A Communications Partners III, L.P., VS&A-HCIA, L.L.C. and VS&A-HCIA, Inc., dated October 11, 1999. Under the terms of the agreement, each share of HCIA Common Stock will be converted to the right to receive $11.00 cash. The transaction is subject to the approval of HCIA's shareholders and a vote on the transaction is scheduled for November 17, 1999. If approved by the HCIA shareholders, the transaction is expected to close on or about November 23, 1999. Page 9 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 1999 compared to three months ended September 30, 1998 Revenue. Revenue for the three months ended September 30, 1999 was $16.2 million, an increase of $300,000 or 1.8% over the three months ended September 30, 1998. The increase was the result of a $1.2 million increase in revenue from the Company's Managed Care/Pharmaceutical Unit and a $300,000 increase in revenue from HCIA Europe, which was partially offset by a $1.2 million decrease in revenue from the Company's Content Unit. The revenue increase in the Managed Care/Pharmaceutical Unit was primarily the result of the expansion of the Company's services to the pharmaceutical markets. The revenue increase in HCIA Europe was primarily the result of the expansion of the Company's services into an additional country. The revenue decrease in the Content unit was primarily the result of a large license fee which occurred in the third quarter of 1998 and did not recur in 1999. Salaries, Wages and Benefits. Salaries, wages and benefits were $7.3 million or 45% of revenue for the three months ended September 30, 1999 as compared to $8.5 million or 53% of revenue for three months ended September 30, 1998. This decrease was primarily the result of the Company's restructuring of operations during 1998. Other Operating Expenses. Other operating expenses, which include facility costs, royalty payments, production costs, travel and consulting expenses, were $5.4 million or 33% of revenue for the three months ended September 30, 1999 as compared to $5.9 million or 37% of revenue for the three months ended September 30, 1998. The decrease in other operating expenses was the result of lower occupancy and employee related costs as the result of the Company's restructuring of operations in 1998. Depreciation and Amortization. Depreciation and amortization were $2.8 million or 18% of revenue for the three months ended September 30, 1999, as compared to $2.5 million or 16% of revenue for the three months ended September 30, 1998. This increase was a result of a higher capitalized software base in 1999, partially offset by the effect of the write-off of certain equipment in 1998. Interest Income and Expense. Net interest income was $35,000 for the three months ended September 30, 1999 compared with net interest income of $11,000 for the three months ended September 30, 1998. This increase was the result of an increase in interest income associated with a higher invested balance in 1999. Income Taxes. During the quarter ended September 30, 1998, the Company recorded a valuation allowance of $1.4 million to reduce the carrying value of its deferred tax asset to an amount management believed was realizable through future taxable income. Exclusive of this valuation allowance, the Company's effective tax rate was 144% for the three months ended September 30, 1998, compared with 50.6% for the three months ended September 30, 1999. The higher rate in 1998 is due primarily to the effect of the write-off of the intangible assets associated with the impairment loss in 1998 and the effects of interperiod tax allocations on the Company's tax provisions. Page 10 Nine months ended September 30, 1999 compared to nine months ended September 30, 1998 Revenue. Revenue for the nine months ended September 30,1999 was $49.0 million, an increase of $1.8 million or 3.9% over the nine months ended September 30, 1998. The increase was the result of a $3.3 million increase in revenue from the Company's Managed Care/Pharmaceutical Unit, which was partially offset by a $1.5 million decrease in revenue from the Company's Content Unit. The revenue increase in the Managed Care/Pharmaceutical Unit was primarily the result of the expansion of the Company's services to the employer and pharmaceutical markets. The revenue decrease in the Content Unit was the result of lower levels of sales to the Company's hospital clients as well as lower levels of sales of certain of the Company's syndicated data products. Salaries, Wages and Benefits. Salaries, wages and benefits were $22.6 million or 46% of revenue for the nine months ended September 30, 1999 as compared to $24.6 million or 52% of revenue for the nine months ended September 30, 1998. This decrease was primarily the result of the Company's restructuring of operations during 1998. Other Operating Expenses. Other operating expenses, which include facility costs, royalty payments, production costs, travel and consulting expenses, were $15.9 million or 32% of revenue for the nine months ended September 30, 1999 as compared to $16.6 million or 35% of revenue for the nine months ended September 30, 1998. The decrease in other operating expenses was the result of lower occupancy and employee related costs as a result of the Company's restructuring of operations during 1998. Depreciation and Amortization. Depreciation and amortization were $8.2 million or 17% of revenue for the nine months ended September 30, 1999, as compared to $8.8 million or 19% of revenue for the nine months ended September 30, 1998. This decrease was a result of the effect of the write-off of certain intangible assets and equipment in 1998. Impairment Loss on Intangible Assets and Restructuring Charges. During the three months ended March 31, 1998, the Company recorded a charge from continuing operations relating to an impairment loss on intangible assets and restructuring charges of approximately $25.1 million. Approximately $24.6 million of the charges arose due to the failure of the Company's Content Unit to execute agreements with customers for large-scale custom solutions and the Company's determination that the Unit's revenue, which could be anticipated from future agreements of this type, was significantly less than had been previously anticipated. As the products marketed by the Content Unit were intended to integrate the products and technologies of the Company's other business units, this determination resulted in a reduced expectation of future cash flows from the Company's intangible assets across most of its business units and, accordingly, an impairment in the value of these intangible assets. The remainder of the charges, totaling approximately $500,000, related primarily to accruals for the cost of employee severance and facilities reduction. Interest Income and Expense. Net interest income was $111,000 for the nine months ended September 30, 1999 compared with net interest income of $88,000 for the nine months ended September 30, 1998. The increase in interest income was the result of a higher invested balance in 1999. Income Taxes. During the nine months ended September 30, 1998, the Company recorded a valuation allowance of $6.4 million to reduce the carrying value of its deferred tax asset to an amount management believed was realizable through future taxable income. Exclusive of this valuation allowance, the Company's effective tax rate was 36.3% for the nine months ended September 30, 1998, compared with 46.5% for the nine months ended September 30, 1999. The higher rate in 1999 is due primarily to the effect of the write-off of the intangible assets associated with the impairment loss in 1998 and the effects of interperiod tax allocations on the Company's 1999 tax provision. Discontinued Operations. The Company decided to discontinue operations of its Implementation Unit during the quarter ended December 31, 1998 and as of March 31, 1999, the Company sold the Unit. Revenues for the Implementation Unit were $1.0 million and $7.7 million for the three months ended March 31, 1999 and the nine months ended September 30, 1998, respectively. During the three months ended March 31, 1999, the Implementation Unit had net income of $271,000 which included a $607,000 gain on the sale and a $336,000 loss from operations. During the nine months ended September 30, 1998, the Unit had a net loss of $18.5 million including pre-tax impairment losses on intangible assets and related restructuring charges of $25.7 million. Page 11 Liquidity and Capital Resources The Company has entered into an Amended and Restated Agreement and Plan of Reorganization with VS&A Communications Partners III, L.P., VS&A-HCIA, L.L.C. and VS&A-HCIA, Inc., dated October 11, 1999. Under the terms of the agreement, each share of HCIA Common Stock will be converted to the right to receive $11.00 cash. The transaction is subject to the approval of HCIA's shareholders and a vote on the transaction is scheduled for November 17, 1999. If approved by the HCIA shareholders, the transaction is expected to close on or about November 23, 1999. The Company maintains a $25 million revolving line of credit (subject to certain borrowing limitations) with First Union National Bank ("First Union") for general corporate purposes including working capital requirements and acquisitions. Borrowings under this line are collateralized by substantially all of the Company's assets and bear interest at varying rates based on an index tied to First Union's prime rate or LIBOR. The Company is required to pay a commitment fee on the average daily unused portion of the facility at a rate from 0.25% to 0.375% per annum, depending on the Company's debt/cash flow ratio. The credit facility also contains financial covenants applicable to the Company, including debt/cash flow ratios and ratios of debt to capital. As of September 30, 1999, the Company was in compliance with all such financial covenants and had a maximum borrowing capacity of approximately $12.2 million, and there were no borrowings outstanding under the facility. The credit facility expires on July 31, 2001. Year 2000 Computer Software The Company has created a Year 2000 Program Office to review its exposure to Year 2000 computer software issues, to coordinate its efforts to identify those computer software systems which require revisions in anticipation of the Year 2000 and to coordinate such revisions on a corporate-wide basis. This has entailed the development of a Company-wide assessment, remediation and certification process, which is monitored by the Program Office and members of the Company's senior management. In addition, senior management reports to the Audit Committee of the Board of Directors on a regular basis regarding the Company's progress in its Year 2000 remediation efforts. While the Company does not currently intend to engage any outside parties to certify the completion of its Year 2000 remediation efforts, it does intend to utilize an internal certification process, whereby remediation efforts will be reviewed and certified by Company personnel not directly involved in the remediation. The Company believes that its primary exposure to the issue is in the ability of its data processing systems to recognize four digit references versus two digit references (i.e., 1998 versus 98) and to accept and process such information from its customers in the process of building databases. In addition, the Company faces exposure in connection with (i) certain of its software products which are used to deliver data to clients, (ii) third-party software products, particularly for its management information systems and (iii) non-information technology systems used in its business, particularly those operated by third parties, such as the owners or operators of buildings where the Company's offices are located. The Company has completed the evaluation of its own data processing systems and software products, and has substantially completed remediation of these systems and products. The Company has completed its evaluation of third-party software products used by the Company. The Company believes that as of September 30, 1999, it has completed approximately 98% of its total expected efforts and has certified as Year 2000 compliant approximately 90% of its data processing systems, software products and third-party software. It is the Company's goal, and the Company's Year 2000 work plans have been scheduled, to finish Year 2000 remediation and certification of all of its data processing, software products and third-party software by no later than November 30, 1999. The Company has not undertaken a substantial effort to verify the Year 2000 compliance on non-information technology systems. Through September 30, 1999, the Company has expended approximately $750,000 on Year 2000 remediation efforts, primarily as the result of allocation of personnel to evaluation, remediation and certification efforts, that it would not have otherwise expended but for the Year 2000 remediation process. The Company believes that it will expend an additional $15,000 on such Year 2000 remediation efforts through 1999. The Company has not, to any material extent, scheduled the acceleration of the replacement of any systems or products as a result of the Year 2000 effort, but has instead been able to schedule such replacement or remediation as part of the planned updates and revisions to its systems and products. The Company intends to have completed the development of all systems which will replace existing non compliant systems by November 30, 1999. In the event the Company does not properly remediate its data processing systems, it might be unable to accept Page 12 data from its clients and others for processing. This would materially and adversely affect its ability to deliver its information products and provide its data management services. The failure of the Company to remediate its software products would also materially and adversely affect its ability to deliver its information products and data management services. In either case, this could place the Company in default of many of its agreements, and also threaten the Company's right to payment from many of its clients. The Company believes that the risks from the failure of third-party software and non-information technology systems to be Year 2000 compliant is less significant for the Company's ability to meet its client obligations, but could have an adverse impact on its ability to carry out functions such as financial reporting and accounts receivable and payable management. While the Company, in the process of making its data processing systems Year 2000 compliant, intends to design algorithms to test data received from its customers and covert it to a usable format, there can be no assurances that the Company's customers will not experience difficulties in actually providing data produced by their systems to the Company as a result of Year 2000-related difficulties. It is not currently possible to estimate the effect on the Company's results of operations from any such difficulties. The Company plans to finalize contingency plans for non-"mission-critical" systems and products by December 31, 1999. It should be noted that because most of the Company's data processing and information product releases involve data which trails the calendar period by one to three months, the full effect of any failure of the Company's systems or products to be Year 2000 compliant would most likely not be experienced until the first quarter of 2000. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements, including statements regarding the intent, belief or current expectations of the Company and its management. These statements are not guarantees of future performance and involve a number of risks and uncertainties that are difficult to predict. Therefore, actual outcomes and results could differ materially from those indicated by such forward-looking statements. The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are (i) variations in quarterly results, (ii) the assimilation of acquisitions, (iii) the management of the Company's growth and expansion, (iv) dependence on key personnel, (v) development by competitors of new or superior products or entry into the market of new competitors, (vi) dependence on major customers, (vii) dependence on intellectual property rights, (viii) integrity, availability and reliability of the Company's data, (ix) volatility of the Company's stock price, (x) changes in the health care industry from both a regulatory and financial perspective, (xi) implementation of required changes to computer systems and software for the year 2000, and (xii) other risks identified from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosure About Market Risk Not applicable Page 13 PART II Other Information Item 6. Exhibits and Reports on Form 8-K (b) Reports on Form 8-K The Company filed a Form 8-K on August 12, 1999, in connection with its entering into an Agreement and Plan of Reorganization dated August 11, 1999 with VS&A Communications Partners III, L.P., VS&A - HCIA, L.L.C. and VS&A-HCIA, Inc. The Company also filed a Form 8-K on October 12, 1999 in connection with its announcement that it had entered into an Amended and Restated Agreement and Plan of Reorganization with Communication Partners III, L.P., VS&A-HCIA, L.L.C. and VS&A-HCIA, Inc. and had scheduled a special meeting of stockholders for Wednesday, November 17, 1999 to approve the proposed merger. Page 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HCIA Inc. --------- (Registrant) Date: November 15, 1999 By: ________________________________ Barry C. Offutt Senior Vice President and Chief Financial Officer (principal financial officer) Page 15 EX-27 2 FDS -- HCIA
5 US$ 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 10,262 0 25,911 0 0 39,875 6,605 0 133,214 13,544 0 0 0 118 119,552 133,214 48,979 48,979 0 46,624 0 0 (111) 2,466 1,147 1,319 271 0 0 1,590 .13 .13
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